USA Flashcards
According to the Investment Advisors Act of 1940, which of the following is not an investment advisor?
The Investment Advisors Act of 1940 excludes from the definition of investment advisor anyone who advises only on government or agency securities. A lawyer who gives investment advice falls within the definition of investment advisor if he or she offers the advice as part of his or her practice and receives compensation for it.
A person who is paid to give advice on bank stocks falls within the definition of an investment advisor under the Act.
A publisher of a newsletter that gives specific securities recommendations falls within the definition under the Act.
A client is primarily concerned with having enough money to retire in 20 years. In making recommendations to the client, an adviser would consider all the following choices, EXCEPT: A) The future value of funds invested B) The present value of funds invested C) The current cost of living D) Current interest rates
All choices are correct, except choice (D).
Current interest rates would not be a factor when considering a long-term investment objective. However, to determine how much the client must invest to achieve a future goal, choices (a) and (b) are necessary, as is choice (c), the current cost of living, which can be used to estimate an inflation rate. (63067)
An adviser is asked by her client the following question. "If I invest $50,000 today and it grows at an annual rate of 6%, how long will it take for me to reach $100,000?" The adviser replies: A) 5 years B) 8 years C)12 years D) 14 years
C) 12 Years.
A quick way to determine how long it will take for funds to double is to use the Rule of 72. If we divide 72 by the annual growth rate, it will give us the number of years it would take for funds to double. 72 divided by 6 equals 12. It would take 12 years for $50,000 to grow to $100,000 at an annual growth rate of 6%. (74605)
Which TWO types of risks are NOT associated with options and derivatives contracts? Reinvestment risk Opportunity risk Purchasing-power risk Market risk A) I and III B) I and IV C) II and III D) II and IV
A) Reinvestment risk and purchasing-power risk are not associated with options or derivatives contracts. Reinvestment risk is the possibility that a principal payment received from an investment will need to be reinvested at a lower rate due to a change in interest rates, or the investor might need to assume more risk to receive the same rate of return. Purchasing-power risk, the risk that the value of assets will be eroded by inflation, applies to long-term debt instruments.
Market risk is the day-to-day potential for losses from fluctuations in securities prices. This type of risk cannot be avoided. (62229)
Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals?
A) Broker-dealers with no place of business in a state and a limited number of noninstitutional clients in a state must register
B) Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register
C) Investment advisers with no place of business in a state and whose only clients are institutional investors in a state need not register
D) Investment advisers with no place of business in a state and a limited number of noninstitutional clients need not register
B) There is no exemption from registration for broker-dealers that have no place of business in a state and who limit their agent’s activities to selling exempt securities. It is the securities that are exempt, not the agents selling those securities. Investment advisers that have no place of business in a state may still do business in that state without registering provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. There is no de minimis exemption for broker-dealers that have no place of business in a state and a limited number of noninstitutional clients. (62894)
Which of the following statements is FALSE concerning federal income tax?
A) For inherited securities, the cost basis is the market value at the time of death
B) When gifting securities to a charity, the deduction the donor may claim is his original cost basis
C) For gifted securities that have appreciated, the cost basis of the recipient represents the donor’s original purchase price
D) For gifted securities that have depreciated, the cost basis of the recipient represents the market value at the time of the gift
B) is False!
The deduction a donor may claim on a gift of stock to a charity is the market value of the stock at the time of the gift.
The donor would benefit if the stock price had risen, since he would avoid paying capital gains tax. In the event that the shares are gifted to a charity, the cost basis is the original purchase price or the current market price, whichever is less. If the stock has increased in value, the gift will take the original purchase price as its basis. If the stock has fallen in value, the gift will take the market value at the time of the gift as its basis. If shares are inherited, the cost basis of the recipient is the market value of the shares on the date of the decedent’s death. (67676
Heather is a registered representative who uses instant messages as a means of communicating with 50 of her high-net-worth clients. This type of communication is considered:
A) A retail communication and is subject to review
B) A retail communication and is subject to approval
C) Correspondence and is subject to review
D) Correspondence and is subject to approval
A) Subjet to review because this question makes no mention of the RR promoting a product or service in the instant messages, the communication is subject to review, but not approval.
A retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period.
A retail investor is considered any person who does not meet the definition of an institutional investor.
A retail communication containing an investment or financial recommendation, or promoting a product or service of the member firm, must be preapproved by a principal of the firm. Correspondence is defined as any written or electronic message that is sent by a member firm to 25 or fewer retail investors within a 30-calendar-day period. Correspondence does not require principal preapproval. For correspondence, the method of delivery—whether by e-mail, instant message, or text message—is not relevant. Instead, the important factor is who receives the communication.
Under IRS rules, which of the following items are exempt from the definition of earned income? Unemployment benefits Alimony Child support Income received from investments in property Net earnings from self-employment A) I, II, and III only B) I, II, III, and IV only C) II, III, IV, and V only D) I, II, IV, and V only
The IRS defines earned income as compensation received for personal services actually rendered. According to the IRS, all of these items are considered earned income.
Wages, salaries, and tips
Union strike benefits
Long-term disability benefits received prior to minimum retirement age
Net earnings from self-employment
Unemployment, alimony, and child support are not considered earned income. Income received from investments in property are defined as passive income, which is different from earned income, and treated separately by the IRS. (62748)
Which TWO of the following statements are TRUE regarding nonqualified annuities?
A) There is a 10% penalty on any taxable withdrawals before age 59 1/2.
B) There is no 10% penalty on any taxable withdrawals before age 59 1/2.
C) Distributions must begin by age 70 1/2.
D) There is no requirement for distributions to begin by age 70 1/2.
A) I and III
B) I and IV
C) II and III
D) II and IV
B) Whether an annuity is qualified or nonqualified, the 10% penalty for withdrawals before 59 1/2 would apply to any taxable amount withdrawn. If it is qualified, all of the money received will be taxable as income and subject to the 10% penalty. If it is nonqualified, only the tax-deferred earnings, which come out first, are taxable and subject to the 10% penalty. Withdrawal of the cost basis (after-tax contributions) is tax-free and penalty-free. On the other hand, the IRS does not require that distributions from a nonqualified annuity be started by age 70 1/2, as it typically does with qualified annuities. (63061)
Which TWO of the following are TRUE if the U.S. balance of trade deficit is decreasing? The dollar will strengthen The dollar will weaken U.S. bond yields will rise U.S. bond yields will fall A) I and III B) I and IV C) II and III D) II and IV
B) When the U.S. is running a balance of trade deficit, it is importing more than it is exporting. This means that, on balance, U.S. dollars will be used to purchase foreign currencies to pay for the net imports. This strengthens foreign currency and weakens the dollar. However, if the balance of trade deficit begins to grow smaller, there is relatively less demand for the foreign currency and the dollar will strengthen. A stronger dollar indicates stronger demand for U.S. financial assets, including bonds. Bond prices will rise and their yields will fall.
Which of the following transactions would NOT be considered exempt under the Securities Act of 1933?
A) A private placement
B) An intrastate offering
C) An unsolicited brokerage transaction
D) An initial public offering of an investment company’s common stock
D) An IPO of an investment company’s common stock.
all of the transactions listed are exempt from the Securities Act of 1933. Generally, when investment company shares are offered to the public, they must be registered and sold with a prospectus.
A general partnership is characterized by all of the following, EXCEPT:
A) At least two partners
B) At least one or more limited partners
C) Unlimited liability
D) Partners who are not all members of the same family
B) A general partnership does not have any limited partners. There must be at least two partners to form a general partnership and all the partners are personally liable for the partnership’s obligations. Although the partners in a general partnership may be from the same family, this is characteristic of Family Limited Partnerships, not general partnerships.
Under the provisions of the Alternative Minimum Tax (AMT), all of the following are tax preference items, EXCEPT:
A) The greater of the purchase price or the current market price of an incentive stock option
B) Any amount of accelerated depreciation expense deducted above the amount calculated by the straight line method
C) Any depletion allowances over and above the investment’s basis
D) Any excess intangible drilling cost deducted that is greater than a stated percentage of the investment’s income generated by an oil and gas program
A) Under the provisions of the Alternative Minimum Tax (AMT), accelerated depreciation, excess depletion, and excess intangible drilling costs are all items that may be added back to an investor’s taxable income. Incentive stock options are a type of company stock option given to employees as part of their compensation. Under the AMT, employees must include, as part of their income, the difference between the fair market value and the purchase price (exercise price) at the time of exercise. Choice (a) is the correct choice, since employees do not choose the greater of the two. Depletion is the using up of a natural resource. Depletion allowance, then, gives the owner the ability to account for the reduction (production) of reserves as a product is produced and sold. For accounting purposes, depreciation indicates the amount of an asset’s value that has been used up. For tax purposes, businesses may deduct the costs of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules. Accelerated depreciation is a method used to claim greater deductions in the earlier years of an asset’s life.
What is a SEP plan?
simplified employee pension plan. As the name implies, a SEP plan is simpler to administer and set up than some other types of pension plans. The employer is not required to make fixed annual contributions to the employee’s account
According to the ABC Test, What is an IA?
A) Provide advice or analisys regarding securities
B) Provide this services as a busineses
C) Receive compensation forthis services (Directly or indirectly)
What is the maximun gift tax per person?
As a married couple, Doug and Bonnie may jointly give $28,000 ($14,000 per person) to an unlimited number of people without incurring a gift tax
Payments for medical expenses and college tuition are not subject to the gift tax
A client is in the 35% tax bracket. She has three children, ages 8, 12, and 16 and would like to invest in a 529 plan for the two oldest children. The client has $20,000 that she can invest in each account. If she anticipates her children will enter college at age 19, and will need $75,000 each for their college expenses over four years, an adviser would determine the future value of each account by inputting all of the following factors, EXCEPT the: A) Principal amount invested B) Rate of inflation C) Number of compounding periods D) Expected rate of interest
B) The inflation rate is not a factor in the calculation of the future value of an investment.
Future value calculation:
Pn = P0(1 + r)n
Pn = Future Value n = Number of compounding periods r = Rate of Interest P0 = Original Principal
An investor who is looking for a relatively high level of potential growth but is also looking to generate income would most likely invest in: A) High-yield corporate debt securities B) Convertible bonds C) Income stocks D) Preferred stock
B) Convertible bond prices are influenced by the underlying common stock into which the bonds may be converted. Therefore, if the stock increases in value, so will the bond; however, if the stock declines in value, the bond will still pay interest on a semiannual basis
The NAV per share for both an open-end and closed-end investment company is determined by:
A) Average assets over a period divided by the number of common shares outstanding
B) Total assets of the portfolio minus the liabilities of the portfolio, divided by the number of common shares outstanding
C) Total assets of the portfolio minus the expenses of the portfolio, divided by the number of common shares outstanding
D) Total assets of the portfolio divided by the number of common shares outstanding
B) With both open-end (mutual funds) and closed-end funds the NAV is calculated by taking the total value of all assets in the portfolio and then subtracting the liabilities of the portfolio to arrive at the net assets of the portfolio and then dividing by the number of common shares outstanding.
Paul works as a registered representative for Broker-Dealer Y. He also works as a financial planner within Broker-Dealer Y’s control. Paul’s only source of compensation is commissions. According to the Investment Advisers Act:
A) Paul must be registered as an investment adviser
B) Broker-Dealer Y must be registered as an investment adviser
C) Paul does not need to be registered as an investment adviser
D) Neither Paul nor Broker-Dealer Y requires registration as an investment adviser
D) According to SEC Release 1092, if a registered representative of a broker-dealer is held out to the public as a financial planner, the exemption from registration as an investment adviser is valid, provided the following conditions are met.
The broker-dealer does not charge a special fee for rendering investment advice.
The broker-dealer does not maintain discretionary authorization over the account.
The agent providing the advice is under the control and supervision of a broker-dealer.
According to NASAA’s Statement of Policy on Unethical Business Practices, which TWO of the following statements are TRUE concerning information to be included in an investment advisory contract?
A) The fee for managing equity securities may not be higher than for fixed-income securities.
B) An assignment of the contract can be made only by the investment adviser with the consent of the client.
C) There is disclosure explaining that no prepaid fees will be returned if the contract is terminated.
D) There is disclosure as to whether the contract grants discretionary power to the adviser.
A) I and II
B) I and III
C) II and III
D) II and IV
D) NASAA’s Statement of Policy on Unethical Business Practices provides that the entering into, or renewal of, an investment advisory contract would need to include disclosure of:
All fees and services provided
The term of the contract
A formula for computing the advisory fee
The amount of prepaid fees to be returned in the event of an early termination of the contract
The fact that no assignment of the contract will be made without the consent of the client
Whether the contract grants discretionary power to the adviser
The fee for managing equity securities may be higher than for fixed-income securities
Choice (II) is true since the contract may be assigned with the consent of the client. Choice (III) is not true since some amount of prepaid fees should be returned if the contract is terminated.
Which of the following persons could contribute to a 457 plan?
A) A computer programmer who works for IBM
B) A public school teacher
C) A local government employee
D) All of the above, since these plans are entirely self-funded with no employer contribution
C) A Section 457 is a type of retirement plan used by many public sector workers. These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Series 65 students may encounter all three types on the examination. All have similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers.
Under the Investment Company Act of 1940, which of the following situations requires shareholder approval?
A mutual fund enters into a contract with an underwriter.
A mutual fund adviser wants to deviate from its investment policy.
A mutual fund wants to terminate the existing contract with its investment adviser.
A mutual fund wants to use the fund’s assets to pay for the cost of distributing shares.
A) I only
B) II and IV only
C) I, III, and IV only
D) All of the above
B) The Investment Company Act of 1940 requires shareholder approval for a company to make changes to its investment policy statement or to have the cost of underwriting or distributing shares paid from the fund’s assets (12b-1 fees). The other two choices involve decisions that are made by the fund’s board of directors. To fire the adviser, the board must approve of the action, while approval by a majority of the board’s disinterested members is required to establish a contract with an underwriter.
The portfolio manager of an open-end investment company has investment discretion for amounts of more than $50 million in equity securities. He is required to file what form with the SEC? A) Form 13D B) Form 13F C) Form 144 D) None of the above
D) If the portfolio manager has investment discretion for more than $100 million of equity securities, he must file Form 13F with the SEC within 45 days of the end of quarter, if that is the value of his holdings as of the end of any month
The annual percentage returns on ABC over the last 9 years have been: 7, -6, -3, 8, 6, 5, 11, 13 and 8. What is the median return? 5.1 8 7 -6 to 13
The median is the center point–the point on a data set where there are the same number of points above as below. In this question the median is 7. There are 4 points below (-6%, -3%, 5%, and 6%) and 4 points above (8%, 8%, 11%, and 13%). Choice (d), -6% to 13%, would represent the range.
All of the following are considered qualified plans under ERISA, EXCEPT: A) Payroll deduction plans B) Keogh plans C) Profit-sharing plans D) Defined benefit plans
B) Keogh Plans.
Payroll deduction plans allow employees to purchase life insurance, mutual funds, and variable annuities through after-tax deductions from their paychecks. Employers may match employee contributions if they wish. The sales charges are often lower than the employees would pay if they purchased these products individually. Payroll deduction plans are nonqualified plans.
Which TWO of the following items does the IRS consider earned income? A) Royalties B) Dividends C) Long-term disability benefits received prior to minimum retirement age D) Social Security A) I and III B) I and IV C) II and III D) II and IV
A) I and III
The IRS defines earned income as compensation received for personal services actually rendered. Royalties and long-term disability benefits received prior to the minimum retirement age come under the IRS’s definition. Dividends and Social Security are not considered earned income. They are still taxable, however
Which of the following is generally considered the GREATEST risk when investing in a portfolio of fixed-income securities? A) Credit or default risk B) Inflation or buying-power risk C) Liquidity risk D) Market risk
B) While fixed-income securities are subject to market, credit, and liquidity risks, the greatest risk in buying and holding fixed-income securities over long periods is that their rate of return will not exceed the rate of inflation. As the rate of inflation rises, it will cause a bond’s real rate of return to be less than its internal rate of return
Gary and Mary were recently divorced. Mary has been ordered by the court to pay alimony to Gary. How are these monthly payments treated for tax purposes?
A) Alimony payments are deductible to Mary.
B) Alimony payments are taxable to Gary.
C) Alimony payments are taxed as earned income.
D) Alimony payments are not taxed as earned income.
I only
I and II only
I, II, and III only
D) I, II, and IV only
D) I, II, and IV only
Alimony is deductible for tax purposes by the payer and taxable to the recipient. It is not taxed as earned income, but is taxed as unearned ordinary income.
All of the following are true regarding the balance of payments, EXCEPT:
A) The capital account shows the results for trade transactions completed in the current year
B) The sum of the capital account and the current account must be zero
C) A persistent current account deficit will drain foreign currency reserves
D) The purchase of a Treasury bond by a foreign investor would represent a positive entry in the capital account
A) The current account shows the results for the trade transactions completed in the current year. The capital account shows the inflows and outflows of capital in transactions involving property and financial assets. The net of the two accounts must be zero.
According to the Investment Advisers Act of 1940, when is an investment adviser required to provide a balance sheet to its clients?
Under the provisions of the Investment Advisers Act of 1940, an investment adviser must provide clients with its balance sheet if it requires the prepayment of a fee in excess of $1,200, six months or more in advance of the service.
At the state level, a balance sheet is provided for collecting/soliciting a prepaid fee of greater than $500, and also for maintaining custody or discretionary control of clients’ assets. However, at the federal level, a balance sheet is provided only if the adviser is collecting/soliciting a prepaid fee of greater than $1,200
A client’s 58-year-old mother passed away after having named him the beneficiary on her IRA. She had not taken any distributions out of the IRA. He may receive the proceeds of the account:
After five years
After the beneficiary reaches 70 1/2
Over the life expectancy of the original owner
Over the life expectancy of the beneficiary
If you inherit a traditional IRA or any other tax-deferred retirement plan, a 401(k) or 403(b), from anyone other than your deceased spouse, you may NOT treat the inherited IRA as your own. But, as with the original owner, you will not owe tax on the assets in the IRA until you receive distributions.
If the previous IRA owner dies before distributions have begun, the entire IRA must be distributed under one of the following two rules.
Rule 1. By December 31 of the fifth year following the year of the owner’s death
Rule 2. Over the life of the designated beneficiary or over a period not extending beyond the life expectancy of the beneficiary
Freedmont Airlines stock has a beta of 1.3. Over the past year, Freedmont has returned 12% while the market as a whole has risen only 10%. A technical analyst would say that Freedmont Airlines has an alpha that is: A) Positive 2% B) Negative 1% C) Negative 2% D) Positive 1%
B)
Alpha is the amount either above or below the expected return as indicated by the beta. If a security outperforms the expected return, it is said to have a positive alpha. If it underperforms the expected return, it has a negative alpha. With the market advancing 10%, the expected return for a security with a beta of 1.3 would be 13%. Since Freedmont Airlines only went up 12%, its actual return is 1% below the expected return. (7473
What characteristic generally makes universal life insurance policies more attractive than other forms of life insurance?
A) There are no fees assessed against a universal life insurance policy
B) Universal life insurance dividends may be reinvested to buy more insurance coverage
C) Universal life insurance policies allow policyholders to lock in short-term rates of return
D) Universal life insurance policies offer the ability to adjust coverage amounts as needs arise
D)
The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease. (67702)
Which of the following item(s) are listed on the income statement? I Assets II Liabilities III Retained Earnings IV Operating Expenses A) III only B) III and IV only C) IV only D) I, II, III, and IV
C) Assets, liabilities and retained earnings are balance sheet items and are not represented on the income statement. Retained earnings are the funds that a company earned that it did not pay out in the form of cash dividends.
Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is:
Under USA, The statute of limitations for criminal violations under the Act is five years. 5 yrs.
To measure net inflows against net outflows using a required rate of return is to look at an investment’s:
A Expected return
B Net present value
C Internal rate of return
D Total return
The net present value of an investment is a dollar amount, not a percentage rate of return. To find the net present value, advisers net all the expected cash outflows (such as the amount of the initial investment) against all the expected cash inflows (such as the income to be generated by the investment). Next, they discount the net amount by using a required minimum rate of return as a discount rate to determine the net present value of the investment in dollars. If the net present value of the investment is positive, the investment is considered to be worthwhile.
A diversified portfolio of fixed income securities would have which of the following risks?
I. Inflation
II. Interest rate
III. Business
IV. Market
A) I, II, III, & IV
B) II & III only
C) I & III only
D) I & II only
Explanation: D)
A diversified portfolio of fixed income securities is subject to both inflation and interest rate risk. Inflation risk exists because the rate of inflation could exceed the fixed rate of return on the portfolio, which would result in a loss of purchasing power.
Further, if interest rates in the economy go up, the portfolio could lose value, which is known as interest rate risk. However, since the portfolio is diversified, most business risk (or performance risk) is eliminated. Market risk cannot be avoided by diversification but is more common to stock portfolios rather than bond portfolios.
A 55 year old invested $10,000 in a non-tax qualified annuity several years ago. Due to earnings in the account, the balance is now $25,000. If he or she withdraws $5,000 in cash, what are the tax implications?
A) $5,000 will be taxable as ordinary income
B) $5,000 will be taxable as ordinary income in addition to a $500 IRS penalty
C) $5,00 will be taxable as long-term capital gain
D) None since this amount is below the $10,000 cost basis
Explanation: B)
Tax rules state that the partial withdrawal of annuity funds are taxed as interest first and principal last. Although the $5,000 withdrawal is less than the cost basis, the entire $5,000 is taxable as ordinary income and is subject to the IRS 10% premature distribution penalty since he or she is less than age 59 1/2.
Under the Investment Advisors Act of 1940, which of the following investment advisors are exempt from registration?
I. All of Fred’s clients reside in his home state and Fred does not offer advice on any exchange-listed securities.
II. All of Lynn’s clients are investment companies.
III. Carol does not hold herself out to the public as an investment advisor and has 14 clients, all separate individuals.
A) I, II, & III
B) I & II only
C) I & III only
D) II & III only
Explanation: C)
There are three exemptions from the registration requirement under the Advisors Act: advisors who render no advice on any exchange-listed security and whose clients are all in one state; advisors who do not hold themselves out as investment advisors and have fewer than 15 clients per year, none of whom are investment companies; and advisors whose only clients are insurance companies.
Under the Investment Company Act of 1940, all are true about affiliated persons EXCEPT:
A) The fund’s investment advisor is considered an affiliated person
B) They can purchase securities directly from the mutual fund’s portfolio
C) They include any person owning 5% or more of the outstanding mutual fund shares
D) The fund’s officers and directors are considered affiliated persons
B) Affiliated persons may own investment company shares but they cannot purchase securities directly from the mutual fund’s portfolio.
Violations of the Securities Act of 1933 would include all of the following EXCEPT:
A) Prior to the effective date of the registration statement, accepting a firm buy order from a customer
B) Delivering to a potential purchaser of mutual fund shares a prospectus which is out of date
C) Disclosing in the preliminary prospectus the pricing formula for the investment company shares
D) A statement in the final prospectus which is a material misstatement
C) It is not a violation of the Securities Act of 1933 to disclose in the preliminary prospectus the pricing formula for investment company shares.
Differences between the balance of payments the current account and capital account?
The current account shows the results for the trade transactions completed in the current year; while The capital account shows the inflows and outflows of capital in transactions involving property and financial assets
An IA must notify the SEC of any material changes in its ADV within:
Any material changes in the IA’s ADV would require that an amendment be filed with the SEC within 30 days. Nonmaterial changes in information in the ADV are amended within 90 days of the end of the IA’s fiscal year.
Under USA the IA must notified the administrator promptly!
Which of the following statements are TRUE of both variable life insurance and variable annuities?
The investment risk is borne by the contract owner.
The product must be sold with a prospectus.
Partial surrenders are first treated as a tax-free return of principal.
If the contract owner dies, the beneficiary receives any proceeds tax-free.
A) I and II only
B) III and IV only
C) I, III, and IV only
D) I, II, III, and IV
A) I and II only
Although partial surrenders of variable life insurance policies are first treated as a return of principal up to the amount of basis, variable annuities are subject to interest-first taxation. Only life insurance proceeds pass to beneficiaries tax-free. Beneficiaries of variable annuity contracts are taxed on the proceeds in the same manner as the annuitant.
If the dollar is declining against foreign currencies, which TWO of the following results would most likely occur?
An improvement in the U.S. balance of trade A worsening of the U.S. balance of trade An increase in imports into the U.S. Increased exports by the U.S. A) I and III B) I and IV C) II and III D) II and IV
B) I and IV
If the U.S. dollar is in a decline against foreign currencies, U.S. goods will be less expensive to foreigners. This should lead to increased U.S. exports and decreasing imports into the U.S. Since the U.S. has a trade deficit, this would improve the balance of trade.
If an investment adviser sells a security that it owns to an advisory client, which of the following scenarios would violate the Uniform Securities Act?
A) The IA acts as a broker-dealer to the seller of the securities without written disclosure
B) The IA acts as a principal in the transaction with written consent and disclosure
C) The IA acts as a broker-dealer to the buyer of the securities without written consent and disclosure
D) The IA recommends the purchase of a private placement to the customer
When an investment adviser sells securities directly to a client (i.e., principal trade), the firm must provide disclosure and obtain the client’s consent before completing the transaction
A corporate bond is purchased at its par value of $1,000 and later sold at a discount. This would be indicative of which of the following risks?
A) Opportunity risk
B) Credit risk
C) Currency risk
D) Interest-rate risk
A) I only
B) III only
C) I and III only
D) II and IV only
D)
The most likely the reason for the bond’s price decline is that interest rates have risen. The risk of interest rates moving against a bond investor is referred to as interest-rate risk. Another possible explanation for the bond losing value is that its credit rating fell (credit risk).
All of the following are associated with state standards for prudent investing by fiduciaries, EXCEPT:
A) The prudent man standard
B) ERISA
C) Legal lists
D) The Uniform Prudent Investor Act
B) ERISA
The traditional state law standards for investing by fiduciaries were the prudent man standard and the more restrictive legal list. Today, many states have adopted a version of the Uniform Prudent Investor Act, which allows fiduciaries to take into account the concepts of Modern Portfolio Theory. ERISA is a federal law regulating qualified pension plans.
An investor has purchased a U.S. government bond for $1,000. The bond is now worth $850. Which TWO of the following risks is a concern to this investor?
A) Market risk
B) Credit risk
C) Currency risk
D) Opportunity risk
A) I and II
B) I and IV
C) II and III
D) II and IV
B) I and IV
There are certain types of risk that are common to any investment. Market risk and opportunity risk would be among these generic risks. Market risk is the day-to-day price fluctuation of a security trading in the marketplace. Opportunity risk is the risk that a better investment decision could have been made after the completion of a purchase or sale. U.S. government bonds would not be subject to credit risk or currency risk, unless the investor had purchased them with foreign currency.
Characteristic of prefer stocks are?
Will follow the pricing of debt instruments and not common stock.
Pays a fixed dividend and is purchased by investors looking for income, not capital appreciation.
Would most closely follow the pricing of long-term debt instruments.
Regarding child support payments?
I Child support is not tax-deductible for the payer.
II Child support is tax-deductible for the payer.
III Child support is taxable for the receiver.
IV Child support is not taxable to the receiver.
I and II only
II and III only
II and IV only
I and IV only
I & IV
Child support payments are not tax-deductible for the payer and not taxable for the recipient.
A 52-year-old client invested $100,000 in a nonqualified annuity that is currently worth $200,000. She decides to liquidate the annuity and take a distribution. The distribution will be:
A) Fully taxable as ordinary income and subject to a penalty
B) Fully taxable at long-term capital gains rates
C) Partially taxable at ordinary rates and subject to a penalty
D) Considered a tax-free return of principal and not subject to taxation
C) Partially taxable at ordinary rates and subject to a penalty.
Anyone may purchase a nonqualified annuity and make nondeductible contributions (after-tax dollars). Withdrawals from a nonqualified annuity are taxable as ordinary income (not capital gains) in excess of the client’s cost basis (original investment). The initial investment is considered return of principal and not subject to taxes. Since the client is less than age 59 1/2, she is also required to pay a 10% tax penalty.
bond’s current yield?
Current yield measures the interest the investor receives from the bond compared to the price the investor paid for the bond and is calculated by dividing the annual interest payments by the purchase price. Current yield does not consider the price appreciation of a bond purchased at a discount or the price depreciation of a bond purchased at a premium.
In accordance with the Investment Advisors Act of 1940, an advisor may only change his or her advisory fee schedule if:
A) With SEC approval
B) He or she files an amended Form ADV within 90 days of the end of the fiscal year
C) He or she can justify the change based upon the current balance sheet
D) He or she files an amendment promptly with the SEC and gives written notification to his or her clients
B) A change in the fee structure does not necessitate an interim amendment be filed. Instead, the change in fees must be noted on the amended Part 2A that is filed within 90 days of the fiscal year. Disciplinary action or a change in an already disclosed disciplinary action would require an interim updating amendment be filed promptly.
A client is primarily concerned with having enough money to retire in 20 years. In making recommendations to the client, an adviser would consider all the following choices, EXCEPT:
A) The future value of funds invested
B) The present value of funds invested
C) The current cost of living
D) Current interest rates
choice (d). Current interest rates would not be a factor when considering a long-term investment objective. However, to determine how much the client must invest to achieve a future goal, choices (a) and (b) are necessary, as is choice (c), the current cost of living, which can be used to estimate an inflation rate.
In order to form a limited partnership, two or more people must:
A) Agree to operate a business together
B) Elect to be taxed under Subchapter S
C) File a certificate with the appropriate state or local official
D) File a registration statement with the SEC under Regulation A
C) File a certificate with the appropriate state or local official.
The only way to create a limited partnership is by filing a certificate (or other document) with a state or local agency. A general partnership, in contrast, is created whenever two or more people agree to form a partnership. The agreement does not even need to be in writing.
A client, age 61, has invested $200,000 in after-tax dollars in a variable annuity. His annuity is currently worth $380,000. The client decides to draw down $50,000 from the contract. How will the distribution be taxed?
A) The distribution will be 25% tax-free and 75% taxable at long-term capital gains rates
B) The distribution will be 25% tax-free and 75% taxable at Pete’s statutory income rate
C) The entire distribution is tax-free since Pete is older than 59 1/2
D) The entire distribution will be taxable at ordinary income rates
D) The entire distribution will be taxable at ordinary income rates.
This question discusses a nonqualified annuity. In a nonqualified annuity, the investment is made with after-tax dollars. When a client makes a single (irregular) withdrawal from a contract, the IRS requires that a last in, first out (LIFO) method be used when calculating tax liability. This means earnings (the last in) come out first. In this case, the $50,000 is taken out of the $180,000 of earnings and would be fully taxable as ordinary income. Annuities never generate long-term capital gains.
Anyone subject to an SEC order has how many days to challenge that order with a US Court of appeals?
Any person challenging an SEC order has 60 days to file a petition
Under Regulation D of the Securities Act of 1933, accredited investors include:
Senior officers are included if they are senior officers of the issuer. Institutional investors, such as insurance companies, are specified in the regulation. A person with annual income of $200,000, or net worth of $1 million, is also considered accredited
When you may use a Testamentary Trust?
A testamentary trust may be used when a donor wishes to control trust assets during his lifetime. John’s will, when executed, will direct the executor to fund the trust with assets contained within the estate. This process does not avoid probate or reduce a potential tax liability levied on the donor’s estate
Every investment advisory contract must be in writing and it must include which of the following provisions?
A) A statement that assignment of the contract is prohibited
B) A statement that defines the length of time for which the services are contracted
C) A statement that limits the investment adviser’s liability to $500,000 per client
D) A statement that fully explains the percentage of the capital gains that will be shared with the adviser
B) A statement that defines the length of time for which the services are contracted.
An investment adviser’s contract must be in writing and clearly disclose the specific length of time that it is in force. Provided customer consent is obtained, advisory contracts may be assigned to another advisory firm. Advisory contracts may not include a clause which attempts to limit an adviser’s liability. Also, an adviser is prohibited from sharing in a client’s capital gains unless the client is qualified and meets specific financial criteria.
An investment adviser may store its books and records on electronic media if:
A) It discloses the format type to the regulators
B) It also makes separate paper copies and stores them separately
C) It provides immediate access to the books and records
D) It discloses to all clients that electronic media storage is used
C) It provides immediate access to the books and records.
Using a form of electronic media storage is acceptable provided the records are readily accessible and copies may be created. Electronic records must also be nonerasable, nonrewritable, and tamper-evident.
A client has invested $20,000 in a variable annuity. After 10 years, the annuity is valued at $45,000. If the client withdrew $20,000 at age 59, he is subject to:
A) A 10% penalty on the amount withdrawn
B) Being taxed on the distribution as a capital gain
C) Being taxed on the distribution as ordinary income
D) Being taxed on the distribution as ordinary income, plus a 10% penalty on the amount withdrawn
D) Being taxed on the distribution as ordinary income, plus a 10% penalty on the amount withdrawn.
If an individual purchases a variable annuity, it is not considered a tax-qualified plan. The contribution is not taxed upon withdrawal; however, any earnings withdrawn prior to age 59 1/2 are subject to a 10% penalty and ordinary income tax.
Which TWO of the following are TRUE if the U.S. balance of trade deficit is decreasing? A) The dollar will strengthen B) The dollar will weaken C) U.S. bond yields will rise D) U.S. bond yields will fall
A) I and III
B) I and IV
C) II and III
D) II and IV
B) I and IV
When the U.S. is running a balance of trade deficit, it is importing more than it is exporting. This means that, on balance, U.S. dollars will be used to purchase foreign currencies to pay for the net imports. This strengthens foreign currency and weakens the dollar. However, if the balance of trade deficit begins to grow smaller, there is relatively less demand for the foreign currency and the dollar will strengthen. A stronger dollar indicates stronger demand for U.S. financial assets, including bonds. Bond prices will rise and their yields will fall.
If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed?
A) LIFO
B) FIFO
C) Part of each payment is taxable earnings and part is a tax-free cost basis
D) All taxable earnings first, then all cost basis
C) Part of each payment is taxable earnings and part is a tax-free cost basis.
A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt.
A 52-year-old client invested $100,000 in a nonqualified annuity that is currently worth $200,000. She decides to liquidate the annuity and take a distribution. The distribution will be:
A) Fully taxable as ordinary income and subject to a penalty
B) Fully taxable at long-term capital gains rates
C) Partially taxable at ordinary rates and subject to a penalty
D) Considered a tax-free return of principal and not subject to taxation
C) Partially taxable at ordinary rates and subject to a penalty.
Anyone may purchase a nonqualified annuity and make nondeductible contributions (after-tax dollars). Withdrawals from a nonqualified annuity are taxable as ordinary income (not capital gains) in excess of the client’s cost basis (original investment). The initial investment is considered return of principal and not subject to taxes. Since the client is less than age 59 1/2, she is also required to pay a 10% tax penalty.
Imports into the United States have been falling dramatically, while exports have been rising. A major cause of this would be:
A) Rising interest rates in the U.S.
B) Falling interest rates in the U.S.
C) The dollar rising in value relative to the currencies of our trading partners
D) The dollar declining relative to our trading partners’ currencies
D) The dollar declining relative to our trading partners’ currencies.
Normally, if a country’s currency is declining in value relative to the currencies of its trading partners, imports would fall and exports would rise. When a country’s currency is in decline, its goods would fall in price relative to similar products imported from abroad. Falling interest rates in the U.S., choice (b), may not always have an effect on lowering the value of the dollar.
Under Regulation D of the Securities Act of 1933, accredited investors include:
A) Accountants.
B) Insurance companies.
C) Any senior officer of a publicly traded company.
D) Individuals with a net worth of one million dollars or more.
A) I and II only
B) II and IV only
C) III only
D) I, III, and IV only
B) II and IV only.
No single profession is specified in the definition of an accredited investor. Senior officers are included if they are senior officers of the issuer. Institutional investors, such as insurance companies, are specified in the regulation. A person with annual income of $200,000, or net worth of $1 million, is also considered accredited.
The expected rate of return?
The expected rate of return is used to estimate or anticipate the performance of a portfolio by averaging all of the possible returns and the probability that they will occur.
