Test Time 26th Flashcards
1. When an agent of a broker/dealer files for state registration, the agent’s registration
a) Becomes effective in 60 days.
b) Becomes effective in 30 days, unless the state administrator approves the registration earlier.
c) Becomes effective in 60 days, unless the state administrator notifies the broker/dealer that it is effective earlier.
d) Is effective immediately.
B
When an agent applies for registration in a particular state, the registration becomes effective 30 days later unless the broker/dealer receives notification from the administrator that the agent is properly registered within the state before the 30-day period has elapsed. The administrator will contact the broker/dealer and not the agent directly.
2. A U.S. government bond quoted at 94.20 - 95.08 has a bid price of
a) $942.00.
b) $946.25.
c) $952.50.
d) $958.00.
B
Bonds are quoted at $1,000 par in 32nds, with each point worth $10. The bid price (the first price listed) is $940 + (20/32 X $10), which converts to $940 + $6.25 for a price of $946.25.
4. A “buy and hold” approach to portfolio management could be expected to do which of the following?
a) Result in a lower portfolio turnover rate than alternative portfolio management styles.
b) Have lower management expense but yield inferior overall performance over the long term.
c) Minimize the potential for loss due to a much lower portfolio turnover rate.
d) More closely mirror the performance of the overall stock market.
A
A passive investment style minimizes overall expenses due to reduced trading and research costs. A “buy and hold” management style does not necessarily produce performance results different than an “active” style or that the overall market would experience. It does, however, reduce portfolio turnover, which may result in lower management expense.
5. Which of the following is not a priority for a fiduciary managing an account in compliance with the Prudent Man Rule?
a) Income
b) Speculation
c) Permanence
d) Safety
B
The rule states that fiduciaries should manage accounts “not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”
8. Which is true of restricted stock? I. The purchase must be paid for in entirety. II. It must be held for 2 years before resale. III. A broker/dealer can act as an agent. IV. Shares are registered with the SEC.
a) I and II
b) I and III
c) II and III
d) II and IV
B
If a selling company is subject to the SEC reporting requirements, the securities must be held at least 6 months. Otherwise, they must be held at least 1 year. The holding period begins when the securities are bought and fully paid for. A broker/dealer can act as an agent, but restricted stock is not registered with SEC.
9. Which type of mutual fund may be heavily invested in companies of cutting-edge industries or start-up companies with unproven earnings?
a) Aggressive growth fund
b) Growth fund
c) Growth and income fund
d) Income fund
A
This is the basic definition and objective of an aggressive growth fund.
10. Which of the following is not a characteristic of tactical portfolio management?
a) Dividing funds among different asset classes
b) Market timing
c) Active management focused on short term results
d) Identifying industry sector cycles
A
Dividing funds among different asset classes is strategic asset allocation.
11. A corporation’s capitalization consists of: Debenture - 7% - $1,000 par, maturity 2022: $4,000,000; Common stock - $1 par, 200,000 shares outstanding: $200,000; Capital in excess of par: $800,000; Retained earnings: $5,000,000. The corporation, for the current year, earns $1,500,000 before interest and taxes. The corporation is in the 50% tax bracket. What are the company’s earnings per share?
a) $0.25
b) $3.05
c) $3.75
d) $7.50
B
Corporate profit of $1,500,000 minus $280,000 interest (7% X 4 million) = $1,220,000 X 50% = $610,000 divided by 200,000 shares = $3.05.
12. All of the following are agency issues backed by government-guaranteed or insured mortgages, EXCEPT
a) SLMA.
b) FNMA.
c) GNMA.
d) Federal Home Loan.
A
Sallie Mae is Student Loan Marketing Association (SLMA) and does not deal in mortgages. The rest do
13. Any adviser that wants to exercise discretionary authority over a client’s account must do which of the following? I. Have written authorization from the client. II. Have approval to exercise such control by the administrator. III. File a Form ADV with the Securities Administrator. IV. Post a bond in the amount of the client’s account value.
a) I and II
b) I and III
c) II and III
d) II and IV
B
Any investment adviser that wishes to exercise discretionary authority over a client’s account must have authorization from the owner of that account, approval for such authority from the broker/dealer (not the administrator), and file a Form ADV for the account with the Securities Administrator.
14. Which of the following is true of the organizational structure of a balance sheet? I. It is arranged from current items at the top to long term items at the bottom. II. Liquid items appear on the left and illiquid and fixed items appear on the right. III. It follows an equation. IV. Leverage items follow equity items.
a) I and II
b) I and III
c) II and III
d) II and IV
B
The balance sheet follows the balance sheet equation, and it starts with current items at the top and flows to long term items below. Leverage (bonds) comes before equity (stock.)
16. A school teacher is retiring after 20 years of service. During the past 10 years, she invested $10,000 in a 403(b) through a payroll deduction offered by the school. Her account is now worth $16,000. What is her cost basis?
a) $0
b) $6,000
c) $10,000
d) $16,000
A
The teacher has contributed to a qualified retirement plan; therefore, all the money she has invested is pre-tax. She has not paid taxes on any of the money yet, so her cost basis is $0, and she will be required to pay ordinary income taxes on the entire amount she withdraws.
18. Which of the following statements regarding diversification is false?
a) Diversification reduces selection risk.
b) Asset allocation involves diversification.
c) Diversification reduces system risk.
d) A portfolio should be diversified between and among asset classes.
C
Diversification does not reduce market, or system risk. If the entire market declines, even a diversified portfolio declines.
19. Which of the following statements is true about tax-qualified annuities?
a) They must meet IRS requirements.
b) Employee contributions are not tax deductible.
c) They can discriminate.
d) Withdrawals are not taxed.
A
In qualified annuities, IRS approval is required; contributions are tax deductible; accumulations are tax-deferred and withdrawals are taxed. Qualified annuities cannot discriminate among policyowners.
20. Alternative investments are investments that
a) Do not entirely meet the definition of stock, bond or cash.
b) Do not meet NYSE registration requirements.
c) Are not available to institutions.
d) Are used to replace underperforming asset classes.
B
Traditional investments are stocks, bonds and cash. In the broadest sense alternative investments are investments that cannot meet those definitions.
21. The shareholders of a mutual fund have certain rights associated with the ownership interests they hold in the company. These rights include all of the following EXCEPT
a) Approval authority for the company’s annual report.
b) Approval of investment advisory agreement.
c) Voting rights/proxy rights regarding company issues.
d) Election of board.
B
Mutual fund shareholders have the right to receive annual/semiannual reports; however, the company itself has approval authority for its publication. Additionally, the shareholders and the board of directors must approve all of the expenses for the operation of the mutual fund.
22. Which of the following is true regarding an insurance company’s general account?
a) Though it is invested primarily in equities, by law it may not deal in options or margin trading.
b) It is conservatively invested because it holds assets associated with guaranteed insurance products.
c) It holds assets invested in products that require insurance and securities licensing of representatives that sell them.
d) Because it is conservatively invested, all investment risk is assumed by the investor.
B
Because the general account is invested to guarantee products such as whole life policies and fixed annuities, it is typically invested conservatively in long-term debt. A securities license is not required to sell guaranteed products.
23. If a stop order for a registration statement is issued by the Administrator, the registrant is entitled to have the matter set before a hearing within how many days of written request to the Administrator?
a) 5 days
b) 15 days
c) 30 days
d) 90 days
B
The registrant is allowed to have the matter set before a hearing within 15 days of written request to the Administrator.
24. A Canadian broker/dealer has customers who winter in Florida and Texas. Which of the following is true?
a) Both the broker/dealer and its agents who service the customers must be registered in Florida and Texas.
b) If the broker/dealer has no office in Texas or Florida, it does not have to register in those states to transact business with its existing customers.
c) The broker/dealer but not the agent must register in those states.
d) The agent but not the broker/dealer must register in those states.
B
When a broker/dealer from Canada or another qualifying foreign country with no place of business in the United States has an existing customer who is only temporarily in the United States, neither the broker/dealer nor its agent must register in the United States to transact business with that existing customer or customers. The broker/dealer or its agents may not, however, solicit new business with U.S. citizens without proper registration.
26. If an agent commits a violation of the Act, civil liabilities may be applied to the broker/dealer under what conditions?
a) If the broker/dealer, in the exercise of reasonable care, should have been aware of the action.
b) Never. The broker/dealer may only be held liable in cases of criminal liability.
c) Civil liabilities may not be applied to violations of the Uniform Securities Act.
d) Only if the agent’s manager knew of the action and did not act to prevent it.
A
For violations of the act without willful intent, civil liabilities may apply to the person committing the violation as well as to “controlling persons” if, in the exercise of reasonable care, the controlling person should have been aware of the action.
28. A U.S. government bond quoted at 108.06 - 109.09 has an asking price of
a) $108.60.
b) $1,081.88.
c) $1,092.81.
d) $1,099.00.
C
Bond prices are quoted at $1,000 par in 32nds, with each point worth $10. The ask price (the last price quoted) is $1,090 + (9/32 X $10) for a price of $1,092.81.
29. A mutual fund pays a 5 percent dividend during the year and pays a 5 percent realized capital gain at the end of the same year. What is the Total Return for the year?
a) 5% percent
b) 7.5% percent
c) 10% percent
d) None
C
The Total Return is the cumulative return for the period. Therefore, 5 percent dividend plus 5 percent capital gain = 10 percent.
30. An investor bought 100 shares of XYZ stock at $55 in January of 20XX. Today, with the stock trading at $75, the investor donated it to a charitable institution. What are the tax consequences of this gift?
a) A $5,500 deduction is allowed.
b) A $7,500 deduction is allowed.
c) The investor must pay a gift tax.
d) No deduction is allowed.
B
The value of a charitable gift that is deductible by the donor is the appreciated value of the securities.
31. Frederick sells a municipal bond at 103 which he held for 13 months. He originally purchased the bond at 101. What is the consequence of this sale?
a) $20 gain is taxed at Frederick’s top marginal rate.
b) The gain is taxed at 15%.
c) The gain is an AMT preference item.
d) The gain is tax-free at the federal level and maybe at the state level.
B
Because Frederick held the bond for more than one year, he experiences a long-term capital gain, taxed at 15%. Only municipal bond interest is tax-free; capital gains are taxed. IDR interest is an AMT preference item.
32. When must form ADV-E be filed?
a) Within 30 days of the day when the IA first takes custody of clients assets
b) Within 120 days of the audit
c) Within 30 days of the audit
d) No later than December 31
B
Form ADV-E must be filed by the auditor of an IA with custody of clients assets within 120 days of the audit.
33. An employee quits her job where she has a balance of $10,000 in her employer-provided qualified plan. If she requests that the plan distribution is paid to her so that she can roll the proceeds into an IRA, how much will she receive from the plan administrator, and how long does she have to complete the tax-free rollover?
a) $8,000, 30 days
b) $8,000, 60 days
c) $10,000, 30 days
d) $10,000, 60 days
B
Because the employee has requested a distribution check, there will be a 20% withholding, and the participant has 60 days to reinvest it in an IRA to qualify as a tax-free rollover. The full amount of $10,000 must be reinvested, or the withheld amount of 20% will be considered a taxable distribution.
34. An agent was found guilty of a criminal liability; however, he also proved he had no prior knowledge of the rule. What are his maximum penalties?
a) $5,000 fine
b) 3 years in prison
c) 5 years in prison
d) $10,000 fine
A
There can be a $5,000 fine but no prison sentence if the agent proves he has no prior knowledge of the rule that was violated.
35. A client purchases 100 XYZ at 47 and later writes a Nov 50 call at 4. The client will break even when the underlying stock is at
a) $40.
b) $43.
c) $51.
d) $54.
B
Price paid for stock $47 - $4 premium received = $43.
36. Meredith is withdrawing money from her variable life insurance policy. Meredith’s withdrawal will be treated on a
a) Weighted average assumption.
b) LIFO basis.
c) FIFO basis.
d) Exclusion ratio assumption.
C
Unlike annuities, dollars distributed from a life insurance policy prior to death are withdrawn assuming FIFO.
37. ABC broker/dealer bought DEF stock at 35 for its inventory position. Three months later, when the inter-dealer market for DEF was 32.50 - 33.25, the broker/dealer sold DEF stock to a customer from the inventory. What was the basis for the dealer’s markup?
a) 32.50
b) 33.25
c) 35
d) 36
B
The basis for a markup cannot be historical cost; it can only be the current inter-dealer ask, or offer price.
39. An investor buys one DEF May 60 call for a premium of 6 and sells one DEF May 70 call for a premium of 3. The investor will break even at expiration of LDEF if trading at which of the following prices?
a) $60
b) $63
c) $66
d) $67
B
Premium = -6 + 3 = -3 Market = -60 (call = right to buy) = 63
41. When a brokerage firm is acting as a dealer, it is acting in the capacity of a/an
a) Fiduciary.
b) Broker.
c) Principal.
d) Agent.
C
As a dealer, a firm is acting as a principal while buying and selling securities for its own account.
42. Which of the following would be considered a broker/dealer in the state of Maine?
a) An issuer whose corporate headquarters is located in Maine
b) A brokerage firm located in New Hampshire doing business in Maine with residents of Maine
c) An agent working at a discount brokerage firm located in Maine
d) A brokerage firm with no office in Maine, selling municipal bonds to a bank located in Maine
B
A broker/dealer must register under the Uniform Securities Act (USA) in any state in which it transacts business unless an exemption is available.
43. XYZ stock is quoted at $45.20 X $45.25. How much is the spread?
a) $0.05
b) $0.50
c) $5.00
d) $50.00
A
The spread is the difference between the bid and ask; $45.25 - $45.20 = $0.05.
44. Which of the following are NOT required to file an annual report with the SEC?
a) Publicly held corporations
b) Privately held corporations
c) Broker/dealers engaging in interstate business
d) National securities exchanges
B
Privately held companies are not required to file information with the SEC for public distribution.
45. Which of the following best fits the definition of an “issuer”?
a) A person proposing to issue a security
b) A market maker in an over-the-counter security
c) A company director selling new shares to the public
d) A trader on a national exchange floor
A
An “issuer” is defined as a person who issues or proposes to issue a security.
46. After ceasing operations, an Investment Adviser must maintain a surety bond for
a) 90 days.
b) 1 year.
c) 3 years.
d) 5 years.
C
An IA must maintain a surety bond for 3 years after it ceases operations.
47. Sunny Sails is currently trading at 12.50-14.25. Sunny Sails is probably
a) A load mutual fund.
b) A regional OTC security.
c) A limited partnership.
d) An exchange-traded security.
B
A thinly traded security, such as a small OTC security, typically has a wide spread between the bid and offer. Securities with a narrow spread are usually widely traded, most likely on an exchange or on NASDAQ. Limited partnerships are illiquid, are sold through a subscription agreement, and do not have a market quote expressed as a bid/ask. Mutual funds are purchased directly from the fund at the POP and are redeemed by the fund at the NAV.
48. Conventional and Roth IRAs are different in which of the following ways?
a) Catch-up provisions
b) Income eligibility limits
c) Minimum withdrawal age
d) Annual contribution limits
B
Only the Roth has income eligibility limits. Anyone with earned income may contribute to a conventional IRA. However, the contribution may not be deductible, based on participation in an employer-sponsored retirement plan and the individual’s income level.
49. A self-employed attorney has earned an income of $100,000 a year and her husband earns $30,000 a year as her accountant. How much can she contribute to a spousal option IRA?
a) $4,500
b) $6,000
c) $10,000
d) $11,000
B
They may each contribute $6,000.
51. If an Administrator finds a registration to be incomplete, the issuer must send
a) An amendment to the application.
b) A financial statement.
c) A consent to service of process.
d) A new and complete registration application.
A
The required information can be submitted to the Administrator in an amendment to the application. The financial statement and consent of service of process were submitted with the initial filing.
53. If a customer is short a stock, which of the following would lower risk and increase income?
a) Buy puts
b) Buy calls
c) Sell puts
d) Sell calls
C
A short stock position is bearish. You would sell puts, which is bullish and would give a partial hedge and income.
55. Mr. & Mrs. Hardy want to contribute into their IRAs. Mr. Hardy earns $35,000 a year as an employee of XYZ Insurance Company. Mrs. Hardy is currently not working. What is the maximum they can currently contribute into their IRAs?
a) $12,000, with not more than $6,000 for Mr. Hardy and $6,000 for Mrs. Hardy
b) $12,000, with any combination of contributions by the 2 of them
c) $12,000 only for Mr. Hardy
d) $12,000 into one account
A
The maximum amount an individual can contribute annually to an IRA is up to 100% of earned income not to exceed $6,000. Married couples can contribute a total of $12,000 split between two accounts, even if one spouse is not working.
56. Retirement account rollovers must be completed within
a) 20 days.
b) 30 days.
c) 60 days.
d) 90 days.
C
Rollovers are subject to 20% withholding and must be completed within 60 days, or they are classified as permanent withdrawals, and income taxes apply. Only one rollover per year is permitted. There is no annual limit on custodian-to-custodian transfers.
57. All of the following employees of a broker/dealer are considered an agent under the Uniform Securities Act (USA) with the EXCEPTION of a person who
a) Transacts business only in exempt securities.
b) Transacts business only in nonexempt securities.
c) Gives securities quotations over the phone.
d) Performs the function of accepting customer orders.
C
An agent is a person that effects a securities transaction. Giving a quotation does not effect a transaction and is exempt from the definition under the Act.
58. A technical analyst would be most interested in which indicator?
a) 200-day moving average
b) Price earnings ratio
c) Current ratio
d) Quick ratio
A
200-day moving averages are considered hallmark market trend indicators. Ratios are fundamental, not technical.
59. A client is planning on retiring in the next 2 years. His current investments consist of equity funds. For increased retirement income, he should begin to move his investments from equity funds to an
a) Value fund.
b) Blend fund.
c) Income fund.
d) Money market fund.
C
The income fund will most likely provide the investor with the highest income of these choices. Income funds invest in blue chip and other dividend-paying stocks.
61. A customer buys one ABC Mar 110 put at 8 and sells one ABC Mar 100 put at 1. Which two of the following describe the spread? I. Credit; II. Debit; III. Bearish; IV. Bullish
a) I and II
b) I and IV
c) II and III
d) II and IV
C
Long at the higher strike price indicates debit put spread, which is bearish.
63. How often does a mutual fund calculate NAV?
a) Daily
b) As stipulated in the prospectus
c) Hourly
d) Weekly, as stipulated in the statement of additional information
A
A mutual fund calculates NAV at least daily at the close of NYSE trading.
64. Which type of investment companies do NOT charge a management fee?
a) Face amount certificates
b) Unit Investment Trusts
c) Open-end investment companies
d) Closed-end investment companies
B
The portfolio of a Unit Investment Trust (UIT) is fixed and does not require an investment adviser. The portfolio is supervised, not managed.
66. Which of the following is subject to current taxation?
a) Keogh plan
b) Incentive stock option plan
c) Employee stock option plan
d) Individual retirement account
C
Unlike an incentive stock option plan, an ESOP is a nonqualified stock option plan. Therefore, the difference between the stock option price and the stock’s current market price at exercise is considered taxable income.
67. Which of the following transactions requires for an individual to be registered as an agent?
a) A CFO issuing company stock for the company pension plan and is not compensated for the transaction
b) A city employee initiating a municipal bonds transaction with an underwriter on behalf of the city
c) An agent of a broker/dealer selling U.S. Treasury Bills to a money manager
d) A bank officer selling bank shares to an institutional investor
C
Broker/dealer representatives are required to be registered to sell securities even when the securities are exempt. The other individuals are exempt from registration as an agent because they represent the issuer in exempt securities or exempt transactions.
68. The amount of money that an investor will probably receive at a point in time in the future from an investment is referred to as
a) Expected return.
b) Rate of return.
c) Rule of interest.
d) Systematic investment value.
A
The amount of money that an investor projects to receive from an investment is commonly referred to as expected return.
69. A securities registration contains misstatements of material facts. All of the following may be held responsible for this violation of the Uniform Securities Act (USA) EXCEPT
a) Directors of issuers.
b) Agents.
c) Underwriters.
d) Issuers.
B
Agents are not involved in securities registrations and therefore cannot be held responsible for this violation.
70. An agent hears a rumor that a large corporation will be launching a hostile takeover on a competitor. Based on the rumor, the agent liquidates all his clients’ positions. Which of the following is true?
a) This action is prohibited.
b) The agent must let the clients know they are selling based on a rumor.
c) As long as the agent informed his supervisor prior to the trades his actions are allowed.
d) None of the above is true.
A
Using hearsay to liquidate a position is a prohibited act. The agent should inform his supervisor but could not act on the rumor.
71. If distributions are made on a variable annuity policy before age ____ , a 10 percent penalty will be imposed.
a) 49½
b) 59½
c) 69½
d) 71½
B
If distributions are made before age 59½, a 10 percent penalty is imposed, unless the circumstances qualify as exceptions to the early distribution rule, such as divorce and disability.
72. For employers to keep pace with growing population, the benchmark for non-farm payroll growth is
a) 150,000 new jobs a month.
b) 125,000 new jobs a month.
c) 100,000 new jobs a week.
d) 225,000 new jobs a quarter.
B
For employment to keep pace with our growing population, the benchmark for non-farm payrolls is 125,000 new jobs a month. This is considered a coincident indicator.
73. When an agent terminates an association with a broker/dealer
a) The firm must notify the State Administrator within 30 days.
b) The agent must promptly submit a revised U-4 form to the Administrator unless he or she is associating with another registered broker/dealer firm.
c) The broker/dealer and agent must promptly file a notice of termination with the Administrator.
d) Both the agent and the firm must promptly notify FINRA unless the agent is moving from one broker/dealer to another, in which case the agent, the prior employer and the new employer must notify FINRA.
C
When an agent terminates employment, both the agent and the firm must promptly notify the Administrator.
74. A broker/dealer charged a commission on a trade. The broker/dealer acted I. As broker. II. As dealer. III. In a principal capacity. IV. In an agent capacity.
a) I and II
b) I and IV
c) II and III
d) II and IV
B
Alternately, when a broker/dealer asks as dealer in a principal capacity, it charges a markup or markdown.
77. What is the most commonly used FRB tool?
a) Fed funds rate
b) FOMC
c) Reserve requirement
d) Discount window
B
The Federal Open Market Committee meets approximately once a month and usually buys or sells treasury securities in the secondary market afterward. Because the reserve requirement is the most powerful FRB tool, it is least often used. FRB member banks borrow at the discount window from the central Federal Reserve Bank in New York. The fed funds interest rate is the rate FRB member banks charge each other for overnight loans.
78. Which of the following is correct with regard to the withdrawal of funds from a tax-qualified retirement plan?
a) All early withdrawals are subject to a penalty.
b) Contributions can be deducted from that year’s taxable income.
c) The employee will be taxed at the ordinary income rate on his cost basis.
d) Funds may be withdrawn at retirement tax free.
B
Cost basis has already been taxed and will not be taxed again upon withdrawal. Premature withdrawals are taxed and penalized unless withdrawn for a qualified exemption. A traditional IRA is a top choice for immediate tax savings because contributions can be deducted from that year’s taxable income.
79. All of the following are used to properly evaluate the yield-to-maturity of a bond investment EXCEPT
a) Current price of the bond.
b) Annual interest paid in dollars.
c) Number of years to maturity.
d) Par value realized at maturity.
A
The factors taken into account when calculating yield-to-maturity of a bond are annual coupon payment in dollars; number of years to maturity; par (or face) value realized at maturity; initial price paid. The current price of the bond is not taken into account.
80. Which of the following statements are true regarding asset allocation? I. As investors approach their goal, they typically adjust their allocation. II. Different allocations are appropriate for different time horizons. III. Sector performance differences have no effect on allocation. IV. Once an allocation is chosen, it does not require adjustment.
a) I and II
b) II and III
c) II and IV
d) III and IV
A
As investors approach their goal, their time horizon changes, which generally necessitates an allocation change. Time horizon is an important factor in selecting an appropriate allocation. Because of differing market sector performance, the portfolio requires regular rebalancing to maintain allocation. An investor’s allocation should be periodically reconsidered and adjusted. This is often done annually.
81. The SEC specifically requires which part of Form ADV to be written in “plain English”?
a) ADV Part 1
b) ADV Part 2A
c) Both Part 1 and Part 2
d) None of the above
B
Part 2A or a written brochure containing the information in Part 2A must be delivered to clients, and therefore must be written in narrative form in plain English.
82. An investment adviser has identified what he perceives to be an excellent investment opportunity for some of his clients. He made calls to the selected clients and told them that he believes that the investment will have over 12% return this year and recommended they invest. Which of the following is true concerning the adviser’s statement?
a) Such statements may not be made since they imply a specific performance of a security for which advice is being given.
b) The adviser may not make this kind of statement to his clients unless it is part of a portfolio of investments and not a single security.
c) The adviser has not violated any provisions of securities law as he was only stating an opinion and not giving formal advice.
d) This is considered an example of an adviser doing performance research which is part of the advisory services contract.
A
An adviser may not make any statement that implies a specific performance of a security for which advice was given. An adviser may not guarantee a specific result based on advice given for a portfolio of investments.
83. A registered investment adviser paid a large sum of money to settle a lawsuit. As a result, the firm’s net worth fell to $22,000. The adviser has discretion over customer accounts; however, the client’s funds are held at a large custodian bank. Under these circumstances, what is the adviser required to do?
a) Do nothing
b) File a report with the state administrator by the end of the next business day
c) File a report with the state administrator on the day that the net worth falls below $35,000
d) Notify all of the clients that the adviser’s net worth has fallen below $35,000
A
Because the adviser does not have custody of the client’s assets, the minimum capital requirement is $10,000, and the adviser is not required to do anything.
84. An investment adviser sells a security from inventory to a customer. Which of the following statements is true?
a) The adviser may not charge a markup on such trades without prior written customer consent.
b) Principal trades between investment advisers and their customers are not permitted.
c) Such trades are not permitted without prior written customer consent.
d) The adviser may not charge a markdown on the customer’s subsequent sale of the security.
C
An investment adviser may not execute trades from inventory (principal trades) with a customer unless it has prior written consent from that customer.
85. All of following are characteristics of high frequency trading EXCEPT
a) Has high portfolio turnover.
b) Utilizes electronic trading tools.
c) Requires a Series 66 registration.
d) Looks at algorithmic trading patterns.
C
High frequency traders are not required to take a Series 65 or 66 examination to trade. They do, however, have high portfolio turnover, use algorithmic trading patterns, and utilizes electronic trading tools.
87. Concerning minimum net worth requirements, which of the following is true? I. They are generally required when a broker/dealer may have custody of client assets or discretion over their accounts. II. A deposit of cash or securities may be accepted in lieu of the net capital requirement. III. Net capital requirements are normally higher for investment advisers who have custody of client assets.
a) I and II
b) I and III
c) II and III
d) I, II and III
B
An appropriate deposit of cash or securities may be accepted in lieu of a surety bond but does not satisfy the net worth requirement.
88. Ms. Curtis is a teacher in School District #12. The value of her TSA (Tax Sheltered Annuity) is $75,000. The district has contributed $35,000 and Ms. Curtis has contributed $20,000. What is Ms. Curtis’ cost basis?
a) $20,000
b) $0
c) $75,000
d) $35,000
B
Ms. Curtis’ contributions were made pre-tax, as were the employer contributions. Therefore, her cost basis is zero and all withdrawals will be taxed as income.
89. A mutual fund’s redemption fee is based on the
a) Offering price.
b) Net asset value.
c) Net asset value plus the sales charge.
d) Offering price less the sales charge.
B
Mutual funds redeem at net asset value (NAV). If there is a redemption fee, the funds would redeem at NAV minus the redemption fee.
90. Which Administrator has jurisdiction if a violation of the Act has occurred? I. The state where the customer resides; II. The state where the agent’s office is located; III. The state where the transaction occurred, regardless of where the customer resides or where the agent is registered
a) II and III
b) III only
c) I and II
d) I and III
B
An Administrator has jurisdiction over any transaction that has occurred in his state.
91. Stanley is working with a client who recently received a lump-sum settlement from an insurance company. The only thing Stanley knows at this time is the amount that the client received. Which of the following best describes a non-financial consideration that Stanley should keep in mind in making any investment recommendation?
a) The client’s attitude toward money and risk
b) The timeframe that the client has for retirement
c) The client’s current financial status and goals
d) The capital needs that the client is currently faced with
A
The client’s attitude is an important non-financial consideration in any investment recommendation. Economic background, attitude toward money itself, level of investment experience, and ability to endure the volatility of the marketplace will determine, to an equal degree as the amount of money the client has to invest, what types of investment are suitable for the client.
92. An agent solicits a trade in a new client’s account. The trade must be broken a week later due to failure to pay. The agent I. Failed to determine the client’s financial condition and capabilities. II. Induced an excessive trade based on the client’s financial resources. III. Created an appropriate trading strategy for his client. IV. Provided all necessary information for the client to make an informed trading decision.
a) I and II
b) I and IV
c) II and III
d) III and IV
A
The agent must make a reasonable inquiry as to the client’s financial condition and resources.
94. If the Federal Reserve Board switched from a tight money policy to an easy money policy, which of the following bonds would increase the most in price?
a) Short-term bonds
b) Intermediate term bonds
c) Long-term bonds
d) None of these. Easy money would cause the price to decline.
C
Switching to easy money means that money supply increases, pushing interest rates down and bond prices up. The rule of thumb here is that the bonds with the longest term to maturity (in this case, the long-term bonds) will change the most in price as measured in dollars.
95. One of the significant advantages of investing in mutual funds is
a) Automatic reinvestment of dividends and capital gains at POP.
b) Automatic reinvestment of dividends and capital gains at NAV.
c) Reinvestment of dividends and capital gains with no tax liability.
d) Reinvestment of dividends at a reduced sales charge and no capital gains tax.
B
The automatic reinvestment of dividends and capital gains with no additional sales charge is a benefit to the mutual fund investor. However, the IRS does charge taxes on the distribution, whether the investor receives the money or reinvests it.
96. Capital market theory I. Is based on the premise that capital markets are essential to economic growth. II. Blends the Keynesian and supply side economic theories. III. Adds validation to the analysis and selection of securities in a managed investment strategy. IV. Seeks to provide optimum returns as a given risk level.
a) I and III
b) I and IV
c) II and III
d) II and IV
A
Capital market theory sets the stage for investment management and adds validation to the analysis and selection of securities in a managed investment strategy. It is based on the premise that capital markets are essential to economic growth.
97. Stanley passes away, leaving most assets to his wife except for his IRA and his Roth IRA, which he leaves to his daughter. Which of the following is true?
a) Stanley’s IRA and Roth IRA will be subject to taxation before his daughter receives them.
b) Stanley’s wife and daughter will each pay taxes on the assets that she receives.
c) All assets are taxed before they are distributed to Stanley’s wife and daughter.
d) Stanley’s daughter will pay taxes on the IRA but not the Roth IRA.
A
All assets not passed on to a spouse are subject to estate taxes. This includes IRAs, annuities, Roth IRAs, and municipal bonds.
98. Which of the following is NOT exempt from state registration as a broker/dealer?
a) Banks, savings & loans, agents and issuers
b) A broker/dealer with no office in the state and whose only customers are institutional investors
c) A broker/dealer located within the state but whose only customers are institutional investors
d) All of the above are exempt.
C
A broker/dealer with an office in the state must be registered in that state.
99. On which of the following forms would a publicly held corporation file details concerning a 10% change in ownership with the SEC?
a) 8K
b) 8Q
c) 10K
d) 10Q
A
Annual information is filed on the 10K, quarterly information is filed on the 10Q, and details concerning significant changes are filed on the 8K.
101. A person may appeal an administrative order within what time period after the entry of the order?
a) 30 days
b) 60 days
c) 90 days
d) 1 year
B
Any person may obtain a review of the Administrative order by filing a written petition asking the court to set aside the order within 60 days after the order was entered.
103. Which of the following are true with regard to provisions under the Uniform Securities Act? I. Civil courts can impose criminal penalties. II. The Act provides for civil liabilities. III. The Act provides for criminal penalties.
a) I only
b) I and II
c) II and III
d) I, II and III
C
The Act provides for civil liabilities and criminal liabilities and penalties. Civil penalties are the judgment of the civil court system.
104. A Canadian broker/dealer has a client who relocated to California. The client has a tax-qualified account. To transact business in California, the broker/dealer must meet which of the following requirements? I. Register with the SEC, FINRA and the California state administrator; II. Be in good standing with Canadian SROs; III. Submit a Consent to Process to the California State Administrator; IV. Only transact business in the client’s tax-qualified account.
a) II and IV
b) II, III and IV
c) I, II and III
d) I and IV
B
Canadian broker/dealers in good standing with Canadian SROs may transact business with clients who relocate to the United States in tax-qualified accounts ONLY. They are not required to register; but must submit a Consent to Process to the state administrator. If the customer opens a taxable account, the Canadian broker/dealer must register with the state in which the customer resides.
105. Randy is a broker who enjoys doing investment research much more than prospecting for sales. His friend Andy is just the opposite as he loves talking to new people and hates numbers. They have agreed that Randy will do all the research work if Andy will send sales Randy’s way when possible. Which of the following is true regarding this relationship?
a) This is considered a soft dollar alliance and must be monitored periodically to avoid the potential for conflicts of interest.
b) Randy must file a Form AD-1 with his broker/dealer listing Andy as his advisory partner for the “mated” transactions.
c) Such a relationship must be tied to a written contract between the broker/dealer and the advisory firm involved and must be binding for all transactions.
d) This form of alliance is considered a unilateral agreement since the broker must rely on the adviser’s goodwill to secure any future compensation.
A
Since this is a soft dollar alliance, the risk of a conflict of interest is inherent regardless of the parties involved and must be monitored for such.
106. An investment adviser is EXEMPT from registration under which of the following conditions?
a) The adviser has no place of business in the state and its only clients are institutional investors.
b) The adviser has an office in the state and its only clients are employee benefit plans (with assets of at least $5 million).
c) The adviser deals with 15 or fewer clients in 12 months.
d) Fewer than 10% of the adviser’s clients are other investment advisers or investment companies.
A
An investment adviser is exempt from registration if the following conditions exist: the adviser has no place of business in the state, and its only clients are other investment advisers, broker/dealers, banks, trust companies and other financial institutions, insurance companies, investment companies, employee benefit plans (with assets of at least $1 million), or government agencies.
107. Which of the following is required in order for a plan to be “qualified”?
a) The plan must be formally written and communicated to the employees.
b) The plan must not be permanent.
c) The plan must be for the exclusive benefit of the employer.
d) The plan’s contribution formula is allowed to discriminate in favor of officers of the company.
A
The plan must be for the exclusive benefit of the employees and their beneficiaries, formally written and communicated to the employees, and the plan’s benefit or contribution formula cannot discriminate in favor of the so-called “prohibited group”: officers, stockholders, or highly paid employees. Participation in a plan may not be geared exclusively to the prohibited group. The plan must be permanent.
109. Which of the following are characteristics of TIPS? I. Fluctuating interest rate; II. Fixed interest rate; III. Fluctuating principal; IV. Fixed principal
a) I and III
b) I and IV
c) II and III
d) II and IV
C
TIPS have a CPI-adjusted, fluctuating principal and a fixed interest rate. Because this fixed rate is applied to a fluctuating principal each semiannual interest period, the interest payment fluctuates.
110. Which of the following would most distinguish a growth from a value stock?
a) IRR
b) NPV
c) P/E ratio
d) Sharpe Ratio
C
Growth stocks have high, and value stocks have low P/E and price-to-book ratios. The Sharpe Ratio compares return to risk. Internal rate of return quantifies the value of an investment by factoring the total of all cash inflows and outflows and their timing, discounted to a required rate of return. Net present value is the discounted rate at which the net present value of all cash flows and final market value of an investment becomes zero.
112. When comparing the IRR of two investments yielding the same amount, which provides the most value to an investor?
a) Highest IRR above “0”.
b) The higher dollar value over the term of the investment.
c) Lowest IRR as it represents the discounted value to investors.
d) The lower dollar value over the term of the investment.
A
The highest IRR (above zero) offers the most value to an investor. Zero represents breakeven and a value above zero represents value above the NPV of the amount invested.
114. What is the penalty for excess contributions to an IRA?
a) 4%
b) 6%
c) 10%
d) 15%
B
An individual can contribute 100% of earned income up to a specified amount (currently $6,000). The excess contribution penalty for traditional IRAs is 6%.
115. A registered representative’s client wants to place a trade that the representative believes is unsuitable. The registered representative should do which of the following?
a) Refuse to execute the trade and terminate the relationship with the client
b) Execute the trade and pass the client’s portfolio to another representative
c) Execute the trade and obtain a written statement from the client that this transaction was unsolicited.
d) Refuse to execute the trade because it will not meet the investor’s financial objectives
C
The registered representative should explain to the client that the trade is unsuitable. If the client still wants to enter the order, the registered representative may do so by marking the transaction unsolicited and asking the client to sign a statement saying that the transaction was unsolicited.
116. Which of the following statements regarding standard deviation is true?
a) Standard deviation finds the most frequently occurring number in a range.
b) A smaller standard deviation indicates less risk.
c) Larger standard deviation indicates less risk.
d) Standard deviation includes range.
B
Since standard deviation measures variance from an average outcome, it is a risk measure of achieving an outcome which differs greatly from the average outcome.
117. A mutual fund portfolio returned 3.5%, it has a beta of 1.5, and its benchmark index returned 3%. The alpha of the portfolio is
a) (-1.5).
b) (-1).
c) 1.5.
d) 2.
B
To calculate alpha multiply, the return of the benchmark index by the beta. The difference between the product and the portfolio return is the alpha: 0.03 x 1.5 = 4.5%, 3.5% - 4.5% = -1.
118. Under the Uniform Securities Act, which of the following would be considered a person? I. The beneficial owner of an UGMA; II. A government; III. A joint stock company; IV. A recently deceased individual
a) I and II
b) I and IV
c) II and III
d) II and IV
C
Under the Act, a person is defined as an organization or group, as well as an individual. The definition excludes minors and deceased individuals.
122. When does the Administrator have the right to subpoena the records of an agent or broker/dealer?
a) If there is suspicion that a violation has occurred
b) Only upon the receipt of written customer complaints
c) Only if criminal charges are being filed
d) After a violation has occurred
A
The Administrator has subpoena rights of records if there is any suspicion that a violation has occurred. This is the most correct answer of the choices given.
The Administrator has subpoena rights of records if there is any suspicion that a violation has occurred. This is the most correct answer of the choices given.
If the correlation coefficient is (-1), it would be that the securities are moving in opposite directions. For example, if one security was up by 1%, the other security would be down by 1%.
124. Which of the following is true regarding estate taxes?
a) All assets not passed on to a spouse are subject to estate taxes
b) IRAs are not taxed as part of an estate.
c) Real estate is excluded from estate taxes.
d) Estates are taxed at preferential capital gains rates.
A
Any assets left to a spouse or left to charity are not subject to estate tax until the spouse also dies.
125. Which of the following is true about a short sale of stock? I. It must be done in a margin account. II. It may be done in a margin account. III. It is bullish. IV. It is bearish.
a) I and III
b) I and IV
c) II and III
d) II and IV
B
Selling short is bearish and must be done in a margin account.
126. Adjusting a portfolio to adapt to a seasonal market trend is an example of
a) Tactical management.
b) Contrarian management.
c) Risk-adjusted management.
d) Strategic management.
A
Tactical allocation involves market timing, identifying and reacting to current market trends, and focusing on short term results.
127. A customer placed a market order. This means
a) The customer has stated the price he is willing to pay.
b) No price is set and the order is to be filled at the best available market price.
c) The order may not be executed because the customer has not specified a price.
d) The customer has specified a price and the order will not be filled unless the market reaches that price.
B
A market order has no specified price and is filled at the best available market price when executed.
130. To calculate taxes due on mutual fund shares being sold using the average cost basis for the shares, what must the investor account for?
a) Only the capital gains received in cash during the holding period.
b) The taxes paid on dividend and capital gain reinvestments made for additional shares.
c) Any cash dividends paid out to the investor during the holding period.
d) All dividend and capital gains paid out to the investor in cash after the shares were purchased.
B
All of the following are true regarding commercial paper EXCEPT that
(A) Any discount is taxable as ordinary income.
(B) It is issued by corporations.
(C) It can be issued either at a discount or with a coupon rate.
(D) Registration is required by the SEC.
D
Commercial Paper does NOT need to be registered with the SEC.
A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months, or 270 days, making it a very cost-effective means of financing.
1. The Investment Company Act of 1940 allows the 12b-1 fee to cover normal operating expenses of a mutual fund, which includes all of the following EXCEPT
a) Fees for printing prospectuses.
b) Sales material.
c) Management fees.
d) Sales commissions.
C
Section 12b-1 of the Investment Company Act of 1940 allows the imposition of a distribution fee to cover expenses associated with the promotion and distribution of fund shares, known as a 12b-1 fee. This fee covers such costs as printing of prospectuses and sales materials as well as certain sales commissions.
2. Net present value represents
a) The discounted sum of all future cash flows plus the final market value.
b) The final market value of the investment, discounted by a risk-adjusted rate of return.
c) The discount rate at which the net present value of all cash flows and final market value of an investment becomes zero.
d) The discounted sum of all future cash flows generated by an investment.
C
Zero is considered breakeven and a value above zero indicates value in excess of the NPV of the investment.
