Cinco

Question 1

1. Which of the following is not a requirement of a qualified plan?

a) The plan must provide an offset for Social Security benefits.
b) The plan must be communicated to all employees.
c) The plan must be for the exclusive benefits of the employees and their beneficiaries.
d) The plan must be permanent, written and legally binding.

Answer 1

A

Plans must meet the general requirements established by IRS.

Question 2

2. An employee quits her job where she has a balance of $10,000 in her employer-provided qualified plan. If she requests that the plan distribution is paid to her so that she can roll the proceeds into an IRA, how much will she receive from the plan administrator, and how long does she have to complete the tax-free rollover?

a) $8,000, 30 days
b) $8,000, 60 days
c) $10,000, 30 days
d) $10,000, 60 days

Answer 2

B

Because the employee has requested a distribution check, there will be a 20% withholding, and the participant has 60 days to reinvest it in an IRA to qualify as a tax-free rollover. The full amount of $10,000 must be reinvested, or the withheld amount of 20% will be considered a taxable distribution.

Question 3

3. Which of the following is not a responsibility of the specialist?

a) Executing limit orders on behalf of other members for a portion of the floor broker’s commission
b) Dealing in over-the-counter securities with market makers on a fee basis
c) Maintaining the published quote and a fair and orderly market in one or more securities
d) Buying and selling for his own account to counteract temporary imbalances in supply and demand

Answer 3

B

Unlike the auction market in securities listed on an exchange such as the NYSE, an over-the-counter security may be bought and sold on a negotiated price basis from any number of market makers.

Question 4

5. The following are examples of exempt transactions EXCEPT

a) A stock sale by a bankruptcy trustee.
b) A stock sale solicited by an agent.
c) A stock sale by an estate’s executor.
d) A stock sale to an insurance company.

Answer 4

B

A solicited stock sale by an agent is not an exempted transaction; however, an unsolicited transaction is exempt regardless of who the buyer is.

Question 5

6. A letter of intent to allow an investor to qualify for sales discounts may be backdated how many days?

a) 30 days
b) 90 days
c) 180 days
d) Backdating is not allowed for sales discounts.

Answer 5

B

Letters of intent may be backdated up to 90 days to qualify for sales discounts.

Question 6

7. Which of the following is NOT an exempt security under the USA?

a) Over-the-counter stock
b) AT&T stock
c) Security issued by Providian life insurance
d) Bond issued by Reading Railroad

Answer 6

A

Stock traded over the counter needs to be registered.

Question 7

8. A customer’s right to be indemnified if defrauded in a securities transaction is known as the right of

a) Indemnification.
b) Rescission.
c) Recovery.
d) Compensation.

Answer 7

B

A customer’s right of rescission allows them to receive compensation if defrauded in a securities related transaction.

Question 8

9. A mutual fund portfolio returned 3.5%, it has a beta of 1.5, and its benchmark index returned 3%. The alpha of the portfolio is

a) (-1.5).
b) (-1).
c) 1.5.
d) 2.

Answer 8

B

To calculate alpha multiply, the return of the benchmark index by the beta. The difference between the product and the portfolio return is the alpha: 0.03 x 1.5 = 4.5%, 3.5% - 4.5% = -1.

Question 9

10. ABC broker/dealer bought DEF stock at 35 for its inventory position. Three months later, when the inter-dealer market for DEF was 32.50 - 33.25, the broker/dealer sold DEF stock to a customer from the inventory. What was the basis for the dealer’s markup?

a) 32.50
b) 33.25
c) 35
d) 36

Answer 9

B

The basis for a markup cannot be historical cost; it can only be the current inter-dealer ask, or offer price.

Question 10

11. Civil liabilities may apply for which of the following violations? I. Failing to provide a prospectus to a customer when required; II. Making false statements or omitting material facts in a transaction; III. Stealing customer funds or securities; IV. Soliciting the sale of unregistered, nonexempt securities

a) III and IV
b) I and III
c) I and IV
d) II and III

Answer 10

C

Making false statements or omitting material facts in a transaction and stealing customer funds or securities constitute fraud and are subject to criminal penalties.

Question 11

12. All of the following employees of a broker/dealer are considered an agent under the Uniform Securities Act (USA) with the EXCEPTION of a person who

a) Gives securities quotations over the phone.
b) Performs the function of accepting customer orders.
c) Transacts business only in exempt securities.
d) Transacts business only in nonexempt securities.

Answer 11

A

An agent is a person that effects a securities transaction. Giving a quotation does not effect a transaction and is exempt from the definition under the Act.

Question 12

14. An agent hears a rumor that a large corporation will be launching a hostile takeover on a competitor. Based on the rumor, the agent liquidates all his clients’ positions. Which of the following is true?

a) This action is prohibited.
b) The agent must let the clients know they are selling based on a rumor.
c) As long as the agent informed his supervisor prior to the trades his actions are allowed.
d) None of the above is true.

Answer 12

A

Using hearsay to liquidate a position is a prohibited act. The agent should inform his supervisor but could not act on the rumor.

Question 13

15. When comparing the IRR of two investments yielding the same amount, which provides the most value to an investor?

a) Lowest IRR as it represents the discounted value to investors.
b) The lower dollar value over the term of the investment.
c) Highest IRR above “0”.
d) The higher dollar value over the term of the investment.

Answer 13

C

The highest IRR (above zero) offers the most value to an investor. Zero represents breakeven and a value above zero represents value above the NPV of the amount invested.

Question 14

17. An IA purchases stock for its own account from one of its institutional clients. This transaction is called a/an

a) Institutional cross trade.
b) ECN trade.
c) Principal transaction.
d) Agency cross trade.

Answer 14

C

In a principal transaction an IA buys a security from a client or sells a security from its own inventory to a client (whether an institution or a retail client). Principal transactions require written disclosure to the client and consent before the transaction is completed.

Question 15

18. Which of the following circumstances would result in the assignment of an investment advisory contract?

a) A majority partner of the investment adviser buys out a minority partner.
b) An investment adviser representative who administers over half of the adviser’s client accounts resigns.
c) An investment adviser is bought out by a competitor.
d) A minority partner of the investment adviser retires.

Answer 15

C

According to NASAA Model Rules contract assignment includes a change in ownership of a majority of any class of voting securities, or a change in the majority interest of a partnership.

Question 16

19. The equation for outstanding stock is

a) Authorized shares minus unissued shares.
b) Issued shares minus treasury stock.
c) Authorized shares minus treasury stock.
d) Issued shares minus unissued shares.

Answer 16

B

Outstanding Stock = Issued Shares – Treasury Stock. Remember that treasury stock, which is stock that has been issued (sold to the public) and subsequently bought back by the corporation, must be subtracted from the shares that have been issued.

Question 17

20. Overlapping debt excludes the following, EXCEPT

a) Housing authority.
b) Hospital board.
c) School district.
d) Port authority.

Answer 17

C

Overlapping debt is general obligation debt. Of these municipal issuers only the school district debt is general obligation. It is backed by taxes.

Question 18

21. Which statement is true concerning dollar cost averaging?

a) Dollar cost averaging protects the investor from a loss in a steadily declining market.
b) Dollar cost averaging is a way to reduce risk.
c) Dollar cost averaging allows the investor to buy the same number of shares per installment.
d) All of the above are true statements.

Answer 18

B

Dollar cost is a method to reduce risk because more shares are purchased in a down market (when the shares are cheaper) and fewer shares are purchased with the same amount of money in a rising market (when the shares are more expensive). The investors buy more when the price is low and less when the price is high. This practice levels out the cost basis of the shares over time providing a lower average share price, which minimizes overall investor risk. Dollar cost averaging cannot protect the investor from a loss in a steadily declining market and is not a guarantee of a profit.

Question 19

22. The following are prohibited practices under the Uniform Securities Act (USA) EXCEPT

a) Commingling customer funds with agent funds.
b) Soliciting excessive trading to increase commissions.
c) Failing to disclose all known facts in a transaction.
d) Effecting private securities transactions for customers.

Answer 19

C

Failing to disclose all known facts is not a violation; the violation occurs from withholding material facts. Churning, commingling funds with customers’ funds, and effecting private security transactions are all prohibited under the Act.

Question 20

23. On a bond purchased at a discount,

a) Yield-to-maturity is lower than yield-to-call.
b) Yield-to-maturity equals yield-to-call.
c) Yield-to-maturity is lower than nominal yield.
d) Yield-to-maturity is higher than yield-to-call.

Answer 20

A

On a discount bond, yield-to-call is the highest yield.

Question 21

24. A broker/dealer that has no office in a state is not required to register to conduct business with which of the following?

a) Banks
b) Wealthy individuals
c) Corporations
d) Prospective clients who are nonresidents of the state

Answer 21

A

Broker/dealers with no office in a state may do business with institutional investors such as banks, other broker/dealers and insurance companies, and existing clients who are nonresidents of the state. They cannot do business with prospective clients even if the prospects are not residents of the state.

Question 22

25. A technical analyst would be most interested in which indicator?

a) Current ratio
b) Quick ratio
c) 200-day moving average
d) Price earnings ratio

Answer 22

C

200-day moving averages are considered hallmark market trend indicators. Ratios are fundamental, not technical.

Question 23

26. ACE Financial is a registered investment adviser that accepts prepayment fees in excess of $500. ACE’s chief compliance officer notices on Tuesday that the firm’s capital has fallen below the minimum requirement. What steps must the officer take? I. Cease doing business until he can bring the net capital back to the required level; II. Inform the administrator of the deficiency by the end of business on Wednesday; III. File a report with the administrator by the end of business on Thursday; IV. Report the deficiency to FINRA by the end of business on Tuesday

a) I, II, III and IV
b) I and IV
c) II and III
d) II only

Answer 23

C

If the adviser’s net worth falls below the minimum requirement and it has taken prepayment fees, the adviser would be required to inform the state administrator by the end of the next business day, which would be Wednesday in this situation. Additionally, the adviser must file a report with the state securities administrator by the following business day, in this case Thursday.

Question 24

27. According to the Uniform Securities Act, investment adviser advertising must

a) Be pre-approved by the SEC.
b) Not violate the Investment Advisers Act of 1940.
c) Be submitted to FINRA within 10 days of first use.
d) Adhere to the advertising provisions of the USA.

Answer 24

B

Under the USA, investment adviser advertising that violates the Investments Adviser Act of 1940 is illegal.

Question 25

#28. A U.S. government bond quoted at 108.06 - 109.09 has an asking price of a) $108.60. b) $1,081.88. c) $1,092.81. d) $1,099.00.

Answer 25

C Bond prices are quoted at $1,000 par in 32nds, with each point worth $10. The ask price (the last price quoted) is $1,090 + (9/32 X $10) for a price of $1,092.81.

Question 26

#29. If an investor owns 150 shares of XYZ Corporation and the stock splits 3-for-2, how many additional shares will he own after the split? a) 75 b) 100 c) 150 d) 225

Answer 26

A The question asks about the number of additional shares, not the total number of shares. The investor would own 75 additional shares after the 3-for-2 stock split or a total of 225 shares. To calculate the new number of shares, multiply 150 by 3/2, which equals 225. To arrive at the additional number of shares: 225 – 150 = 75. Remember that when there is a stock split, the total number of shares increases and the price per share decreases.

Question 27

#30. Which of the following is not a characteristic of a hybrid REIT? a) Invests in real property b) Provides potential appreciation c) Less diversified d) Invests in mortgages

Answer 27

C Because it invests in real property and mortgages, a hybrid REIT is more diversified. It provides both potential appreciation and income.

Question 28

#31. Which of the following is not a priority for a fiduciary managing an account in compliance with the Prudent Man Rule? a) Income b) Speculation c) Permanence d) Safety

Answer 28

B The rule states that fiduciaries should manage accounts “not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”

Question 29

#32. The formula for GDP is a) Industrial production plus consumer spending plus imports. b) Consumer, government and business spending plus exports minus imports. c) Consumer, government and business spending plus exports. d) Consumer and business spending plus exports minus imports.

Answer 29

B Gross domestic product is a measure of our total national output of goods and services.

Question 30

#33. The amount of money that an investor will probably receive at a point in time in the future from an investment is referred to as a) Rule of interest. b) Systematic investment value. c) Expected return. d) Rate of return.

Answer 30

C The amount of money that an investor projects to receive from an investment is commonly referred to as expected return.

Question 31

#34. A 53-year-old individual who was laid off from his former company withdrew money from his traditional IRA despite immediately getting a new job with an increased salary. Which of the following is true? a) The withdrawals will be taxed as ordinary income and subject to a 10% early withdrawal penalty. b) All of the money he takes from his IRA will be tax-free because he was between jobs. c) The withdrawals will be considered ordinary income and subject to a 15% penalty. d) The IRS will not tax him on the withdrawals because his employer terminated him from his job prior to age 59½.

Answer 31

A If withdrawals from an IRA are made prior to age 59½, the IRS will assess a 10% early withdrawal penalty, unless the withdrawals meet certain qualifications. The amount of the premature withdrawal from a traditional IRA is also taxed as ordinary income to the recipient when received.

Question 32

#35. A letter mailed to the State Administrator indicating an issuer's intent to sell securities in that state is considered registration by a) Filing. b) Assumption. c) Coordination. d) Qualification.

Answer 32

A In registration by filing, issuers communicate their intention to sell securities in that state and that they meet the eligibility requirements.

Question 33

#36. All of the following are agency issues backed by government-guaranteed or insured mortgages, EXCEPT a) Federal Home Loan. b) SLMA. c) FNMA. d) GNMA.

Answer 33

B Sallie Mae is Student Loan Marketing Association (SLMA) and does not deal in mortgages. The rest do.

Question 34

#37. Disintermediation is a) Large scale movement from the short to the long end of the yield curve. b) Large scale investor movement from debt to equities c) An investor purchasing a primary offering directly from the issuer rather than the syndicate. d) Terminating an investment advisory contract between the issuer and the underwriter during the offering period.

Answer 34

A Disintermediation occurs when investors leave the uncertainty of short term rates and lock in long term rates when the yield curve is inverted.

Question 35

#39. In a custodian account, the responsibility for tax liabilities from dividends, interest income, and capital gains belongs to the a) Custodian. b) Minor. c) Minor's parents or guardians. d) All of the above.

Answer 35

B Tax liabilities belong to the minor in a custodian account.

Question 36

#40. Which of the following securities is NOT exempt from the USA? a) A bond from a company listed on the NYSE b) Municipal bonds c) An intrastate offering of nonexempt securities d) A stock listed on NASDAQ

Answer 36

C Municipal bonds are exempt securities. Also, an issue of a company listed on a national exchange is exempt under the federal covered exemption, since these companies already adhere to stringent federal regulations. An intrastate offering is registered at the state level under the USA.

Question 37

#41. One of the significant advantages of investing in mutual funds is a) Automatic reinvestment of dividends and capital gains at POP. b) Automatic reinvestment of dividends and capital gains at NAV. c) Reinvestment of dividends and capital gains with no tax liability. d) Reinvestment of dividends at a reduced sales charge and no capital gains tax.

Answer 37

B The automatic reinvestment of dividends and capital gains with no additional sales charge is a benefit to the mutual fund investor. However, the IRS does charge taxes on the distribution, whether the investor receives the money or reinvests it.

Question 38

#42. In order for an Administrator to impose a penalty on an agent, the Administrator must a) Give 30 days' advance notice of the action. b) Give the agent an opportunity for a hearing. c) Give the agent the opportunity to withdraw his registration. d) Any of the above would be correct.

Answer 38

B The Administrator must give the agent the opportunity for a hearing within 15 days of the request.

Question 39

#43. For employers to keep pace with growing population, the benchmark for non-farm payroll growth is a) 150,000 new jobs a month. b) 125,000 new jobs a month. c) 100,000 new jobs a week. d) 225,000 new jobs a quarter.

Answer 39

B For employment to keep pace with our growing population, the benchmark for non-farm payrolls is 125,000 new jobs a month. This is considered a coincident indicator.

Question 40

#44. An investor writes an XYZ May 25 put and buys an XYZ May 35 put. This position I. Is a credit spread; II. Is a debit spread; III. Loses money if premiums narrow; IV. Loses money if premiums widen. a) II and III b) II and IV c) I and III d) I and IV

Answer 40

A Buy a 35 put and write a 25 put is a debit put spread. A higher strike price put is more expensive than the lower strike price put so the investor established the spread for a debit; the investor loses money if the spread narrows (goes down in value).

Question 41

#46. The quick ratio is a) An inferior measure because it fails to consider inventory. b) A more stringent measure than the current ratio. c) A more lenient measure than the current ratio. d) Less accurate than the current ratio because it does not consider the time value of money.

Answer 41

B The quick ratio is a more stringent measure because it uses only cash equivalents (inventory is deducted) which are divided by current liabilities.

Question 42

#47. A customer has the objective of maximizing current income. Under which conditions would you recommend that the customer sell long-term debt positions and buy short-term obligations? a) The yield curve is inverted. b) The yield curve is bell-shaped. c) The yield curve is positive. d) The yield curve is normal.

Answer 42

A An inverted yield curve means that short-term rates are high and long-term rates are lower. So to maximize current income, the investor will buy short-term debt and sell long-term bonds.

Question 43

#48. An Administrator can deny registration to a person who a) Has a conviction for a securities violation from foreign country within last 5 years b) Been convicted of misdemeanor shoplifting within the last 3 years in the Administrator’s state. c) Has filed for bankruptcy within the last 5 years. d) Lacks investment experience

Answer 43

A An administrator can deny registration to a person convicted of a misdemeanor involving securities or has been convicted of any felony within the past 10 years.

Question 44

#49. The Rule of 72 identifies which of the following? a) Length of time for an investment to double b) Minimum required interest rate c) Simple interest rate of return d) Coefficient of the portfolio beta

Answer 44

A The rule of 72 identifies the number of compounding periods required for an investment to double.

Question 45

#51. An investor likes the safety of a government bond fund, but will forfeit a portion of this safety for a slightly higher return. She would most likely choose which of the following? a) Growth and income fund b) Mortgage-backed security fund c) High yield bond fund d) Corporate bond fund

Answer 45

B The MBS fund has less credit risk than a corporate bond fund because it generally invests in mortgage-backed securities, issued by a government agency. The other three funds have significantly more risk than the MBS fund.

Question 46

#52. Meredith is withdrawing money from her variable life insurance policy. Meredith’s withdrawal will be treated on a a) FIFO basis. b) Exclusion ratio assumption. c) Weighted average assumption. d) LIFO basis.

Answer 46

A Unlike annuities, dollars distributed from a life insurance policy prior to death are withdrawn assuming FIFO.

Question 47

#53. Which of the following would increase U.S. exports? I. Strengthening dollar; II. Weakening dollar; III. Balance of payment deficits; IV. Balance of payment credits a) I and IV b) II and III c) II and IV d) I and III

Answer 47

C If the dollar is weak (lower-priced than the foreign currency) and the balance of payments are in credit, then exports should exhibit less restraint.

Question 48

#54. ABC Corporation shares are currently trading at $50 per share. ABC is about to initiate a two-for-one stock split. After the split, an investor who currently owns 100 shares of ABC stock would own a) 200 shares at $50. b) 200 shares at $25. c) 100 shares at $50. d) 100 shares at $25.

Answer 48

200 shares at $25 a share is what the investor would own after the two-for-one split. It is important to remember that the total value of the investment remains the same; however, the number of shares goes up and the price per share goes down proportionately. In this case, to arrive at the new number of shares after the split, multiply 2/1 × 100 shares = 200 shares. To calculate the new price after the split, multiply ½ (which is the inverse of 2/1) × $50 per share = $25 price per share after the split. Note that the total value of the investment remains the same before and after the split: 100 x $50 = $5,000 and 200 x $25 = $5,000.

Question 49

#55. An investor buys a growth fund for a) Concentrated investment in industry. b) Long-term appreciation. c) Regular income. d) Preservation of capital.

Answer 49

B Growth funds offer long-term appreciation potential. They do not provide significant present income. They carry high market risk, not capital safety. They are not necessarily invested in one market sector.

Question 50

#56. Stanley passes away, leaving most assets to his wife except for his IRA and his Roth IRA, which he leaves to his daughter. Which of the following is true? a) All assets are taxed before they are distributed to Stanley’s wife and daughter. b) Stanley’s daughter will pay taxes on the IRA but not the Roth IRA. c) Stanley’s IRA and Roth IRA will be subject to taxation before his daughter receives them. d) Stanley’s wife and daughter will each pay taxes on the assets that she receives.

Answer 50

C All assets not passed on to a spouse are subject to estate taxes. This includes IRAs, annuities, Roth IRAs, and municipal bonds.

Question 51

#57. Which class of mutual fund shares is appropriate for an investor who will need to redeem his shares in 18 months? a) Class A shares b) Class B shares c) Class C shares d) Class D shares

Answer 51

C Class C shares are level load shares that are purchased at NAV and have a CDSC that lasts for only one year, allowing the investor to redeem the shares in 18 months without incurring a CDSC.

Question 52

#58. All of the following sources of income may be used to contribute to an IRA EXCEPT a) Gifts. b) Wages. c) Spouse's salary. d) Alimony.

Answer 52

A Individuals with earned income may fund an IRA. Wages and salary are earned income and a spouse’s salary may be used to fund a spousal IRA. Gifts are not earned income.

Question 53

#61. ERISA qualified pension plan fund managers’ fiduciary responsibilities regarding plan investments are determined by a) SEC. b) "Prudent Man" rules in the state where the fund operates. c) The Investment Company Act of 1940. d) FINRA.

Answer 53

B When investing pension fund money, pension fund managers must follow the Prudent Man rules in the state where they operate.

Question 54

#62. Duration is best described as a) The measure of a bond’s expected volatility in a changing interest rate environment. b) A bond’s beta coefficient. c) Being shorter than maturity on a zero coupon bond. d) Being synonymous with maturity.

Answer 54

A A zero coupon bond’s duration equals its maturity. It identifies the period of time during which an investor can expect return of principal, based on changing interest rates.

Question 55

#63. Which of the following is not a priority for a fiduciary managing an account in compliance with the Prudent Man Rule? a) Income b) Speculation c) Permanence d) Safety

Answer 55

B The rule states that fiduciaries should manage accounts “not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”

Question 56

#64. A customer buys 100 shares of XYZ stock for $40 a share and sells one XYZ July 45 call for a premium of $2. If the customer is assigned an exercise notice when the stock price is $50, the resulting gross profit would be a) $200. b) $500. c) $700. d) $1,200.

Answer 56

C Premium = +2 Market = -40 (stock) +45 (call strike price) = +5 +2 = +7 X 100 = $700 gain

Question 57

#65. ABC Corp., a newly formed corporation, is developing a machine to harness wind power to create energy. Because ABC currently has no earnings and is still in the growth phase, it is unable to pay cash dividends to its investors. However, ABC is very optimistic about its new product and wants to provide some sort of dividend to its current shareholders. ABC's board of directors declares a 20% stock dividend to its current shareholders. An investor who currently owns 1,000 shares valued at $50 per share would own what after the stock dividend? a) 1,000 shares at $41.67 b) 1,200 shares at $50 c) 1,200 shares at $41.67 d) 1,000 shares at $50

Answer 57

C When a corporation declares a stock dividend, the number of shares goes up while the price per share goes down. The aggregate or total value of the investment stays the same. In the case of ABC Corp. declaring a 20% stock dividend, an investor who owned 1,000 shares will now own 1,200 shares. However, the value of $50 per share will be reduced to $41.67 per share (50/1.20). The total value of the investment remains $50,000.

Question 58

#66. A school teacher is retiring after 20 years of service. During the past 10 years, she invested $10,000 in a 403(b) through a payroll deduction offered by the school. Her account is now worth $16,000. What is her cost basis? a) $0 b) $6,000 c) $10,000 d) $16,000

Answer 58

A The teacher has contributed to a qualified retirement plan; therefore, all the money she has invested is pre-tax. She has not paid taxes on any of the money yet, so her cost basis is $0, and she will be required to pay ordinary income taxes on the entire amount she withdraws.

Question 59

#67. The term “total return” I. Includes appreciation or depreciation of assets held and the effect of reinvested distributions. II. Includes the effect of reinvested distributions of net investment income but not capital gains distributions. III. Does not include the effect of income taxes on distributions. IV. Assumes distributions are taken in cash and taxed at a rate of 28 percent, unless stated otherwise. a) I and II b) I and III c) II and IV d) III and IV

Answer 59

B The term “total return” assumes reinvestment of all distributions (including capital gains) and the unrealized appreciation/depreciation of all shares during the period.

Question 60

#69. Which characteristics are associated with a “buy and hold” investment strategy? I. Higher portfolio turnover II. Lower management costs III. Less demanding research IV. Different investments than an active trading style a) I and II b) I and IV c) II and III d) II and IV

Answer 60

C A buy and hold investment style involves selecting and holding investments long term, which results in lower turnover, less demanding research and lower costs. Given the same investment objective, a buy and hold strategy uses the same investments as an active trading investment style.

Question 61

#70. When must form ADV-E be filed? a) Within 120 days of the audit b) Within 30 days of the audit c) No later than December 31 d) Within 30 days of the day when the IA first takes custody of clients assets

Answer 61

A Form ADV-E must be filed by the auditor of an IA with custody of clients assets within 120 days of the audit.

Question 62

#72. Anita received equal quarterly 25 cent dividends on her Kabob stock last year. In addition, her shares appreciated from $20 to $27. Which of the following is true? a) Anita will be taxed on $7.25 per share. b) Anita will be taxed on $1 per share. c) Anita will be taxed on $8 per share. d) If Anita participates in a DRIP, she will pay no taxes on the reinvested dividends.

Answer 62

B Anita will be taxed on last year’s dividend distributions whether she receives them or automatically reinvests through a dividend reinvestment program. Anita is not taxed on the appreciation (unrealized gain) until she sells her shares and realizes the gain.

Question 63

#73. Differences between an insurance company’s general account and separate account include I. The separate account is registered pursuant to the Securities Act of 1933. II. The separate account must comply with the Dodd-Frank Act. III. The separate account is usually registered under the Investment Company Act of 1940. IV. If it funds a tax-qualified annuity, the separate account is exempt from registration under the Securities Act of 1933. a) I and III b) II and III c) II and IV d) III and IV

Answer 63

A The separate account is always registered pursuant to the Securities Act of 1933. If it funds a tax-qualified annuity, the separate account is exempt from registration under the Investment Company Act of 1940.

Question 64

#74. A corporation pays a stock dividend to a) Reduce the price of its stock. b) Reduce accounts payable. c) Conserve cash. d) Promote its stock.

Answer 64

C A corporation pays a stock dividend to reward the shareholders while saving cash.

Question 65

#76. Your client is bearish on ABC stock. Which of the following option spreads might you recommend? I. Buy 1 ABC July 50 call, sell 1 ABC July 55 call. II. Buy 1 ABC July 55 call, sell 1 ABC July 50 call. III. Buy 1 ABC July 55 put, sell 1 ABC July 50 put. IV. Buy 1 ABC July 50 put, sell 1 ABC July 55 put. a) I and IV b) II and III c) II and IV d) III and IV

Answer 65

B II and III are both bearish. II is a credit call and III a debit put spread.

Question 66

#77. Which of the following is not defined as a security under the Uniform Securities Act? a) Multilevel marketing schemes b) Real estate condominium investments c) Keogh plans d) Commercial paper

Answer 66

C A Keogh plan (HR-10 Plan) is not a security, although the investments held under the plan are almost always securities. Multilevel marketing schemes have been defined as securities for investor protection under the Act due to past abuses in the selling of the interests.

Question 67

#78. Which of the following are two key elements of effective diversification? a) Diversification among asset categories and within asset categories b) Diversification in indexed and non-indexed funds c) Diversification among fundamental and speculative investments d) Diversification of both aggressive equities and conservative equities

Answer 67

A To be properly diversified, a portfolio should be diversified on two levels: among asset categories and within asset categories. The goal is to not only cover the spectrum of investment, thereby lowering overall market risk, but also to diversify sector risk by owning multiple investments with each sector. For example, the energy sector could be further diversified by energy storage, energy transportation and energy manufacturing.

Question 68

#79. If an investor cannot specifically identify redeemed shares, IRS assumes that reporting will be on the basis of a) Last-In, First-Out. b) First-In, First-Out. c) Determined on a case by case basis. d) Average cost.

Answer 68

B IRS assumes the First-In, First-Out accounting method when shares cannot be specifically identified.

Question 69

#81. After ceasing operations, an Investment Adviser must maintain a surety bond for a) 90 days. b) 1 year. c) 3 years. d) 5 years.

Answer 69

C An IA must maintain a surety bond for 3 years after it ceases operations.

Question 70

#83. If a mutual fund publishes investment performance charts, the information presented must include a) Minimum sales charges. b) Average sales charges. c) Maximum sales charges. d) All of the above.

Answer 70

C Published performance charts reflect maximum sales charges.

Question 71

#84. An agent solicits a trade in a new client's account. The trade must be broken a week later due to failure to pay. The agent I. Failed to determine the client's financial condition and capabilities. II. Induced an excessive trade based on the client's financial resources. III. Created an appropriate trading strategy for his client. IV. Provided all necessary information for the client to make an informed trading decision. a) I and II b) I and IV c) II and III d) III and IV

Answer 71

A The agent must make a reasonable inquiry as to the client's financial condition and resources.

Question 72

#85. Annualized return may be overstated or understated if a) NPV is understated. b) The period that is measured contains seasonal extremes. c) The assumed hurdle rate is overstated. d) The risk-free rate of return is inaccurate.

Answer 72

B Since annualized return converts a brief period into an annualized return, that brief period must be representative of the entire year’s performance.

Question 73

#86. Conventional and Roth IRAs are different in which of the following ways? a) Income eligibility limits b) Minimum withdrawal age c) Annual contribution limits d) Catch-up provisions

Answer 73

A Only the Roth has income eligibility limits. Anyone with earned income may contribute to a conventional IRA. However, the contribution may not be deductible, based on participation in an employer-sponsored retirement plan and the individual’s income level.

Question 74

#87. Which of the following is true of the organizational structure of a balance sheet? I. It is arranged from current items at the top to long term items at the bottom. II. Liquid items appear on the left and illiquid and fixed items appear on the right. III. It follows an equation. IV. Leverage items follow equity items. a) I and II b) I and III c) II and III d) II and IV

Answer 74

B The balance sheet follows the balance sheet equation, and it starts with current items at the top and flows to long term items below. Leverage (bonds) comes before equity (stock.)

Question 75

#88. Issuers engage in a) Primary transactions. b) Secondary transactions. c) Neither primary nor secondary transactions. d) Both primary and secondary transactions.

Answer 75

A When the issuer receives the money, it is a primary transaction.

Question 76

#90. George bought 500 shares of ABC at 41 and wrote 5 ABC June 40 straddles. At expiration, ABC closes at 37.50 and George is exercised on his short puts. After being exercised, what is George’s stock position? a) Long 500 shares ABC b) Short 500 shares ABC c) Long 1,000 shares ABC d) Short 1,000 shares ABC

Answer 76

C A put writer has the duty to buy stock at the strike price. George already owned 500 shares and had to buy another 500 shares of ABC at the 40 strike price.

Question 77

#91. A customer placed a market order. This means a) The customer has stated the price he is willing to pay. b) No price is set and the order is to be filled at the best available market price. c) The order may not be executed because the customer has not specified a price. d) The customer has specified a price and the order will not be filled unless the market reaches that price.

Answer 77

B A market order has no specified price and is filled at the best available market price when executed.

Question 78

#92. Capital market theory I. Is based on the premise that capital markets are essential to economic growth. II. Blends the Keynesian and supply side economic theories. III. Adds validation to the analysis and selection of securities in a managed investment strategy. IV. Seeks to provide optimum returns as a given risk level. a) I and III b) I and IV c) II and III d) II and IV

Answer 78

A Capital market theory sets the stage for investment management and adds validation to the analysis and selection of securities in a managed investment strategy. It is based on the premise that capital markets are essential to economic growth.

Question 79

#93. An investor must have a margin account in order to I. Close long positions. II. Purchase securities on credit. III. Make short sales. IV. Open long positions. a) I and III b) I and IV c) II and III d) II and IV

Answer 79

C Making margin purchases and selling short all involve the extension of credit against assets in the account. Therefore, both require the establishment of a margin account.

Question 80

#94. Which of the following is correct with regard to the withdrawal of funds from a tax-qualified retirement plan? a) All early withdrawals are subject to a penalty. b) Contributions can be deducted from that year's taxable income. c) The employee will be taxed at the ordinary income rate on his cost basis. d) Funds may be withdrawn at retirement tax free.

Answer 80

B Cost basis has already been taxed and will not be taxed again upon withdrawal. Premature withdrawals are taxed and penalized unless withdrawn for a qualified exemption. A traditional IRA is a top choice for immediate tax savings because contributions can be deducted from that year's taxable income.

Question 81

#97. A firm is acting in the capacity of a broker and receiving a commission. The firm is performing as a) An agent. b) An investment adviser. c) A dealer. d) A principal.

Answer 81

A A firm that brokers and charges a commission is acting as an agent.

Question 82

#98. An investment adviser representative has done extensive personal research on a pharmaceutical company. He wants to take advantage of what he considers an excellent growth opportunity by purchasing the company's stock at the current market price; however, he has limited funds to do so. Under what circumstances may the IAR borrow funds from his clients to make the trade? a) He may borrow the funds from any client that is an affiliate of the Investment Advisor and is willing to make the loan. b) He may not borrow the funds to execute this transaction under any circumstances as it is a direct violation of the SEC bylaws. c) If he has a client that has sufficient money market funds who is willing to make a brokerage loan against the account, he may set-up the loan. d) He may borrow the funds from his pooled funds in his custodial account listed under his name for his clients’ funds.

Answer 82

A It is inappropriate for an investment adviser or an investment adviser representative to borrow from or loan to clients any form of security or funds unless the client is a broker/dealer, an affiliate of the investment adviser, or a financial institution engaged in the lending business.

Question 83

#99. The SEC specifically requires which part of Form ADV to be written in “plain English”? a) ADV Part 1 b) ADV Part 2A c) Both Part 1 and Part 2 d) None of the above

Answer 83

B Part 2A or a written brochure containing the information in Part 2A must be delivered to clients, and therefore must be written in narrative form in plain English.

Question 84

#100. Which of the following is the price-to-book ratio? a) Current assets / authorized shares b) Current market price / book value per share c) Current assets / book value per share d) Current market price/ par value per share

Answer 84

B The formula for the price-to-book ratio is current market price / (total assets-intangible assets-liabilities / number of outstanding shares)

Question 85

#101. An investor owns 1,000 shares of XYZ Corporation, which just declared a stock dividend of 6%. The stock was selling for $10 just before the dividend was declared. The dividend announcement will have what effect? a) Increase the number of shares the investor owns to 1,060 shares, but will not impact the total value of the stock holding. b) Increase the cash in the account and decrease the number of shares owned. c) Increase the number of shares outstanding and lower the investor’s proportional ownership of the company. d) Increase the number of shares the investor owns to 1,060 shares and increase the share price to $10.60 in the market.

Answer 85

A A stock dividend is used by the company to gradually lower the price of the stock in the marketplace and save cash for future growth. It does this by paying dividends in shares rather than in cash. In this scenario, the investor will have more shares, but at a lower price. Therefore, the market value of the stock holding remains the same.

Question 86

#102. Time-weighted return is also called a) Holding period return. b) Internal rate of return. c) Geometric mean return. d) Annualized return.

Answer 86

C Geometric return is considered the standard quantitative measure of an investment manager's value in managing a portfolio.

Question 87

#103. An agent's deliberate omission of a fact in a securities transaction constitutes fraud I. If a reasonable person would base a decision on the omitted information. II. Only if the information given was known to be true. III. Only if the offering is a new issue of a security. IV. If the information is relevant to an investment decision. a) I and II b) I and IV c) II and III d) II and IV

Answer 87

B Omission of material information constitutes fraud if a reasonable person would make a decision based on the information, regardless if the offering was a primary offering or secondary market transaction.

Question 88

#104. An employee making $20,000 a year contributes to an IRA for 2 years. The employer then begins a qualified plan. The employee may a) Transfer IRA proceeds to the employer plan. b) Cease making deposits immediately, but the proceeds will no longer accumulate tax-deferred. c) Continue to make IRA deductible contributions. d) Withdraw IRA proceeds without taking a penalty.

Answer 88

C The taxpayer can continue fully deductible IRA contributions while under a qualified plan. A single taxpayer making less than $59,000 or joint making less than $95,000 may continue fully deductible IRA contributions, even when covered by a qualified employer plan. Withdrawals before age 59½ result in a 10% penalty, in addition to income taxes. IRA funds may not be transferred to an employer plan. Even if the employee ceases contributions, the earnings grow tax-deferred.

Question 89

#105. Which of the following would be included in the definition of an investment adviser? a) An attorney who works with his client on a Chapter 11 re-organization b) A business professor who teaches a class in portfolio management c) A broker/dealer who charges a fee for analyzing client portfolios d) An individual who publishes a quarterly newsletter with a model portfolio that includes buy/sell recommendations

Answer 89

C Investment advisers are paid for providing customer specific investment advice. This does not include professionals, such as lawyers or accountants, whose advice is incidental to their primary profession and who are not paid specifically for such advice. Attorneys may work with their clients on Chapter 11 reorganization and are not considered investment advisers in this capacity. Publishers are not considered investment advisers if they do not provide advice about the specific investment situations of individual clients.

Question 90

#106. A high school student earned $1,200 last year while working at a fast food restaurant. He also earned $600 during the summer as a little league umpire. His trust account earned $800 in interest income. How much can this individual contribute to his IRA account for the year? a) $600 b) $1,200 c) $1,800 d) $2,600

Answer 90

C IRA contributions are based on earned income. In this case, the earned income for the year was $1,800, which is this individual's maximum allowable contribution. The $800 interest income is unearned income, and is not eligible for calculating IRA contribution amounts.

Question 91

#107. An investor places $10,000 into a mutual fund which reinvests dividends and capital gains. After 12 months, the investor’s fund has a value of $12,000. If inflation during the period was 3%, what is the investor’s real rate of return for the year? a) 17% b) 20% c) 23% d) 12%

Answer 91

A Total return: (Value at the end of the period – Value at the beginning of the period) divided by the Value at the beginning or (12,000 – 10,000 = 2,000) / 10,000 = 20%) minus inflation rate (3%) = Real rate of return 17%.

Question 92

#108. The Uniform Prudent Investor Act a) Outlines permissible broker/dealer and investment adviser activity in UGMA/UTMA accounts. b) Supersedes the Investment Advisers Act of 1940. c) Sets standards by which investment advisers should manage discretionary accounts. d) Sets broker/dealer conduct standards regarding handling of cash, margin and option accounts.

Answer 92

C The Uniform Prudent Investor Act sets standards by which investment advisers should manage funds over which they exercise discretionary control

Question 93

#109. Which of the following is the largest expense item of the fund? a) Custodial b) Management fee c) Transfer agent d) Board of directors

Answer 93

B The management fee is generally the largest expense item of the fund itself. Please note the sales charge goes to the underwriter and not the fund itself.

Question 94

#110. Which of the following is NOT exempt from state registration as a broker/dealer? a) Banks, savings & loans, agents and issuers b) A broker/dealer with no office in the state and whose only customers are institutional investors c) A broker/dealer located within the state but whose only customers are institutional investors d) All of the above are exempt.

Answer 94

C A broker/dealer with an office in the state must be registered in that state.

Question 95

#111. When broker/dealers effect trades for the accounts of others, they are acting in what capacity? a) Agency b) Dealer c) Principal d) Individual

Answer 95

A When a firm trades for the account of others, they are acting in an agency capacity. In this capacity, they are also known as the broker.

Question 96

#112. Alternative investments are investments that a) Are not available to institutions. b) Are used to replace underperforming asset classes. c) Do not entirely meet the definition of stock, bond or cash. d) Do not meet NYSE registration requirements.

Answer 96

C Traditional investments are stocks, bonds and cash. In the broadest sense alternative investments are investments that cannot meet those definitions.

Question 97

#115. A redeemable security is a) A marketable security. b) Traded on an exchange or OTC market. c) A security with no secondary trading. d) A negotiable security.

Answer 97

C A redeemable security is non-negotiable (i.e., nonmarketable) and must be redeemed by the issuer. Unit Investment Trusts (UITs), face amount certificates (FACs) and open-end mutual funds are all examples of redeemable securities.

Question 98

#116. Which of the following is FALSE regarding a client’s risk tolerance? a) The risk tolerance associated with the investment is a non-financial consideration of an investment risk. b) A 65-year-old retiree will have a higher risk tolerance than a 40-year-old professional. c) It determines the investor’s degree of tolerance of negative changes in the portfolio. d) The risk tolerance factor is more important when an investor has control over the purchase and sale of the investment.

Answer 98

B Risk tolerance might be defined as the degree of uncertainty that investors can tolerate with regards to a negative change in the value of their portfolio. An investor's risk tolerance typically varies according to age, investment experience, income requirements, and financial goals among other factors.

Question 99

#117. Which of the following is true about a short sale of stock? I. It must be done in a margin account. II. It may be done in a margin account. III. It is bullish. IV. It is bearish. a) I and III b) I and IV c) II and III d) II and IV

Answer 99

B Selling short is bearish and must be done in a margin account.

Question 100

#118. A security will be registered by qualification. What may an agent say to a prospective buyer? a) The Administrator has approved the security as soon as the registration is effective. b) The security will be registered in the State. c) The issue is already selling quickly. d) Since this is the most stringent registration process, the security is relatively safe.

Answer 100

B The making of any statement that a security is guaranteed, that it is approved, or that it is a hot sale is a violation of the Act. The only true statement that is not coercive is that the security is being registered.

Question 101

#119. Which of the following is NOT a qualified exemption to the IRA early distribution rule and will incur a penalty? a) At age 60 for retirement purposes b) To purchase an investment property c) For educational purposes d) To pay for excessive medical bills

Answer 101

B Withdrawing funds for an investment property is not one of the conditions that will waive the 10% early withdrawal penalty.

Question 102

#121. Which of the following is required in order for a plan to be "qualified"? a) The plan must be for the exclusive benefit of the employer. b) The plan's contribution formula is allowed to discriminate in favor of officers of the company. c) The plan must be formally written and communicated to the employees. d) The plan must not be permanent.

Answer 102

C The plan must be for the exclusive benefit of the employees and their beneficiaries, formally written and communicated to the employees, and the plan's benefit or contribution formula cannot discriminate in favor of the so-called “prohibited group”: officers, stockholders, or highly paid employees. Participation in a plan may not be geared exclusively to the prohibited group. The plan must be permanent.

Question 103

#122. XYZ stock is quoted at $45.20 X $45.25. How much is the spread? a) $0.05 b) $0.50 c) $5.00 d) $50.00

Answer 103

A The spread is the difference between the bid and ask; $45.25 - $45.20 = $0.05.

Question 104

#123. An investment adviser has identified what he perceives to be an excellent investment opportunity for some of his clients. He made calls to the selected clients and told them that he believes that the investment will have over 12% return this year and recommended they invest. Which of the following is true concerning the adviser's statement? a) This is considered an example of an adviser doing performance research which is part of the advisory services contract. b) Such statements may not be made since they imply a specific performance of a security for which advice is being given. c) The adviser may not make this kind of statement to his clients unless it is part of a portfolio of investments and not a single security. d) The adviser has not violated any provisions of securities law as he was only stating an opinion and not giving formal advice.

Answer 104

B An adviser may not make any statement that implies a specific performance of a security for which advice was given. An adviser may not guarantee a specific result based on advice given for a portfolio of investments.

Question 105

#124. To calculate the after-tax yield on an investment, an investor takes the return on investment and multiplies that number by the a) Investor’s current tax bracket. b) Current FED funds rate of return. c) Reciprocal of the investor’s tax bracket. d) Number of years the investment was held.

Answer 105

C The after-tax yield is calculated by multiplying the investor's return by the reciprocal, or complement, of the investor's tax bracket. The reciprocal is equal to 100% - tax rate %.

Question 106

#125. Which of the following types of trusts provide the greatest tax benefits? a) Irrevocable trusts b) Testamentary trusts c) Revocable trusts d) Insurance trusts

Answer 106

A Trusts may be established as either revocable or irrevocable; however, the greatest tax benefits are given to irrevocable trusts. Since this type of trust holds title to the assets, property in the trust bypasses probate, which in turn reduces estate taxes and administrative fees.

Question 107

#126. A registered investment adviser paid a large sum of money to settle a lawsuit. As a result, the firm’s net worth fell to $22,000. The adviser has discretion over customer accounts; however, the client's funds are held at a large custodian bank. Under these circumstances, what is the adviser required to do? a) Do nothing b) File a report with the state administrator by the end of the next business day c) File a report with the state administrator on the day that the net worth falls below $35,000 d) Notify all of the clients that the adviser’s net worth has fallen below $35,000

Answer 107

A Because the adviser does not have custody of the client's assets, the minimum capital requirement is $10,000, and the adviser is not required to do anything.

Question 108

#127. A registered representative's client wants to place a trade that the representative believes is unsuitable. The registered representative should do which of the following? a) Execute the trade and pass the client's portfolio to another representative b) Execute the trade and obtain a written statement from the client that this transaction was unsolicited. c) Refuse to execute the trade because it will not meet the investor's financial objectives d) Refuse to execute the trade and terminate the relationship with the client

Answer 108

B The registered representative should explain to the client that the trade is unsuitable. If the client still wants to enter the order, the registered representative may do so by marking the transaction unsolicited and asking the client to sign a statement saying that the transaction was unsolicited.

Question 109

#129. The difference between CPI and noncore CPI is that a) Noncore excludes food, clothing and fuel. b) CPI excludes food and fuel. c) Noncore CPI excludes food and fuel. d) CPI excludes food, clothing and fuel

Answer 109

B Core CPI excludes the cost of food and fuel and is the most closely followed.

Question 110

Geometric Mean Return is also called..?

Answer 110

Time-Weighted return is considered the standard quantitative measure of an investment manager's value in managing a portfolio.

Question 111

What type of debt is Overlapping Debt?

Answer 111

Overlapping Debt is General Obligation debt