Targeted topics from test simulation

Question 1

Under both federal and state law, it is required to disclose to the client that the bonds will be sold

Answer 1

from the firm’s inventory, from one of the firm’s accounts, often called a proprietary account. However, when selling from inventory, there would never be a commission. The charge, if any, would be a markup.

Not doing so is prohibited.

Question 2

investment adviser’s advertising describes an investment system

Answer 2

References to charts, tables, formulas, or other devices used to forecast securities prices without setting forth difficulties or limitations in their use is prohibited.

Question 3

The USA PATRIOT Act

Answer 3

the full title is Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Assets Control (OFAC).

This is accomplished through the customer identification program (CIP).

Question 4

Adoption is defined

Answer 4

as a firm’s endorsement of the content of a third-party site

Question 5

Entanglement is adoption taken one step further. This is when

Answer 5

the firm (or one of its representatives) contributes to the third-party information and then posts it.

Question 6

In a TIC account, each co-owner has

Answer 6

an undivided interest in the portfolio. That means the assets are not allocated specifically to each owner; instead, each has a proportionate share of the entire portfolio. Anytime there is a sale of securities in a joint account, any cash disbursement must be in the names of all of the account owners. In a TIC account, the death of a co-tenant results in that individual’s share passing to their estate.

Question 7

One of your ultra-high net worth clients has extensive real estate holdings and is concerned about his children being forced to liquidate some of them in order to pay the estate taxes after his death

Answer 7

purchasing a life insurance policy using an ILIT irrevocable life insurance trust (ILIT) where a policy is purchased on the life of the client, but owned by the trust. When properly structured, this means that the death benefit is not included in the estate and passes tax free to the beneficiaries. Those funds can then be used to pay the estate taxes and the real estate assets pass to the beneficiaries

Question 8

The only types of accounts that may have the Transfer on Death (TOD) designation are

Answer 8

individual, JTWROS, and TBE accounts

Question 9

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15?

Answer 9

For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15

Question 10

The annual report to shareholders

Answer 10

contains not only a complete financial report of the prior year’s operations but also a statement from key personnel dealing with the company’s future plans.

Form 10-K does not include discussion of future business plans—it is a report of what happened over the previous fiscal year.

Question 11

Selling forward contracts

Answer 11

Because there is no standardization for forward contracts, they are considered to be illiquid. Because there is no entity backing up the contract (as the OCC does with listed options), a seller must always be concerned about the ability of the buyer to pay

Question 12

Which of the following are characteristics of negotiable jumbo CDs?

Answer 12

Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay interest on a semiannual basis, not monthly.

Question 13

The most common collateral securing a Brady bond is

Answer 13

U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond.

Question 14

Which of the following would appear as assets on a corporation’s balance sheet?

Answer 14

Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities

Question 15

Cash flow from operations is computed by

Answer 15

adding the year’s depreciation deduction to the net income.

Question 16

Understand what is on corporate balance sheet vs income statement

Question 17

Top down vs bottom up analysis

Question 18

The maximum deduction of net capital losses against other income in any one year is

Answer 18

$3,000; any remaining loss can be carried forward into the next year.

Question 19

A broker-dealer that operates on a fully disclosed basis is one that

Answer 19

introduces its customers to the broker-dealer’s clearing firm.

Question 20

The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket?

What would NOT be on the ticket?

Answer 20

Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order

This is one of those questions where the best way to find the answer is by determining what is not correct.

Not on the ticket
- Customer name and/or address would never be on an order ticket
- Current market price wouldn’t be, but the execution price would be

Question 21

A discussion of algorithmic trading is probably referring to

Answer 21

high frequency trading.

Question 22

Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities?

Answer 22

The Federal Reserve Board
(FRB)

Question 23

A taxpayer’s marginal tax rate is

Answer 23

the rate of taxation on any additional taxable income received.

Question 24

Which of the following is generally believed to present a more accurate picture of a portfolio manager’s performance?

Answer 24

Time-weighted return

Because contributions and withdrawals by the investor are not under the control of the fund manager, time-weighted return is a more reliable measure of a portfolio manager’s performance.

Dollar-weighted is a more reliable measure of how the investor fared.

Question 25

Buy limit vs buy stop order

Answer 25

With a Buy Stop Order you set the Price higher than the current market price.

With a Buy Limit Order the limit price is always lower than the current market price, not higher

Question 26

Sell limit vs sell stop

Answer 26

Remember that the key difference between a limit order and a stop order is that the limit order will only be filled at the specified limit price or better; whereas, once a stop order triggers at the specified price, it will be filled at the prevailing price in the market—which means it could be executed at a price

Question 27

Dollar weighted returns vs time weighted returns

Answer 27

Dollar weighted - individual investor
Time weighted - porfolio manager

Because dollar-weighted returns reflect the individual investor’s cash deposits and withdrawals from the investment account, it is the preferred measure of return for them.

On the other hand, time-weighted returns are generally a more important tool to show portfolio manager performance.

Question 28

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified?

A)
Equity mutual funds
B)
Common stock
C)
Preferred stock
D)
Bond mutual funds

Answer 28

Bond

Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest.

Question 29

Mr. Berg has been charting DMF stock prices. The stock usually fluctuates between 71 and 86. The stock is currently at 84, and the increasing upside volume makes him believe that a breakout is possible. Which of the following would he most likely enter?

Answer 29

A buy stop at 88

A breakout occurs when a security trades outside an established range. In this case, because Mr. Berg has no position, he would want to purchase only if the stock breaks through the resistance level already established.