65 Flashcards

Question

True or False: A BD making recommendations about investing in various securities is an IA under the USA.

Answer 1

False. Since the BD is not charging a fee for the advice, it is excluded from the IA definition.

Answer 2

Assets under management, the number of accounts, clients, employees, and IA representatives

Answer 3

Yes, but no state may impose a requirement that exceeds the requirement of the IA's home state.

Answer 4

False. At a minimum, the IA must (in writing) offer to deliver its brochure annually.

Answer 5

Under the USA, the de minimis exemption limits an IA to no more than five clients within the previous 12 months.

Answer 6

Within 90 days from the IA's fiscal year-end

Answer 7

The process in which information that is filed with the SEC is also filed or shared with the Administrator.

Answer 8

Provide written notification to clients and the Administrator

Answer 9

No, mutual funds advisers are federally covered and are excluded from the IA definition at the state level.

Answer 10

Form required for IAs with general partners who are non-U.S. residents; gives the SEC the right to receive legal papers

Answer 11

Change in the number of discretionary and non discretionary accounts, or change in assets under management

Answer 12

Banks, S&Ls, insurance or investment companies, investment advisers, or entities with at least $50 million in assets

Answer 13

Yes, if the IAR has no office in the state and has five or fewer retail clients in the state in the past 12 months.

Answer 14

The form filed by investment advisers for registration

Answer 15

Journals, blotters, ledgers, position records, and trade confirmations

Answer 16

It is filed within 120 days from the completion of an audit of the IA's books; filed by the auditor.

Answer 17

The transfer of an advisory contract by the adviser or any change in the overall management of the advisory firm.

Answer 18

A fee-based (wrap) account

Answer 19

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $1,100,000 under management

Answer 20

Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.

Answer 21

The fact that the IA may be collecting both advisory fees and commissions

Answer 22

No. An established FCA must register with the state Administrator if the AUM falls below $90 million.

Answer 23

False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds.

Answer 24

Yes. Provided the testimonial is not misleading and certain disclosures are made.

Answer 25

The private placement disclosure document is the Offering Memorandum.

Answer 26

The Investment Advisers Act of 1940

Answer 27

Nationally Recognized Statistical Ratings Organization

Answer 28

No. Solicitors only solicit new clients; they do not recommend or approve transactions.

Answer 29

True. Provided proper disclosure is made, charging clients different fees is permitted.

Answer 30

The IA Act of 1940 considers any communication that is directed to more than one person to be advertising.

Answer 31

False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500.

Answer 32

False. However, at the time of contact, the solicitor must provide clients with a solicitor disclosure document.

Answer 33

False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.

Answer 34

Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $2,200,000

Answer 35

Make a reasonable inquiry into a customer's background and provide suitable advice based on known information.

Answer 36

Statements must be sent quarterly.

Answer 37

The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than one person.

Answer 38

An IA with offices in 15 or more states must register with the SEC.

Answer 39

Assets are held by a qualified custodian. Clients must be notified of custodian's name, address, and manner of holding.

Answer 40

No. Depending on the frequency of the client's trading, he may ultimately pay more than if the fees are paid separately.

Answer 41

Sports and entertainment reps, pension consultants and financial planners

Answer 42

Yes. IARs of federal covered advisers must register in any state in which they have a place of business.

Answer 43

False. An IA must always disclose a conflict, but they don't necessarily need to end the relationship.

Answer 44

The IA's clients reside in the state in which its office is located and its advice is not related to exchange-listed securities

Answer 45

No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.

Answer 46

Until it has been withdrawn, cancelled, or revoked by the SEC.

Answer 47

A person who acts on behalf of another, which gives rise to a relationship of trust and confidence.

Answer 48

Yes, provided it is fully owned by the IA.

Answer 49

False. IA registration is not required if a consultant provides incidental advice that is not securities-related.

Answer 50

When it is being paid to provide securities-related investment advice

Answer 51

A fee is charged to cover transaction costs (often a percentage of assets), but no management is performed.

Answer 52

True. The consultant must register as an IA since it is providing securities-related advice for compensation.

Answer 53

A conviction of any felony or securities-related misdemeanor within the last 10 years

Answer 54

Services costing less than $500 per year that are not tailored to meet the investment objectives of a specific client

Answer 55

Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings.

Answer 56

Only securities that are suitable based on the information the client did provide

Answer 57

No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited.

Answer 58

False. They are excluded from the definition under the IA Act of 1940, not under the USA.

Answer 59

No, since it is only a minority change of partners. A majority must retire for it to be considered an assignment.

Answer 60

A full power of attorney

Answer 61

Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.

Answer 62

Correct answer is C. Regulation Best Interest prohibits sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities, or specific types of securities like stocks from a particular industry. However, incentives based on sales of general categories of securities (such as all equity securities or all mutual funds) are allowed. Hiring bonuses that take the form of forgivable loans are included in this prohibition. Forgiveness of the loan cannot be based on the sales of specific securities or specific types of securities.

Answer 63

Correct answer is B. You are expected to know the client's financial status, tax status and investment objectives. You are not expected to know information the client refuses to disclose.

Answer 64

Correct answer is C. As an agent, Terrence is responsible for revealing everything that Bradley would need to know in order to make a proper investment decision. Even though Brad has only expressed an interest in avoiding front-end charges that does not mean Terry should avoid telling him about other charges that are part of a particular mutual fund. Thus he should disclose the back-end charges during their meeting. Additionally, remember that simply providing a client with a mutual fund prospectus does not constitute full disclosure, and highlighting any part of prospectus is prohibited.

Answer 65

Correct answer is C. A trust is considered to be a legally separate entity. Income received by a trust is taxable to the trust, to the beneficiary, or to the grantor of the trust, unless there is a specific exemption in the Internal Revenue Code for which the trust qualifies.

Answer 66

The correct answer is A. The NASAA outlines a number of unethical practices relating to the purchase or sale of securities through professionals and their firms. Failing to make a bona fide public offering ***(In good Fath)*** of all of the securities that were allotted to a broker-dealer is one such unethical trading practice. During a public offering, broker-dealers are allotted a certain amount of shares to be sold to investors; it is a violation to hold back these shares for their own account in the hopes that the price will rise in the future. Manipulating market prices through unnecessary trading among agents is also a violation, often referred to as making matched purchases. Backing away refers to a broker-dealer’s failure to honor a quote. It is a violation for a broker-dealer to offer to buy or sell a security at a particular price with no intention of actually buying or selling the security at that price.

Answer 67

Correct answer is C. The resistance level is the price that technical traders think a stock will have trouble exceeding. So when a stock’s price reaches this level, those traders will typically sell it off. The price level itself does not determine the action taken. This means that if a technical trader thinks a stock will have trouble pushing past a relatively low value, he will sell when it reaches that value; if he thinks a stock will have trouble pushing past a relatively high value, he will likewise sell when the stock reaches that level.

Answer 68

Correct answer is A. When renting a property, you are allowed to deduct expenses like repairs and maintenance. This does not include building improvements. Having a deck added to the house would be considered a building improvement.

Answer 69

The correct answer is D. "The [Administrator] may by rule or order require an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in this state." The de minimis exemption allows an investment adviser to avoid registering in the state altogether.

Answer 70

Answer is B All gains and losses associated with an LP are passed through directly to investors. On the other hand, while issuing companies pay dividends as a sort of pass-through gain to investors, they do not pass losses through to shareholders. Limited partnerships provide the potential for high gains to investors, but stocks can also provide the potential for high gains. Neither limited partnerships nor stocks offer tax-free income to investors. Finally, both limited partnerships and stocks offer limited liability to investors; stocks provide limited liability to all investors, while LPs provide limited liability to limited partners.

Answer 71

Correct answer is A. Since municipal securities are considered to be exempt, Molly, or any other person employed by Redwood, can sell its securities without registering as an agent. This also means that she can take orders for the sale of those securities without registering as an agent. Had she been employed by a broker-dealer, Molly would not have been allowed to take securities orders under any circumstances unless she was also registered as an agent.

Answer 72

Correct answer is B. An investment adviser representative is expressly prohibited by the Investment Advisers Act of 1940 from claiming that she has been recommended by the SEC. A firm cannot choose a name that suggests that they are better than other firms, such as AAA Investments. A firm cannot put investment counsel on their business cards unless it's primary business is actively managing accounts. An investment adviser rep is allowed to use someone else's information when making a recommendation, as long as she informs the client that the information was provided by a third party.

Answer 73

Correct answer is B. As part of its registration with a state securities administrator, a broker-dealer must file a consent to service of process. This document allows the administrator to receive legal papers on behalf of the broker-dealer. Form U4 is the registration form for associated persons who are applying for FINRA registration. Form CRS is the relationship summary that must be delivered to all new customers of a broker-dealer when they open an account with the firm. Finally, Form BDW is the form that a broker-dealer files when it wishes to withdraw its registration.

Answer 74

Correct Answer is B. One of the issues that arises in insider trading cases is whether a person who shared and/or traded on material nonpublic information breached a “duty of trust or confidence” by doing so. According to Rule 10b5-2, a duty of trust or confidence exists when the person receiving the information knows or should know that the person passing on the information expects it to be kept confidential. There are several factors that go into whether the recipient should know that confidentiality is expected, including the nature of the relationship and the extent to which the person who shared the information has in the past relied on the recipient to keep information confidential. In this case, the banker does not normally talk about his job with his brother. Additionally, because the brother doesn’t know much about investing, he might not have understood that the information was supposed to be confidential. Therefore, the brother could argue that he had no duty of trust or confidence. Whether this defense would work depends on many factors, but of the choices presented, it is the only reasonable one. With regard to the other choices, Rule 10b5-2 also says that a duty of trust or confidence exists when a person has agreed to keep the information confidential, as the investment banker would have had to do in order to work on the IPO. Insider trading laws apply generally, not just to securities professionals. Finally, knowledge of the IPO was both material and nonpublic, since a person could reasonably conclude that the announcement of a well-known automaker’s IPO could have a positive effect on the stock price of its major suppliers.

Answer 75

Correct answer is B. An investment adviser's registration can be terminated by an administrator's revocation or voluntarily through filing a Form ADV-W. A U5 is filed to terminate an investment adviser representative's registration, and suspension by an administrator implies a temporary halt of operations rather than termination.

Answer 76

Correct answer is A. If Jane writes 5 covered calls, she will be able to take in $3,500 of extra income. If the calls are exercised she can use 500 of her shares to cover the calls.

Answer 77

The correct answer is C. The Board of Directors decides whether to issue dividends, not the stockholders. Stockholders have no voting rights regarding dividends nor do they have any recourse should the Board decide not to issue them, even if the company has issued them in the past.

Answer 78

Correct answer is D. Agents are not allowed to tell clients that they are certified to sell securities, by FINRA or anyone else. An agent is registered, but that in no way constitutes certification as a securities professional. Agents are also prohibited from making any promises or inferences that a client working with the agent will experience any level of performance. Statistics detailing past client performance can be utilized by an agent; however, they cannot be used as a means to predict future results. Unlike an investment adviser, for whom their use is restricted, an agent can typically provide testimonials to clients.

Answer 79

Correct answer is A. The SEC does not approve the merits of an investment under any circumstances. This would be considered an unlawful representation.

Answer 80

Correct Answer is B. Under the Uniform Securities Act, securities issued by Canadian government (Item I), securities issued by other foreign governments with which the US maintains diplomatic relations (Item III), and securities issued by the US government (Item II), are exempt from registration.

Answer 81

Correct answer is C. Simply disclosing a possible conflict of interest to a client can resolve many conflicts of interest.

Answer 82

Correct answer is C. Annuitants can receive payments through random withdrawals, which is when an annuitant requests sums at random times, in a lump sum, which is when an annuitant requests the payment all at once, and through monthly payments, which is when an annuitant annuitizes the contract.

Answer 83

An adviser must notify the Administrator in writing that it is taking custody of a client account. Maintaining custody of a client account is a big responsibility that comes with a lot a regulation attached to it, so advisers typically try to avoid becoming custodians, allowing "qualified custodians," such as banks, to do the job. Requirements for an adviser to become a custodian include paying for a CPA to make an surprise annual audit (not a pre-scheduled one). Under the Uniform Securities Act, an Administrator may or may not allow custody. Note if the Administrator allows custody, the Administrator may impose a higher minimum net capital requirement.

Answer 84

Correct answer is C. A corporation is a business entity that is legally set up as a separate entity from the owners of the company and the people who run it. Due to the fact that a corporation is a separate legal entity, the stockholders are not responsible for the company's debts. The only liability that a stockholder has is the amount invested. If the company should go bankrupt, the investor's loss is limited to the amount that was invested in the company.

Answer 85

Correct answer is C. A callable bond can be redeemed prior to its maturity date. An issuer may wish to redeem a callable bond when interest rates drop significantly so the company can pay off the bonds and issue new ones at a lower interest rate.

Answer 86

Correct answer is B. Revenue bonds may be issued when voter approval for general obligation bonds cannot be attained. Or revenue bonds may be used to finance projects when statutory or constitutional debt limitations prevent a municipality from issuing GO bonds. Because bond payments are contingent on a project’s success and have little access to tax revenues, revenue bonds are riskier and require higher yields than GO bonds to entice buyers.

Answer 87

Correct answer is D. Refusing to accept a gift or an inheritance is a way for assets to bypass one beneficiary in favor of another and is an established method of reducing estate taxes. In order for such a disclaimer to be acceptable to the IRS, it must be "qualified" per IRS code section 2518 and those rules include the following: the disclaimer must be "irrevocable and unqualified," it must be in writing, it must be delivered to the person who is making the transfer or is the transferor's legal representative (most likely the executor), it must be made before the recipient has accepted the asset and the disclaimer must be made within nine months "after the date of transfer creating the interest disclaimed or nine months after a minor disclaimant reaches age 21." A recipient of a gift or a bequest cannot direct where the property will go, rather the asset must bypass the individual making the disclaimer otherwise, the disclaimer will not be considered valid by the IRS. Approval of the executor is not required in order for a disclaimer to be considered qualified.

Answer 88

Discretionary authorization for an agent must be provided in writing. It should be kept on record, but there is no requirement to file the authorization with the SEC or the state securities administrator. Discretionary authorization may be used at any time; the client does not need to be incapacitated.

Answer 89

Correct answer is C. Any time a broker-dealer has no place of business in the state they must register in that state if they have any non-institutional clients.

Answer 90

Correct answer is C. Whenever a securities professional has a material conflict of interest, they must inform clients of that conflict. For IAs or IARs, selling a customer securities out of the firm’s account is a conflict of interest. As a result, the IAR should inform the customer and get written approval from that customer by the date the transaction is complete.

Answer 91

Correct answer is B. If an IA has no office in the state and has had no more than five retail clients in that state during the preceding twelve-month period, it does not need to register there. However, having six clients in the past year would not allow the IA to meet the exception requirement. Exceptions to the definition of investment adviser include investment adviser representatives, accountants whose offering of investment advice is incidental to their jobs, and publishers of media that does not consist of rendering specific investment advice.

Answer 92

The correct answer is A. The net asset value (NAV) of a mutual fund is the book value of the fund. It is calculated by determining the fair market value of the securities in the fund, adding other assets (such as cash from interest or dividends), and then subtracting the fund’s liabilities. The book value is then divided by the number of shares in the fund to yield the NAV per share. In this example, Mega Mutual Fund has a total market value of $8,000,000. Subtracting the assets and liabilities yields the book value ($8,000,000 - $400,000 = $7,600,000). Dividing the total book value or net asset value by the number of outstanding shares yields the NAV per share ($7,600,000 / 2,000,000 = $3.80 / share).

Answer 93

72 s your trigger price, and you will not pay over 75. This is a stop limit order.

Answer 94

Correct answer is D. The SEC requires that IAs adopt and enforce a code of ethics for all supervised persons. That code of ethics does not need to be standardized, and the SEC mandates that each firm develop its own standards. While the adviser must describe its code of ethics to clients, it is not required to offer clients a copy of that code before they receive investment advice. However, an IA must furnish a copy of its ethics code to clients upon request. Finally, an IA must include a description of the ethics code in Form ADV.

Answer 95

Correct Answer is B. Generally, if an investment adviser has less than $100 million in client assets under its care, it must register at the state level. However, in order to reduce the significant regulatory burden of having to register in multiple states, the SEC permits advisers who provide investment advice exclusively through interactive web sites to register at the federal level if they wish. Additionally, an adviser relying on this rule may provide investment advice to fewer than 15 clients through other means during the preceding 12 months.

Answer 96

Correct answer is B. Investment advisers and investment companies are two different things. An investment adviser is a firm that advises others with regard to investing in securities. An investment company is a company, such as a mutual fund, that pools people’s money to invest in a fund of securities. The Investment Company Act of 1940 divides investment companies into three types: face-amount certificate companies, unit investment trusts (UITs), and management companies. Mutual funds are a type of management company.

Answer 97

Correct answer is B. Any firm that engages in effecting securities transactions and has an office in a given state must register in that state as a broker-dealer. It does not matter whether or not that firm’s only clients are institutional clients, such as other broker-dealers or banks, it must still register. On the other hand, an individual who effects securities transactions for a firm is defined as an agent and must register in that capacity, not as a broker- dealer. Given that the agent in question is also compensated for offering investment advice, he must register as an investment adviser as well. Both securities issuers and banks are excluded from the definition of broker-dealer at the state level and thus do not need to register as such

Answer 98

Correct answer is C. Wrap fees are charged by broker-dealers and include payment for securities advice, so the broker-dealer Ellen wants to invest with can offer her the advice she needs. The broker-dealer would have to be registered as an investment adviser, and any agent providing advice, and accepting fees for this advice, would have to be registered as an IAR. Wrap fees can cost the client more than if the services were purchased individually (this is a testable point!), so Ellen must be provided with that disclosure and others.

Answer 99

A balance sheet must be provided if the IA collects prepaid fees of $1,200 or more, six months or more in advance.

Answer 100

Correct answer is B. mortgage bond is secured by the company pledging corporate property if the company defaults, giving the bondholders the right to sell property if they are not paid. They are issued by corporations and provide more incentive to pay than a debenture bond because a debenture bond is an unsecured debt (meaning there are no ramifications for default). All bonds are types of debt securities, not equity securities.

Answer 101

Correct answer is B. The question deals with soft dollars, which is compensation received from broker- dealers that is not in the form of money. Research (Item I), software aiding in research, and custodial and clearing services (Item III) are allowable forms of soft dollar compensation. Not allowed is anything that clearly benefits the adviser but not the client, including office overhead (Item IV), computers (Item II), salaries, vacations, and cell phones.

Answer 102

Correct answer is C. The issuer is not required to disclose its own competitiveness. Rather, it must prepare a disclosure of general competitive conditions in the industry or business in which it is or will be engaged.

Answer 103

Correct answer is C. While seeing a client's current asset allocation may give some indication as to how the client's investments have performed historically, it also may not. The current allocation may be relatively new, with the previous investments being unsuccessful.

Answer 104

Correct answer is D. Net income is calculated by starting with sales and deducting cost of goods sold, operational expenses, interest payments and taxes. Dividend payments are taken out after net income has been calculated.

Answer 105

Correct answer is D. Shares received as a gift maintain their original cost basis. So Barry's shares remain at a basis of $10/share, resulting in a cost basis of $1,000 for the whole position.

Answer 106

Correct Answer is D. Since shares in the fund are trading for more than the NAV (net asset value) we know the fund is trading at a premium. Since we don't know the NAV for yesterday, we can only calculate for today. To find out how much of a premium, we subtract the NAV from the trading price: $30 - $27.50 = $2.50. Closed end funds (CEFs) have the following characteristics: * Fixed number of shares, issued in an IPO. * Not redeemable, instead traded on secondary market, often on an exchange * May trade at a premium or discount to NAV * CEF portfolios are generally actively managed by an investment advisor * Higher expenses, often over 1% * Often use leverage, which is accomplished by issuing auction rate securities, preferred stock, long-term debt, or reverse-repurchase agreements. * Leverage a fund uses is expressed as a percent of total fund assets (e.g. if it has a 25% leverage ratio, that means that for each $100 of total assets under management, $75 is equity and $25 is debt). * Can invest in a variety of assets, including debt, equity and derivatives * May pay dividends monthly rather than quarterly * Are subject to SEC registration and regulation under both the Securities Act of 1933 and the Investment Company Act of 1940 * May use options to boost income, for example equity CEFs may sell call options against their stock portfolio * CEFs trade on exchanges like ETFs, but because institutional buyers may redeem shares of an ETF for creation units (a basket of the fund's underlying assets) ETF prices do not stray far from the NAV price. CEFs have no such arbitrage reduction mechanism built in, they are priced purely by supply and demand in the secondary market which means that CEF prices can and do vary substantially from their NAV.

Answer 107

Correct answer is B. Both strong and semi-strong forms encourage passive management, as neither believes that investors can outperform the market based on the available information. Weak form encourages active management and holds to the possibility that investors can outperform the market.

Answer 108

Correct answer is B. Automatic stabilizers are programs whose expenditures fluctuate automatically depending on the economy. In a recession, food stamp payments, unemployment insurance and welfare payments all increase as unemployment deepens. The consumer price index is an indicator of how well an economy is doing, but it does not affect the economy in any way.

Answer 109

Correct answer is B. Growth investors believe that if a company is growing at an above average rate, that growth will raise the stock price. A growth investor believes that the share price today and dividends are less important. Fundamental analysis of financials is not as relevant either as the growth rate of sales and earnings (profits). Growth investing, by definition, looks to the future so growth investors generally take a longer-term outlook since the passage of time (and the hoped for growth of their shares) is the only way they can profit.

Answer 110

Correct answer is B. In looking out for the best interests of clients, the Uniform Securities Act prohibits investment advisers from certain practices that would have a detrimental effect on the client, such as failing to follow a client's specific instructions or taking a loan from a client's account.

Answer 111

The brochure rule states that investment advisers subject to state registration may be required to provide certain basic information about their business to prospective clients. The disclosure statement or brochure should be delivered to clients at least 48 hours before an advisory contract is signed. Since the rule only applies to advisers subject to state registration, federal covered advisers are not subject to its provisions.

Answer 112

The correct Answer is C. The formula for the Capital Asset Pricing Model (CAPM) is given by the following: Return on Stock = Risk Free Rate + Beta of Stock x (Return on Market - Risk Free Rate). Plugging in for Stock ABC gives Return on Stock ABC = 1% + [1.5 x (7% - 1%) = 10%]. Note the Sharpe Ratio is not used in the CAPM formula.

Answer 113

Correct answer is B. Broker-dealers are in the transaction-based business and are regulated by the Securities Exchange Act of 1934, sometimes called the "People Act." Investment Advisers are in the fee-based business and are regulated by the Investment Advisers Act of 1940. Broker-dealers are, in fact, allowed to use client testimonials provided directly from a client in the promotion of their services. Recent recent rules changes now allow an IA to use testimonials originally published on an independent third-party website as long as all such testimonials (positive and negative) from that site are included. However, it is still the case that an IA can never use testimonials provided directly from a customer.

Answer 114

IRAs and 401(k)s are retirement savings vehicles as defined by the IRS. 529s and CESAs are college savings plan.

Answer 115

Correct answer is B. In general, investment advisers are held to the highest fiduciary standards in the financial industry, because there is an intangible element of good faith that they must adhere to that is not technically required from the other choices listed.

Answer 116

Correct answer is D. While investors can purchase commodities directly in bulk, most investors trade commodities on exchanges through futures and forward contracts. Investors can also purchase commodities through an index fund or a mutual fund that specializes in a particular type of commodity.

Answer 117

Correct Andwer is B. A gift tax applies to money or property that is given to other persons, if the gifts meet certain conditions. Gifts to a single person in a single year not in excess of $17,000 (as of 2023) do not need to be reported to the IRS and are not taxed. This amount is called the annual gift tax exclusion.

Answer 118

Correct answer is C. A state securities administrator has a bunch of tools at its disposal to ensure that securities professionals, firms, and issuers operating in their state do what they are supposed to. One of these tools is the administrative order. An order that denies, suspends, or revokes a person’s or security’s registration can only be given with prior notice to all interested parties, opportunity for a hearing, and written findings of fact and conclusions of law. These are not required for temporary actions (summary orders) against a registration, nor are they required for cease and desist orders. However, if a hearing is not indicated as part of the initial contact received from the state, a professional or firm may request a hearing. If a person requests a hearing regarding a summary or temporary order, the state administrator must set a date within 15 days of receiving the request. Since Sam made no request for a hearing before the administrator issued his order, however, the administrator's action was proper. Sam, of course, may request a hearing in the matter.

Answer 119

Correct Answer is B. One of the main advantages for employers is that they do not have to make a contribution to their employees' accounts in a year where no profit has been made, although they can if they so choose.

Answer 120

Correct Answer is c. An agent must be registered in each state in which any new retail clients reside in order to do business with those clients. This means that Bryant must be registered in Illinois. It makes no difference where a specific transaction involving a new retail client who lives in a different state occurs; the agent must be registered in that out-of-state client's home state in order to effect any transaction for him. Likewise, whether or not Bryant's firm has an office in Illinois is irrelevant to the fact that once he begins effecting trades for a retail client from Illinois he must be registered in Illinois. Finally, a firm can never approve a trade made by an agent who is not properly registered to make it.

Answer 121

Correct answer is B. Credit risk, also known as default risk, is the risk that a bond issuer will fail to make payments when they are due. Bonds and issuers with lower credit ratings are seen as more likely to fall victim to this situation and thus they are considered to have high risk. The credit rating for a bond indicates its creditworthiness as determined by a ratings agency. Thus a bond with a low credit rating, and a high credit risk, would be more likely to default than a bond with a low credit risk and a higher rating. On the other hand, bonds with high credit risk typically come with higher coupon rates in order to entice investors into a risky investment. Such bonds can include municipal and corporate bonds. Finally, when credit risk rises, a bond’s price typically falls; when credit risk falls, a bond’s price typically rises.

Answer 122

Form BD should be updated whenever any information on the form becomes inaccurate.

Answer 123

Correct answer is C. Annually, at least 75% of a real estate investment trust’s (REIT) gross income must be real estate-related income, and 95% of gross income must be real estate-related and dividends and interest from any source. At least 75% of the REIT’s total assets must be invested in real estate. And annually, the REIT must distribute 90%, ***not 95%, of its income to shareholders.*

Answer 124

Correct answer is D. Regulation Best Interest (Reg BI) requires associated persons to act in retail customers’ best interest when making investment recommendations. Reg BI applies to recommendations about any securities transaction or investment strategy involving securities. It doesn't matter whether the recommendation is made to a current or potential customer. Nor does it matter whether the customer is an accredited investor. Finally, it doesn't matter whether the associated person is employed by a broker-dealer, an investment adviser, or a firm with dual registration. However, Reg BI only applies to a communication that rises to the level of an actual recommendation. Merely inviting a potential customer to discuss investment options is not considered a recommendation, nor is an "educational" statement such as letting a customer know the annual contribution limit of her retirement account. The more that a communication emphasizes a certain type of investment, the more likely it is to be considered a recommendation. Statements involving a "call to action" are generally considered recommendations.

Answer 125

Correct answer is C. A loan taken against an annuity is considered a withdrawal. When earnings from an annuity are withdrawn, they are taxed at the annuitant’s ordinary tax rate. Additionally, withdrawals made before an annuitant reaches age 59.5 are assessed a 10% early withdrawal fee.

Answer 126

Correct answer is A. Capital equipment tends to wear out over time, and for that reason it's value declines each year. Earnings statements must reflect this fact, and so tangible assets get depreciated, while intangible assets get amortized. Most of the other answers don't make much sense.

Answer 127

Correct Answer is C. (Note: If cash + Acc Rec. + Securities increase) ( Quick ratio increases) ( If current liabilities Increase) ( Quick Ratio Decreases) To demonstrate this, pretend that XYZ Corporation has $200,000 in cash, $200,000 in inventory, $100,000 in accounts receivable, and $400,000 in current liabilities. XYZ Corporation decides to reduce it's inventory by $100,000 and increase its cash holdings by a corresponding $100,000. How will this change the acid-test ratio? Using the formula below, the acid-test ratio was formerly .75 = ($200,000 + $100,000)/$400,000. But with the reduction in inventory and increase in cash, it increases to 1.0 = ($300,000 + $100,000)/$400,000. How will this change the current ratio? Using the formula below the current ratio was 1.25 = ($200,000 + $200,000 + $100,000)/$400,000. With a reduction in inventory and an addition in cash it stays at 1.25 = ($300,000 + $100,000 + $100,000)/$400,000. Acid-test ratio = (cash + accounts receivable + marketable securities)/current liabilities. The quick ratio measures how quickly a company's assets can be converted to cash. The acid-test ratio is also known as the quick ratio. Another formula for the acid-test ratio = (the total of current assets - inventory)/current liabilities. Current ratio = current assets (including inventory) divided by current liabilities. The current ratio measures a company's ability to meet its short-term obligations. The current ratio is also called the working capital ratio.

Answer 128

Correct answer is C. A defining feature of a corporation is that it offers limited liability to its investors, meaning that investors are held liable for only the amount of money they invest in the company. All stock certificates have the words “fully paid and non-assessable” printed on them to assure stockholders of this right. This means that investors’ other assets are not at risk for the company’s debts; nor are investors personally liable for any lawsuits that might be brought against the company. The most they can ever lose by the purchase of a company’s stock is its purchase price. This is true not just for holders of common stock, but for any investor in a corporation.

Answer 129

Correct answer is D. Mutual funds can only be open-ended. A closed-end fund is a type of investment company but it is not considered to be a type of mutual fund. Mutual funds can also be diversified or non-diversified. A diversified fund has three primary rules: A. 75% or more of its assets are invested in securities B. No more than 5% of its assets are invested in any one security C. Contains no more than 10% of the outstanding shares for any one security Equity funds invest in stocks, while bond funds invest in corporate or government debt.

Answer 130

Correct answer is B. Operating income is calculated by subtracting selling, general, and administration (SG&A) expenses; research and development; and depreciation and amortization from gross profit. Gross profit is sales minus COGS. Once operating income is determined, interest expenses are subtracted to calculate earnings before taxes (EBT). Only then are taxes subtracted from the EBT to arrive at net income.

Answer 131

Correct answer is D. Blanket prohibition of investment categories is not mandated under this Act. This Act specifies that virtually any category of securities can be appropriate, but fiduciary care needs to be taken in recommending securities from a given category, regardless of its inherent level of risk.

Answer 132

Correct answer is C. Exchange Traded Notes (ETNs) are unsecured debt usually issued by a bank that promises to track an index, minus fees. ETN investors do not have a claim to any securities, instead they receive a promise from the issuer to repay their loan at a future date based on the performance of the index being tracked. This difference means that ETNs do not suffer from any tracking risk at all, but in return the ETN investor is relying on the issuer to be around in the future, thus the credit risk. Additional ETN risks include the following: Credit risk -- the risk that issuer could default, Market risk -- performance risk of the underlying index or benchmark, Price volatility -- market price vs indicative value based on index - may sell at a premium or discount, Liquidity risk -- risk of low trading volume.

Answer 133

Correct answer is B. The IAR can fill out the paperwork and needs to give her consent for the background check and service of process related to the application, but the investment adviser, not the IAR, must submit the entire application to the IARD.

Answer 134

Correct answer is B. There is no POP (public offering price) associated with closed-end funds. These funds trade at a discount or premium to NAV, per supply and demand.

Answer 135

Correct answer is C. In general, par value is an accounting artifact with little relevance for the investor. It is not influenced by the market value of the stock and thus is not related to that price. For the exam, know that for investors in common stock, the par value of a share is set arbitrarily, has no relation to market value, and thus has little to no significance.

Answer 136

Correct answer is A. Index funds operate by many of the same principals as other types of funds. Included among these principals, index funds are not traded on the secondary market, their shareholders may receive dividends, and they typically come with either a front- or back-end sales charge. Unlike most other types of mutual funds, however, index funds are not actively managed. Instead, a portfolio manager selects investments meant to track and index and then does not actively buy for or sell from the fund.

Answer 137

Correct answer is D. Dividend-paying common stocks typically have higher dividend yields and lower P/E ratios than other stocks. They are a good choice for income investing or to diversify a portfolio. They can help insulate a portfolio against a market downturn as the earnings of the income-bearing stock can offset losses in the portfolio. Furthermore, dividend- paying stocks tend to retain their value, as investors are often reluctant to sell these positions in a market downturn.

Answer 138

Correct Answer is B. A securities professional must always offer full disclosure to a client when discussing any potential investment. As part of the disclosure process, the professional is not allowed to misrepresent or omit any material facts. A material fact is defined as something that a reasonable person would need to know in advance of making an investment decision. The past financial performance of a securities issuer constitutes a material fact, so Jill is guilty of omission here. That means she did not offer proper disclosure to Mikala. In terms of offering proper disclosure, it does not matter whether or not most of the important facts or all current information about the company were revealed truthfully to a client. Additionally, the fact that the client made money on an investment is irrelevant to whether or not proper disclosure was offered.

Answer 139

Correct answer is B. Principle protection note. Money market securities are the most liquid investment vehicles with very short-term maturities. They also tend to be very safe investments, which is why they are sometimes referred to as cash equivalents. Some of the more common money market securities are T-bills, commercial paper, banker’s acceptances, and money market funds. Certificates of deposit (CDs) are not considered securities, but are still considered part of the money market. A principal-protected note (PPN) is a long-term investment combining elements of debt and equity securities. It is not considered as low-risk as money market securities.

Answer 140

Correct answer is D. Futures contracts on commodities are not considered securities. Options are always securities, even if they are on futures contracts. An investment contract and an interest in an oil well would both be considered a security.

Answer 141

Correct answer is c. Under FINRA rules, member firms and their employees are prohibited from making offers to buy or sell at a stated price unless they are prepared to buy or sell at that stated price. If a broker or an rep fails to honor a quote, it is called backing away, and it is considered a rule violation. Mark’s actions in this instance constitute backing away, and as such they are prohibited.

Answer 142

Correct answer is A. ***NOT 30 days but propyl!*** There are many requirements for investment advisers that take custody of client securities. They must physically keep the securities in the care of a qualified custodian, such as a bank or broker-dealer. They must provide the qualified custodian's contact information to their clients. They must ensure that account statements are sent to their clients at least quarterly, either by the qualified custodian or the investment adviser. The Administrator must be notified promptly in writing using Form ADV of when the adviser takes custody of the securities, not 30 days later. There are other requirements as well, such as a higher minimum net capital requirement.

Answer 143

Correct answer is B. A broker-dealer must always register in any state in which they have a place of business. They must also register in any state in which they have any non-institutional clients. This means the broker-dealer must register in states A and B. The broker-dealer does not need to register in state C because they do not have a place of business there or any non-institutional clients in that state.

Answer 144

Correct Answer is C 90%. A Real Estate Investment Trust is a company that owns and operates income-producing real estate, such as office buildings, apartments, malls, hotels and resorts. They differ from other real estate companies in that they are required to operate the properties they develop after they have built them, rather than selling them off. Most REITs specialize in a single type of real estate. To qualify as a REIT, it must: 1) Invest at least 75% of its assets into real estate or cash 2) Distribute at least 90% of its taxable income to shareholders annually in the form of dividends 3) Be a corporation, trust, or association that would be taxable as a domestic corporation except for its status as a REIT. 4) Be managed by a board of directors and have 'unit' shares that are fully transferable 5) Have a minimum of 100 shareholders after its first year of operation, and no more than 50% of its shares may be held by five or fewer individuals during the last half of any taxable year 6) Derive at least 75% of its gross income from its real estate sources 7) Derive at least 95% of its gross income from those real estate sources mentioned above and dividends and interest from other sources 8) Have no more than 25% of its assets in securities of taxable REIT subsidiaries By annually distributing at least 90% of taxable income to shareholders, REIT income is not taxed at the entity level. This is huge benefit to the REIT. However, because this income has never been taxed, dividend distributions to shareholders are not considered "qualified dividends," instead REIT dividends are generally taxed as ordinary income at the investor's top marginal rate.

Answer 145

Correct answer is D. Two elements are needed for insider trading liability are (1) awareness of material non- public information and (2) trading on that information before public disclosure. The offering of a 401(k) plan to employees will have no effect in and of itself on stock prices.

Answer 146

Correct Answer is C. Roth IRAs are a type of individual retirement account that allow after-tax contributions to grow tax-free. Educational savings bonds are certain EE and I savings bonds that have tax-exempt interest when used for qualified educational expenses (in the same calendar year the bond is redeemed). Both these programs are not available to high-income taxpayers. Traditional IRAs and 403(b) retirement plans are retirement plans that do not have income eligibility requirements. 529 college savings plans is a qualified educational savings plan without income eligibility requirements. Finally, UGMA/UTMAs allow an adult custodian to manage a savings account for the future needs of a minor. Again, no income eligibility limits apply to these accounts.

Answer 147

Correct answer is C. An investor’s cost basis (also known as tax basis) is the amount he pays for the securities plus any commissions paid. Louis pays $2,000 for his ABC shares (100 shares x $20/share = $2,000). His commission is 2% of his sale value, making it $40 ($2,000 x 0.02 = $40), and thus his cost basis is $2,040 ($2,000 + $40 = $2,040). Please note that the commission that Louis pays when he sells his ABC shares is subtracted from the total amount he receives from the sale to calculate his sale proceeds.

Answer 148

Correct Answer is D. Because options are speculative they come with significant risk to investors. As a result, investors must provide financial information, define their investment objectives, and document previous investment experience before opening this type of account, and they most likely to be used only by experienced investors. The last point means that newer and less experienced investors typically cannot open an options account. Additionally, since options provide high risk but also high reward, investors using them do not generally expect low levels of profit.

Answer 149

Correct answer is B. Standards for state-registered investment adviser advertisements are set by NASAA model rules. Standards for federal covered adviser advertisements are set by the SEC Marketing Rule. Regulation S-P is a federal regulation that deals with customer confidentiality.

Answer 150

Correct answer is A. Mortgage-backed securities are bonds that are secured by a pool of real estate loans. While these bonds are mostly sold by U.S. governmental agencies, ***only GNMA securities are secured by the "full faith and credit" of the U.S. government.*

Answer 151

Correct Answer is A. **Pension consultants must advise plans with at least $200 million in assets before they are required to register with the SEC.** Consultants to plans below this asset level must register at the state level. The threshold for pension consultants increased from $50 million in plan assets under management to $200 million in plan assets under management on September 19, 2011.

Answer 152

Correct Answer is D. A put option is in the money when the price of the underlying asset is below the strike price. An option being in the money is good for the holder, not the writer. At $45, XYZ is $5 in the money. Diana has the right to buy 100 shares of XYZ at $45, "put" the shares in the writer's hand and require the writer to buy them from Diana at $50 a share. But this does not necessarily mean Diana will make a profit. The premium she paid in order to buy the put must be taken into account. A put's breakeven point is the difference between the strike price and the premium. When the price falls below this, the holder turns a profit and the writer loses money. For Diana's put, the breakeven is $50 - $4 = $46. The price of the stock is $1 below the breakeven point, so when Diana makes the writer buy those shares at $50, her profit is $1/share. A call option is in the money when the price of the underlying asset is above the strike price. Again, being in the money is good for the holder, not the writer. At $45, ABC is actually $5 out of the money, not in the money. If Diana tried to exercise this option, the writer would be forced to buy 100 shares of ABC at $45 and sell them to Diana at $50. Since it is not in Diana's interest to force a transaction where she would lose $5 a share, the call option will expire worthless. A call's breakeven point is the sum of the strike price and the premium, which in this case is $50 + $4 = $54. In order for statement IV to be true, ABC would need to be at $55.

Answer 153

Correct answer is B. Mel should select life income. He will receive the largest monthly check, because this option is likely the shortest amount of time for receiving payments, therefore the least expensive for the insurance company. It is also the only option that does not provide for a beneficiary to continue to receive payments. With the life with period certain, Mel would receive a medium sized monthly payment and could designate a beneficiary. Life with amount certain is not a payout option.

Answer 154

Correct answer is D. Purchasing power risk is the risk that inflation will negatively affect investments in a portfolio. Inflation affects all securities within a market, and thus it is considered systematic rather than unsystematic risk.

Answer 155

Correct answer is B. A discretionary account allows you to decide all of these things, but a non-discretionary allows you to decide only "when" and "at what price."

Answer 156

Correct Answer is D. Technical analysts use items such as market trends, index comparisons, and historical returns to predict future performance of securities. In doing so, a technical analyst does not look at fundamentals such as the company's financials (e.g., P/E ratios).

Answer 157

Broker dealers operating in a bank setting must offer their services in an area separate from the location where retail banking activities take place. They must also disclose the fact that securities purchased or sold by the broker-dealer are not guaranteed by the bank. The other choices represent normal banking functions and as such are permitted whether a broker-dealer is located on a bank’s premises or not.

Answer 158

Correct Answer is B. Investments that provide income will lead to higher taxes for someone who is in a high tax bracket. That is because, unless the investments are tax-exempt, the investor will taxes on all dividends or interest received from those investments. Value funds contain stocks that often pay dividends, which would be taxed. The same is true of large-cap stock funds. Bond funds contain bonds, which make interest payments. Unless the bond funds are municipal bond funds, the interest payments received from them will be taxed. Growth funds typically contain stocks that make low or no dividends. That means an investor in one of these funds will most likely have fewer tax obligations from his investment than he would from any of the other answer choices.

Answer 159

Correct Answer is D. Earned income is considered taxable compensation to the IRS, but in laymen terms it is wages. Social security benefits, child support, and unemployment benefits are types of unearned income in addition to dividends, capital gains and interest on securities.

Answer 160

Correct Answer is B. If a stock has been held for more than a year and it is donated to a charity, then the donor is permitted to take a charitable deduction on his/her income taxes for the fair market value of the stock, provided the amount is no more than 50% of adjusted gross income. In this case, the donor owned the stock for less than a year and as a result she is permitted to take a charitable income tax deduction on the cost of the shares, not the fair market value. Had she held the shares for more than a year, she would have been able to deduct the fair market value of the shares. Gifts to charities are not taxed provided the receiving entity is a "qualified organization." Moreover, to deduct a charitable contribution, a donor must itemize rather than take the standard deduction. The annual gift exclusion applies to gifts made to individuals only.

Answer 161

Correct Answer is B. round lot is the normal unit of trading for a security on Nasdaq (usually 100 shares), and a round lot order is an order for a multiple of the normal unit of trading. An odd lot is less than the normal unit of trading, and a mixed lot is more than a normal unit of trading without being a multiple of the normal unit of trading. An odd lot order would normally be an order for less than 100 shares, while a mixed lot order could be for any number of shares greater than 100, as long as the order is not for a multiple of 100 shares. An order for one round lot is typically an order for 100 shares.

Answer 162

Correct Answer is D. Unless it is specifically modified in the original account, ownership of the assets in a Coverdell Education Savings Account (CESA) will transfer to the beneficiary when the beneficiary reaches the age of majority (age 18 in most states). So a CESA is the correct answer because it would not meet her goal. A 529 plan is not the correct answer because it would meet not her goal. This is because the custodian will keep control of the assets in the plan after the beneficiary reaches the age of majority. EE and I bonds are also not the correct answer because they belong to an owner and will be redeemed by the owner, so Sally could keep them in her own name.

Answer 163

Correct answer is D. Market capitalization is calculated by multiplying total shares outstanding by share price. Shares outstanding is the number of issued shares minus the number of treasury shares, which in this example is 6.5 million (8,000,000 – 1,500,000 = 6,500,000). Multiplying that number of shares by B Corporation’s $30 share price gives a market capitalization of $195,000,000 (6,500,000 x $30 = $195,000,000).

Answer 164

Correct Answer is A. Rebalancing needs to be done at least once a year, and when the investment advisor thinks that the client's current asset allocation is out of line with the original asset allocation mix. There are no rules, however, tied to specific changes in the market (such as 3%). Rebalancing can be done by either selling securities or buying additional securities to bring an investor's portfolio back to a client's original asset allocation mix

Answer 165

Correct Answer is D. The Trust Indenture Act of 1939 protects investors in debt securities, i.e., bonds, collateralized debt obligations, etc. Trusts and indentures are legal entities not investments. The Trust Indenture Act of 1939 applies to bond offerings that are in excess of $50 million issued over 1 year that mature in more than 270 days. Companies that issue bonds that are in excess of $50 million issued over 1 year and mature in more than 270 days must sell these bonds under an indenture or contract. The indenture is with an outside trustee who represents the bondholder's interests. The company must appoint this outside trustee. If the company goes bankrupt, the role of the trustee is to try to recoup the bondholder's money through bankruptcy court. Government issued debt such as treasury bonds and municipal bonds are not covered under the Act.

Answer 166

Correct Answer is D. The Marketing Rule requires that any material facts can be substantiated, or proven to be true. In this case, any claims about the experience of representatives must be accurate. A federal covered adviser must be able to reference proof that each representative has been advising for at least ten years, should the SEC ask for it. The other answers are not necessary for this statement.

Answer 167

Correct answer is C. Entering a sell stop somewhere below the current price protects her from a sharp drop in the price of the stock. Sell stops cannot be entered above the stock price, and buy stops do nothing to protect her investment.

Answer 168

Corect Answer is B. Agents must always be sure to offer proper disclosure to customers about investments. Proper disclosure means that an agent, among other things, can never misrepresent or omit any facts that would persuade a customer to either approve or deny a potential transaction. Even if an agent thinks the investment will be suitable for the customer, he cannot misrepresent or omit important facts related to that security. Additionally, a securities professional is never allowed to say that he has been 'approved' by the state administrator. By passing his licensing exam registering in his state, he has simply done those two things: 'passed' the exam and 'registered' as an agent. He has not gained the state administrator's 'approval', and to say so is unethical. Finally, when a customer purchases shares of an IPO issued within the past 25 days, an agent must delivery a copy of the preliminary prospectus no later than 48 hours before purchase and a copy of the final prospectus no later than the due date of trade confirmation.

Answer 169

An IAR with no office in a given state and no more than five non-institutional clients in that state does not need to register there. Whenever the IAR has more than five non- institutional clients in the state over a 12-month period, however, he must register there.

Answer 170

The value of bonds has an inverse relationship with interest rates. When interest rates go up, the value of bonds in the secondary market decreases because people could now invest in bonds that pay higher interest rates. When interest rates fall, the value of bonds increases because now these bonds have pay higher interest payments that newly issued bonds.

Answer 171

A trust can help provide for minor children, it can minimize estate taxes and because it's a private entity it limits public disclosure. Probate, the legal proceeding after death in which a court oversees the distribution and dissolution of an estate, is a public process. Assets in trust are typically excluded from the probate process thereby limiting probate.

Answer 172

Alternative Inv: Sales charge 8 1/2% (8.5 -100 = 91.5) = NSC NAV 10.3% (10.3 / 91.5 = 11.256 or 11.26% POP) POP - NAV = .957 (11.26 - 10.30 = .957) POP - NAV = .957 Total Sales Charge = .957 x 1000 shares = $957

Answer 173

Fraud is the willful or intentional act of deceiving another person for gain or profit.

Answer 174

It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25

Answer 175

f the registrant has died, ceased doing business, been declared mentally incompetent or cannot be located

Answer 176

It is a violation of the USA for an IA to act as a broker-dealer for a buyer of securities without written disclosure.

Answer 177

Transactions should be executed at a price that is reasonably related to the current market price.

Answer 178

No. Disclosure is not required if the IA's recommendations are based on its own independent conclusions.

Answer 179

No. Statutory disqualification is due to conviction for any felony or securities-related misdemeanor in the past 10 yrs.

Answer 180

Investigate the complaint

Answer 181

For an agent to exercise discretion over a client's account, the client must have signed a power of attorney.

Answer 182

An IAR may exercise discretion over a client's account based on the client's oral authorization for up to 10 days.

Answer 183

Officers, directors, partners, greater than 10% owners, and immediate family members of all listed

Answer 184

At the time of either the grantor's death or declaration of grantor's incompetence

Answer 185

Officers, directors, partners, or persons with access to client investment positions or investment company holdings

Answer 186

Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a BD.

Answer 187

No, this is a prohibited action known as selling dividends.

Answer 188

True. Cancellation may be due to the death of an agent or a firm no longer being in business.

Answer 189

The IA must disclose the source of the research to its client.

Answer 190

No, but she does need to be able to refer to a rule or order when starting the investigation.

Answer 191

False. The Administrator may inspect records, but cannot confiscate them.

Answer 192

The statute of limitations for criminal violations of the USA is five years.

Answer 193

Yes, if both the firm and customer provide approval and all sharing is proportionate to each party's investment.

Answer 194

False. The orders must be approved promptly afterward.

Answer 195

With newspaper offers, no offer is made if more than two-thirds of the circulation is outside of the publishing state.

Answer 196

If the offer originated in, was directed in, or was accepted in the Administrator's state

Answer 197

Power of Attorney

Answer 198

A holdings report filed by an access person must be current as of 45 days prior to the date the report is submitted.

Answer 199

Action (buy/sell), Amount (quantity), and Asset (security)

Answer 200

A person subject to an order by an Administrator may appeal the order to the state court within 60 days.

Answer 201

Filing false registration documents, issuer's business is illegal, spread is unfair, or failing to pay the filing fee.

Answer 202

False. Powers of attorney do not have to be renewed.

Answer 203

False. The client's prior written authorization is required.

Answer 204

An offer is any attempt or solicitation to acquire or dispose of a security for value.

Answer 205

A customer must respond to a letter of rescission within 30 days or lose the right to sue.

Answer 206

False. Unsolicited transactions are exempt transactions.

Answer 207

Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.

Answer 208

Yes. An Administrator may initiate action, but may not impose fines or penalties for violations.

Answer 209

**True. **Agents should make a good-faith effort to disclose all material facts to an investor.

Answer 210

BD need the client's prior written authorization.

Answer 211

In the state from which it originated and the state to which it is directed

Answer 212

An offer to buy back a security from a client when that security was sold in violation of the USA

Answer 213

The power to interpret and apply the law or the territorial range of authority or control.

Answer 214

No. However, she may require the IA to notice file.

Answer 215

False. Transactions reports are filed within 30 days of the end of each calendar quarter.

Answer 216

Yes, powers of attorney do not need to be renewed.

Answer 217

An agent executing securities transactions for compensation and not recording the trades on the BD's books and records.

Answer 218

An offer (offer to sell) is any attempt or solicitation to dispose of a security for value.

Answer 219

If a client has been defrauded by an BD or IA, the firm may be required to disgorge commissions/fees.

Answer 220

The prohibited act of mixing client funds with those of the BD

Answer 221

Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

Answer 222

False. Agents only need disclose material facts, not all facts.

Answer 223

The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.

Answer 224

Yes, lending to immediate family members is permissible.

Answer 225

Within 15 days of the receipt of a written request from the agent

Answer 226

If a cease-and-desist order is issued against an agent, the agent may file an appeal within 60 days.

Answer 227

Yes, since it is NOT a not held order. Not held orders are only good for a trading day, and this order is for the week.

Answer 228

No. This is a prohibited practice and is considered an unsuitable recommendation.

Answer 229

Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.

Answer 230

Excessive trading in a customer's account for the primary purpose of generating commissions and other fees

Answer 231

Firms must keep client information confidential unless disclosure is authorized by the client or a regulatory authority.

Answer 232

False. Mutual fund advertising is filed with FINRA, not the Administrator.

Answer 233

When selling mutual fund shares, an agent must adequately disclose the sales charge.

Answer 234

Statue of limitations for USA civil violations is three yrs. of occurrence or two yrs. of discovery, whichever is first.

Answer 235

False. Registration may be denied for ANY felony conviction or securities-related misdemeanor conviction.

Answer 236

The maximum criminal penalty for violations of the USA is three years in prison and/or up to a $5,000 fine.

Answer 237

Yes. The Administrator may subpoena, audit, and inspect the books and records of registered firms.

Answer 238

No. This is a prohibited action.

Answer 239

Yes, provided the IA provides written disclosure (often in Form ADV) to clients.

Answer 240

Yes. This is NOT a not held order since the client did not specify the quantity of shares to be purchased.

Answer 241

No. This is unethical since it is considered a guarantee against loss.

Answer 242

Within 10 days of becoming an access person and at least once every 12 months thereafter

Answer 243

No. The order remains in effect until the outcome of the hearing.

Answer 244

Yes. Insiders are required to wait until an earnings report is released publicly before selling shares.

Answer 245

False. If denied, a person is entitled to written notification and findings of fact and an opportunity for a hearing.

Answer 246

False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.

Answer 247

The appeal of an administrative order is made before a court of competent jurisdiction (state court).

Answer 248

False. The Administrator may only issue a cease and desist order. The Administrator may not issue an injunction.

Answer 249

A registration withdrawal is effective 30 days after filing.

Answer 250

Yes, the Administrator has broad inspectorial power, which stretches beyond his own state.

Answer 251

Action (buy/sell), asset, and amount. Time and/or price may remain the agent's discretion without written authorization.

Answer 252

The transaction report and the holding report

Answer 253

No. If the client determines the action (buy/sell), amount, and asset, power of attorney is not required.

Answer 254

A not held order is considered a day order.

Answer 255

True. Both the Administrator and a private citizen may bring a case in civil court.

Answer 256

Not held orders are considered to be in effect for one trading day.

Answer 257

Conversation is converting bonds in to stocks. Convert preferred stock into common stock.

Answer 258

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

Answer 259

False. The Administrator does not have the authority to arrest a person who violates state law.

Answer 260

False. Only a court may issue an injunction; however, the Administrator may issue a cease and desist order.

Answer 261

The Administrator has to power to issue a cease and desist order, but not an injunction.

Answer 262

Yes, since this is a material fact, it must be disclosed before the customer buys the stock.

Answer 263

False. However, the gift of assessable stock IS considered both an offer and a sale.

Answer 264

An immediate supervisor

Answer 265

No. Employees of a broker-dealer may not trade ahead of their firm's research report.

Answer 266

The Administrator

Answer 267

No, the client must provide written consent initially, but not for every trade.

Answer 268

The agent must also disclose any material facts of which he may be aware.

Answer 269

BD securities and client securities must be segregated; in other words, they may not be commingled.

Answer 270

No, this prohibited practice is referred to as "painting the tape."

Answer 271

Trading on material, non-public information is considered insider trading.

Answer 272

No. Material provided to clients must include all facts about the issue, not just the positive ones.

Answer 273

False. Past performance is not indicative of future results.

Answer 274

False. Converting a bond into stock is neither an offer nor a sale.

Answer 275

For any securities that are delivered to a BD, an agent must immediately provide the customer with a receipt.

Answer 276

No. Since discretion is limited to time and/or price, written authority is not required.

Answer 277

An order giving agents discretion as to execution time/price. Clients must specify buy/sell, security, and quantity.

Answer 278

When it originates in, is directed to and received in, or is accepted in the state

Answer 279

The statute of limitations for criminal violations of the Uniform Securities Act is five years.

Answer 280

No, not without the client's written authorization.

Answer 281

Both states

Answer 282

No. The Administrator may not issue an injunction. Injunctions may only be issued by a court of competent jurisdiction.

Answer 283

Front-running is the prohibited practice of a BD trading for its own account ahead of a customer's block order.

Answer 284

No. However, an agent may share in a client's account.

Answer 285

Conviction for any felony or securities-related misdemeanor within the last 10 years

Answer 286

No, this is a not held order. The customer specified the action (buy), the amount (500 shares), and the asset (DMB).

Answer 287

The maximum criminal penalties under the USA are a fine of $5,000 and 3 years in prison.

Answer 288

The Administrator may subpoena books, records, and witnesses from inside and outside the state.

Answer 289

In the state in which the broadcast or telecast originated

Answer 290

No, one side must be unsolicited.

Answer 291

Churning is described as excessive trading designed to generate commissions.

Answer 292

A person may appeal a stop order that is issued by the Administrator within 60 days.

Answer 293

Within 30 days of the end of each calendar quarter

Answer 294

By paying the appropriate amount

Answer 295

Yes, with written third-party authorization.

Answer 296

A sale is any agreement or contract to dispose of a security for value.

Answer 297

Under the Uniform Securities Act, the statute of limitations for fraud is five years.

Answer 298

An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is unsolicited.

Answer 299

Parking stock is the repeated practice of placing stock in the account of a person who is not the rightful owner.

Answer 300

At the time of death of the grantor of the POA

Answer 301

Under the provisions of the USA, a hearing will be held 15 days after a written request.

Answer 302

The cost of the security or the cost of the advice, commissions, legal fees, interest, less any income received

Answer 303

True. In-laws are considered immediate family members; therefore, the loan would be acceptable.

Answer 304

Stock that allows the issuing entity to demand additional funds from existing stockholders

Answer 305

False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.

Answer 306

Yes. Sam is engaging in arbitrage.

Answer 307

Capping is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).

Answer 308

False. This is an example of trading ahead and is prohibited.

Answer 309

The original amount paid, plus the legal rate of interest, attorney fees, and court costs, minus any cash received

Answer 310

After executing a large block order, but before the trade is reported, a BD trades for its own account.

Answer 311

A firm/individual executing trades for its own account with knowledge of an impending large block customer order.

Answer 312

If an agent has withdrawn registration, the Administrator may still take action for one year after the withdrawal.

Answer 313

No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.

Answer 314

Administrative cease-and-desist orders may be appealed in a state court if application is made within 60 days.

Answer 315

The execution of transactions by an associated person outside his employment with a member firm

Answer 316

False. The Administrator must provide written findings of fact. However, providing all documents is not required.

Answer 317

No. This is referred to as "selling away."

Answer 318

Yes, if the adviser or BD is in the business of lending money.

Answer 319

False. Agents and IARs must follow all customer requests, even those with which they disagree.

Answer 320

Traders effecting transactions back and forth to create a misleading appearance of activity

Answer 321

A mutual fund with no front-end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year.

Answer 322

An adviser may exercise discretion for 10 days with the client's oral authorization as long as it is followed up in writing.

Answer 323

Yes. However, client and firm approval is required and the sharing must be proportionate to each person's investment.

Answer 324

False. However, a lack of training, knowledge, and experience may be grounds for denial.

Answer 325

Both oral and written disclosure of the relationship

Answer 326

A trade executed by a financial firm that is acting as a broker for both the buyer and seller.

Answer 327

Both oral and written disclosure of the relationship

Answer 328

False. Failing to respond to a formal written complaint is prohibited.

Answer 329

False. The Administrator must provide written notification, written findings of fact, and an opportunity for a hearing.

Answer 330

Written approval of the client and the BD and any sharing must be proportionate to each person's contribution.

Answer 331

The over-the-counter (OTC) market in which market makers negotiate prices (e.g., Pink Market)

Answer 332

False. Liquid investments would be considered current assets.

Answer 333

If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.

Answer 334

It avoids probate.

Answer 335

To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk.

Answer 336

Partnerships are dissolved due to the death of any of the partners, while corporations may continue.

Answer 337

Front-loading five years of contributions is allowed; therefore, each could contribute $90,000 for a total of $180,000.

Answer 338

False. This statement describes a defined benefit plan.

Answer 339

Writer, short

Answer 340

It has multiple owners and each has trading rights. If one owner dies, his account value passes to his estate.

Answer 341

Sales tax is an example of regressive/flat tax.

Answer 342

Yes, provided the Keogh contribution is solely based upon the employee's self-employment income.

Answer 343

Sell limit orders are placed above the market.

Answer 344

Her basis is $15,000 since the annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.

Answer 345

C Corporations

Answer 346

The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.

Answer 347

Bearish (to find strategy for put buyers, use the phrase PUT DOWN)

Answer 348

The total of all assets and liabilities of a decedent

Answer 349

Income and estate tax are examples of a progressive or graduated tax.

Answer 350

True. By selling the option, the seller is immediately credited with the premium.

Answer 351

Progressive Tax

Answer 352

When a limited partnership's assets are sold for a capital gain, the gain is taxed when realized, not when distributed.

Answer 353

Withdrawals are tax-free if the account is open for at least five years and is not considered an early withdrawal.

Answer 354

They are after-tax contributions that may possibly grow tax-free.

Answer 355

Stop and stop-limit orders are triggered when a round lot trades at, or through, the stop price.

Answer 356

Two (one general partner and one limited partner)

Answer 357

Deduct up to $3,000 of the losses against ordinary income and carry forward the remainder to the next tax year.

Answer 358

A narrow-based index measures the movement of a particular sector or industry.

Answer 359

Income, growth, preservation of capital, liquidity, tax relief, and speculation

Answer 360

No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.

Answer 361

Assets = Liabilities + Shareholders' Equity

Answer 362

Bullish on the S&P 100 Index

Answer 363

Treasury stock is stock that was issued and repurchased by the issuing corporation.

Answer 364

False. All owners of an S-Corporation must be U.S. citizens or resident aliens.

Answer 365

Retirement goals, future college tuition, and remaining mortgage payments are examples of capital needs.

Answer 366

Progressive taxes are also referred to as graduated taxes.

Answer 367

The rights, liabilities, and obligations of each partner

Answer 368

Federal income tax, estate tax, gift tax

Answer 369

Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.

Answer 370

On any business day up to the expiration date

Answer 371

Federally tax-exempt, but may be subject to state and local tax

Answer 372

Age, occupation, time horizon, investment experience, and social values

Answer 373

An S Corporation

Answer 374

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)

Answer 375

Employees of state and local governments

Answer 376

When investing for an estate, the most suitable investments are normally short-term.

Answer 377

Prior to selling a DPP, passive losses can only be used as deductions against passive income.

Answer 378

If an investor is short stock, a buy stop order can be used to limit upside risk.

Answer 379

Bullish since they are long the stock. The put is purchased to protect downside risk.

Answer 380

Her cost basis must be adjusted.

Answer 381

False. Generally, the trustee should act in the best interests of the beneficiary, not the grantor.

Answer 382

Pink Market

Answer 383

Both. Payment is due within three business days for a cash account (100% payment) and a margin account (50% payment).

Answer 384

The ability to maintain their percentage of ownership and buy additional shares at a discount.

Answer 385

Existing stockholders receive one right for every one share owned.

Answer 386

If long stock, a put option can be used to limit downside risk.

Answer 387

Certificate of Limited Partnership

Answer 388

False. Futures, not forwards, trade on the exchanges.

Answer 389

Age, marriage status, state or country of residence, earned income, and unearned income.

Answer 390

Required minimum distributions apply to traditional IRAs, 401(k), 457, and 403(b) plans.

Answer 391

To speculate on market movement or to hedge a portfolio

Answer 392

Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor's accounts)

Answer 393

A straddle, which is the purchase or sale of both a call and a put with the same stock, expiration, and strike price

Answer 394

Regressive taxes are also referred to as flat taxes.

Answer 395

Issuers will attach warrants to stock or bond offerings to make the offerings more marketable.

Answer 396

Without incurring gift taxes, individuals may give gifts of up to $18,000 per year to any number of persons.

Answer 397

Update the client's information that is on file

Answer 398

During the donor's lifetime

Answer 399

An investor's strategy is bearish when effecting a short sale (If stock falls, investors may buy back at a lower price).

Answer 400

Her basis is zero, since the annuity is qualified (funded pre-tax) and the entire $22,000 is taxed as ordinary income.

Answer 401

The sale of a call (obligation to sell) against stock that is owned

Answer 402

Keogh Plans and SEPs

Answer 403

A Partnership Agreement is required to open an account for a partnership.

Answer 404

The cost basis is usually the donor's original cost (purchase price)

Answer 405

Order of liquidation and dividends

Answer 406

Basis will be the donor's cost or market value, whichever is lower.

Answer 407

25% of the amount that should have been taken (an actuarial amount).

Answer 408

Equity options have a contract size of 100 shares.

Answer 409

If there is a lack of liquidity in a security, the spread between the bid and asked price would be expected to widen.

Answer 410

True. When long stock, investors may buy a put. When short stock, investors may buy a call.

Answer 411

An individual's taxable income (e.g., wages, commissions, tips, dividends, and interest)

Answer 412

No, stop orders execute at the market price (which is uncertain) once they are activated.

Answer 413

False. The assets in an UGMA/UTMA account are owned by the child, which may reduce the eligibility for student aid.

Answer 414

False. Canadian companies generally issue shares directly in the U.S.

Answer 415

Only one IRA rollover is allowed per rolling 12 months.

Answer 416

The earnings would be subject to ordinary income tax plus a 10% penalty.

Answer 417

An after-tax contribution of $2,000 is allowed per year.

Answer 418

True. Cash forward transactions are negotiated between a buyer and seller and can be for any amount.

Answer 419

True. Mortgage payments are also found on the income statement.

Answer 420

Collectibles, insurance, and metals (except U.S. gold and silver coins)

Answer 421

False, only those named in the Corporate Resolution

Answer 422

False. Each owner must provide information to open a joint account.

Answer 423

Public school employees [403(b)] and certain non-profit organization employees [501(c)3]

Answer 424

Alternative Minimum Tax

Answer 425

False. Passive income is derived from an investment in a direct participation program (e.g., limited partnership).

Answer 426

S Corporations have the same flow-through treatment as partnerships (i.e., they are not taxable entities).

Answer 427

The two main uses are hedging and speculation.

Answer 428

False. Futures, not forwards, are standardized by a futures exchange.

Answer 429

Volatility

Answer 430

Rights, warrants, swaps, forwards, options, and structured or exchange-traded notes

Answer 431

Death, disability, qualified higher education, home buyer ($10,000 limit), birth or adoption of a child ($5,000 limit)

Answer 432

The maximum contribution to an IRA is 100% of earned income up to a maximum of $7,000.

Answer 433

Employee Retirement Income Security Act

Answer 434

Her loss is $5 ($100-$95). The $10 dividend is taxed separately and is not treated as a capital event.

Answer 435

Salary, wages, tips, self-employment income

Answer 436

An investor sells stock for more than she originally paid. The result is a capital gain.

Answer 437

Investment objectives, financial situation, risk tolerance, tax status

Answer 438

True. Partnership interests are typically illiquid, whereas stock is easy to buy and sell.

Answer 439

They are given priority up to the value of their collateral and are unsecured for any remaining claim.

Answer 440

It is generally the donor's cost. Example my watch and ring

Answer 441

An unlimited amount

Answer 442

The Federal Reserve Board (FRB) has the authority to regulate margin requirements.

Answer 443

His basis is the market value at the time of his grandfather's death (stepped up basis).

Answer 444

Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.

Answer 445

Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.

Answer 446

Corporate Resolution

Answer 447

Right to buy at 70

Answer 448

Mutual funds, stocks, bonds, and notes

Answer 449

True. Required minimum distributions apply to IRA SEP plans.

Answer 450

Long (buying) puts may be used to hedge long stock positions.Long (buying) puts may be used to hedge long stock positions.

Answer 451

No, not until the stock is actually sold.

Answer 452

Stocks, bonds, mutual funds, and CDs

Answer 453

Individual Retirement Account

Answer 454

For any person who's age 50 or older, an additional $1,000 is allowed. Therefore, the maximum contribution $8,000.

Answer 455

A revocable trust will eliminate probate, but will not reduce estate tax.

Answer 456

In the employee's individual SEP IRA

Answer 457

False. Clients buy at the ask/offer (price at which a BD will sell) and sell at the bid (price at which a BD will buy).

Answer 458

General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability.

Answer 459

It has multiple owners and each has trading rights. If one owner dies, her account value passes to the other owner(s).

Answer 460

An agreement to buy or sell a specific amount of a commodity on a stipulated date in the future

Answer 461

A contribution of $7,000 can be made to a Spousal IRA for a non-working spouse.

Answer 462

Sole proprietorships and Subchapter S-Corps

Answer 463

Only once, and it is at the partner's level. The program itself is not a taxable entity.

Answer 464

The next trade after activation.

Answer 465

It may indicate the client's level of sophistication and the potential need for liquidity

Answer 466

The cost basis is the asset's market value at the time of death (a stepped-up basis)

Answer 467

A call option gives the owner the right to buy.

Answer 468

False. Stop-limit orders may not be executed if the limit price cannot be met.

Answer 469

False. Only buyers can exercise the contract.

Answer 470

Maintaining liquidity and buying and selling from their own account

Answer 471

Selling securities that are not owned, but are borrowed from a BD

Answer 472

Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and then common.

Answer 473

Obligation to sell at 55

Answer 474

If securities are inherited, a beneficiary's holding period is automatically long-term (regardless of previous owner's).

Answer 475

Long-term gains are taxed at a maximum of 20%, whereas short-term gains are taxed at the investor's ordinary rate.

Answer 476

False. Only common stockholders have the right to vote.

Answer 477

Deductions reduce an investor's taxable income with a tax savings found by multiplying the deduction by the tax bracket.

Answer 478

True A stockholder is able to vote for a director, (but not an officer.) *****

Answer 479

As a single shareholder

Answer 480

On the floor of the exchange, the DMM maintains a fair and orderly market. (Designated Market Maker)

Answer 481

Short-term gains are taxed at ordinary income rates, and long-term gains are taxed at a maximum of 20%.

Answer 482

A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages

Answer 483

The maximum number of shareholders in an S Corporation is 100.

Answer 484

When not covered by an employer-sponsored plan or when covered by a plan and below an adjusted gross income limit.

Answer 485

If exercised against, the writer of an equity put option is obligated to buy the underlying stock.

Answer 486

A put option gives the owner the right to sell.

Answer 487

False. That would be a liability on the balance sheet.

Answer 488

If an investor is long stock, a sell stop order can be used to limit downside risk

Answer 489

Since soybean futures have 5,000 bushels/contract and Bill lost $.25/bushel, his total loss is $1,250 ($.25 x 5,000).

Answer 490

Simplified Employee Pension Plan

Answer 491

The over-the-counter market (OTC)

Answer 492

False. European options are considered derivatives because their value is derived from an underlying security.

Answer 493

Cash dividends received by individuals are generally taxed at a maximum rate of 20%.

Answer 494

Copper, lead, tin, and zinc are considered non-precious metals.

Answer 495

True. Both LEAPS and swaps are derivatives.

Answer 496

Contributions to a Keogh plan are solely based on self-employment income.

Answer 497

The marginal tax rate is the rate that is used to tax the last dollar amount that a person earns.

Answer 498

As the value of a taxable item rises, the rate of tax also increases. This describes progressive taxation.

Answer 499

As a long-term capital gain, since the fund held the shares for three years. Joe's holding period is irrelevant.

Answer 500

A majority

Answer 501

Assumed Interest Rate

Answer 502

A fixed number of annuity units with a fluctuating value per unit

Answer 503

In the secondary market (like shares of stock)

Answer 504

A permanent life insurance policy designed so the policy owner may adjust the death benefit and premium payments

Answer 505

A fund's management fee is typically calculated based on a percentage of assets under management

Answer 506

This option provides the highest monthly income.

Answer 507

Common stock

Answer 508

General partnerships, limited partnerships, joint ventures, Subchapter S corporations

Answer 509

No, since it does not go to selling brokers, but rather stays within the fund.

Answer 510

A life policy where the death benefit varies depending upon the performance of the investment options

Answer 511

Straight-Life with Period Certain

Answer 512

Straight-Life is the payout option that provides payments for the annuitant's whole life and will cease at death.

Answer 513

When calculating the POP for a mutual fund, the sales charge is added to the NAV.

Answer 514

If performance in a given period is below the AIR, the next payment will decrease.

Answer 515

To calculate the sales charge percentage for a mutual fund, the formula is: (POP - NAV) ÷ POP

Answer 516

Equity-Indexed Annuity (also known as an Equity-Indexed Contract or EIC)

Answer 517

Investment companies must send financial statements to customers every 6 months.

Answer 518

False. Mutual funds are always considered new issues and are bought and sold through the fund.

Answer 519

Closed-end management companies, since both trade in the secondary market (exchange or OTC)

Answer 520

False. Performance below the AIR will cause the payment to fall, even if the investment result was positive.

Answer 521

Only the earnings portion is subject to tax as ordinary income

Answer 522

Equity-indexed annuities are a type of fixed annuity and are therefore not securities.

Answer 523

To transfer to an insurance company the risk of losing a person's wages due to death

Answer 524

Bid price or Redemption price

Answer 525

Yes. Closed-end funds may issue common stock, preferred stock, or bonds.

Answer 526

A mutual fund that invests in other multiple hedge funds

Answer 527

1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies

Answer 528

At annuitization (payout), accumulation units are exchanged for annuity units.

Answer 529

False. Partners are taxed in the year in which the income is reported, not in the year in which it is received.

Answer 530

The Public Offering Price (POP). POP = NAV + Sales Charge (if applicable).

Answer 531

No. Unlike DPPs, REITs do not pass through losses.

Answer 532

Interest (mortgage REIT), rent from both residential and commercial property, and capital gains (equity REIT)

Answer 533

A UIT is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.

Answer 534

A hedge fund Regulation D offerings 3(c)(1) hedge funds

Answer 535

No, these contracts are not considered securities by the SEC.

Answer 536

False. Equity-index annuities have a guaranteed minimum rate of return.

Answer 537

To calculate the POP for a mutual fund, the formula is: NAV ÷ (100% - Sales Charge %)

Answer 538

False. Closed-end shares are priced intraday. They trade constantly at a prices that may be discounts or premiums to NAV.

Answer 539

According to industry rules, 8.5% is the maximum sales charge on mutual funds.

Answer 540

$0. There is no death benefit post-annuitization, since the contract is based on her life only.

Answer 541

Market price plus a commission

Answer 542

Sales charge is always expressed as a percentage of the POP (public offering price).

Answer 543

It may have no front-end or deferred sales charge, and a 12b-1 fee cannot exceed .25%.

Answer 544

(Assets - Liabilities) ÷ Number of Shares Outstanding

Answer 545

Correct Answer is 1 and 1. ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk 4. ETNs have a maturity date and ETFs do not ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.

Answer 546

Interest rates

Answer 547

Cyclical stock fluctuates with the business cycle (auto companies).

Answer 548

False. Corporate bond interest is taxed at the federal, state, and local level.

Answer 549

Bondholders are also referred to as creditors.

Answer 550

T-Bills are issued in maturities of: 4 week, 13 week, 26 week, and 52 week

Answer 551

Stocks of mature companies with a long history of dividend payments

Answer 552

A leading indicator. However, length of unemployment is considered a lagging indicator.

Answer 553

Assets that may be converted into cash in a short time (usually one year or less)

Answer 554

Yes, due to a bond's non-dilutive feature.

Answer 555

The analysis of a specific company (its balance sheet, income statement, etc.) are the focus of the fundamental analyst.

Answer 556

Unsecured. They are backed only by the issuer’s full faith and credit.

Answer 557

Intangible

Answer 558

The fed funds rate is the rate of interest banks charge each other on overnight loans.

Answer 559

Value investors look for stocks of companies that are intrinsically undervalued.

Answer 560

The same as the basis of the converted security.

Answer 561

If the U.S. dollar rises in value relative to foreign currencies, the balance of trade will generally widen.

Answer 562

Both the Dow Jones Industrial Average and the S&P 500 Index are large-cap indexes.

Answer 563

False, the S&P 400 is a mid-cap index.

Answer 564

The quick asset ratio is calculated by excluding inventory from a company's current assets.

Answer 565

Duration is a measurement of how sensitive a bond’s price is to small changes in interest rates (i.e., interest rate risk). Bonds with longer maturities tend to be more sensitive to interest-rate swings and have a longer duration. Convexity conversely, bonds with shorter maturities are less sensitive to interest-rate swings and have a shorter duration.

Answer 566

Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of liquidity ratios.

Answer 567

Price/Earnings (P/E) Ratio (also called the earnings multiple)

Answer 568

Working capital, current ratio, and quick asset ratio (acid test)

Answer 569

Current Assets ÷ Current Liabilities = Current Ratio

Answer 570

London Interbank Offered Rate (LIBOR)

Answer 571

Income stock pays higher than average dividends (e.g., stocks of utility companies).

Answer 572

The quick asset ratio is more stringent since it excludes inventory from the current assets.T

Answer 573

The Russell 2000 Index is a small-cap index.

Answer 574

Leading, lagging, and coincident

Answer 575

More than 10 years

Answer 576

Indacaters of the current market cycle

Answer 577

Stocks of companies that are more volatile and growth-oriented than the large-cap stocks

Answer 578

Gross Domestic Product (GDP) measures the goods & services produced within the U.S., disregarding the producer's origin.

Answer 579

Accounts payable, interest payable, dividends payable

Answer 580

A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations

Answer 581

A bond has a basis of 7 1/4%. This is synonymous with the bond's yield to maturity (YTM).

Answer 582

The number of years after issuance during which bonds may not be called by the issuer

Answer 583

When discussing a bond, the YTM may also be referred to as basis.

Answer 584

If the U.S. dollar declines in value relative to foreign currencies, the balance of trade will generally narrow.

Answer 585

A company with more debt than equity outstanding is considered leveraged.

Answer 586

1) Expansion 2) Peak 3) Recession / Contraction 4) Trough

Answer 587

Annual Interest ÷ Current Market Price

Answer 588

A company's current share price multiplied by the number of shares outstanding

Answer 589

A company's current share price multiplied by the number of shares outstanding

Answer 590

1) Current assets (cash) is increased and 2) Long-term liabilities is increased (Working capital is increased)

Answer 591

Current market price ÷ earnings per share (EPS)

Answer 592

2 to 10 years

Answer 593

Dollar-denominated bonds issued outside the U.S.

Answer 594

Coupon rate and nominal yield

Answer 595

Bonds rated BBB (for S&P and Fitch) or Baa (for Moody's) and higher are considered investment grade.

Answer 596

Cash, marketable securities, accounts receivable

Answer 597

True The S&P 400 is mid-cap

Answer 598

Dividend payout ratio

Answer 599

No, it is a tax-free exchange. The taxable event would occur when the stock is sold.

Answer 600

Market price ÷ P/E ratio

Answer 601

current ratio and the quick asset ratio (acid test) both measure a company's liquidity.

Answer 602

Current Assets - Inventory) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

Answer 603

S&P uses + or - , while Moody’s uses 1, 2, 3.

Answer 604

False. Charts, trends, pattern analysis, and theories would be the focus of a technical analyst.

Answer 605

To determine a company's working capital, subtract its current liabilities from its current assets.

Answer 606

Funded debt (long-term debt)

Answer 607

T-Bills, Bankers' Acceptances (BAs), Commercial Paper, Negotiable CDs

Answer 608

Fully-taxable (taxed at the federal, state, and local level)

Answer 609

Growth investors are concerned with a company's future earnings potential.

Answer 610

The formula for finding the conversion ratio is: Par ÷ Conversion Price (par for a bond is $1,000)

Answer 611

Defensive stock is resistant to recession (utility companies).

Answer 612

A corporation makes an interest payment on its bonds. This payment is considered a pre-tax expense.

Answer 613

A corporation that issues convertible bonds is borrowing money at a lower rate (convertibles pay lower interest rates).

Answer 614

Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it’s still a bond).

Answer 615

Correct Answer is D Federal registration for BDs is a two-step process. First, it must register with the SEC by using the Central Depository Registration System to submit Form BD. Then it must register with FINRA by filing Form NMA. A broker-dealer does not need to file a Form U-4 for the firm to register; however, it does need to file that form for each agent it wants to employ. Most broker-dealers register federally, but they are not required to register with the SEC in all cases. A broker-dealer’s registration at the state level becomes effective 30 days after it is filed. 45 days is the amount of time the SEC has to approve or initiate proceedings to deny a broker-dealer’s registration.

Answer 616

Correct answer is C. According to the Capital Asset Pricing Model (CAPM), expected return is calculated by using the following formula: Expected Return = Risk-free Return + [beta x (Market return – Risk-free return)]. Thus, for this example, expected return is -6.0% = .02 + [-1 x (.10 – .02)] = -.06, or -6%.

Answer 617

The correct Answer is C Typically, value investors look for well-established companies, often paying a dividend, that have lower price/earnings ratios. Initial public offerings (IPO) on the OTC market are often considered high risk and high reward and generally would be better suited for a growth investor or a speculator.

Answer 618

The correct answer is B An agent can represent a broker-dealer or an issuer. A broker-dealer can never be an agent, or vice-versa. An individual associated with an investment adviser who manages the accounts of clients would be an investment adviser representative; an agency or official empowered by state law to regulate the securities industry in that state would be the Administrator.

Answer 619

The correct answer is B Opportunity cost refers to the return an investor would have received by making a particular investment. If an investor passed up an opportunity to earn 10% on an investment, the opportunity cost for the investor is 10%.

Answer 620

The correct answer is A If an investor's risk tolerance is too low, then investments may be chosen that will not grow adequately, thereby leaving the investor unprepared for retirement.

Answer 621

The correct answer is C The Uniform Securities Act requires federally covered investment advisers to file a notice filing in states in which they do business.

Answer 622

The correct answer is B Fiduciary duty means putting the interests of the client above one's own interests. Providing sound investment advice, matching such advice with a client's needs, and being loyal to clients all fit this description. However, charging a specific annual fee does not necessarily apply, and FINRA's suggested maximum fee is 5% (per the 5% policy).

Answer 623

The correct answer is C An application for registration (Form BD) must be filed with both FINRA and the SEC. It identifies the type and nature of the applicant’s business and in what states it will operate. The applicant must identify anyone having a control relationship with the firm, it must identify every direct and indirect owner (more than 5% voting rights) and executive(s) in the firm, and it must disclose the legal standing of all owners and officers of the firm. All individuals become registered by filing a Form U4, which must include such information as physical characteristics, residential history, and criminal history.

Answer 624

The Correct answer is C To find the breakeven point for a call option, whether the buy side or the sell side, add the premium to the strike price. This option has a strike price of $22 and a premium of $2. The BE is $24 for both the holder and the writer.

Answer 625

The correct answer is A Market capitalization is determined by multiplying the outstanding shares of a company's stock by the price per share. Total debt / total assets is called the debt ratio and it is a measure of a company's leverage. Generally, the lower the debt ratio the lower the risk of insolvency. Capital expenditures - noncash depreciation is the formula for a company's net capital investment. Market value per share / earnings per share (PE ratio) measures how much profit investors are willing to pay per share.

Answer 626

The Correct answer is D The regulatory agencies do not need to be directly notified of this information; they only require that adequate records be kept of all client holdings and transactions.

Answer 627

The Correct answer is C Performance-based fees are fees that investment advisers may earn based on capital gains or appreciation in a client’s account. Usually these fees are based on a percentage of gains or return above designated benchmarks, such as the performance of the S&P 500 index. Unless they are dually-registered, broker-dealers may NOT charge performance-based fees. Performance-based fees are prohibited by the Investment Advisers Act and NASAA model rules, with some notable exceptions: “Qualified clients” – individuals with at least $1.1 million at the firm or more than $2.2 million in net worth excluding a personal residence. Assets held jointly with a spouse can be included in the $2.2 million calculation. Debt that is secured by the individual's primary residence in excess of the estimated fair market value of the residence must be deducted from the net worth calculation. Registered investment companies (annuities, mutual funds, etc.) "Qualified purchasers" -- individuals and family-owned corporations with $5 million in investments or corporations with $25 million in investments. Partnerships where all partners are accredited, such as hedge funds. Note that registered hedge funds must have all qualified clients to charge performance fees. Private Investment Companies – companies that only work with qualified purchasers who otherwise meet one of the other exceptions for this rule Knowledgeable employees of an investment advisor such as officers, directors and investment adviser representatives are considered “qualified clients” and thus may be charged performance-based fees

Answer 628

Correct answer is C The NASAA Model Rule requires all pertinent facts be disclosed in a contract. These include: New and renewed investment advisory contracts must: Be in writing Outline all services to be provided Contain a term (time limit) for the contract Contain the advisory fee Include the formula for calculating the fee Specify the amount of the fee to be returned if the client terminates early Specify whether the contract grants the adviser discretionary authority over the client’s portfolio Include specific wording that the contract may not be assigned to another investment advisory firm without the client’s consent State that the investment adviser will not be compensated on the basis of capital gains or capital appreciation (performance-based fees; see Compensation section later in this chapter for more detail) If the investment adviser is a partnership, notify clients of changes in the partnership (for example, a partner has been added or left) No advisory contract can be entered into or can contain language that requires a client to waive any part of her rights under the Investment Advisers Act of 1940.

Answer 629

The correct answer is C The SEC requires that investment advisers have a code of ethics in place to ensure responsible behavior of the IA's access persons and supervised persons. IARs must offer fair and reasonable fees to clients,but that requirement is not part of the code of ethics. Nor is a description of the duties of a firm's compliance officer. Since the fiduciary standard, enjoined by the code of ethics, looks out for the best interest of the client above anything else, the firm’s best interests are not directly considered.

Answer 630

The correct answer is B It is unethical to borrow money from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds. Simple Advisers may therefore borrow money from Simple Investments, as the client is an affiliate (Item II). Borrowing money from an individual client that does not meet the criteria above is not ethical, regardless of how much the client has under management.

Answer 631

The correct answer is B Tenants in common accounts are for two or more co-owners who, unlike joint tenants, need not be equal owners. Tenants in common does not offer survivorship (when one owner dies, the deceased owner's portion is distributed to that owner's estate or heirs, NOT to the other owners). Tenants in common interests are subject to probate. Tenancy in common is most popular among unmarried people because it allows the transfer of ownership or ownership interests by deed, will or other conveyance. Tenants in common offers no protection from creditors. Joint tenants, often called joint tenants with right of survivorship (JTWROS), is the most common form of account for married couples, particularly for assets acquired together. Each person named on the account is an equal owner of the account. Assets held in a JTWROS may be transferred by deed, will or other conveyance. When one owner dies, the balance of the account goes automatically to the surviving joint owner or owners, bypassing probate. Joint tenants ownership offers no protection from creditors which means that a creditor may claim one spouse's interest in joint tenant property. Totten Trusts may be known as "payable on death" (POD) accounts for money in a bank account or "transfer on death" (TOD) accounts for brokerage account. To claim the assets in the account all the beneficiary has to do is show an ID and show evidence that the account owner has died (death certificate). However, a TOD or POD account usually supersedes a trust or a will which makes complex estate planning difficult. Assets in an account with a TOD or POD are not protected from creditors. Tenants by entirety (or tenancy by the entirety) ownership is generally available only to married couples. Tenants by entirety is not available in all states. The asset must have been obtained during the marriage and upon the death of one spouse, the entire asset passes to the surviving spouse. Probate court is avoided if one spouse dies, but not if both die simultaneously. Unlike joint tenants and tenants in common, with tenants by entirety a spouse cannot transfer his or her half of the property without the consent of the other. With tenants by entirety, the deceased spouse's half of the asset must go to the surviving spouse. A possible advantage of joint tenants by entirety is that creditors cannot make a claim on asset held in tenants by entirety unless both spouses are liable.

Answer 632

The correct answer is B First find the conversion ratio: divide the conversion price into the par value of the bond ($1000 / $20 = 50 shares). Then take the price of the bond and divide by the conversion ratio to find the parity price of the common stock. 10 x 104 = 1040 $1040 / 50 = $20.80.

Answer 633

Correct answer is A Dividends are not an expense and they do not appear on the Income Statement. Dividends are paid out of after- tax net income. While cash dividends effect the balance sheet (they reduce cash and owner's equity), they do not appear on the balance sheet. Dividends paid are recorded as a decrease in cash in the financing section of the Cash Flow Statement.

Answer 634

The correct answer is A Correlation is the measure of how two investments perform relative to each other. If there is a pattern of coordination between them, then there is a higher degree of correlation. If there is not, then there is no or low correlation.

Answer 635

The correct answer is D Independent organizations, (Moody's and S&P), rate bonds based on their creditworthiness. These ratings are important guides for investors purchasing bonds so they know which companies' bonds are most at risk of default. Bonds can be classified as investment grade and non-investment grade. Investment grade bonds are bonds that range from medium credit quality up to the highest credit quality; non-investment grade bonds all fall below a medium credit quality rating. These bonds are most at risk of default, but these companies do offer investors a higher yield for the higher risk.

Answer 636

The Correct answer is A According to SEC Rule 204A-1, registered investment advisers must adopt and enforce a code of ethics for all "supervised persons." This amendment to the Investment Advisers Act of 1940 includes the requirement that advisers monitor the personal securities transactions of "access persons" to prevent the misuse of nonpublic information. The code of ethics should include the requirement that access persons report their securities holdings to the firm when they become an access person and then again at least annually. All securities are "reportable" with the following five exceptions: government securities, money market instruments such as CDs, money market funds, unaffiliated mutual fund shares, and unit investment trust securities which are invested exclusively in unaffiliated mutual fund shares. Access persons must also report to the firm any personal securities transactions within 30 days of each calendar quarter, and private placements and IPO investments by access persons must be cleared with the firm in advance. The rule does not require the firm to adopt a specific code of behavior but it requires a minimum standard of fiduciary behavior and compliance with securities laws. The chief compliance officer must review access person securities transaction reports. Violations of the code of ethics should be reported promptly. Firms must keep a written acknowledgment from each access person that he/she received the code of ethics. The adviser must describe its code of ethics to clients, it must include a description of the ethics code in Form ADV Part2A, and it must furnish a copy of its ethics code to clients upon request. The rule requires firms maintain records related to the ethics code and securities transactions by access persons for at least five years, such records to include a list of access persons, copies of the code of ethics, reports made by access persons and any records of violations and corrective actions. According to the rule, "an access person is a supervised person who has access to nonpublic information regarding clients' purchase or sale of securities, is involved in making securities recommendations to clients or who has access to such recommendations that are nonpublic. A supervised person who has access to nonpublic information regarding the portfolio holdings of affiliated mutual funds is also an access person." The rule specifically identifies portfolio managers as being access persons, and it states that any supervised person, including "administrative, technical and clerical personnel" who "have information about investment recommendations whose effect may not yet be felt in the marketplace" may be access persons. Any supervised person could be an access person, the determining factor is access to material nonpublic information. Finally, the rule states that "if the firm's primary business is providing investment advice, then all of its directors, officers and partners are access persons." No personal securities reporting is required if: *The transactions stem from an automatic investment plan *The securities in question are in accounts that the access person does not control or influence *The adviser has just one access person and the firm keeps records of the access person's holdings and transactions

Answer 637

The correct answer is D Securities are regulated by the Uniform Securities Act and other regulations. These regulations determine what types of investments are subject to anti-fraud statutes and which must be registered (as well as the people offering and selling them). Other types of investments, like fixed annuities, whole life and term life insurance, and commodities futures contracts, as well as precious metals, collectibles, and currency, are not securities and are not regulated the same way securities are.

Answer 638

The correct answer is B Value investing places primary emphasis on getting a bargain. Using fundamental analysis, a value investor looks for stocks that are trading below their “intrinsic” value. Value investors like growth as much as growth investors do, but value investors are wary of overpaying for that growth. Value investing’s bargain-hunting approach means value investors pay as much attention to the balance sheet as they do to the income statement, searching for gold that the market might have overlooked. Value stocks then, by definition, on average, have lower P/E ratios, lower price-to-book and price-to-sales ratios, and higher dividend yields.

Answer 639

Correct answer is B Central tendency is a single value that summarizes a set of scores. The geometric mean is the most accurate measure of central tendency for a set of returns because the returns for each year on an investment are not independent of one another. Each year your total capital is shrinking or growing depending on the performance of the previous year, so that a 10% increase one year may be different than a 10% increase in another year. The arithmetic average does not account for this fact. The geometric mean does account for this, and thus gives the investor a truer representation of the central tendency of their returns.

Answer 640

The correct answer is B Although both equity-indexed and variable annuities carry some risk and offer a higher potential reward than fixed annuities, an investor can potentially gain the greatest return from a variable annuity. That is because the potential return from an equity-indexed annuity is limited by both its participation rate and caps on performance. A variable annuity faces no such limitations. On the other hand, equity-indexed annuities often come with a guaranteed minimum return that protects against downside risk. Variable annuities come with no such guarantee. However, since Aidan is not concerned with risk, this is not a concern in recommending variable annuities to him. Fixed annuities pay guaranteed rates of interest which do not vary. But this means they also do not come with the potential for an investor’s return to increase, which of course is the case with both equity-indexed and variable annuities. Annuities are also suitable because Aidan has a relatively long time horizon, so he won’t be harmed by surrender periods.

Answer 641

The correct answer is A Sector rotation involves shifting investment assets from one sector of the economy to another, typically in an attempt to profit by investing in sectors expected to perform well during a given business cycle. A sector is an area of the economy in which businesses share the same product or service. Of the choices listed, shifting allocation from pharmaceuticals (a sector) to high tech (another sector) in response to economic cycle changes is the best example of sector rotation. Note it is not the case that a sector rotation strategy tries to ensure every sector is represented in a portfolio. Also, large-cap and small-cap stocks are not typically considered sectors, and re-allocating a portfolio based on a pre-specified timeline is not how the typical sector rotation strategy is implemented. Finally, efficient frontiers are plotted to visualize risk vs. return of various investment opportunities, but it does not make sense to "rotate" an efficient frontier.

Answer 642

The correct answer is D According to the Securities Act of 1933 the term "issuer" means every person who issues or proposes to issue any security. Since a "person" can be a natural person or an entity (corporation, government agency, partnership, etc.) all choices could be issuers.

Answer 643

The correct answer is B One of the primary benefits of derivatives for more conservative investors is that they can be used to hedge an investment’s performance or hedge against broad economic downturns. By guaranteeing an investor’s right to buy or sell a security or commodity at a price in the future, an investor can limit the effects of swings in the price of the underlying security or even the broad market. Note that derivatives may be used for speculation and leverage, but they cannot be used to finance a security.

Answer 644

The correct answer is C Any withdrawal from an IRA that is not a qualified exception is taxed as ordinary income before age 59½. Qualified exceptions include: Qualified education expenses (e.g., books, tuition, supplies) Payment of medical expenses (if they are more than 10% of the individual's gross income) Permanent disability First-time home purchase ($10,000 lifetime maximum) Payment of health insurance premiums by unemployed or self-employed person who has received state or federal aid for three consecutive months Up to $5,000 when the person has a child or adopts a child (withdrawal must be made within 1 year of birth/adoption) Withdrawals that occur in substantially equal periodic payments (IRS Rule 72(t)) continuously for five years

Answer 645

The correct answer is C To make an IRA contribution, you (or your spouse) have to have earned income, also called compensation. According to the IRS the following are considered compensation for the purposes of an IRA: wages, salaries, tips, commissions, self-employment income, alimony/separate maintenance, and nontaxable US armed forces combat pay. In other words, with the exception of alimony/separate maintenance, earned income for the purposes of an IRA, is income you earned. The following are not considered compensation for the purposes of the IRS and an IRA: rental income, interest, dividends, pension and annuity income, capital gains, deferred compensation, income from a partnership from which you do not provide services, child support, welfare benefits, unemployment compensation worker's compensation benefits, social security, gifts, inheritances, bequests, compensatory damages … income you did NOT work to earn.

Answer 646

Correct answer is C Accounts receivable are an asset, not a liability.

Answer 647

Correct answer is D Buy limit and sell stop orders are generally placed below the current market price, with few exceptions. This means that they could suddenly be filled when the market price is adjusted downward to reflect the loss of the dividend.

Answer 648

Correct Answer is D Probate is a legal process in which a special court reviews a deceased person’s will and determines how the person’s assets will be distributed. The probate process can take months to complete. Account designations that bypass probate include transfer on death (TOD) and joint tenants with rights of survivorship (JTWROS).

Answer 649

Correct answer is A A federal covered adviser or one of its IARs can use client testimonials in their advertising only if certain conditions described in the SEC’s Marketing Rule are met. They can also reference past client performance as long as they are presented in a fair and balanced way and represent performance over a significant period of time. Statements that are clearly opinions are also allowed. However, if the IAR or adviser includes gross performance results for client portfolios, they must also include net performance results alongside them.

Answer 650

The correct answer is A The strong form of the Efficient Market Hypothesis states that all information, private and public, is reflected in the market price of the security. Investors will always be a step behind the market and, therefore, will not profit from actively managing their investments. They are much better off putting their money in an index fund or an ETF, and following passive management strategies, such as constant rebalancing or a buy-and-hold strategy.

Answer 651

Correct answer is D If a state securities administrator suspects that a broker-dealer from another state is engaging or has engaged in fraudulent transactions involving investors in its state, the administrator can issue a cease and desist order to prohibit that broker-dealer from engaging in transactions in its state. The order is not permanent but serves as a temporary halt on the out-of-state broker-dealer’s ability to effect transactions in the state. Only the administrator of the state in which a broker-dealer is registered or the SEC can suspend a broker-dealer’s license. Additionally, a state administrator cannot levy fines; it must ask a court to do so.

Answer 652

The Correct answer is A Alpha is a measure of the return of a portfolio that cannot be explained by the portfolio’s expected return. Alpha is often attributed to the skill (or lack thereof) of the portfolio manager. Mathematically, the alpha of a portfolio is equal to the actual return minus the expected return. Alpha = actual return - expected return. The expected return is equal to the beta multiplied by the performance of the S&P 500. Expected return = beta x S&P 500. If the S&P 500 performance is 3%, then the expected return of the portfolio should be in this example adding up both the Alpha and the S&P together will total the S&P returns of the 6% If alpha

Answer 653

The Correct answer is C Regulation Best Interest prohibits sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities within a limited period of time. This prohibition extends to specific types of securities. For example, a sales contest for stocks from a particular industry is prohibited. However, incentives based on sales of general categories of securities are allowed. For example, a sales contest for overall sales of all stocks (or all mutual funds, or all variable annuities) would be acceptable. So would a sales contest based on total sales of all securities.

Answer 654

The Correct Answer is D Like a lot of the language that comes from the Administrator, federal limitations often provide the framework. In this case, it is the Act of 1934, which is known as the people act since it regulates individuals who work in the securities industry.

Answer 655

Correct answer is D Dollar-cost averaging is a popular investment strategy in which the investor invests the same dollar amount in a security at regular intervals. In this case, Jonathan will invest $100 in XYZ mutual fund each week. Jonathan will purchase 10 shares the first week, 5 shares the second week, and 4 shares the third week, resulting in 19 shares over the three weeks. By using dollar cost averaging, the investor purchases more of the security when prices are low and fewer shares when prices are high. This results in a lower per share cost to purchase a security than its average price over the same time period.

Answer 656

The Correct answer is C Participating preferred stock allows investors to receive extra dividends when the company exceeds certain predetermined financial goals. Thus, investors receive regular dividends but may also participate in a company’s growth when the company does well. Like participating preferred, convertible preferred stock allows shareholders to participate in the growth of a company. These investors have the right to convert their preferred shares to shares of common stock at a set conversion ratio. This exchange may occur any time at the investor’s sole discretion.

Answer 657

The correct answer is C A firm files a Form U4 to register a new agent or representative, and it submits the individual's fingerprints as part of that process. Individuals who are not engaged in effecting securities transactions, such as clerical staff, are not required to register as agents or representatives. There is no de minimis exemption for broker-dealers or broker-dealer agents under the 1956 Uniform Securities Act.

Answer 658

Correct answer is D Qualified dividends are ordinary dividends that instead of being taxed as ordinary income, are taxed at the lower long-term capital gain rate. To understand why, remember that dividends are not a tax-deductible expense to the company paying the dividend. Instead, dividends come out of after-tax profits and since dividend payments from C-corporations (most publicly traded companies) have already been taxed at the corporate level, the thinking goes, it's not fair to tax the shareholder's dividend income again on the shareholder's individual tax return. To reduce the shareholder's tax burden, the government permits special "qualified" treatment of dividend distributions. However, to be qualified dividends must be paid by a US corporation or a "qualified foreign corporation" which means the foreign corporation must be incorporated in the US or a US territory or the foreign company's stock or ADR is traded on a US exchange or the foreign corporation's home country has an income tax treaty with the US. Also, in order to a receive the "qualified" status the investor must have held the shares unhedged for more than 60 days including the ex-dividend date. For preferred shares, the holding period requirement is more than 90 days including the ex-dividend date. Examples of dividends that are generally NOT qualified include REITs as well as distributions from any tax-advantaged pass-through entity such as MLPs, royalty trusts, S-corporations and partnerships, An easy way to tell if a distribution is qualified or not: if the paying entity reports the distribution to the shareholder via a 1099-DIV form (yes) versus a Schedule K-1 (no). The portion of mutual fund dividends that come from qualified dividends are taxed on the mutual fund shareholder's return at the favorable qualified dividend rate, provided the shareholder meets the holding period requirement.

Answer 659

Correct answer is B According to the model rule for the dishonest or unethical business practices of broker-dealers and agents, broker-dealers need to have written discretionary power before engaging in discretionary transactions unless the discretionary power relates to time or price. Thus, a broker-dealer does not need discretionary trading authority if the broker is only making a judgment about time or price. If the judgment is about the amount to be bought or sold, whether to buy or sell, or what security to buy or sell, discretionary authority is necessary.

Answer 660

Correct answer is D Performance-based fees are fees that investment advisers may earn based on capital gains or appreciation in a client’s account. Typically, these fees are based on a percentage of gains or return above designated benchmarks, such as the performance of the S&P 500 index. Broker-dealers may not charge performance-based fees. Performance-based fees are prohibited by the Investment Advisers Act and NASAA model rules, with some notable exceptions, as follows: “Qualified clients” – individuals with at least $1.1 million at the firm or at least $2.2 million in net worth excluding a personal residence Registered investment companies (annuities, mutual funds, etc.) Qualified purchasers -- individuals and family-owned corporations with $5 million in investments or corporations with $25 million in investments Hedge funds where all customers are either qualified clients or qualified purchasers Private Investment Companies – companies that only work with qualified purchasers who otherwise meet one of the other exceptions for this rule Knowledgeable employees of an investment advisor such as officers, directors and investment adviser representatives are considered “qualified clients” and thus may be charged performance-based feesCorrect answer is

Answer 661

Correct Answer is B Registered representatives cannot guarantee performance on any investment.

Answer 662

The correct answer is D (CAPM) The capital asset pricing model allows us to calculate the expected return on the portfolio. Expected return = Risk-free return + Beta (Market return - Risk-free return). Expected return = .01 +[.5 x (.05 - .01) = .03 Next we must calculate alpha. Alpha = Actual return - Expected return So, .05 - .03 = .02, which is 2% Note that when the beta is equal to one, the expected return will be the same as the market return. The exam may give you a question with a beta of 1 and no riskless rate, in this case, the expected return is simply equal to the market return.

Answer 663

The correct answer is B An investment policy statement (IPS) is a document that outlines a retirement plan’s investment goals and strategies and serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy’s investment goals. While having an investment policy statement (IPS) is not required by ERISA or the IRS, an investment policy achieves many of the requirements of the U.S. Department of Labor (DOL). For example, The DOL requires that fiduciaries make investment decisions and document these decisions. They must also invest prudently and monitor the investments they make. An IPS provides an excellent way to accomplish these requirements. Investment Policy Statements (IPS) also limit an employer’s liability as a fiduciary. Companies that have operated within the parameters set by their investment policy statements are generally spared punitive action by regulators if losses due to investment performance occur within the plan.

Answer 664

Correct Answer is C There is an order of priority for liquidation in the event of bankruptcy. Secured creditors can claim their collateral. Employees and wages are paid out next followed by the IRS/Taxes. Debentures/general creditors are next, and then subordinated debentures. Preferred stockholders come next and common stockholders are last to be paid.

Answer 665

The correct answer is C. On the exam, associate the term broker with commission and agency transaction; associate the term dealer with markup or markdown and principal transaction. When a broker-dealer acts as a broker, it is an agent for the customer who wants to buy or sell. This is called an agency transaction. The broker-dealer makes money by changing the customer a commission. When a broker-dealer acts as a dealer, it is buying or selling out of its own inventory of securities, perhaps with its own customer. This is called a principal transaction. The broker-dealer makes money with either a markup added to the ask/offer price when a customer buys a security, or a markdown taken off the bid price when a customer sells a security. Of course, in a principal transaction with its own customer, a broker-dealer could reasonably claim that the transaction involves both its capacity as a dealer and its capacity as the customer’s broker. But for purposes of what it charges the customer, it must choose either a commission or a markup/markdown, not both. A prohibited double-charging of both a commission and a markup/markdown on the same transaction is called a hidden profit.

Answer 666

The Correct answer is A. The NASAA’s Uniform Securities Act requires an investment adviser representative to register with the state securities administrator of any state in which he either has an office or advises more than five customers within a 12-month period. Because he registers with a state administrator, an IA’s registration is held by that entity. Unlike broker-dealers and agents, IARs never register with FINRA. They also never register with the SEC.

Answer 667

Correct answer is D Participating preferred stock allows investors to receive extra dividends when the company exceeds some predetermined financial goals. Thus, investors receive regular dividends but may also participate in a company’s growth when the company does well. Participating preferred stock also often receives a greater claim during liquidation than non-participating preferred. However, participating preferred stock does not pay dividends more regularly than all other types of preferred stock. Finally, it is convertible preferred stock and not participating preferred stock that allows investors to convert preferred shares to shares of common stock.

Answer 668

Correct answer is A Exchange Traded Funds (ETFs) track an index by owning a basket of investments that are held by a custodian and which each shareholder has a pro rata claim to. ETFs tend to track their indices well, but tracking is inherently imperfect due to such issues as cash held, fund fees and how liquid an asset or a market is. Exchange Traded Notes (ETNs) are unsecured debt usually issued by a bank that promises to track an index, minus fees. ETN investors do not have a claim to any securities, instead they receive a promise from the issuer to repay their loan at a future date based on the performance of the index being tracked. This difference means that ETNs do not suffer from any tracking risk at all, but in return the ETN investor is relying on the issuer to be around in the future, thus the credit risk. While the default of an issuer (default risk is another term for credit risk) may seem remote, it is a real possibility since there is always risk in the financial markets.

Answer 669

Correct Answer is C An IA can take custody of client assets as long as the firm meets the necessary safekeeping requirements and has notified the state administrator of its intention to hold client assets. However, failing to disclose important facts about information that is material to an analysis of an adviser’s integrity and paying cash for client solicitations without a written agreement to do so are both fraudulent activities.

Answer 670

The correct answer is D Anyone may contribute to a Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account and there are no contribution limits. Assets in UGMA/UTMA accounts may be used for any purpose and earnings are reported on the minor's social security account, not the custodian's.

Answer 671

The correct answer is D The P/E ratio is essentially the same as the ratio of equity value to net income. To determine equity value, multiply shares outstanding by market price per share (2.5 x 20 = 50), which equals $50 million. Then divide that number by net income (50 /3 = 16.66), resulting in a P/E ratio of 16.7. Net debt is needed to calculate neither equity value nor P/E ratio.

Answer 672

Correct Answer is B Following the registration of a security, the cooling-off period begins. A cooling-off period must be a minimum of 20 days, but it can last much longer. During this time, underwriters for Gary’s may place tombstone ads and obtain indications of interest from the public using the preliminary prospectus. Since the cooling-off period is at least 20 days, the earliest possible date that Gary’s could go to market would be March 25. January 5 and March 5 are not correct since these two dates don't allow for a 20-day cooling-off period. April 5 could certainly be the date of the Gary’s initial public offering; however, since the cooling-off period is a minimum of 20 days, the IPO could actually occur before then.

Answer 673

Correct answer is A An agent of an issuer who only engages in exempt securities does not need to register at the state level. This exemption applies whether the agent has an office in the state or not. Additionally, an agent of a broker-dealer with no office in a state and only institutional clients in that state would not need to register. Broker-dealers are included in the definition of institutional clients. However, both agents of broker-dealers and investment adviser representatives with an office in a state must always register in that state.

Answer 674

Correct answer is B If a firm does not charge a 12b-1 fee, it can charge a maximum front-end sales charge of 8.5% of the public offering price. If a firm charges 8.5%, however, it must also offer breakpoints, rights of accumulation, and reinvestment of dividends at the NAV. A different type of fee from the 12b-1 fee, which must be listed separately in informational materials, is the management fee. The management fee covers the cost of the portfolio manager. Conversion privileges allow investors to sell shares of one type of fund and buy shares of a different fund within the same family at the NAV rather than the POP.

Answer 675

The correct answer is D For a buy-limit order, the rep must wait until the market comes down to the rep’s buy-limit price before purchasing the shares.

Answer 676

Correct answer is B Partnership articles and any amendments to the partnership articles, such as articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise.

Answer 677

Correct answer is D To find the breakeven point for a put option, whether the buy side or the sell side, you subtract the premium from the strike price. This option has a strike price of $30 and a premium of $3. The breakeven point is, therefore, $27 for both the holder and the writer. Because Shamus is the holder of the put, he has the long position, but you didn't need this information to answer the question. Nor did you need either of the market prices.

Answer 678

Correct answer is A A general partnership is a business structure in which all the owners are considered “general partners.” General partners actively engage in the management of the business, and they also assume any liabilities if the business is sued or goes bankrupt. The general partnership structure will not protect their personal assets. In contrast, a limited partnership allows some owners to be general partners, while others take a more passive role as a “limited partner.” Limited partners give up their right to be involved in day-to-day business operations, but they are shielded from any business liabilities. Both general and limited partnerships are considered “pass-through” entities for tax purposes. The partnership is not taxed as a separate entity, so profits and losses are passed on to the tax returns of the owners.

Answer 679

The correct answer is B An agent must always report any information that is material to a client. Material facts are defined as anything that a reasonable person would want or need to know when deciding whether to invest in a product. However, an agent is not allowed to pick and choose which pieces of material information to disclose to a client, whether that decision is based on a specific client’s investment situation or something else. The bottom line is if it is a material fact, it must be disclosed to every client that is considering a specific securities transaction. Additionally, immaterial information does not need to be reported to a client unless the client requests such information. Remember that an agent is responsible for providing customers with any information they are entitled to upon request, whether that information is material or otherwise. Finally, for new securities issues, an agent must provide a customer with a copy of the preliminary prospectus at least 48 hours prior to purchase. However, the delivery of the final prospectus does not need to occur until the trade is actually confirmed.

Answer 680

Correct Answer is D If an adviser provides a report or recommendation to a client that was prepared by someone else, the adviser must disclose the provider. In this case, Gwen must disclose to Jeff that her friend authored the hedge fund report, so Item I must be disclosed. If an adviser orders reports or published research to inform recommendations, it is not necessary to disclose to clients the source of such reports. Gwen need not disclose that she relied on published research in forming her recommendations to Jeff, so it is not necessary she disclose as described in Item II.

Answer 681

The Correct answer is A Certificates of deposit (CDs) are used when customers wish to obtain higher returns than in a savings account. The customer agrees to tie up their money for a fixed period, which can range from one month to five years, in exchange for a higher yield.

Answer 682

The correct answer is B The Uniform Securities Act (USA) states that the Administrator may act against an application or a registration for several reasons, including engaging in dishonest or unethical business practices in the securities industry, committing a felony within the past ten years, filing an incomplete or misleading application for registration, or willfully violating the securities or banking laws of a foreign country. In our inmate's case, he unintentionally violated a Swiss banking regulation and therefore the Administrator would not have grounds to deny the applicant's registration.

Answer 683

Correct answer is B. The correct answer is A S corporations, LLCs and partnerships are pass-through tax entities. This means that profits and losses are allocated to the owners and reported on their individual tax returns, regardless of whether earnings have been distributed or retained. In contrast, a C corporation, the traditional corporate entity, may distribute earnings via dividends or keep the profits in the business as retained earnings without the earnings being taxed to the owners' individual returns.

Answer 684

Correct answer is B The ex-dividend or ex-date is one business day prior to the record date. Ex-date = Record date – 1 business day. An investor who buys stock on or after the ex-date does not receive the dividend.

Answer 685

The correct answer is D Laddering is a strategy whereby a fixed-income investor buys multiple bonds or CDs at different maturities to avoid being locked into a single interest rate and a single maturity. The short-term bonds offer liquidity, while the longer-term bonds offer higher coupon rates. This is an especially effective strategy for anyone who needs a continuous cash flow, such as retirees or someone planning to pay for college tuition over the next several years. Since the ladder is over five years, this would be the best match for the graduate student who will need the funds in two years. The other investors should consider more an aggressive investment or a bond ladder with longer maturities to benefit from the higher yields.

Answer 686

The correct answer is C To compare the two types of bonds you need to transform the municipal yield into an equivalent corporate bond yield. You do this because the investor won't have to pay taxes on the municipal bond--you want to see what yield a corporate bond would have to pay to be equivalent to the muni, considering taxes. The corporate bond equivalent yield is calculated by dividing the municipal yield by (1 - the tax). In this case, this is .045/(1-.25) = .06. This municipal bond is equivalent to a corporate bond paying 6% that you'd have to pay taxes on. Because the 6% is higher than 5.5%, the muni is a better investment. 110. Which of the following would be considered a non-issuer transaction

Answer 687

Correct Answer is D This option ensures payments for a specified number of years, even if the beneficiary dies before the end of that period. After a guaranteed period elapses, the payments continue only for the life of that beneficiary.

Answer 688

The correct answer is D. When an issuer raises money by selling securities to investors, the sale is an issuer transaction. The proceeds of the sale go to the issuer. Securities bought in an initial public offering (IPO) are considered issuer transactions. An issuer transaction takes place in the primary market and often an underwriter is involved. Generally sales of mutual fund shares are considered issuer transactions because when an investor buys shares of a mutual fund, the shares are issued new, and when the investor wants to sell these shares, they are then redeemed by the fund. If a mutual fund decides to sell some of the securities that are owned by the fund, however, this transaction is considered a non-issuer transaction. A non-issuer transaction is when a one party sells a security to another party, and neither party is the issuer. The proceeds of this kind of transaction do not go to the issuer, and these kinds of transactions take place in the secondary market. Non-issuer transactions either occur as over-the-counter transactions or exchange transactions with a broker-dealer typically earning a commission on the transaction. A market maker selling securities out of his own account would be considered a non-issuer transaction.

Answer 689

C 4:30 PM CST on the business day before expiration

Answer 690

A. Cash equal to the strike price

Answer 691

Premium = Intrinsic + Time Value 6 = 0 + T 6 = T

Answer 692

The sale of a call (obligation to sell) without owning the stock

Answer 693

An agreement to buy or sell a specific amount of a commodity on a stipulated date in the future

Answer 694

A. Always Cash

Answer 695

If an investor is long stock, a sell stop order can be used to limit downside risk.

Answer 696

If an investor is short stock, a buy stop order can be used to limit upside risk.

Answer 697

Normally, stock dividends and stock splits are not taxable events. Investors simply adjust their cost basis.

Answer 698

Only on the expiration date

Answer 699

Since soybean futures have 5,000 bushels/contract and Bill lost $.25/bushel, his total loss is $1,250 ($.25 x 5,000).

Answer 700

Rights, warrants, swaps, forwards, options, and structured or exchange-traded notes

Answer 701

A broad-based index measures the market as a whole.

Answer 702

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)

Answer 703

False. The purchase of the put is designed to protect against downward price movement.

Answer 704

To speculate on market movement or to hedge a portfolio

Answer 705

True. Cash forward transactions are negotiated between a buyer and seller and can be for any amount.

Answer 706

Stop-limit orders become limit orders once they are triggered/activated.

Answer 707

An investor's strategy is bearish when effecting a short sale (If stock falls, investors may buy back at a lower price).

Answer 708

Equity options have a contract size of 100 shares.

Answer 709

Long (buying) puts may be used to hedge long stock positions.

Answer 710

The highest bid and the lowest offer for a security is referred to as the Inside Market.

Answer 711

A. The intestate Administrator If an individual dies without a will and the assets of estate exceed the estate's liabilities, the estate is considered intestate. A probate court will appoint a person to act as the administrator of the estate and distribute the estate's assets to the beneficiaries. A power of attorney is void after a client dies.

Answer 712

C. The fiduciary of the estate When a person dies with a will, she has named an executor who will act as a fiduciary for the estate. If a person dies without a will, a court will appoint an administrator to act as a fiduciary for the estate. Notice that the question mentions the term "executor," which makes fiduciary the best response. Durable powers of attorney don't remain in effect after a person dies.

Answer 713

D. Payment for order flow Payment for order flow (PFOF) is a practice in which a market maker or exchange pays a retail broker-dealer for sending (i.e., routing) its customer orders. Payment for order flow is a legal business practice, but the broker-dealer that holds the customer accounts must disclose its PFOF practice when customer accounts are opened and periodically thereafter.

Answer 714

B. Joint tenants in common Joint tenancy in common (JTIC) permits multiple owners of the same property. In addition, JTIC permits each owner to assign their own beneficiaries to their ownership in the jointly owned property. In this question, the siblings want to leave their interest in the real estate to different individuals (i.e., their own children); therefore, JTIC is the best type of designation. Joint tenants in entirety and community property are only available to married couples and not available to siblings. Transfer on death permits multiple beneficiaries, but is not a type of joint ownership.

Answer 715

D. Employees are permitted to make contributions to the account. A simplified employee pension plan (SEP-IRA) does not allow employees to make contributions. Instead, SEPs are funded by employer contributions only and these contributions are elective

Answer 716

D. Clearing broker. Clearing brokers are broker-dealers that execute trades on an exchange for their own account as well as accounts of investors. After a trade is executed, the clearing broker will communicate (i.e., clear) with the counter-party and then deliver securities or cash

Answer 717

B. Since the plan is non-qualified, employees have unsecured claims for their benefits in bankruptcy. Deferred compensation plans allow employees to withhold some of their compensation until they retire. However, if the employer declares bankruptcy, the deferred compensation benefits are an unsecured liability of the employer. Employees become general creditors of the bankrupt company.

Answer 718

B. The subscription agreement

Answer 719

D. A person who executes trades on behalf of a broker-dealer without receiving commissions An agent is a person who sells securities, regardless of how they're compensated. If a person provides investment advice, he would be required to register as an investment adviser representative (IAR), not as an agent. Agents of issuers are not required to register if the securities being sold are exempt securities (e.g., municipal bonds) or the transaction is exempt (e.g., issuers selling it securities to underwriters).

Answer 720

A. An investor purchased bonds and received a warrant as a bonus

Answer 721

A buy or sell order that may not be executed. An order that will only be executed at a specific price or lower An order that will only be executed at a specific price or higher

Answer 722

Bullish! (Hope) Stock rises in value (Fear) Stock falls in value (Need) Limit downside risk (Note enter sell stop orders below the current market risk)

Answer 723

(Bearish) (Hope) Stock Falls in value (Fear) Stock rises in value (Need) Limit upside risk (Note enter buy stop orders above the current market risk)

Answer 724

Sell stop Stop limit Stop Order Buy Stop

Answer 725

Volatility Stability

Answer 726

They have the right to sell 100 shares of stock

Answer 727

A personal transaction between the buyer and the seller Not for a standard amount of the commodity, but rather for a specific amount and quality of the cash commodity Not negotiated by open outcry in the trading pits and not subject to the rules of a futures exchange

Answer 728

Since corn futures have 5,000 bushels/contract and the investor makes $.05/bushel, the profit is $250 ($.05 x 5,000).

Answer 729

Bullish (to find the strategy for call buyers, use the phrase CALL UP)

Answer 730

To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk.

Answer 731

False. Futures, not forwards, are standardized by a futures exchange.

Answer 732

If exercised against, the writer of an equity put option is obligated to buy the underlying stock.

Answer 733

Owner, holder, long

Answer 734

A put option gives the owner the right to sell.

Answer 735

Futures contracts are easier to offset; forwards are generally non-transferrable.

Answer 736

Auction markets

Answer 737

Volatility

Answer 738

Stop and limit orders placed away-from-the-market

Answer 739

False. Futures, not forwards, trade on the exchanges.

Answer 740

Mutual funds, stocks, bonds, and notes

Answer 741

If short stock, a call option can be used to limit upside risk.

Answer 742

The sale of a call (obligation to sell) against stock that is owned

Answer 743

Selling securities that are not owned, but are borrowed from a BD

Answer 744

False. Preemptive rights are only offered to common stockholders.

Answer 745

Her cost basis must be adjusted.

Answer 746

False. European options are considered derivatives because their value is derived from an underlying security.

Answer 747

A limit order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.

Answer 748

Obligation to buy at 40

Answer 749

SC W TU PC Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and then common.

Answer 750

If long stock, a put option can be used to limit downside risk.

Answer 751

They are given priority up to the value of their collateral and are unsecured for any remaining claim.

Answer 752

Purchased at $25,000 min. and is subject to federal, but exempt on both state, and local taxes

Answer 753

A. The bill has a greater yield than the bond T-bills are issued and quoted on a discount yield basis, whereas corporate bonds are quoted on a yield-to-maturity basis. These yields are calculated in different manners. The bond equivalent yield of a T-bill is always higher than its discount yield.

Answer 754

Correct Answer is A. The writer of a put calculates his breakeven point by deducting the $3 premium from the $35 exercise price. The writer, therefore, breaks even at $32. The breakeven point is a per-share price. The fact that the investor writes 5 contracts is not relevant.

Answer 755

B. Interest is subject to federal tax but is exempt from state tax The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass- through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.

Answer 756

C. Tell the customer's son to contact the transfer agent since the shares were registered in his mother's name. Once the owner of securities registered in their name dies, securities need to be sent to an issuer's transfer agent. Once the transfer agent reviews the appropriate legal documents (e.g., death certificate), it will register the securities in the beneficiary's name.

Answer 757

B. The ratio of the amount of net overall debt to assessed valuation (An engineering study is a review Bond) The ratio of the amount of net overall debt (both direct and overlapping) to assessed value is useful in analyzing the credit risk of an issuer of general obligation (not revenue) bonds. In order for a municipal revenue bond issuer to raise funds for a project, it will conduct a feasibility and engineering study.

Answer 758

A. Short 1 DEF May 45 call By selling (short) 1 DEF May 45 call, Louis will generate income through the premium received and reduce the overall cost of the position. While the short call allows the owner to purchase DEF from him at $45 per share until it expires in May, Louis is long a DEF call that allows him to purchase the same stock at $35 per share until May. Louis has established a debit call spread. Had Louis added 1 short DEF May 25 call, he may have been required to sell DEF at $25 per share with the risk it would have cost him $35 per share to purchase DEF. If he added either of the short puts, he may have been required to purchase DEF at $25 or $45 per share without a right to dispose of it.

Answer 759

B. DRS The Direct Registration System (DRS) allows investors to hold securities in book-entry form. The TRF is used to report equity trades. The RTRS is used to report municipal trades. EMMA is the MSRB's database for municipal disclosures and is similar to the SEC's EDGAR database for corporate filings.

Answer 760

D. One business day from the trade date Option trades involving both American and European-style options settle one business day after the trade date (i.e., T+1). However, if an American-style option is exercised, the settlement occurs two business days after the trade date (i.e., T+2). The rationale is that American-style (listed equity) options require the delivery of shares of the underlying stock. In other words, the exercise of an American-style option is the same as the settlement of a stock trade. (European-style options have cash settlement and don't require the delivery of stock. As a result, the exercise of a European-style option results in a settlement of one business day after exercise) (i.e., T+1).

Answer 761

B. Yield to maturity The MSRB regulates the yield that must be disclosed on a client's confirmation. The yield disclosed is the lower of the yield to maturity or yield to call. In other words, the yield to worst. If a bond is callable and trading at a discount, the lower of the two would be the yield to maturity.

Answer 762

C. Limited tax bond A GO bond is backed by taxes. The issuer promises to raise taxes, if necessary, to pay principal and interest on the bonds. A limited-tax GO bond has a ceiling on how high the tax rate may be raised.

Answer 763

Convexity is used when large changes in interest rates are anticipated. Duration would be the best tool, as it is designed to compare the effect of small changes in interest rates on the value of securities with different coupons, maturities, and credit quality.

Answer 764

A. Monday, May 14 A stock's ex-dividend date is the same date as the record date, which is Monday, May 14.

Answer 765

B. Gross profit from sales, divided by sales The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The higher this ratio, the better from an investor's point of view, because a company that has a higher gross profit margin than its competitors is more efficient. Investors would normally be willing to pay more for a company that has a higher efficiency rating than its competitors.

Answer 766

D. 1. Whole life insurance 3. Variable life insurance Universal life policies, including variable universal life, have flexible premiums. Variable universal life is sometimes called flexible-premium variable life insurance. Whole life and variable life insurance policies have fixed premiums.

Answer 767

Compounding Increases Investment for Future Value

Answer 768

Discounting is used to determine present value

Answer 769

Payment in Perpetuity / Discount Rate (PV of Perpetuity = Payment / Dis. Rate) For each child $1,000 month x 12 months =1200 x 3 children = $36,000 / 3% = $1,200,000

Answer 770

B. The ratio of the amount of net overall debt to assessed valuation The ratio of the amount of net overall debt (both direct and overlapping) to assessed value is useful in analyzing the credit risk of an issuer of general obligation (not revenue) bonds. In order for a municipal revenue bond issuer to raise funds for a project, it will conduct a feasibility and engineering study.

Answer 771

C. An $800 capital gain The premium paid on a municipal bond must be amortized over the life of the bond. If held to maturity, the cost basis is reduced to par value and there is no loss.

Answer 772

B. Baa Moody's investment grade bond ratings, from highest to lowest, are Aaa, Aa, A, Baa. BBB is Standard & Poor's lowest investment grade rating. Use the following memory aide to distinguish Moody's ratings from S&P ratings. The name Moody's is a capital letter followed by small letters, just like their ratings (e.g, Baa). S&P consists of all capital letters, just like their ratings (e.g., BBB).

Answer 773

D. Revenue bond Housing program bonds are generally a type of revenue bond and the income that's generated by the properties is used to pay the debt service. General obligation bonds are primarily supported by property taxes. Industrial development revenue bonds are supported by lease agreements with the business(es) leasing the property. Special tax bonds are a type of revenue bond, and they're backed by the taxes that are assessed on certain products or services.

Answer 774

B. Fall. The value of yield-based options is determined by the difference between the yield of a Treasury index and the strike price. Yield-based calls have intrinsic value when the Treasury index yield is above the strike price. Yield-based puts have intrinsic value when the Treasury index yield is below the strike price. When interest rates (yields) decrease, a long position in yield-based puts and/or a short position in yield-based calls will be profitable.

Answer 775

D. Federal National Mortgage Association (Fannie Mae) bonds Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA was created as a government-chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not directly backed by the U.S. government.

Answer 776

C. The purchase and sale of bonds to realize a capital loss to offset against a capital gain for tax purposes A tax swap is the sale and purchase of bonds (or other securities) to realize a capital loss that can be offset against a capital gain.

Answer 777

D. The conversion price decreases to $22.73 and the conversion ratio increases to 44. A nondilutive feature requires that the conversion features be adjusted should there be a stock split or stock dividend. The conversion ratio will be increased and the conversion price will be reduced. 1. The new conversion ratio will be 44 [the old ratio (40) plus the old ratio times the percentage dividend (40 x 10% = 4)] + 40 = 44 New Conversion 2. The new conversion price will be the par value of the bond divided by the new conversion ratio ($1,000 divided by 44 equals $22.73).

Answer 778

D. Existing or potential competitive facilities The credit analysis of a general obligation bond is based on the issuer's ability to levy and collect taxes in an amount that's sufficient to cover the debt service of the issue. The main considerations are as follows: Demographics, such as the diversification of economic activity Factors affecting the issuer's ability to pay, such as the budgetary pictures and legislative climate The credit analysis of a revenue bond is based on the project's ability to generate enough revenue to pay the debt service of the issuer. One consideration is whether there are existing or potential competitive facilities (e.g., if a new airport is being financed by an issuer, determination must be made as to whether there's another airport in the same geographical area).

Answer 779

D. AMBAC AMBAC insures new municipal bond issues. Moody's, Standard & Poor's, and Fitch are credit rating services.

Answer 780

B. 111 The writer of a covered call will have a breakeven point equal to the purchase price of the stock (116) less the premium received (5). Therefore, his breakeven point is $111 ($116 - $5 = $111).

Answer 781

A. Buyers of new bills paid more than buyers paid the previous month Treasury bills are purchased at a discount from the dollar amount on its face. The larger the discount, the higher the discounted yield to maturity. In this example, the discounted yield to maturity has gone down to 4.58% from 4.61% from the previous month. This indicates that buyers of new bills paid more for the Treasury bills (meaning the discount was less) than buyers paid the previous month.

Answer 782

B. Debt service expenses Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.

Answer 783

C. Serial bonds Bonds with staggered maturity dates are referred to as serial bonds. For serial bonds, the principal amount outstanding is reduced over time. On the other hand, term bonds have one maturity date.

Answer 784

B. Ordinary income The investor purchased an already outstanding municipal bond at a discount and later redeemed it for par at maturity. The profit on the transaction is taxed as ordinary income. This is different from an example in which the investor purchased an original issue discount municipal bond and held it to maturity. In such an example, the profit is considered interest and is exempt from federal income tax.

Answer 785

C. $1,250 It is necessary to find the conversion ratio to solve this problem. The bond is convertible at $40: 1. $1,000 divided by $40 equals the conversion ratio of 25 shares of stock to one bond, or 25 to 1. 2. To find the parity price of the bond, multiply the market price of the stock of $50 by the conversion ratio of 25 ($50 x 25 = $1,250). 3. This means that the bond must sell for $1,250 to be equal in value to the stock when the stock has a market value of $50 per share.

Answer 786

B. $660 A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.

Answer 787

A. Tuesday, July 3 Since the trade was executed on a cash basis, it settles on the trade date. If the transaction were executed on a regular-way settlement, it would settle on Thursday, July 5, after incorporating the July 4th holiday.

Answer 788

C. Lower of yield to call or yield to maturity A bond's confirmation must disclose the lower of the yield to maturity or the yield to call. This is sometimes referred to as the yield to worst.

Answer 789

C. August 21 European style options may be exercised only on the day the contract expires—the expiration date. The expiration date for standardized option contracts, including European-style options, is the third Friday of the expiration month. In this question, an exercise notice for the August option may be entered on Friday, August 21.

Answer 790

CORRECT ANSWER C All the choices are considered felonies, except an offense that's punishable by a fine of at least $500. A felony is an offense that's punishable by a prison sentence of at least one year and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial or an offense that's punishable by a prison sentence of less than one year and/or a fine of less than $1,000.

Answer 791

CORRECT ANSWER C Under the SEC's pay-to-play rule, an employee of an investment adviser is prohibited from making a political contribution that exceeds $350 to a candidate for whom she may vote. If an employee of an IA is not allowed to vote for a candidate, the employee is only able to contribute up to $150. If a contribution is made that exceeds $350 (if able to vote) or $150 (if unable to vote), the investment adviser is prohibited from receiving an advisory fee from that municipality for two years after the contribution was made.

Answer 792

CORRECT ANSWER A Alpha is a way to measure risk that's association with a single investment, which is better known as non- systematic risk. On the other hand, systematic risk is associated with all investments and is measured by beta. Gamma and theta are both risk measurements, but they're specific to option contracts.

Answer 793

CORRECT ANSWER C The arithmetic mean (or average) is found by calculating the sum of a given set of data and dividing by the size of the data set. In this example, the sum of the data is 51 and the size of the data set is 10. Therefore, 51 ÷ 10 = 5.1%.

Answer 794

CORRECT ANSWER D Open-end investment companies (i.e., mutual funds) are always issuing and redeeming shares in the primary market. This means that their capitalization is always increasing as investors buy new shares or decreasing as investors redeem old shares. Closed-end investment companies trade on exchange and have a fixed capitalization. Only open-end fund shares trade at their net asset value (NAV). Closed-end fund shares may trade either above or below their NAV depending on the supply and demand on the exchange.

Answer 795

CORRECT ANSWER A Section 529 plans are savings accounts that are used to pay for "qualified education expenses." Tuition is the largest qualified expense, but in some cases, 529 plan savings can be used to pay for student loans after college. Travel expenses (e.g., plane tickets), health insurance, and application fees are NOT considered qualified education expenses.

Answer 796

CORRECT ANSWER B Broker-dealers are required to deliver prospectuses to purchasers of a new issue along with the confirmation, which is due by the settlement date.

Answer 797

CORRECT ANSWER D A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant's benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.

Answer 798

CORRECT ANSWER B A broker-dealer is considered an underwriter when it helps issuers raise capital through the sale of their new issues. Agents (of broker-dealers) and investment adviser representatives (of investment advisers) are the individual employees of their respective firms and are, therefore, not considered broker-dealers.

Answer 799

CORRECT ANSWER D The lifetime gift tax exclusion is currently $12.92 million. Over the course of a person's life, he can give up to $12.92 million without being required to pay the gift tax. If a person dies without giving away $12.92 million, any unused portion can be used by his surviving spouse. For example, if an individual has given away $11.92 million in his lifetime, the remaining $1 million he did not use can be "ported" or used by his surviving spouse. As a result, the surviving spouse could give away a total of $13.92 million in her lifetime.

Answer 800

CORRECT ANSWER B Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well as stock dividends do not constitute a sale if nothing of value is given by the shareholder for the dividend. If an option is exercised, one party to the contract is selling the underlying securities.

Answer 801

CORRECT ANSWER D Individuals are not allowed to simply leave their firm and begin transacting business independently as a broker-dealer. They must be affiliated with a broker-dealer or issuer. In this case, the agent must first create and register as a broker-dealer and fulfill whatever conditions are required in his state. The firm may also be required to register with the SEC and join FINRA. The agent would also need to become a registered principal. However, a surety bond might not be required.

Answer 802

CORRECT ANSWER B The annual exclusion to the gift tax is $17,000 per year, per person (or $34,000 for married couples). A gift that exceeds the annual exclusion could be taxable, but only if takes the cumulative lifetime gifts to the recipient over the lifetime exclusion, which is currently $12.92 million. For example, a gift of $18,000 is over the annual exclusion, but it's only taxable if the excess amount takes the donor's lifetime gifts over $12.92 million. It's important to note that if the donor has only gone over the annual limit (i.e., $17,000), the gift is reported, but the excess amount will not be taxable as long as the donor has not exceeded $12.92 million.

Answer 803

D. Is the Correct Answer. Correlation measures the degree to which two securities move in relation to each other. The greatest diversification benefit is found when a security is negatively correlated. Asset allocation is incorrect since the question relates to diversifying a stock portfolio. Asset allocation involves the process of building a portfolio that consists of multiple asset classes (e.g., stocks, bonds, cash equivalents, real estate).

Answer 804

CORRECT ANSWER A The investment advisory contract must disclose the manner in which the adviser will be compensated. The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and may not be compensated based on a share of capital gains.

Answer 805

Securities listed on an exchange, issued by an investment company, and sold as a private placement (Reg. D Rule 506)

Answer 806

Yes. An Administrator may initiate action, but may not impose fines or penalties for violations.

Answer 807

Who must prove that an exemption exists? Exemptee

Answer 808

Federal Covered Advisers and Federal Covered Securities

Answer 809

No. However, such fee arrangements may be permitted by rule or order of the Administrator.

Answer 810

A written communication for mutual fund shares that contains limited information (less than a regular prospectus).

Answer 811

CORRECT ANSWER B According to the Uniform Securities Act, if the information contained in any document filed with the Administrator becomes materially inaccurate or incomplete, an amendment must be filed by the registrant promptly.

Answer 812

CORRECT ANSWER C Under the provisions of the Internal Revenue Code, at least 75% of a REIT's assets must be invested in real estate, cash, or U.S. government securities. The remainder of the portfolio can be invested at the discretion on the REIT's manager. A REIT must also distribute at least 90% of its income to its shareholders. Notice that the rule on distributions doesn't impact how the portfolio's assets are invested.

Answer 813

CORRECT ANSWER C Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not render an opinion of the investment merits of a particular security.

Answer 814

CORRECT ANSWER C Ideally, a diversified portfolio should be composed of assets that are largely uncorrelated--i.e., do not move in the same direction.

Answer 815

CORRECT ANSWER A The amount of money that must be invested at an expected rate over a specified number of periods to produce a sum of money is referred to as the present value. In this question, if the married couple invests $18,122 today with a 7% annual return, they will have $50,000 in 15 years. Obviously, the setup of the question did not provide the future mortgage payoff amount but based on a present value of $18,122 and a 7% return, it's $50,000. The formula for calculating present value from a known future value is: P0 = Pn / (1 + r)n In this example, P0 = Pn / (1 + r)n = $50,000 / (1 + .07)15 = $50,000 / 2.759 = $18,122

Answer 816

CORRECT ANSWER B Bonds that are issued by foreign (e.g., Brazilian) companies pay interest and principal in the issuer's currency (e.g., Brazilian reals). At maturity, the bondholder will receive both the $50,000 principal amount plus the final $1,500 semiannual interest payment (i.e., $50,000 x 6% ÷ 2). Therefore, the total payment at maturity is 51,500 Brazilian reals.

Answer 817

CORRECT ANSWER D An application for initial or renewal registration is not considered filed until the Administrator has received all of the required fees and documents. Remember, state Administrators receive, process, and grant registration; however, they do not approve these items.

Answer 818

CORRECT ANSWER A If the stock is put to the writer, he would be required to buy the stock for $2,500. His cost basis for tax purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for $1,600, he would have a net $500 loss ($2,100 - $1,600).

Answer 819

CORRECT ANSWER D A sole proprietorship does not have stockholders, federal reporting requirements, or a chief financial officer. Partnerships and S Corporations file Form K-1, not sole proprietorships. The owner is required to maintain all necessary books and records in the event of an audit by the IRS or State Department of Revenue.

Answer 820

A. Future value of money The investor is trying to determine the future value of money. He wants to know how much he will have in 10 years if he invests $100,000 today with an annual return of 6%. (63004)

Answer 821

CORRECT ANSWER C Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not render an opinion of the investment merits of a particular security.

Answer 822

B. Money-rate In this question, the equity portfolio may be subject to market risk, regulatory risk, and currency risk. Market risk is simply the day-to-day potential for an investor to experience losses due to market fluctuation in securities' prices. Regulatory risk is based on the fact that changing laws could have a negative impact on the business. In this question, currency risk is being assumed since the portfolio consists of international equities, which may involve the need to exchange foreign currencies into U.S. dollars. However, since the portfolio consists of equities, money-rate (interest-rate) risk less likely to be a concern. Money-rate risk is more likely to be associated with bond portfolios. (14421)

Answer 823

CORRECT ANSWER A According to the Uniform Securities Act, if the information contained in any document filed with the Administrator becomes materially inaccurate or incomplete, an amendment must be filed by the registrant promptly.

Answer 824

CORRECT ANSWER A In an equity-indexed annuity, the insurance company guarantees a minimum rate of return (typically 87.5% of the premium payments plus 3%).

Answer 825

CORRECT ANSWER B A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation, and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder's tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder's net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.

Answer 826

CORRECT ANSWER B Behavioral finance, which is a sub-category of behavioral economics, uses psychological biases to explain the behavior of individuals and markets. Unlike traditional financial theory, behavioral finance doesn't assume that all investors are rational. Some of the topics behavioral finance addresses include loss avoidance, confirmation bias, disposition bias, recency bias, and self-attribution. The Efficient Market Hypothesis (EMH) assumes that stock prices reflect all information and assumes that investors behave rationally. Predicting market trends on historical data is referred to as "technical analysis." While an investor making large withdrawals is not rational, it doesn't reflect a specific psychological bias that's covered in behavioral finance.

Answer 827

CORRECT ANSWER B Exchange-traded funds (ETFs) are exchange-traded portfolios that are typically designed to track an index. Like closed-end funds, ETFs are valued based on the bids and offers of investors and traders on stock exchanges.

Answer 828

CORRECT ANSWER C One of the provisions that is required in investment advisory contracts is that the adviser will notify its clients of any change in the partnership (ownership) within a reasonable period. Whether a partner who leaves or dies is responsible for managing a client's assets is irrelevant to the notification provision. If the IAR that manages Caris’ account leaves to start a new advisory firm, notification is not required since the IAR is not a partner of the firm. However, it is certainly a good practice for the advisory firm to notify Caris that her IAR has left the firm.

Answer 829

CORRECT ANSWER B ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.

Answer 830

CORRECT ANSWER A Personal securities transactions involving the following securities are excluded from the reporting requirements: Direct obligations of the U.S. government Money-market instruments Shares of money-market mutual funds Shares of unit investment trusts Shares of other types of mutual funds provided the adviser is not the underwriter or adviser to the fund. There is no exclusion provided for transactions involving corporate bonds.

Answer 831

CORRECT ANSWER C If the net present value of an investment is greater than zero, the investment will generate a positive return. Net present value is used in discounted cash flow (DCF) analysis. It is a standard method for using the time value of money to evaluate investments. For example, if an adviser wants to purchase a portfolio of bonds, she would discount the cash flows of those bonds into one present value amount, for example, $1,300,000. If the adviser can purchase the bonds for less than that amount, then the investment has a positive net present value. This would mean that the return on the portfolio would be greater than the discount rate used to arrive at the net present value. If the adviser could not locate the bonds for a total price of less than $1,300,000, then the purchase would not be completed.

Answer 832

CORRECT ANSWER B The NASAA Record-keeping Requirements for Investment Advisers Model Rule states that advisers must maintain a file which contains copies of all written client complaints. However, if a client requests that the original complaint be returned, the firm and the IAR should follow the client's instructions, document that the original was returned at the client's request and retain a copy for their records.

Answer 833

CORRECT ANSWER C Investment advisers, including mutual fund managers, must ensure that the benefit of a soft dollar arrangement is worth the added costs to their clients. Advisers must disclose the conflict of interest that's posed by soft dollar arrangements with their customers but are not specifically required to file the conflict with a regulator. There's no maximum length of time for a soft dollar contract in state or federal law. Advisers are not permitted to waive their fiduciary responsibility as it relates to a soft dollar arrangement.

Answer 834

A written communication for mutual fund shares that contains limited information (less than a regular prospectus).

Answer 835

No. Securities issued by non-profit organizations are exempt from registration.

Answer 836

No, one side must be unsolicited.

Answer 837

Yes. According to the USA, any person who solicits investment advisory service is considered an IAR.

Answer 838

False. No registration is required as long as the IA has no place of business in the state.

Answer 839

The issuer must have its principal place of business in that state

Answer 840

The final public offering price and the effective date

Answer 841

The appeal of an administrative order is made before a court of competent jurisdiction (state court).

Answer 842

D. 8 The mode of a set of data (in this case, annual returns) is the value in the set that occurs most often. In this question, 8% occurs most often and therefore is the mode.

Answer 843

D. Intrinsic value of 2 and time value of 2.50 With the market value of the stock at 42, the 40 call is in-the-money (has intrinsic value of) by 2 points. The remainder of the total premium of 4.50 is the 2.50 of time value. In other words, the 4.50 premium consists of the intrinsic value of 2 plus the time value of 2.50.

Answer 844

D. A strategic asset allocation strategy A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.

Answer 845

$25 million per violation

Answer 846

Agent or broker

Answer 847

Firm name, # of employees, nature of business, history of officers/directors, legal/disciplinary action in past 10 years

Answer 848

False. Exculpatory clauses are waivers absolving agents from wrongdoing. The waivers are null and void under the USA. (show or declare that (someone) is not guilty of wrongdoing:)

Answer 849

No. BDs of Mexico are required to register in the U.S. to effect securities transactions in a state.

Answer 850

True. The consultant must register as an IA since it is providing securities-related advice for compensation.

Answer 851

An IAR may exercise discretion over a client's account based on the client's oral authorization for up to 10 days.

Answer 852

C. 9% The Rule of 72 can be used to find the annual return on the investment over the eight-year period. To approximate the compounded growth rate, 72 is divided by the number of years it takes for the funds to double. In this example, it took eight years for the money to double (from $4,000 to $8,000); therefore, 72 divided by 8 years equals a growth rate of 9%.

Answer 853

The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client.

Answer 854

D. $13.61 million The annual exclusion to the gift tax is $18,000 per year, per person (or $36,000 for married couples). A gift that exceeds the annual exclusion could be taxable, but only if it takes the cumulative lifetime gifts over the unified tax credit for gift and estate taxes, which is currently $13.61 million. For example, a gift of $19,000 is over the annual exclusion, but it's only taxable if the excess amount takes the lifetime gifts from the donor over $13.61 million. It's important to note that if the donor has only gone over the annual limit (i.e., $18,000), the gift is reported, but the excess amount will not be taxable as long as the donor has not exceeded $13.61 million. Ultimately, if a person has given away $13.61 million during her lifetime, then the amount remaining in her estate is subject to the estate tax.

Answer 855

Within 2 business days of the trade

Answer 856

False. The purchasing firm must update its application, but paying a new filing fee is not required.

Answer 857

A. The IAR's sister. Representatives are allowed to borrow funds from clients that are actively engaged in the business of loaning money or affiliates of the investment adviser. Financial institutions (e.g., banks and broker-dealers) regularly lend money; therefore, borrowing from them is permitted. Borrowing from a subsidiary of the adviser is also permitted. However, borrowing from a sister or another close relative is not permitted for investment advisers representatives. Please note that the rules regarding borrowing are different for agents of broker-dealers. Broker-dealer agents are permitted to borrow from family members.

Answer 858

A fulcrum fee is averaged over a specific period. It increases and decreases proportionately with the investment performance of a client's account, in relation to the investment record of an appropriate index of securities. If the client's account outperformed the index, the adviser would be entitled to an additional fee. If the client's account underperformed the index, the fee would be reduced.

Answer 859

Yes. Selling wrap accounts is considered advisory service which requires registration.

Answer 860

False. The Administrator must provide written notification, written findings of fact, and an opportunity for a hearing.

Answer 861

Under the Uniform Securities Act, the statute of limitations for fraud is five years.

Answer 862

False. Because the BAs were not issued in at least $50,000 denominations, registration is required.

Answer 863

CORRECT ANSWER C Section 457 plans are retirement accounts for municipal government workers and certain non-profits. Unlike 401(k) plans, 457 plans are non-qualified and are not required to meet guidelines that were established by the Employee Retirement Income Security Act of 1974 (ERISA).

Answer 864

False. Futures and forward contracts are not securities.

Answer 865

CORRECT ANSWER A The dividend discount model is a way to estimate a company's share price by dividing a company's future (i.e., expected) dividend by a discount, typically the corporation's cost of equity (i.e., Stock Price = Dividend ÷ Discount Rate). NOTE: this is the same formula as the present value of a perpetuity. Under the dividend discount model, investors are assuming that the price of a stock should be equal to the present value of the dividends, which are expected to be paid perpetually (i.e., forever).

Answer 866

D. Average price of the securities purchased will be more than the average cost of the securities over a long period Dollar cost averaging involves investing the same amount of money, in the same securities, over a long period. The outcome of this investment method is that the average cost of the securities purchased should be less than the average price of the securities purchased over that period, or, put another way, the average price of the securities purchased should be more than the average cost of the securities purchased over that period (as the correct answer indicates). Also, it's important to note that profit is not guaranteed.

Answer 867

An order giving agents discretion as to execution time/price. Clients must specify buy/sell, security, and quantity.

Answer 868

An endowment policy is a type of life insurance that pays face value at the end of a period.

Answer 869

Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.

Answer 870

The Administrator

Answer 871

Sports and entertainment reps, pension consultants and financial planners

Answer 872

Self-Regulatory Organization (such as FINRA)

Answer 873

A holdings report filed by an access person must be current as of 45 days prior to the date the report is submitted.

Answer 874

No. However, an agent may share in a client's account.

Answer 875

A Regulation A Tier 2 exemption is permitted for issuers that raise no more than $75 million over 12 months.

Answer 876

C. II or III only To protect (not guarantee) against a loss in a short sale, an investor could buy a call or enter a stop-loss order (buy-stop) to cover the short sale. If the stock increases in value, the call option may also appreciate in value offsetting a portion, or all of the loss, on the short stock position. The buy-stop order would limit the loss on the upside of the short sale. The short sale would be covered as the stop order would become an order to buy at the market when the stop price is reached.

Answer 877

D. 12.50% (Ending Value - Beginning Value) + Income Beginning Value In this question, the gain is $40,000 ($280,000 - $240,000) and the income is $20,000, for a total of $60,000. The $60,000 is then divided by the starting value of $240,000, which equals a total return of 25%. However, the 25% return is for two years of investing. Since the question is asking for the annualized return, the 25% return must be divided by the two years that the portfolio was invested, which equals an annualized return of 12.5%.

Answer 878

A Regulation A Tier 2 exemption is permitted for issuers that raise no more than $75 million over 12 months.

Answer 879

Provide written notification to clients and the Administrator

Answer 880

No. This is a prohibited practice and is considered an unsuitable recommendation.

Answer 881

Under the USA, private placements are exempt if securities are offered to 10 or fewer retail clients over 12 months.

Answer 882

C. A per stirpes trust. In a per stirpes distribution, each branch of a family receives an equal share of an estate. In this question, Carrie's three children represent separate branches of her family. If Carrie dies and her children are still living, each child will receive one-third of her estate. If one of Carrie's children dies before her, her deceased child's heirs will equally split the decedent's one-third of the estate. On the other hand, a per capital (by head) distribution allocates estate assets to all surviving members equally, regardless of how close or distant the relationship.

Answer 883

B. 3%. The first step is to adjust the investor's yield for taxes. The formula for finding After-Tax Yield is: Nominal Yield x (100% - Tax Rate%). In this case, the investor's after-tax yield equals 8% [10% x (100% - 20%)]. The next step is to adjust the after-tax yield of 8% for inflation. The formula for Inflation-Adjusted Return is: Bond Yield - Inflation Rate. In this question, start with the after-tax yield of 8% and subtract by the inflation rate of 5% (i.e., CPI), which is 3% (8% - 5%). Returns that are adjusted for inflation are also referred to as "real returns."

Answer 884

Revenues, expenses, net income, or net loss

Answer 885

No. The National Securities Markets Improvement Act (NSMIA) exempts federal covered advisers from state registration.

Answer 886

Bonds issued by insurance companies are exempt from state registration.

Answer 887

The Securities Exchange Act of 1934 regulates the Secondary Market.

Answer 888

No, mutual funds advisers are federally covered and are excluded from the IA definition at the state level.

Answer 889

Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $2,200,000

Answer 890

True. There is no indication that the agent is managing accounts and charging a fee.

Answer 891

The original amount paid, plus the legal rate of interest, attorney fees, and court costs, minus any cash received

Answer 892

False. This is an example of trading ahead and is prohibited.

Answer 893

Any person who issues or proposes to issue a security, such as government entities and corporations.

Answer 894

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $1,100,000 under management.

Answer 895

When it registers as an investment company under the Investment Company Act of 1940

Answer 896

On a proxy statement (Form 14A); however, some information may also be found in the Form 10-K filing.

Answer 897

No. U.S. government securities advisers are excluded from the IA definition under the IA Act of 1940.

Answer 898

To determine if an IA is eligible for continued SEC registration; it is filed within 90 days of its fiscal year end

Answer 899

Yes. Sam is engaging in arbitrage.

Answer 900

Form filed by an independent public accountant after auditing the records of an IA maintaining custody of client assets

Answer 901

Yes, no place of business in state and a client visits the state or existing client moves to the state (regist. pending)

Answer 902

An IAR with no place of business in a state must register in the state if he has more than five retail clients there.

Answer 903

If it has no office in the state and it has institutional clients only OR five or fewer retail clients in the last 12 months

Answer 904

True. Since advice is being provided, as a business, and compensation is received, the ABC test is met.

Answer 905

Banks, S&Ls, insurance or investment companies, investment advisers, or entities with at least $50 million in assets

Answer 906

The IA's clients reside in the state in which its office is located and its advice is not related to exchange-listed securities

Answer 907

False. They are excluded from the definition under the IA Act of 1940, not under the USA.

Answer 908

Surety bonds must be maintained for three years after the firm ceases operations.

Answer 909

Registration by Coordination has a minimum cooling-off period of 10 days.

Answer 910

Routine items require an amendment within 90 days after the end of the IA's fiscal year.

Answer 911

The Securities Act of 1933 regulates new issues.

Answer 912

D. A bottom-up approach. When an investment adviser analyzes the market by first evaluating individual companies, it is considered a bottom-up approach. Conversely, when an adviser begins by analyzing the performance of a sector as a whole, it is considered a top-down approach.

Answer 913

C. Monte Carlo Theory Monte Carlo is a technique which uses randomly generated scenarios, called simulations, to attempt to determine the probability of possible returns. It is one of several computer programs that has been developed recently to give investors different tools to help them manage their portfolios.

Answer 914

The correct Answer is C. Discounted cash flow (DCF) analysis evaluates the present value of all coupon payments and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client. If a bond is trading at a discount to its present value, the investor will earn more than the interest rate that has been used to calculate the present value. Conversely, a bond that is trading at a premium to its total present value will be worth less than the price of the bond. (The investor would be overpaying for the bond.)

Answer 915

Gamma and theta are both measures of the volatility of an option's premium. Gamma is used to measure the option's delta sensitivity to changes in the underlying stock price, while an option's delta measures the amount by which an option's premium will change when the underlying stock price changes. Theta is a measure of how quickly an option's time value decreases. Duration and convexity are measures of a bond's volatility. Alpha and beta are measures of non-systematic and systematic risk and can be applied to any investment. Expected return and standard deviation are both used in the Modern Portfolio Theory.

Answer 916

The correct Answer is -36% A. *The total return for a security is found by taking the ending value minus the beginning value plus any income. In this example, the ending value of the stock was *$67.50 minus the beginning value of $75.00 plus $0.75 in dividends. Dividing this sum by the beginning value of $75.00 will equal a 9% loss for the quarter. Multiplying this by four quarters will equal an annualized loss of 36%.*

Answer 917

A. Tactical asset allocation. Tactical (active) asset allocation may be utilized by investors who believe that securities markets are not perfectly efficient. These investors may try to use an active strategy (i.e., market timing) to alter the portfolio’s asset mix in an effort to take advantage of anticipated economic events. This market timing approach is primarily based on short-term decisions. On the other hand, periodically rebalancing a client’s portfolio in an effort to maintain an optimal portfolio based on his risk tolerance and investment objectives is referred to as strategic (passive) asset allocation. Strategic asset allocators tend to view the market as efficient and market timing as ineffective, thereby taking a more long-term outlook. Sector rotation is an investment strategy that involves the movement of money from one industry or sector to another in an attempt to beat the market.

Answer 918

Correct Answer is B. When using net present value (NPV) to evaluate a project, the value of the cash inflow is compared to the cash outflows returned by the project. If the NPV is zero, then the project is assumed to return all of the cash inflow plus the required rate of return.

Answer 919

C. -8% A security's total return takes into account the cash flow from dividends or interest, plus appreciation or minus depreciation, and divides by the original value. In this case, during the first quarter, the stock paid a $1 dividend, but its price fell by $2. To determine the quarterly return, $1 + (-$2) ÷ $50 = -2%. To annualize the return, the -2% quarterly return is multiplied by four, which equals a -8%.

Answer 920

Correct Answer is C. Discounted cash flow (DCF) analysis evaluates the present value of all coupon payments and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client. If a bond is trading at a discount to its present value, the investor will earn more than the interest rate that has been used to calculate the present value. Conversely, a bond that is trading at a premium to its total present value will be worth less than the price of the bond. (The investor would be overpaying for the bond.)

Answer 921

Federal Covered Advisers and Federal Covered Securities

Answer 922

The Investment Adviser Registration Depository (IARD)

Answer 923

All 50 U.S. states, the U.S. Virgin Islands, Puerto Rico, the District of Columbia, Canada and Mexico

Answer 924

10 business Days

Answer 925

Currently, there is no SRO for advisers.

Answer 926

False. A buy-and-hold strategy is considered a passive/strategic investment strategy.

Answer 927

B. Fixed-income securities Fixed income securities (i.e., bonds) are typically not traded on an exchange. Instead, broker-dealers will buy or sell bonds directly to or from their customers in a principal capacity. In these transactions, the broker-dealer will charge a markup, rather than a commission. Stocks and ETFs are exchange-traded are more likely to have a commission. Most mutual fund shares are sold with a sales charge, not a markup.

Answer 928

Lawyers, Accountants, Teachers and Engineers—these are the professionals excluded from the IA definition.

Answer 929

Schedule 13D must be filed within five business days if an investor acquires more than 5% of a publicly traded company.

Answer 930

If an asset was held for one year or less prior to its sale, any gain or loss would be short-term.

Answer 931

Financial Industry Regulatory Authority

Answer 932

Within 90 days from the IA's fiscal year-end

Answer 933

Securities issued under the intrastate exemption may not be sold outside the state until 6 months have passed.

Answer 934

The statute of limitations for criminal violations of the Uniform Securities Act is five years.

Answer 935

A 20-year U.S. Treasury zero-coupon bond is most susceptible to inflation risk.

Answer 936

False. In a weak-form efficient market, only fundamental analysis will be useful.

Answer 937

Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings.

Answer 938

Under the Uniform Securities Act, the statute of limitations for fraud is five years.

Answer 939

D. I and IV. The writer (seller) of a straddle (call and put) believes the stock's price will remain stable. The buyer of a straddle expects that the market price of the underlying stock will be volatile.

Answer 940

The maximum criminal penalties under the USA are a fine of $5,000 and 3 years in prison.

Answer 941

Registration by Filing (Notification) requires issuers to be in business at least 36 months preceding registration.

Answer 942

Under the USA, the de minimis exemption limits an IA to no more than five clients within the previous 12 months.

Answer 943

It is filed within 120 days from the completion of an audit of the IA's books; filed by the auditor.

Answer 944

Both. Payment is due within three business days for a cash account (100% payment) and a margin account (50% payment).

Answer 945

The issuer must have its principal place of business in that state

Answer 946

Under the provisions of the USA, a hearing will be held 15 days after a written request.

Answer 947

D. Gamma and theta Gamma and theta are both measures of the volatility of an option's premium. Gamma is used to measure the option's delta sensitivity to changes in the underlying stock price, while an option's delta measures the amount by which an option's premium will change when the underlying stock price changes. Theta is a measure of how quickly an option's time value decreases. Duration and convexity are measures of a bond's volatility. Alpha and beta are measures of non-systematic and systematic risk and can be applied to any investment. Expected return and standard deviation are both used in the Modern Portfolio Theory.Gamma and theta are both measures of the volatility of an option's premium.

Answer 948

regulatory risk

Answer 949

A person may appeal a stop order that is issued by the Administrator within 60 days.

Answer 950

Three. While 10-Q forms must be filed quarterly, a 10-K is filed at the end of the year in lieu of a fourth 10-Q.

Answer 951

An investor who follows the contrarian style of investing bets against market trends.

Answer 952

B. All public information, including historical data, is reflected in securities prices.. The Efficient Market Hypothesis (EMH) explains three different forms -- strong, semi-strong, and weak form efficiency. In a weak form efficient market, all past prices and data are fully reflected in current prices. In a semi-strong form efficient market, all public data, including historical pricing, is reflected in current prices. In a strong form efficient market, both public and non-public (i.e., inside) information is reflected in current prices. The assumption that investors want to minimize risk and maximize returns is made in the Modern Portfolio Theory, not the Efficient Market Hypothesis.

Answer 953

corporation makes an interest payment on its bonds. This payment is considered a pre-tax expense.

Answer 954

Current Assets ÷ Current Liabilities = Current Ratio

Answer 955

Cyclical stock fluctuates with the business cycle (auto companies).

Answer 956

A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations

Answer 957

Current assets (cash) is increased and 2) Long-term liabilities is increased (Working capital is increased)

Answer 958

Growth investors are concerned with a company's future earnings potential.

Answer 959

Cash, marketable securities, accounts receivable

Answer 960

A leading indicator. However, length of unemployment is considered a lagging indicator.

Answer 961

C. 18.50 After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price.

Answer 962

Gross Domestic Product (GDP) measures the goods & services produced within the U.S. Over a period of time!

Answer 963

A. Home equity loans Similar to a collateralized mortgage obligation (CMO), asset-backed securities (ABS) are bonds which are backed by a pool of assets. However, unlike CMOs, ABS are secured by a pool of loans that don't include mortgages. Instead, they typically consist of home equity loans, credit card receivables, auto loans, or student loans.

Answer 964

A leading indicator. However, length of unemployment is considered a lagging indicator.

Answer 965

The quick asset ratio is more stringent since it excludes inventory from the current assets.

Answer 966

If interest rates trend upward as the term of the debt lengthens, this is referred to as a positive/normal yield curve.

Answer 967

Earnings Per Share (EPS)

Answer 968

Assets that may be converted into cash in a short time (usually one year or less)

Answer 969

Dividend payout ratio

Answer 970

Market price ÷ P/E ratio

Answer 971

Current assets, fixed assets and intangibles

Answer 972

The Russell 2000 Index is a small-cap index.

Answer 973

Stocks of emerging companies that would generally be suitable only for speculative investors

Answer 974

Income stock pays higher than average dividends (e.g., stocks of utility companies).

Answer 975

$250,000 for single filers or $500,000 for joint filers

Answer 976

A SIMPLE 401(k) may not be established by a business that has more than 100 employees.

Answer 977

Regressive taxes are also referred to as flat taxes.

Answer 978

False, only those named in the Corporate Resolution

Answer 979

Marginal tax rate

Answer 980

Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.

Answer 981

Public school employees [403(b)] and certain non-profit organization employees [501(c)3]

Answer 982

The cost basis is the asset's market value at the time of death (a stepped-up basis)

Answer 983

It is generally the donor's cost.

Answer 984

Yes, provided the Keogh contribution is solely based upon the employee's self-employment income.

Answer 985

Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor's accounts)

Answer 986

The maximum number of shareholders in an S Corporation is 100.

Answer 987

Investment objectives, financial situation, risk tolerance, tax status

Answer 988

A testamentary trust, since it is established by the estate of the grantor

Answer 989

Ordinary income

Answer 990

The maximum contribution to an IRA is 100% of earned income up to a maximum of $7,000.

Answer 991

Basis will be the donor's cost or market value, whichever is lower.

Answer 992

The results of the business venture (profits and losses) flow through directly to the investor.

Answer 993

Payroll deduction plans and deferred compensation plans

Answer 994

The sale of an asset at a price that exceeds its basis (gain) or at a price lower than its basis (loss)

Answer 995

False. Each owner must provide information to open a joint account.

Answer 996

During the donor's lifetime

Answer 997

Short-term gains are taxed at ordinary income rates, and long-term gains are taxed at a maximum of 20%.

Answer 998

It has multiple owners and each has trading rights. If one owner dies, her account value passes to the other owner(s).

Answer 999

Within four business days of the event. However, compliance with Regulation FD may require filing sooner.

Answer 1000

True. Mortgage payments are also found on the income statement.

Answer 1001

Death, disability, qualified higher education, home buyer ($10,000 limit), birth or adoption of a child ($5,000 limit)

Answer 1002

Employees who are 21 years or older with one year of full-time service

Answer 1003

Partnerships are dissolved due to the death of any of the partners, while corporations may continue.

Answer 1004

To minimize estate tax and gift tax liabilities. It’s when it goes to kids, family, etc., that they get hit. FLPs can help with that in terms of giving ownership interests to beneficiaries while providing limited liability—a son works for his dad, etc.

Answer 1005

rogressive taxes are also referred to as graduated taxes.

Answer 1006

True. Tax refunds are cash inflows (i.e. money coming into a customer's account).

Answer 1007

Regulation T governs the extension of credit by BDs.

Answer 1008

The cost basis is the lower of the donor's original basis or the market value at the time of the gift.

Answer 1009

A branching trust would pass on an equal share of the trust to the next generation.

Answer 1010

Reinvesting dividends in a mutual fund creates a taxable event.

Answer 1011

A contribution of $7,000 can be made to a Spousal IRA for a non-working spouse.

Answer 1012

When securities are gifted, the recipient's holding period will be the same as the donor's.

Answer 1013

The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits

Answer 1014

The rights, liabilities, and obligations of each partner

Answer 1015

The investment policy statement

Answer 1016

Her basis is $15,000 since the annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.

Answer 1017

The total cost to acquire an asset.

Answer 1018

False. Although income taxes are deferred, unemployment and Medicare taxes must still be paid in the current year.

Answer 1019

The trustee is the person who has fiduciary control over a trust.

Answer 1020

Generally there is no estate tax between spouses. However, if the spouse is a non-U.S. person, the exclusion is denied.

Answer 1021

Corporations are not subject to double taxation.

Answer 1022

By April 1st of the year after an individual turns the age of 73

Answer 1023

Education Savings Account (Coverdell)

Answer 1024

If securities are inherited, a beneficiary's holding period is automatically long-term (regardless of previous owner's).

Answer 1025

If reinvested dividends are used to acquire additional shares, the client's cost basis will increase.

Answer 1026

There's no limit on gift size between spouses. The gift tax exclusion of $18,000 per year doesn't apply to spouses.

Answer 1027

Yes. The plan's trustee must abide by the Uniform Prudent Investor Act.

Answer 1028

Income and estate tax are examples of a progressive or graduated tax.

Answer 1029

As a single shareholder

Answer 1030

ERISA gave the U.S. Government jurisdiction over private pension plans.

Answer 1031

An irrevocable trust is one that may not be modified or terminated without the permission of the beneficiary. Once assets are transferred to the trust, all rights of ownership are removed from the grantor. Assets held in an irrevocable trust avoid probate and are not included in the grantor’s estate.

Answer 1032

Retirement goals, future college tuition, and remaining mortgage payments are examples of capital needs.

Answer 1033

A bypass trust is a type of irrevocable trust that’s most commonly used to pass assets from parents to children at the time of the second parent’s death. The trust is structured so that the children will not be required to pay estate taxes on assets that are in excess of the current estate tax exemption.

Answer 1034

As opposed to the irrevocable trust, a revocable trust provides the grantor with the ability to alter or cancel (terminate) the trust and reclaim the assets. Income earned during the life of the trust is distributed to the grantor. Similar to irrevocable trusts, the assets placed in a revocable trust avoid probate, but will be included in the value of a deceased’s estate.

Answer 1035

In a simple trust, the trustee is required to distribute all of the income generated by the trust to the beneficiaries in the year in which the income is received. The corpus (principal) of the trust must be left intact; therefore, the trustee is not allowed to make distributions of principal to the beneficiaries. (Interest and dividend payments are normally considered income, while capital gains are considered part of the trust’s principal.)

Answer 1036

A complex trust is able to perform certain activities that a simple trust cannot, such as making tax-deductible contributions to charities and retaining income that’s generated by the trust. The trustee may also distribute the principal to the beneficiaries in accordance with the terms of the trust.

Answer 1037

A testamentary trust is created based on the instructions found in the grantor’s will and becomes effective at the time of the grantor’s death. The assets must go through probate and are included in the value of the estate for tax purposes.

Answer 1038

A trust that’s created during the grantor’s lifetime is an inter vivos (living) trust. Inter vivos is Latin for “between the living.” Most of these trusts are revocable. The assets placed in an inter vivos trust avoid probate, but are included in the grantor’s estate for tax purposes.

Answer 1039

Involves changing the balance in a portfolio (shifting the percentages so one asset class is more or less heavily represented) in anticipation of changing market or economic conditions. Assumes that the markets are efficient and it is impossible to time the market in this fashion.

Answer 1040

On a $10,000 long-term gain, since the losses are netted against gains

Answer 1041

False. All owners of an S-Corporation must be U.S. citizens or resident aliens.

Answer 1042

S Corporations have the same flow-through treatment as partnerships (i.e., they are not taxable entities).

Answer 1043

simple trust must distribute earnings, but not principal. Complex trusts may retain earnings or distribute principal.

Answer 1044

Federal income tax, estate tax, gift tax

Answer 1045

A limited liability company (LLC)

Answer 1046

They are allocated to owners based on their percentage of ownership.

Answer 1047

Update the client's information that is on file

Answer 1048

From the intestate Administrator

Answer 1049

Per IRS Publication 950, the gift tax annual exclusion is $10,000, but is adjusted by the cost of living (now $18,000).

Answer 1050

Federal income tax, estate tax, gift tax

Answer 1051

Yes, since anyone representing a BD in the sale of securities is an agent.

Answer 1052

Notification (filing)

Answer 1053

False. Since fixed annuities aren't securities, they are not subject to any provision of the USA.

Answer 1054

False. A partner, officer, or director is deemed an agent of a BD if she is involved in the purchase/sale of securities.

Answer 1055

The USA considers preorganization certificates, prime bank notes, and voting trust certificates to be securities.

Answer 1056

False. Registration will become effective simultaneously with SEC registration, but need not be filed at the same time.

Answer 1057

Exempt transaction

Answer 1058

Non-issuer trading of securities subject to reporting requirements of the Act of 1934 are exempt transactions.

Answer 1059

When it registers as an investment company under the Investment Company Act of 1940

Answer 1060

NO! Insurance, endowment policies, or annuity contracts under which an insurance company promises to pay a fixed sum of money either as a lump sum or periodically for life or other specified period (i.e., term, universal, or whole life insurance policies, and fixed annuities)

Answer 1061

Yes. Notice filing is the process by which information filed with the SEC is also filed/shared with the Administrator.

Answer 1062

Central Registration Depository

Answer 1063

False. Only non-recurring secondary market transactions are considered exempt transactions.

Answer 1064

Registration by Coordination has a minimum cooling-off period of 10 days.

Answer 1065

Exempt security

Answer 1066

D. 10 days of the end of each quarter, excluding direct obligations of the U.S. government. Under both the Investment Advisers Act and the Uniform Securities Act, investment advisers are required to keep a record of every securities transaction within 10 days of the end of the quarter in which the transaction took place. Transactions in direct obligations of the U.S. government are excluded from this requirement.

Answer 1067

No. Under the USA, bank holding companies are not excluded from the BD definition.

Answer 1068

False. Securities issued by non-profit organizations are exempt from state registration.

Answer 1069

Yes, no place of business in state and a client visits the state or existing client moves to the state (regist. pending)

Answer 1070

No, since the individual is involved in an exempt transaction.

Answer 1071

A 270-day (9 months) maximum life, minimum denomination of $50,000, rated in one of the top three categories according to an NRSRO

Answer 1072

The security may be legally offered or sold in the state.

Answer 1073

No, (Its a comidity) but an OPION on a futures contract is a security.

Answer 1074

Surety bonds must be maintained for three years after the firm ceases operations.

Answer 1075

Transactions between the issuer and its underwriter are considered exempt transactions.

Answer 1076

Those listed on national exchanges (e.g. NYSE, NASDAQ) and investment company securities (e.g., mutual fund shares)

Answer 1077

A transaction in which the issuer receives the proceeds.

Answer 1078

Yes, since anyone representing a BD in the sale of securities is an agent.

Answer 1079

To use Filing (Notification) to register stock, the offering price must be at least $5.00 per share.

Answer 1080

Federal Covered Advisers and Federal Covered Securities

Answer 1081

The Investment company Act of 1940

Answer 1082

The Administrator or the sec depending on if its state or federal coverd

Answer 1083

Bonds issued by insurance companies are exempt from state registration.

Answer 1084

Exempt security

Answer 1085

No, since the individual is involved in an exempt transaction.

Answer 1086

Any person who issues or proposes to issue a security, such as government entities and corporations.

Answer 1087

An endowment policy is a type of life insurance that pays face value at the end of a period.

Answer 1088

Under the USA, an institutional investor is any person designated by rule or order of the Administrator.

Answer 1089

False. The agent may engage in transactions with the client for 60 days if registration is pending in the new state.

Answer 1090

No. BDs of Mexico are required to register in the U.S. to effect securities transactions in a state.

Answer 1091

Securities listed on an exchange, issued by an investment company, and sold as a private placement (Reg. D Rule 506)

Answer 1092

A. The investment adviser is an exempt reporting adviser (ERA) and is not required to register with the SEC, but must notice file with the state Administrator(s) and pay a fee. The IA is an exempt reporting adviser (ERA) and is exempt from registration, but must notice file with the state Administrator(s) and pay a filing fee. ERAs are exempt from registration with the SEC if they manage private funds that have less than $150 million in AUM. Private funds are typically referred to as hedge funds. Unlike mutual funds, private funds are exempt from SEC registration if they have 100 or fewer investors. This exemption for private funds is provided in Section 3(c)(1) of the Investment Company Act of 1940.

Answer 1093

Yes, because the firm established an office in the state.

Answer 1094

Agent or broker

Answer 1095

When acting in an agency capacity, firms assist customers, but do not assume risk (e.g., a best-efforts underwriting).

Answer 1096

Yes. Treasury stock is stock that was issued and subsequently repurchased by the company

Answer 1097

With the Administrator in the state in which its office is located, FINRA, and with the SEC Every One!

Answer 1098

To appoint the Administrator as the applicant's attorney to receive and process any non-criminal legal complaints

Answer 1099

Qualification

Answer 1100

False. Because the BAs were not issued in at least $50,000 denominations, registration is required.

Answer 1101

True. Since advice is being provided, as a business, and compensation is received, the ABC test is met.

Answer 1102

No, since the individual is involved in the sale of exempt securities.

Answer 1103

A trade involving a firm (BD or IA) buying or selling securities for its own account at its own risk.

Answer 1104

A. An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer. Equity-indexed annuities are NOT considered securities. Instead, they are hybrid products that combine elements of both fixed and variable annuities. The return of an EIA is linked to the performance of an underlying stock index. The insurance company that issues an equity-indexed annuity guarantees a minimum rate of return (as in a fixed annuity), but the annuity's ultimate return (which is capped) will vary depending on the performance of the index to which it is linked. To receive the EIA's guarantees, an investor must be willing to accept the limited potential gain.

Answer 1105

D. The discount rate used in the model would rise, causing stock prices estimated by the model to fall. The dividend discount model attempts to estimate the true value of stock prices by calculating the present value of future dividend payments. The model also attempts to explain the reaction of stock prices to interest-rate changes. If interest rates rise, the discount rate used in the present value calculation must be increased as well, causing the present value--the stock's hypothetical price--to decline. Falling interest rates would result in a lower discount rate and higher stock prices, as valued by the model.

Answer 1106

Bullish on the S&P 100 Index

Answer 1107

ADV Part I is a disclosure document for use by the SEC and the Administrator.

Answer 1108

Bullish (to find the strategy for call buyers, use the phrase CALL UP)

Answer 1109

Withdraw money from the account

Answer 1110

The advisor's compensation. The statement does include the goals, objectives, and responsibilities of the advisor.

Answer 1111

Board of Directors elections and stock splits

Answer 1112

The highest bid and the lowest offer for a security is referred to as the Inside Market.

Answer 1113

A company's current share price multiplied by the number of shares outstanding RI = Rf + B x (Rm - Rf) Ri: Expec Return Rf: Risk Free B: Bata Rm: Market

Answer 1114

True. Cash forward transactions are negotiated between a buyer and seller and can be for any amount.

Answer 1115

No. Provided the attorney's advice is incidental to his profession, he is excluded from the IA definition.

Answer 1116

Cash, marketable securities, accounts receivable

Answer 1117

Exclusion signifies that a person does not meet the definition of a BD or IA in the state.

Answer 1118

A put option gives the owner the right to sell.

Answer 1119

Dividend payout ratio

Answer 1120

If exercised against, the writer of an equity put option is obligated to buy the underlying stock.

Answer 1121

A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations

Answer 1122

Common and preferred stockholders

Answer 1123

Funded debt (long-term debt)

Answer 1124

Client account statements are sent on a quarterly basis and must include the amount of funds in the firm's possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided.

Answer 1125

A corporation makes an interest payment on its bonds. This payment is considered a pre-tax expense.

Answer 1126

B. II and IV The two persons who are required to register as agents are the insurance salesperson who is selling separate account products and the branch manager who supervises salespersons who engage in securities sales. Remember, separate account products are associated with variable contracts and variable contracts are considered securities. At the state level, to offer securities products, a person must be registered as an agent. Although the branch manager does not have her own customers, to be responsible for supervising agents, she too must be registered as an agent. Choices (I) and (III) both relate to persons representing the issuer who are not required to register as agents, either because they are involved in an exempt transaction (between issuer and underwriter) or because they are involved in the sale of an exempt security (municipal debt obligations).

Answer 1127

Yes. According to the USA, any person who solicits investment advisory service is considered an IAR.

Answer 1128

Sell limit orders are placed above the market.

Answer 1129

B. A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant's benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.

Answer 1130

A. Contrarian. An investor who uses the contrarian style of investing is going against market trends and conventional wisdom. Many contrarians search for stocks that are out of favor and have low P/Es.

Answer 1131

False. Charts, trends, pattern analysis, and theories would be the focus of a technical analyst.

Answer 1132

Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and then common. SC. Staff IRS. Credit Prefer. Common

Answer 1133

B. A strategic asset allocation strategy A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.

Answer 1134

Until December 31, unless renewed by the adviser

Answer 1135

No. The de minimis exemption only applies to IAs and IARs.

Answer 1136

If it has no office in the state and it has institutional clients only OR five or fewer retail clients in the last 12 months

Answer 1137

If an IA has custody or discretion, it must include a balance sheet with its Form ADV and brochure.

Answer 1138

Mutual funds, stocks, bonds, and notes

Answer 1139

The analysis of a specific company (its balance sheet, income statement, etc.) are the focus of the fundamental analyst.

Answer 1140

B. If it was held for less than one year, the annualized rate of return would be greater than the holding period return The holding period rate of return states how much an investor earns over the period an investment is held. The annualized rate of return states how much an investor makes over a one-year period. If an investor had a 5% rate of return over six months, her holding period rate of return would be 5%; however, her annualized rate of return would be 10% (the 5% return earned over the six-month period multiplied by two). If the holding period had been more than one year, the opposite would be true--the holding period return would be larger than the annualized rate of return.

Answer 1141

D. Fixed annuity that offers the potential for greater returns An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, but has significant upside potential since the annuity's return is tied to a benchmark index (e.g., the S&P 500 Index. If the index underperforms, the investor will simply receive the minimum rate. On the other hand, if the index performs well, the investor will receive the indexed return based on contractual provisions.

Answer 1142

A. The current market value is more than the discounted cash flows. Net present value is the difference between the present value of an investment's cash flows (e.g., interest payments), less the market value of the investment (i.e., NPV = PV Cash Flows - Market Price). If the net present value is less than 0, the present value of the cash flows is worth less than the purchase price and the investment is overvalued (i.e., NPV is less than 0 if PV of Cash Flows is less than the Market Price).

Answer 1143

Normally, stock dividends and stock splits are not taxable events. Investors simply adjust their cost basis.

Answer 1144

The sale of a call (obligation to sell) against stock that is owned

Answer 1145

The interest rate on a U.S. T-bill is commonly used to measure an asset's risk-free rate of return.

Answer 1146

Inflation risk

Answer 1147

Tactical asset allocation assumes that markets are inefficient.

Answer 1148

It is non-systematic risk, since liquidity risk may be diversified against by buying actively traded assets.

Answer 1149

False. Strategic asset allocation is considered a passive approach.

Answer 1150

Systematic risk

Answer 1151

Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.

Answer 1152

B. I and III Short interest and trading volume are technical indicators. EPS and the P/E ratio are fundamental indicators.

Answer 1153

An investment's annualized return would be greater than its holding period return if it was held for less than one year.

Answer 1154

Using the Rule of 72, divide 72 by the rate of return (72 ÷ 6 = 12 years).

Answer 1155

The internal rate of return (IRR)

Answer 1156

Defensive stocks

Answer 1157

False. The purchase of the put is designed to protect against downward price movement.

Answer 1158

Modern Portfolio Theory

Answer 1159

True (disinterested) having or feeling no interest in something

Answer 1160

D. I and III When bonds are priced at a discount, the yield to call will be greater than the yield to maturity since the holder will be receiving no less than par value, at an earlier time. When bonds are priced at a premium, yields will decrease, but the yield to call may not fall as far as the yield to maturity if a call premium exists. To a certain extent, the call premium will offset the premium paid for the bond.

Answer 1161

Liquidity risk

Answer 1162

Non-diversifiable risk

Answer 1163

Debt (i.e., bonds)

Answer 1164

Alpha and the Sharpe Ratio

Answer 1165

Systematic risk

Answer 1166

Cash, marketable securities, accounts receivable

Answer 1167

The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%.

Answer 1168

Correct Answer is D. Correlation measures the degree to which two securities move in relation to each other. The greatest diversification benefit is found when a security is negatively correlated. Asset allocation is incorrect since the question relates to diversifying a stock portfolio. Asset allocation involves the process of building a portfolio that consists of multiple asset classes (e.g., stocks, bonds, cash equivalents, real estate).

Answer 1169

A. Industrial production Industrial production is a coincident business cycle indicator; the other choices are leading indicators. The following is a list of leading economic indicators. Average workweek (manufacturing) Initial unemployment claims New orders for consumer goods and equipment Vendor performance Plant and equipment orders Building permits Interest rate spreads, 10-year Treasury bonds less federal funds Stock prices (S&P 500) The Money Supply (M2) Index of consumer expectations

Answer 1170

Correlation measures the degree to which the movements of two variables are related.

Answer 1171

Concentration risk

Answer 1172

(Current Assets - Inventory) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

Answer 1173

Present value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.

Answer 1174

The difference between an investment's total return and the risk-free rate is the risk premium.

Answer 1175

Poor management, obsolete products, changing market conditions

Answer 1176

The expenses are generally low and it is passively managed.

Answer 1177

$100,000 principal = $3,000 annual payment /.03 rate of return

Answer 1178

False. Stocks, bonds, real estate, and cash are asset classes.

Answer 1179

An investor who follows the contrarian style of investing bets against market trends.

Answer 1180

The investment will generate a negative return.

Answer 1181

Dollar-weighted return

Answer 1182

Another name for a security's risk-adjusted return is its alpha.

Answer 1183

If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept market risk.

Answer 1184

A leading indicator. However, length of unemployment is considered a lagging indicator.

Answer 1185

Remove or subtract any deposits into and/or withdrawals out of the portfolio

Answer 1186

False. An asset with a low beta would be less volatile and would, therefore, be expected rise less in a rising market.

Answer 1187

An investor buys stock that returns 2% for the year rather than a T-Bond yielding 6%. The opportunity cost is 4%.

Answer 1188

Bullish (to find the strategy for call buyers, use the phrase CALL UP)

Answer 1189

A capital needs analysis is done to determine a client's insurance needs in order to fund future financial goals.

Answer 1190

False. Preemptive rights are only offered to common stockholders.

Answer 1191

Business risk, since indexing involves purchasing stocks of many companies

Answer 1192

An investor's strategy is bearish when effecting a short sale (If stock falls, investors may buy back at a lower price).

Answer 1193

The interest rate on a U.S. T-bill

Answer 1194

A corporation that issues convertible bonds is borrowing money at a lower rate (convertibles pay lower interest rates).

Answer 1195

Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $100,000.

Answer 1196

$70 interest ($35 each 6/1 and 12/1), matures on June 1, 20XX, is a discount since YTM (8.7%) is above the nominal (7%)

Answer 1197

Joint and Last Survivor

Answer 1198

C. When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service 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. For questions regarding the requirement to send a balance sheet, it is important to identify whether it is referencing state or federal law. 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.

Answer 1199

If performance in a given period equals the AIR, the next payment will remain constant.

Answer 1200

Equity-Indexed Annuity (also known as an Equity-Indexed Contract or EIC)

Answer 1201

Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it’s still a bond).

Answer 1202

The sale of a call (obligation to sell) against stock that is owned.

Answer 1203

Board of Directors elections and stock splits

Answer 1204

Unsecured. They are backed only by the issuer’s full faith and credit.

Answer 1205

Yes, due to a bond's non-dilutive feature.

Answer 1206

Income, sales, or gasoline tax, but also licensing fees and fines.

Answer 1207

1) Diversification 2) Professional Management 3) Liquidity

Answer 1208

A. Past market prices and data are fully reflected in securities prices. The Efficient Market Hypothesis (EMH) explains three different forms -- strong, semi-strong, and weak form efficiency. In a weak form efficient market, all past prices and data are fully reflected in current prices. In a semi-strong form efficient market, all public data, including historical pricing, is reflected in current prices. In a strong form efficient market, both public and non-public (i.e., inside) information is reflected in current prices. The assumption that investors want to minimize risk and maximize returns is made in the Modern Portfolio Theory, not the Efficient Market Hypothesis.

Answer 1209

False. **Convertible securities** are convertible into common stock.

Answer 1210

A **put** option gives the owner **the right to sell.**

Answer 1211

Buying bonds with less than two years to maturity would be best. Money-market securities would also be suitable.

Answer 1212

A call option gives the owner ***the right to buy.***

Answer 1213

Coupon rate and ***nominal yield***

Answer 1214

Common stock

Answer 1215

False. Futures, not forwards, are standardized by a futures exchange.

Answer 1216

Since mutual funds are considered primary market issues, they must be sold by prospectus.

Answer 1217

Bonds rated BB (Ba) or lower are considered speculative or junk bonds.

Answer 1218

The different methods by which the sales charge is collected

Answer 1219

When discussing a bond, the YTM may also be*** referred to as basis.***

Answer 1220

True. Cash forward transactions are ***negotiated between a buyer and seller*** and can be for any amount.

Answer 1221

To calculate the sales charge percentage for a mutual fund, the formula is: (POP - NAV) ÷ POP

Answer 1222

C. It reduces estate taxes and speeds up the probate process Wills are legal documents that provide directions for managing an estate after a person's death. Although wills make the probate process quicker and easier, all estates must go through probate. By distributing assets, wills can minimize estate taxes; however, they may not always be able to be avoided altogether.

Answer 1223

B. Future value of money The investor is trying to determine the future value of money. He wants to know how much he will have in 10 years if he invests $100,000 today with an annual return of 6%.

Answer 1224

A. Clearing brokers will pay introducing firms for their retail customers' orders. Payment for order flow (PFOF) is the payment made by a clearing broker to an introducing broker in exchange for the introducing broker's retail orders. PFOF is permitted as long as the introducing broker discloses its order routing practices to its customers.

Answer 1225

The measure, expressed in years, ***of a bond's price sensitivity to interest rate changes***

Answer 1226

Interest paid on bonds issued by U.S. territories or possessions is triple-tax-exempt.

Answer 1227

A. The Uniform Securities Act is a model law that governs state registration statutes for securities and financial professionals. Each state may choose whether to adopt the Act in its entirety or only certain provisions. In addition, individual states may draft their own securities statutes. As a result, the USA itself is not the actual law of any one state.

Answer 1228

D. II and III only According to Rule 206(4)-2 of the Investment Advisers Act of 1940, it is a deceptive trade practice to have custody of client cash and securities unless a qualified custodian maintains those funds and securities. When an account is opened with a qualified custodian, the client must be informed of the name and address of the custodian. Account statements must be sent at least quarterly.

Answer 1229

To calculate the POP for a mutual fund, the formula is: NAV ÷ (100% - Sales Charge %)

Answer 1230

Non-diversifiable risk

Answer 1231

The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%. ( By taking the 10 and. doubling the number to 20, then double it again to 40, and then again to 80, we get the 3 divided by 36)

Answer 1232

The range is calculated by starting with the largest value (7) and then subtracting the smallest value (3). (7-3) = 4

Answer 1233

Expected return, standard deviation, and correlation

Answer 1234

A corporation makes an interest payment on its bonds. This payment is considered a pre-tax expense.

Answer 1235

Assets that may be converted into cash in a short time (usually one year or less)

Answer 1236

Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.

Answer 1237

The three-month return is 2.5% ($1.25 ÷ $50) = .025 or (2.5%) A quarterly return is annualized by multiplying by four (2.5% x 4 = 10%).

Answer 1238

The discounted present value of the sum of the future payments 5% bond with a 5 year maturity: yr 1 : $50.00 ** ( COUPON)** yr 2 : $150.00 yr 3 : $50.00 yr 4: $50.00 Yr 5 : $50.00 + $1000 (PAR) ***# 1,250 - Not discounted***

Answer 1239

It is non-systematic risk, since liquidity risk may be diversified against by

Answer 1240

A market in which prices reflect all known information; therefore, nothing will be overvalued or undervalued.

Answer 1241

The expenses are generally low and it is passively managed.

Answer 1242

Business, regulatory, political, and liquidity risk are all types of unsystematic risk.

Answer 1243

(Return on Investment - Risk-Free Return) ÷ Standard Deviation

Answer 1244

Another name for a security's risk-adjusted return is its alpha.

Answer 1245

C. II and III only Duration measures the volatility of a bond's price. The measurement expresses in years the time it will take the investor to recoup his investment. The longer (higher) a bond's duration, the greater the pricing volatility. The higher the coupon of a bond, the greater the amount of payout to the bondholder; therefore, the faster he will recover his original invested amount. Also, the shorter the maturity of a bond, the shorter the duration. Since duration is evaluating all the cash flows received through the ownership period of a bond, the only bonds that will have duration that exactly matches its maturity are zero-coupon bonds.

Answer 1246

A. 3% The first step is to adjust the investor's yield for taxes. The formula for finding After-Tax Yield is: Nominal Yield x (100% - Tax Rate%). In this case, the investor's after-tax yield equals 8% [10% x (100% - 20%)]. The next step is to adjust the after-tax yield of 8% for inflation. The formula for Inflation-Adjusted Return is: Bond Yield - Inflation Rate. In this question, start with the after-tax yield of 8% and subtract by the inflation rate of 5% (i.e., CPI), which is 3% (8% - 5%). Returns that are adjusted for inflation are also referred to as "real returns."

Answer 1247

The efficient frontier

Answer 1248

To determine a bond's real interest rate, the bond's yield is subtracted by the rate of inflation.

Answer 1249

Dollar Cost Averaging

Answer 1250

An annuity that pays out forever.

Answer 1251

Price/Earnings (P/E) Ratio (also called the earnings multiple)

Answer 1252

The total return received from holding an asset or portfolio of assets

Answer 1253

The total return received from holding an asset or portfolio of assets

Answer 1254

Strategic asset allocation assumes that the markets are efficient.

Answer 1255

Present value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.

Answer 1256

Dividend payout ratio

Answer 1257

A. If it was held for less than one year, the annualized rate of return would be greater than the holding period return. The holding period rate of return states how much an investor earns over the period an investment is held. The annualized rate of return states how much an investor makes over a one-year period. If an investor had a 5% rate of return over six months, her holding period rate of return would be 5%; however, her annualized rate of return would be 10% (the 5% return earned over the six-month period multiplied by two). If the holding period had been more than one year, the opposite would be true--the holding period return would be larger than the annualized rate of return.

Answer 1258

C. The investment adviser is an exempt reporting adviser (ERA) and is not required to register with the SEC, but must notice file with the state Administrator(s) and pay a fee. The IA is an exempt reporting adviser (ERA) and is exempt from registration, but must notice file with the state Administrator(s) and pay a filing fee. ERAs are exempt from registration with the SEC if they manage private funds that have less than $150 million in AUM. Private funds are typically referred to as hedge funds. Unlike mutual funds, private funds are exempt from SEC registration if they have 100 or fewer investors. This exemption for private funds is provided in Section 3(c)(1) of the Investment Company Act of 1940.

Answer 1259

D. Unlimited EXPLANATION:The maximum fine for someone found to have acted on inside information is unlimited. ***Treble damages: IS FOR CIVIL ONLY***

Answer 1260

CORRECT ANSWER IS B: There is no bond requirement if the broker-dealer does not have custody or discretionary authority EXPLANATION: The Administrator may require broker-dealers to post bonds (typically $35,000, max is $500,000) if they have custody of or discretionary authority over client funds or securities. The bond may be waived if the broker-dealer's net capital exceeds a specified amount. The Administrator ***AGENTS HAVE A BOND; ANDS HAVE NET WORTH REQUIREMENTS ***

Answer 1261

Mark For Review1 of 140As the value of a taxable item rises, the rate of tax also increases. This describes progressive taxation.

Answer 1262

For financial professionals, state registration expires annually on December 31.

Answer 1263

Progressive taxes are also referred to as graduated taxes.

Answer 1264

Yes ***Looking for investors for a new busniess.***

Answer 1265

The different methods by which the sales charge is collected

Answer 1266

Accredited (sophisticated) investors through ***Regulation D offerings***

Answer 1267

The expenses are generally low and it is passively managed.

Answer 1268

In 12 years, the money doubled twice (every six years). Using the Rule of 72, 72 divided six years = 12%. ***Look for how meany times the innisial deposit will double. ***

Answer 1269

Under the USA, an institutional investor is any person ***designated by rule or order of the Administrator.***

Answer 1270

D. During the grantor's lifetime, any income taxes are paid by the grantor. Unlike revocable trusts, income that's generated in an irrevocable trust is taxable to the trust, not the grantor. Irrevocable trust assets are excluded from the grantor's estate, which minimizes the estate tax liability. Both revocable and irrevocable trusts avoid probate, and this is often a main reason that trust accounts are established.

Answer 1271

C. Form 8-K Form 8-K is filed by companies in order to provide information regarding unscheduled material events that are important to shareholders. The filing must be made within four business days of any material event that may affect a company’s share price or financial condition. Form 10-K is filed at the end of a company's fiscal year and Form 10-Q is filed quarterly. Schedule 13D is filed by investors who acquire more than 5% of the shares of a SEC reporting company.

Answer 1272

An investor who follows ***the contrarian style of investing bets against market trends.***

Answer 1273

D. Market value Par value is an accounting term and bears no relation to the market value of a company. For traders and investors, the market value is the current price as determined by the forces of supply and demand.

Answer 1274

C. Project X's return will exceed the discount rate. An investment's net present value is the present or discounted value of the project's cash flows, less the investment's current market price (i.e., NPV = Present Value - Market Price). In this question, Project X has an NPV of +$75 (i.e., PV of $175 PV - market price of $100)). Project Y's net present value is - $10 (i.e., PV of $135 - market price of $145). If a project's net present value is positive, the project's return will exceed the discount rate that's used to calculated the present value of the project's cash flows (i.e., the discounted cash flows, or DCF). If a project's net present value is negative, the project's return will be less than the discount rate. Since the NPV on Project X is positive, its return will exceed the discount rate that was used to find its present value.

Answer 1275

True. However, this is provided that ***it has no place of business in the state.***

Answer 1276

False. This statement describes a defined benefit plan.

Answer 1277

Capital Asset Pricing Model

Answer 1278

C. Employers must make mandatory contributions. A Money Purchase Plan is a type of defined contribution plan to which an employer makes mandatory contributions, regardless of the company's profitability. For tax purposes, the employer is able to deduct the contributions.

Answer 1279

A model of the relationship between expected risk and expected return

Answer 1280

The Federal Reserve Board (FRB) has the authority to regulate margin requirements.

Answer 1281

200%, which is calculated by multiplying the holding period return (50%) by four quarters ***Valve = $15 Cost = $10 *$5.00 appreciation $5.000 appreciation = 50% (15 - 10 = 5) x 10 = 50% $10.00 cost* 50% x 4 quarters = 200%*

Answer 1282

B. Securities listed on an exchange, but traded in the OTC market The third market is concerned with securities that are listed on an exchange (e.g., the NYSE or Nasdaq) that are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges.

Answer 1283

D. Risky because it's contrarian. When using a value investing approach, and investor's goal is to find and invest in companies that are intrinsically undervalued. Value investors tend to focus on company stocks that have low share prices, high dividends, low P/E ratios, and low price-to-book ratios. Value investors try to find stocks that are trading at prices lower than their intrinsic value (i.e., the market undervalues them). Put another way, value investors are betting against the market as a contrarian strategy.

Answer 1284

False. Stocks, bonds, real estate, and cash are asset classes.

Answer 1285

D. U.S. government securities advisers The IA Act of 1940 provides an exemption for advisers that limit their advice to U.S. government securities. Note, there is no de minimis exemption for domestic advisers. However, there is a de minimis exemption for foreign advisers that have fewer than 15 clients and (1) have no place of business in the state, and (2) have less the $25 million in aggregate assets under management that are attributable to U.S. investors.

Answer 1286

Present Value - Market Price.

Answer 1287

Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.

Answer 1288

C. Believes that the markets were too efficient to actively trade with superior results A follower of the Random Walk Hypothesis believes that the market is too efficient to effectively trade with sustained returns exceeding the average return of the market. She would, therefore, most likely follow a buy and hold strategy, possibly in index funds. Market timing, even using index funds, is not taking a random walk approach.

Answer 1289

Investment companies must send financial statements to customers every 6 months.

Answer 1290

False. Performance below the AIR will cause the payment to fall, even if the investment result was positive.

Answer 1291

B. Does not meet the definition of an agent Since commodities are not securities, a person effecting transactions in commodities is not considered an agent.

Answer 1292

D. Equities Over long periods, equities have historically provided higher returns than fixed income investments or money markets. However, short-term performance can be very unpredictable. Thus, the shorter an investor's time horizon, the less exposure she should have to equity securities.

Answer 1293

Money-market securities have a maturity of one year or less.

Answer 1294

The discounted present value of the sum of the future payments

Answer 1295

Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.

Answer 1296

Within 2 busniess days of the trade

Answer 1297

The SEC may suspend trading on an exchange for up to 90 days with notification to the President of the U.S.

Answer 1298

Income, sales, or gasoline tax, but also licensing fees and fines.

Answer 1299

Since mutual funds are considered primary market issues, they must be sold by prospectus.

Answer 1300

Board of Directors elections and stock splits

Answer 1301

Bid price or Redemption price

Answer 1302

True Open-end management companies (i.e., mutual funds) must always be bought and sold at their net asset value (NAV) plus any applicable sales charges. However, closed-end fund shares are exchange-traded. Closed-end funds will have a NAV, but investors will buy and sell their shares at the current price that's available on the exchange. In other words, closed-end fund shares may trade at either a premium or discount to their NAV.

Answer 1303

***The market value of a company's stock relative to the accounting value of the company*** Price-to-book ratios compare the market price of a company's stock to its shareholders' equity (i.e., book value). Since shareholders' equity is found on a company's balance sheet, the book value is the accounting value of a company. Companies with lower price-to-book ratios appear undervalued, while high price-to-book ratios may signal that a stock is overvalued.

Answer 1304

Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money

Answer 1305

***A UIT is a type of investment company ***which has a fixed portfolio of securities and is supervised, not managed.

Answer 1306

A fund's management fee is typically calculated based on a percentage of*** assets under management. AUM***

Answer 1307

***Total liabilities increase*** When total assets remains the same and stockholders' equity declines, then total liabilities must increase. The correct formula for a balance sheet is: Total Assets = Total Liabilities + Stockholders' Equity

Answer 1308

***Time-weighted return (TWR) *** This is a more accurate measure of a portfolio manager's performance since it eliminates the effects of cash flowing into the portfolio over a given period. It is assumed that all cash distributions are reinvested in the portfolio and the same periods are used for comparisons. The effect of varying cash inflows is eliminated by assuming a single investment at the beginning of a period and measuring the growth or loss of value to the end of that period.

Answer 1309

Increased gains and losses due to the fund's leverage Leveraged exchange-traded funds (ETFs) borrow money (i.e., use leverage), which can both increase gains and losses. As with many ETFs, leveraged ETF directly track an index.

Answer 1310

***In an SEC-registered initial public offering (IPO)*** A special purpose acquisition company (SPAC) is initially set up as a blank check company with shares that are sold to investors in an initial public offering (IPO) and subsequently listed on an exchange. Like any IPO, the sale of SPAC shares to public investors must be registered with the SEC. In addition, the SPAC's IPO must also be registered in any state in which the offered is made, typically using registration by coordination. After the SPAC's shares are sold to investors, the manager will then find another privately held company in which to invest.

Answer 1311

When determining the rate that makes the net present value of an investment zero. EX. The internal rate of return (IRR) is a rate that makes the present value of an investment equal to the market price of the investment. In other words, the IRR is the rate that makes the net present value (NPV) of an investment equal to zero.

Answer 1312

Compensation may not be based on capital gains. EX. Under the Uniform Securities Act, performance-based fees are generally prohibited. However, under the Investment Advisers Act of 1940, these types of fees are only permitted for "qualified clients." Fees that are based on a percentage of assets under management are permitted under the USA. Contracts may be assigned, but clients must be notified of the assignment and, in certain situations, they may be required to consent or approve of the assignment. When material changes occur for an IA (ownership change), the firm's clients must be notified of the change.

Answer 1313

D. Pay dividends in the currency of the country in which their issuer is domiciled. ADRs (American Depositary Receipts) represent foreign securities that have been deposited in U.S. banks. They facilitate American investment in foreign securities since they may be purchased on the U.S. exchanges and OTC markets, just like any other stock. They pay dividends in U.S. dollars.

Answer 1314

B. A swap Of the given choices, only a swap is considered a derivative. ***A derivative is a security whose price is dependent on or derived from one or more underlying assets. There are many different types of swaps, including interest-rate swaps, currency swaps, and credit default swaps.***

Answer 1315

I & III I. It may be used to compare the performance of two money managers. III. It does not consider the inflows and outflows of cash. Time-weighted return is used to compare the performance of two money managers. Since managers cannot control when investors either deposit or withdraw their funds, the time-weighted return does not consider inflows and outflows. Dollar-weighted return is used to calculate a client's internal rate of return and takes into account how much the client earned based on the amount of money invested.

Answer 1316

The disadvantages of limited partnerships! An investor in a limited partnership may receive an assessment (i.e., a demand that he contribute additional capital to the partnership). Many partnerships invest in assets, such as real estate, that may actually be a hedge against inflation, which addresses inflation risk. One of the advantages of limited partnerships compared to C Corporations is that they are not subject to double taxation, which eliminates that choice. For tax purposes, limited partnerships are pass-through entities. This means that all income, losses, and gains are passed through to the partners, who must declare the income on their own tax returns. When investing in LPs, limited liability is considered an advantage, not a disadvantage.

Answer 1317

Bond A. Bond A's real interest rate is 4.5% (7.5% - 3%) and Bond B's real interest rate is 4% (8% - 4%).

Answer 1318

4. Range is calcuated by starting with the largest value (7) and then subtracting the smallest value (3). *7*, *3*, 5, 4, 4, 6

Answer 1319

A. Growth Stock Growth stocks are characterized by high P/E ratios, low dividend payout ratios and high levels of retained earnings. Therefore, the stock described in the question is most likely a growth stock. Value stocks, are characterized by low P/E ratios, high dividend payout ratios, and low price-to-book ratios. Many growth stocks are also small cap-stocks which are issued by companies with market capitalizations between $300 million and $2 billion or micro-cap stocks which are issued by companies with market capitalizations of less than $300 million. However, the characteristics of the stock being described fit the definition of a growth stock much more exactly.

Answer 1320

D. Blockchains Digital assts include cryptocurrencies, non-fungible tokens (NFTs), and stablecoins. A blockchain is a method of recording ownership of digital assets, (e.g., a ledger). Blockchains are used to keep track of purchases and sales of digital assets; however, in and of themselves, they're not an investment. Unlike traditional securities markets which typically use one central clearinghouse to record transactions, blockchains are decentralized. In other words, blockchain records are updated communally and verified through an algorithm.

Answer 1321

C. Value Two of the characteristics of value stocks are a low P/E (price/earnings) ratio and a high dividend payout ratio (or high dividend yield). A company's dividend payout ratio is the percentage of its earnings that are paid to investors as a dividend. Value stocks are also characterized by low price-to-book ratios, which is consistent with a company that has a lot of cash on hand. In contrast, growth stocks, generally have a high P/E ratio and a low dividend payout ratio. These companies tend to keep most of their earnings in order to fund their continued expansion. Large-cap stocks are issued by companies that have market capitalizations of more than $10 billion. Many value stocks may also be large-cap stocks since they tend to be issued by mature companies with a history of regular dividend payments but they are NOT characterized by low P/E ratios.

Answer 1322

Qualitative analysis relies on descriptive judgements rather than objective measurements. Quantitative analysis uses quantities, including numbers, statistics, and other objective measurements to draw conclusions. Qualitative analysis relies on descriptive judgements and narratives rather than objective measurements. However, both are needed in order to make the best investment decisions.

Answer 1323

Think Variable A rate of return that varies with the value of the underlying index. ***In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. However, the guaranteed return is never as high as the return of the actual index.*** The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate return may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked

Answer 1324

C. Gains from the short-term maturities will offset losses in the long-term maturities A barbell strategy consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end of the barbell.

Answer 1325

Standard deviation The primary measure of volatility used in the Modern Portfolio Theory is standard deviation. Standard deviation is a statistical measures of the amount of variability or dispersion around an average. In simple terms, volatility is a reflection of the degree to which a security's price moves. A stock with a price that has wide fluctuations or moves erratically is volatile. On the other hand, a stock that maintains a relatively stable price has low volatility. Beta shows the sensitivity of a fund's, security's, or portfolio's performance in relation to the market as a whole. Alpha is considered a risk-adjusted return and represents the difference between an asset's expected return and its actual return. The Sharpe Ratio is a risk-adjusted return measurement that indicates the amount of return earned per unit of risk. The basic idea is to determine how much additional return is being received for the willingness to hold a risky asset.

Answer 1326

B. Holding period return is a discounted cash flow Holding period return does not discount or compound cash flows. Holding period return is calculated by adding any income, plus capital gains, minus capital losses, and dividing by the value of the initial investment.

Answer 1327

A. That a recommendation is suitable for at least some investors FINRA has a three-part suitability standard. The first part is the reasonable basis standard, which indicates that a recommendation must be suitable for at least some investors. The customer-specific standard requires that a recommendation must be suitable for a specific customer based on the customer's investment profile. The final part of the FINRA rule is the quantitative standard, which specifies that a series of recommendations cannot be too excessive and that they don't leave a customer with too much invested in one type of investment. FINRA has a three-part suitability standard. The first part is the reasonable basis standard, which indicates that a recommendation must be suitable for at least some investors. The customer-specific standard requires that a recommendation must be suitable for a specific customer based on the customer's investment profile. The final part of the FINRA rule is the quantitative standard, which specifies that a series of recommendations cannot be too excessive and that they don't leave a customer with too much invested in one type of investment.

Answer 1328

A. Active day Trading. Active investment strategies stress that markets are inefficient. Day trading, which involves attempting to time the market, is a type of tactical investment approach. On the other hand, systematic rebalancing, buy-and-hold, and indexing are all types of passive strategies.

Answer 1329

A. Defensive stocks B. Stocks with a low beta C. A contrarian investment profile D. Growth stocks Incorrect Answer chosen Growth stocks traditionally have high betas, high levels of retained earnings, low dividend payout ratios, and a high growth of earnings per share. This is the opposite of defensive stocks. A contrarian investment profile does not relate to the question. A contrarian investment profile means that a person is investing in the opposite direction of conventional wisdom. Examples of this would be investors who believed in the short interest theory or the odd-lot theory of investing. (74758)

Answer 1330

Inflation Incorrect Answer chosen Inflation typically impacts fixed-income investments the most. Since many digital assets, especially cryptocurrencies and non-fungible tokens (NFTs), don't pay any income, inflation risk is not a significant concern. Digital assets are often illiquid and their prices can be quite volatile. In addition, the regulations for issuing and trading digital assets are still being established, thereby giving digital assets a large amount of regulatory risk as well.

Answer 1331

D. Variability of expected returns about the mean In MPT, risk is defined as the degree to which investment returns deviate from what was expected or predicted. It is usually measured by the standard deviation of expected returns about the mean (δ), although its square, variance (δ2), is sometimes used.

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