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66 - Final Topics > Final #6 > Flashcards

Final #6 Flashcards

1
Q

Regarding the customer’s cost basis of shares being sold out of a stock position, which method is allowed?

A

Specific identification is allowed, but if it is not elected, then FIFO is the required method

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2
Q

The net worth requirement to be registered as a broker-dealer (or an investment adviser) in a State is based on:

A

Only the broker or the adviser’s principal State of residence. If the firm has multiple locations in differing States, the Net Worth requirement is not additive

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3
Q

What is an example of a negative beta stock?

A

Gold stocks - these move in the opposite direction of the market

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4
Q

What 3 bits of information are included on an applicant’s registration application?

A
  1. Business history of the applicant
  2. Financial condition of the applicant
  3. Conviction record of the applicant
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5
Q

What forms are required to be filed with the SEC to register as an Investment Adviser?

A

ADV Forms Part 1 and Part 2

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6
Q

A consent of service form is only required for _________ registration

A

State registration

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7
Q

What 3 things are examined when determining if an account has been “churned”?

A
  1. Whether the trading is in line with client investment objectives
  2. Character of client’s account
  3. Financial condition (motive) of the agent
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8
Q

To be registered as a broker-dealer, the Administrator typically requires the posting of a surety bond in the amount of:

A

$10,000

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9
Q

Under the Uniform Securities Act, who must notify the State Administrator when an agent disassociates from his or her broker-dealer?

A

Both the agent and the broker dealer!

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10
Q

The first $____________ of an estate is excluded from tax in 2018

A

$5,600,000 ($5MM default)

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11
Q

The first $___________ of a gift per person is excluded from tax in 2018

A

$15,000

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12
Q

Gift and estate taxes are classified as what types of taxes?

A

Progressive taxes - they increase with the size of the estate

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13
Q

A market maker buys or sells securities to and for its own account on a ___________ basis

A

Principal basis

Note that BD’s trade for accounts on an agency basis

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14
Q

True or False? It is not possible for a stock to trade at 2 different prices at the same moment on an exchange floor

A

True

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15
Q

If a premium bond is called prior to maturity, what happens to the yield?

A

It decreases. The “loss” from amortization that would be spread over years to maturity are condensed into a shorter time frame, so therefore the yield decreases when a premium bond is called pre-maturely

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16
Q

Stock options granted to an employee are only taxable if:

A

The stock options are exercised and stock subsequently sold

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17
Q

Disclosure of an impaired financial condition to customers by an investment adviser is only required where:

A

The IA has already taken custody of the customer’s funds

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18
Q

What happens when a company declares and issues a stock dividend?

A

The stock dividend results in the cost basis per share being reduced, with the number of shares held increased proportionately

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19
Q

What type of security is especially inappropriate for tax deferred retirement plans (IRA’s, 401k’s, etc)?

A

Municipal bonds

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20
Q

What are the requirements for commercial paper to be an exempt security?

A
  • Straight (non-convertible) corporate debt
  • Max maturity of 270 days (9 months)
  • At least $50,000 in amount
  • Top 3 rating classes for investments
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21
Q

What is the formula for the Sharp Ratio?

A

Rate of Return - Risk Free Rate of Return/Standard deviation

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22
Q

What does the sharpe ratio measure?

A

Risk adjusted rate of return relative to portfolio volatility. It asks “what is the reward for taking on incremental risk?”

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23
Q

What is the passive rate of return?

A

The return achieved by an asset manager to match the specified benchmark (compare Active return)

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24
Q

What is the active rate of return?

A

The EXCESS return achieved by an asset manager above the specified benchmark

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25
Q

It is permissible for either the custodian or the Investment adviser to send out quarterly customer accounts statements?

A

Yes. Either the custodian or the IA can send out accounts statements, so long as an independent auditor conducts surprise audits at least once a year verifying all funds and securities

26
Q

The “Present Value” of a fixed income security is based on the:

A

Discounting of all expected future payments to be made by the issuer of the security

27
Q

In a corporate liquidation, the priority of claim to corporate assets is:

A

Secured creditors, unpaid wages and taxes, creditors, unsecured bondholders, preferred stockholders, common stockholders

28
Q

What are the 4 major advantages to investing in RE?

A

I. The real estate can be depreciated, even if its market value is increasing
II. Non-recourse financing is included in the basis
III. Interest on loans is fully deductible
IV. Long term capital gains may be achieved when the real estate is sold

29
Q

What is a capital need?

A

A capital need is the amount of capital needed at a future date to meet some objective

30
Q

What are the administrator’s exec. powers?

A
  • Revoke registration if for public good AND part of the USA was violated
  • Subpoena books and records for investigations
  • Seek injunctions against suspected violators
  • issue stop orders based on other states and fed’s stop orders
31
Q

What is the Internal Rate of Return?

A

IRR is the true compound rate of return generated by an investment. Implicit in the formula is that any cash flows generated are reinvested at the “IRR” and it considers TVM in the calculation

32
Q

What is the general maximum 529 contribution amount, and the one time maximum allowed for a donor, without incurring gift taxes?

A

The general rule is that you can put $15,000 in a 529 plan per year. However, there is a one-time gift allowed for 5x that amount: $75,000. Note that for a married COUPLE, they could donate $75K each, for a grand max total of $150,000 without any gift taxes

33
Q

What are three examples of things that are not securities?

A
  1. Swaps
  2. Real estate options
  3. Futures (note that if these were future options, they would be securities)
34
Q

What is the tax rule relating to capital gains on selling a home?

A

The first $250,000 of capital gain from the sale of a personal residence can be excluded from tax for an individual ($500,000 for a married couple).

Rules:
- Cannot have been rented out MORE than 3 of the last 5 years

35
Q

An investment adviser will always be considered to have taken custody if the adviser:

A

Is the trustee for the client in an account

36
Q

Under NASAA, investment advisers must update their ADV filing made with the State:

A

Yearly, within 90 days of FISCAL year end and for significant material changes, within 30 days

37
Q

Under SEC rules, investment advisers must update their ADV filing made with the SEC:

A

Yearly, within 90 days of FISCAL year end and for significant material changes, PROMPTLY

38
Q

A trader who places an order to sell 100 shares of ABC at $64 when the market price of ABC stock is at $68 has placed a(n):

A

Stop loss order. The market price is at 68, and he doesn’t want to sell until it hits 64. This order is stopping the loss on his holding - a stop loss order.

39
Q

Under Registration by Filing, registration becomes effective how long after the filing?

A

5 business days

40
Q

Under Registration by Coordination, registration becomes effective when:

A

The federal registration becomes effective

41
Q

Under Registration by Qualification, registration becomes effective:

A

On a date set by the administrator - the admin will only give a specific response on registrations by qualification

42
Q

What is the definition of an agent?

A

An individual who effects securities transactions for either a broker-dealer OR an issuer

43
Q

What are the taxation rules on a UTMA account?

A

There is no tax deduction for contributions to the account, and the earnings are taxed each year

44
Q

What are the taxation rules in a 529 plan?

A

There is no tax deduction for contributions to the account, but the earnings are tax deferred

45
Q

What is a limit order?

A

A limit order specifies an execution price (“the limit”). For example, an order to sell 100 shares of ABC at $50 GTC on the Specialist’s book (DMM) is a limit order.

46
Q

How can you easily identify a stop order?

A

Stop orders must state the word “stop” with a price

47
Q

How can you determine when an order is a market order?

A

Market orders do not specify a price. If a price is specified, it is NOT a market order

48
Q

What is a stop limit order?

A

A stop order that, instead of becoming a market order if the security trades at a specified price, becomes a limit order to buy or sell at the specified price or better

49
Q

What is a buy stop limit order?

A

A buy stop-limit order is placed above a stock’s current market price and is “elected” if the market rises to, or through, that price.

50
Q

What is a sell stop limit order?

A

A sell stop-limit order is placed below a stock’s current market price is “elected” if the market falls to, or through, that price. The order then becomes a limit order to sell - so the price must meet the customer’s limit for an execution

51
Q

The interest rate that is used as the “risk free” rate of return is the:

A

90 day Treasury Bill rate

Sometimes 1-year Treasuries can also be used as the basis for the “risk free” rate of return

52
Q

When an agent changes employment from one broker-dealer to another, when must the agent’s registration be transferred?

A

Immediately

53
Q

Who must notify the administrator when an IAR is terminated from a state registered only IA?

A

Only the Investment adviser - NOT the individual

54
Q

Who must notify the administrator when an IAR of a federally covered adviser is terminated?

A

Only the INDIVIDUAL - NOT the Federally covered Investment Adviser

55
Q

What is the definition of a State under the Uniform Securities Act?

A

“State” is defined under the Act to be any State, territory, possession of the United States, the District of Columbia, and Puerto Rico

56
Q

What must occur before a customer can be sold securities in a bank location?

A

Customers who wish to effect securities transactions must be told ORALLY and IN WRITING that securities products are not FDIC insured; are not deposits; and are subject to risk of loss of principal

Reasonable efforts must be made to get written acknowledgement of these disclosures under NASAA

57
Q

A value investor seeks:

A
  • Low P/E ratios
  • High dividend yields
  • Low price to book value ratios
  • Low market capitalization
58
Q

Sending out a blanket e-mail that makes recommendations of securities to a list of web addresses by a broker-dealer or agent is:

A

Prohibited. The underlying issue is that there has been no suitability determination performed

59
Q

An investor that buys securities issued by companies based in Third World countries would be MOST concerned with what risk?

A

Political risk

60
Q

Past performance, if shown by an investment adviser in an advertisement, must be based on:

A

Gross investment income, reduced by advisory fees, commissions and expenses paid

61
Q

An analyst at a broker dealer that prepared a research report on a stock is prohibited from trading that stock until:

A

5 days after the release of the report

Note: no such limitation applies to analysts of IA firms - only BD analysts are restricted here

66 - Final Topics (6 decks)

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