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1
Q
1. A client buys a BAT July 40 put and sells a BAT April 40 put. The client would profit if this spread position
a) Narrows.
b) Expires.
c) Widens.
d) Narrows, then widens.
A
C
The option position is a calendar or horizontal spread. As in all spreads, one option leg is important and is netted against the other, less important leg. July has more time value than April. The April leg was sold. The spread is debit. Debit spreads benefit from premium widening.
2
Q
3. Sam was having difficulty selling his investments due to a lack of demand in the secondary market. What does that say about his investments?
a) Their market value was lower than their book value.
b) They have a high liquidity risk.
c) They may be subject to legislative risk.
d) They were fixed income securities.
A
B
Liquidity Risk is the risk that an asset may not quickly convert to cash at a fair price. Illiquid investments might not sell quickly or at a fair price due to low trading activity in the secondary market.
3
Q
4. Stanley passes away, leaving most assets to his wife except for his IRA and his Roth IRA, which he leaves to his daughter. Which of the following is true?
a) Stanley’s daughter will pay taxes on the IRA but not the Roth IRA.
b) Stanley’s IRA and Roth IRA will be subject to taxation before his daughter receives them.
c) Stanley’s wife and daughter will each pay taxes on the assets that she receives.
d) All assets are taxed before they are distributed to Stanley’s wife and daughter.
A
B
All assets not passed on to a spouse are subject to estate taxes. This includes IRAs, annuities, Roth IRAs, and municipal bonds.
4
Q
7. A registered representative’s client wants to place a trade that the representative believes is unsuitable. The registered representative should do which of the following?
a) Refuse to execute the trade and terminate the relationship with the client
b) Execute the trade and pass the client’s portfolio to another representative
c) Execute the trade and obtain a written statement from the client that this transaction was unsolicited.
d) Refuse to execute the trade because it will not meet the investor’s financial objectives
A
C
The registered representative should explain to the client that the trade is unsuitable. If the client still wants to enter the order, the registered representative may do so by marking the transaction unsolicited and asking the client to sign a statement saying that the transaction was unsolicited.
5
Q
8. The dollar is strengthening against the Euro. Which are the probable causes?
a) Increasing imports/decreasing exports
b) Falling interest rates/rising prices
c) Rising interest rates/falling prices
d) Increasing exports/decreasing imports
A
C
Rising interest rates support a strengthening of the dollar compared to foreign currencies, and cause the prices of bonds and stocks to decline. Import/export levels are a consequence of the relative strength of the two currencies.
6
Q
10. In a stock trading account, “churning” is defined as effecting transactions solely to generate commissions. A similar practice with regard to mutual funds is known as
a) Switching.
b) Matched Order.
c) Front Running.
d) Wash Trades.
A
A
Switching refers to the practice of periodically moving a client from one fund family to another for the purpose of generating commissions.
7
Q
11. Bill is considering a mutual fund with a high portfolio turnover. Bill’s agent tells Bill that he should not expect
a) Greater transaction costs.
b) A higher sales load.
c) A higher expense ratio.
d) A higher capital gains distributions.
A
B
The sales load assessed by the fund is unrelated to portfolio turnover. The other three alternatives are symptoms of a fund with a high portfolio turnover.
8
Q
12. The state administrator has the ability to cancel the registration of an individual who I. Has been found mentally incompetent by the courts. II. Has violated the USA. III. Cannot be located within a reasonable time and effort. IV. Has violated a fiduciary responsibility to one or more clients within the state.
a) I and II
b) I and III
c) II and III
d) III and IV
A
B
The state administrator has the ability to cancel an individual registration within the state if the individual has been found mentally incapacitated or cannot be located within a reasonable time period. It is important to remember that the administrator is not required to have a hearing in order to cancel registration under these circumstances.
9
Q
13. 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
A
B
Core CPI excludes the cost of food and fuel and is the most closely followed.
10
Q
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.
A
A
Using hearsay to liquidate a position is a prohibited act. The agent should inform his supervisor but could not act on the rumor.
11
Q
15. Employer contributions made to a qualified plan
a) Are taxable as salary.
b) Are subject to vesting requirements.
c) Are taxable for employees above certain income levels.
d) Have no vesting requirement.
A
B
Qualified plans must have a vesting requirement. Vesting is when the employee actually has ownership interest in the plan.
12
Q
16. If an investor cannot specifically identify redeemed shares, IRS assumes that reporting will be on the basis of
a) First-In, First-Out.
b) Determined on a case by case basis.
c) Average cost.
d) Last-In, First-Out.
A
A
IRS assumes the First-In, First-Out accounting method when shares cannot be specifically identified.
13
Q
17. 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.
A
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.
14
Q
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.
A
A
Using hearsay to liquidate a position is a prohibited act. The agent should inform his supervisor but could not act on the rumor.
15
Q
15. Employer contributions made to a qualified plan
a) Are taxable as salary.
b) Are subject to vesting requirements.
c) Are taxable for employees above certain income levels.
d) Have no vesting requirement.
A
B
Qualified plans must have a vesting requirement. Vesting is when the employee actually has ownership interest in the plan.
16
Q
16. If an investor cannot specifically identify redeemed shares, IRS assumes that reporting will be on the basis of
a) First-In, First-Out.
b) Determined on a case by case basis.
c) Average cost.
d) Last-In, First-Out.
A
A
IRS assumes the First-In, First-Out accounting method when shares cannot be specifically identified.
17
Q
17. 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.
A
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.
18
Q
18. A floor broker on the NYSE trading floor must work with whom in order to trade in a given security?
a) Specialist
b) Market maker
c) Registered secondary trader
d) Another floor broker
A
A
To execute a trade in given security, the floor broker must approach the specialist in that security, who will facilitate the trade.
19
Q
19. An agent living in Iowa solicits a customer living in Minnesota about a security. The customer finally decides to purchase the security while on vacation in Florida. Which Administrator(s) has(have) authority over the transaction?
a) Iowa, Minnesota and Florida
b) Minnesota only
c) Minnesota and Florida only
d) Iowa and Florida only
A
A
The scope of authority is very broad for administrative jurisdiction. All three state Administrators have jurisdiction because some form of the transaction happened within their boundaries.
20
Q
20. Publications reporting total return data for an investment should use the recommended reporting period of
a) 3 years and 5 years.
b) 5 years and 10 years.
c) 1 year, 5 years and the lesser of 10 years or life of the investment.
d) 1 year, 5 years and life of the investment.
A
C
FINRA guidelines recommend that total return illustrations be provided for a minimum of 10 years or the lifetime of the investment, but also include the 1- and 5-year intervals for the sake of full disclosure.
21
Q
21. Which of the following would be considered a broker/dealer in the state of Maine?
a) An issuer whose corporate headquarters is located in Maine
b) A brokerage firm located in New Hampshire doing business in Maine with residents of Maine
c) An agent working at a discount brokerage firm located in Maine
d) A brokerage firm with no office in Maine, selling municipal bonds to a bank located in Maine
A
B
A broker/dealer must register under the Uniform Securities Act (USA) in any state in which it transacts business unless an exemption is available.
22
Q
22. An investment adviser is prohibited from doing all of the following EXCEPT
a) Sharing proportionately in the gains and losses in a customer account.
b) Charging a retainer fee.
c) Charging commissions on effected trades for the customer.
d) Transferring an advisory contract without the customer’s permission.
A
B
There are no restrictions on an investment adviser charging a retainer fee. Advisers cannot share in the gains and losses in an account or charge a commission on the trades since they are compensated on the total assets under management.
23
Q
24. Which of the following is true regarding a portfolio manager’s style?
a) Within an allocation model, style is always the same.
b) Management style has little effect if asset allocation is chosen carefully.
c) The style a manager applies to the allocation model will create wide variances in performance.
d) Style is the more important than asset allocation.
A
C
The portfolio manager’s style will greatly affect his or her ability to achieve optimal results within a given allocation.
24
Q
25. All of the statements below are true of hedge funds EXCEPT
a) They are mutual funds.
b) They use aggressive strategies to generate income and minimize losses in a down market.
c) Short selling and buying on margin are hedge fund strategies.
d) They are appropriate only for the experienced investor.
A
A
As defined by the Act of 1940, hedge funds are limited partnerships and not mutual funds.
25
#26. 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.
B
When investing pension fund money, pension fund managers must follow the Prudent Man rules in the state where they operate.
26
#27. In early October, a customer buys 100 shares of XYZ stock at $50 per share and, at the same time, writes an XYZ April 50 call option for a premium of $8 per share. Excluding commissions and dividends, what is the market price per share of XYZ stock at which the customer breaks even?
a) $42
b) $45
c) $50
d) $58
A
Breakeven is the price paid for the stock less the premium received. $50- $8 = $42.
27
#28. What qualifies an individual to contribute to an IRA?
a) Earned income
b) Any income
c) Investment income
d) Retirement income
A
Anyone with earned income can have an IRA. An individual can contribute 100% of earned income up to a specified amount (currently $6,000). A married couple could contribute up to a specified amount ($12,000), even if only one had earned income, but each must have an account.
28
#29. When an investment advisory contract has provisions that allow for early termination, contract assignment, or discretionary trading authority, such provisions must be
a) Endorsed by the client and the adviser and filed with the State Administrator.
b) Endorsed in a separate document and attached to the original contract.
c) Stated in clear terms that the client can understand.
d) Individually approved by the State Administrator prior to going into effect.
C
If an advisory contract has a provision for early termination, contract assignment, or discretionary trading authority, such provisions must be stated in clear terms that the client can understand.
29
#30. Which one of the following statements regarding Coverdell Education Savings Accounts is correct?
a) Contributions are made with after-tax dollars and grow tax-deferred.
b) Contributions must cease when the beneficiary turns 30.
c) Funds not used for education may be rolled over into an IRA for the beneficiary.
d) All distributions are taxable to the beneficiary.
A
Contributions to a Coverdell are made with after-tax dollars and grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses. Contributions are not permitted once the beneficiary turns 18 and the money must be used by age 30 or rolled over to a Coverdell for another qualified family member. Unused funds cannot be rolled into an IRA.
30
#31. 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) Notify all of the clients that the adviser’s net worth has fallen below $35,000
b) Do nothing
c) File a report with the state administrator by the end of the next business day
d) File a report with the state administrator on the day that the net worth falls below $35,000
B
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.
31
#32. All the following are advantages of owning mutual fund shares EXCEPT
a) Tax-free capital gain distributions.
b) The reinvestment of dividends and capital gains at NAV.
c) Simplification of tax filing.
d) Easily accessible information about the fund.
A
The investor may reinvest capital gains with no additional sales charge; however, the investor would still be required to pay taxes on the capital gain distribution whether they receive the money or reinvest it. All the other statements are benefits of mutual fund ownership.
32
#33. Which of the following are characteristics of BABs? I. They provide tax-free interest. II. They may provide a federal subsidy to the issuer. III. They may provide a tax credit to the investor. IV. They provide tax-free capital gains.
a) I and II
b) II and III
c) II and IV
d) III and IV
B
Interest on BABs is taxable, and capital gains from trading ALL bonds is taxable.
33
#34. Which of the following is a key feature of the buy and hold strategy?
a) Lower portfolio turnover rate
b) Low potential for loss
c) Higher research and trading expenses
d) A more active approach to investing
A
The buy and hold strategy takes advantage of lower trading activity, employing a passive management style. Once purchased, investments are held with the objective of producing favorable results over time. Research and turnover are minimized, but investments are similar to those that active portfolios might contain.
34
#35. An investor purchases 10 bonds with a coupon rate of 6 percent. How much will the investor receive at maturity?
a) $1,030
b) $1,060
c) $10,300
d) $10,600
A 6 percent bond pays annual interest of $60 (1000 x 6 percent). This $60 annual interest is divided into semiannual payments of $30. At maturity, the investor receives the last semiannual interest payment of $30 and also receives the principal, or par of $1,000, for a total of $1,030 per bond. Since this investor owns 10 bonds, the investor receives a total of $10,300 ($1,030 x 10.)
35
#36. 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
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.
36
#37. A customer shorts 1 XYZ October 50 put for 2 and buys 1 XYZ October 60 put for 7. He will experience a profit from this position if: I. Both puts are exercised; II. The premium difference narrows to less than $5 per share; III. The premium difference widens to more than $5 per share.
a) I and II
b) I and III
c) II and III
d) II and IV
B
The position is a debit put spread. Debit profits from exercise and premiums widening.
37
#38. The Administrator has the right to request examination of all broker/dealer records for the previous
a) 3-year period.
b) 5-year period.
c) 7-year period.
d) 10-year period.
Broker/dealers are required to maintain all customer files for 3 years, and the Administrator may examine all broker/dealer files.
38
#39. Lump-sum distributions without penalty from qualified retirement plans may NOT be made to an individual for
a) Permanent disability.
b) 30 years of service with the company.
c) Person reaches age 59½.
d) Permanent retirement.
Lump-sum distributions cannot be made to a person for continuous service with a company, unless the person is also 59½ or older. Separation of service, death, retirement, disability, and attainment of age 59½ are the qualifying events eligible for lump sum distributions.
39
#40. 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.
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.
40
#41. An investment adviser's compensation may come from
a) A percentage of capital gains in an account.
b) A percentage of all assets under management.
c) Commissions from trades effected for the customer.
d) All of the above
B
An investment adviser may only receive compensation from the total assets under management. He may not share in the gains and losses or receive a commission on transactions in the account.
41
#42. An IA purchases stock for its own account from one of its institutional clients. This transaction is called a/an
a) Principal transaction.
b) Agency cross trade.
c) Institutional cross trade.
d) ECN trade.
A
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.
42
#43. With regard to mutual funds, switching occurs when
a) The fund’s adviser “churns” the fund portfolio without discretionary authority.
b) The registered representative recommends moving assets from one fund family to another to generate commissions.
c) An investor frequently moves assets from one fund to another within a family of funds.
d) The rep recommends moving assets in or out of money market accounts based on market conditions.
Moving of fund assets between families of funds generates additional sales commissions that represent a cost to the customer. Such a recommendation is rarely appropriate and to do so for the purpose of generating commissions is a violation known as “switching."
43
#44. If the market price of the underlying securities remains the same, which two of the following investors would realize a loss? I. Buyer of an at-the-money put; II. Seller of an at-the-money put; III. Buyer of a straddle; IV. Seller of a straddle
a) II and IV
b) I and III
c) I and IV
d) II and III
For buyers of options, low volatility and the passing of time erode option premiums. An at-the-money put has no intrinsic value, so if the stock remains at or near the strike price, the premium will erode. At expiration, if it is at the money, it will expire worthless. Straddle holders need large moves in the underlying stock to make a profit, because they paid two premiums for the straddle.
44
#46. 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.
B
Tax liabilities belong to the minor in a custodian account.
45
#47. A U.S. government bond quoted at 94.20 - 95.08 has a bid price of
a) $942.00.
b) $946.25.
c) $952.50.
d) $958.00.
B
Bonds are quoted at $1,000 par in 32nds, with each point worth $10. The bid price (the first price listed) is $940 + (20/32 X $10), which converts to $940 + $6.25 for a price of $946.25.
46
#50. If distributions are made on a variable annuity policy before age ____ , a 10 percent penalty will be imposed.
a) 49½
b) 59½
c) 69½
d) 71½
B
If distributions are made before age 59½, a 10 percent penalty is imposed, unless the circumstances qualify as exceptions to the early distribution rule, such as divorce and disability.
47
#51. If an Administrator finds a registration to be incomplete, the issuer must send
a) An amendment to the application.
b) A financial statement.
c) A consent to service of process.
d) A new and complete registration application.
A
The required information can be submitted to the Administrator in an amendment to the application. The financial statement and consent of service of process were submitted with the initial filing.
48
#52. Which of the following is true of the organizational structure of a balance sheet? I. It is arranged from current items at the top to long term items at the bottom. II. Liquid items appear on the left and illiquid and fixed items appear on the right. III. It follows an equation. IV. Leverage items follow equity items.
a) I and II
b) I and III
c) II and III
d) II and IV
B
The balance sheet follows the balance sheet equation, and it starts with current items at the top and flows to long term items below. Leverage (bonds) comes before equity (stock.)
49
#53. If the yield curve is inverted, I. Short-term yields are less than long-term yields. II. Short-term yields are higher than long-term yields. III. Investors are lengthening maturities in their portfolios. IV. Investors are shortening maturities in their portfolios.
a) I and II
b) I and III
c) II and III
d) II and IV
C
In an inverted curve, short-term rates are temporarily higher than long-term rates. Because of the inverted curve’s uncertainty, investors move from short-term to long-term yields.
50
#54. One of your customers enters a limit order good for one month. Your firm has entered the order as a GTC order. The responsibility for canceling the order, if not executed by the end of that month, is that of the
a) Specialist.
b) Firm's commission broker.
c) Firm.
d) Customer.
C
When a member firm accepts an order of this type, it accepts ultimate responsibility for follow-through. The firm's commission broker is commonly known as the "floor broker" and is on the floor of the exchange. The specialist has no responsibility in this case because the specialist doesn't know that the order was only good until the end of the month.
51
#55. Persons who are found guilty of insider trading violations are subject to all of the following penalties EXCEPT
a) Treble charges.
b) Imprisonment.
c) FINRA fines.
d) Civil lawsuits.
C
FINRA fines can only be assessed against FINRA members and their associates. All other violators may be subjected to any of the other penalties listed.
52
#56. The following are prohibited practices under the Uniform Securities Act (USA) EXCEPT
a) Failing to disclose all known facts in a transaction.
b) Effecting private securities transactions for customers.
c) Commingling customer funds with agent funds.
d) Soliciting excessive trading to increase commissions.
A
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.
53
#57. Which of the following is false regarding bond anticipation notes?
a) Notes are repaid from general tax collections and direct government obligations.
b) Interest is paid semi-annually.
c) Interest on the notes is exempt from federal income tax.
d) The maturity of the notes is under 5 years.
A
Bond anticipation notes, or BANSs, are interim financing that is repaid from the proceeds of an upcoming bond issue.
54
#58. A customer placed a market order. This means
a) The customer has stated the price he is willing to pay.
b) No price is set and the order is to be filled at the best available market price.
c) The order may not be executed because the customer has not specified a price.
d) The customer has specified a price and the order will not be filled unless the market reaches that price.
B
A market order has no specified price and is filled at the best available market price when executed.
55
#59. 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
B
II and III are both bearish. II is a credit call and III a debit put spread.
56
#60. Assuming that a bond is purchased at a discount, then
a) Nominal yield, or stated rate, is less than YTC.
b) Nominal yield is greater than YTC.
c) CY is greater than YTC.
d) CY is greater than YTM.
A
If a bond is selling at a discount, the current yield (CY) will be higher than the nominal (coupon) yield. The yield-to-maturity (YTM) will be even higher than the current yield, since the discount represents a profit earned at maturity. The yield to call (YTC) is the highest yield on a callable bond traded at a discount.
57
#61. Which of the following is FALSE regarding a client’s risk tolerance?
a) The risk tolerance factor is more important when an investor has control over the purchase and sale of the investment.
b) The risk tolerance associated with the investment is a non-financial consideration of an investment risk.
c) A 65-year-old retiree will have a higher risk tolerance than a 40-year-old professional.
d) It determines the investor’s degree of tolerance of negative changes in the portfolio.
C
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.
58
#63. An announcement in the newspaper states that the MI money supply has declined. This means that
a) Demand deposits, NOW accounts, and money in circulation have decreased.
b) Money has been moving from savings accounts into checking accounts.
c) The U. S. Treasury has been removing damaged currency from circulation at a faster rate than it is replaced.
d) Both demand deposits and time deposits have been decreasing.
A
Demand deposits, NOW accounts and money in circulation are the definition of M1.
59
#64. The business model that has a single owner and in which the owner and the company are viewed as one and the same is called a
a) Corporation.
b) Limited partnership.
c) Sole proprietorship.
d) General partnership.
C
Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, the owner is one and the same with the business.
60
#66. After ceasing operations, an Investment Adviser must maintain a surety bond for
a) 90 days.
b) 1 year.
c) 3 years.
d) 5 years.
C
An IA must maintain a surety bond for 3 years after it ceases operations.
61
#67. A broker/dealer would need to file a Currency Transaction Report for which of the following transactions?
a) Multiple transactions by the same customer: one of $5,000 on one business day, and the other of $5,000 two days later
b) Single transaction involving $3,000 of currency
c) Single transaction involving $11,000 of currency
d) Multiple transactions on the same business day by the same customer: one of $3,000 and the other of $5,000
C
Broker/dealers are required to file the Currency Transaction Report (CTR) for single transactions involving currency that exceed $10,000, or multiple transactions during any one business day that total more than $10,000.
62
#68. The federal funds rate has been increasing consistently over the last several months. This would indicate which of the following?
a) Banks are having trouble meeting reserve requirements.
b) Money market interest rates will decrease.
c) The prime rate will decrease.
d) The Federal Reserve Board will increase reserve requirements.
A
Federal Reserve member banks charge each other the Fed funds rate for overnight loans to meet their reserve requirement. If this rate is rising, it indicates greater loan demand among Fed member banks to satisfy the reserve requirement.
63
#69. All of the following sources of income may be used to contribute to an IRA EXCEPT
a) Spouse's salary.
b) Alimony.
c) Gifts.
d) Wages.
C
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.
64
#72. Which of the following is false regarding S corporations?
a) Sub S corporations and C corporations are taxed in the same manner.
b) All expenses and earnings are represented on the shareholder’s K1.
c) For tax liability, the shareholder and Sub S corporation are one and the same.
d) Earnings are taxed at the shareholder’s individual tax rate.
A
A C corporation is subject to double taxation but an S corporation is not.
65
#73. In order for a retirement plan to be qualified, what type of qualifications must be met?
a) Health
b) Industry
c) Federal
d) State
C
In order for a retirement plan to be qualified, certain federal requirements must be met.
66
#75. A magazine published in New York contains an offer to sell a security. The magazine is also circulated in Pennsylvania. The offer to sell would come under the Act in which state?
a) Pennsylvania
b) New York
c) Both
d) All states
B
Jurisdiction for an offer to sell a security falls under the state where the media is published, even if the circulation is distributed to other states.
67
#78. Which of the following accurately describes an ETN?
a) ETNs have principal protection.
b) Interest payments fluctuate based on the underlying index.
c) Principal at maturity is based on an index.
d) ETNs are senior secured debt instruments.
C
Principal at maturity is based on the underlying index at that time, minus fees. ETNs are unsecured debt; they are backed by the credit of the issuing bank. ETNs have no principal protection. They do not pay periodic interest.
68
#80. 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
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.
69
#81. The broker call rate is based on
a) Rate governing bond call provisions.
b) Broker/dealer investment in Treasury Securities.
c) Rate banks charge broker/dealers for loans secured by securities.
d) Debit balances in customer margin accounts.
C
The broker call rate is the rate banks charge broker/dealers for loans to customers for margin account purchases.
70
#82. Sell short 100 shares of XYZ at 46 in a margin account. Buy an XYZ July 45 call for 4. XYZ is at 50 when the call is exercised. What is your gain or loss?
a) $300 loss
b) $500 loss
c) $400 gain
d) $500 gain
A
Paid premium of $400, then paid $4,500 when call exercised, $4,900 total paid. Received $4,600 when sold stock. So $4,600 received minus $4,900 paid = $300 loss
71
#83. Which of the following withdrawal circumstances subject the retirement plan participant to a premature withdrawal penalty?
a) Participant's debt
b) Participant's disability
c) Death of participant
d) A loan from the plan
A
The following are considered exceptions to the early distribution rule: death of the participant, the participant's disability, a divorce decree, as a series of equal payments (at least annually) over the participant's life expectancy, a loan from the plan, as part of a qualified rollover.
72
#84. An employee stock option is similar to a warrant in that I. It is long-term. II. At issue, its exercise price is above the stock’s current market value. III. It is attached as a sweetener to employer bonds. IV. It may be detached and sold in the secondary market.
a) I and II
b) I and III
c) II and III
d) II and IV
A
Employee stock options are long-term incentives granted to employees or important nonemployees.
73
#85. A security will be registered by qualification. What may an agent say to a prospective buyer?
a) The security will be registered in the State.
b) The issue is already selling quickly.
c) Since this is the most stringent registration process, the security is relatively safe.
d) The Administrator has approved the security as soon as the registration is effective.
A
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.
74
#86. If a retirement plan or annuity is "qualified", this means
a) It can be used to replace any endowment contract.
b) It is not permitted by the Internal Revenue Service.
c) It satisfies all requirements of the Internal Revenue Service for favorable tax treatment.
d) It has unlimited uses.
C
A qualified annuity permits an employer or individual the opportunity to use contributions to the plan as a tax deduction. In addition, the income earned by the contribution while in the plan accumulates income tax-free. The money is not taxed until withdrawn from the plan; it is then taxed at the current rate.
75
#88. 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.
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.
76
#89. All of the following are contained in the CPI EXCEPT
a) Consumer spending on entertainment.
b) Consumer purchases of mutual funds.
c) Consumer spending on apparel.
d) Consumer spending on medical care.
B
CPI does not measure savings and investment.
77
#90. To calculate the after-tax yield on an investment, an investor takes the return on investment and multiplies that number by the
a) Current FED funds rate of return.
b) Reciprocal of the investor’s tax bracket.
c) Number of years the investment was held.
d) Investor’s current tax bracket.
B
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 %.
78
#92. A broker/dealer that publishes a bid and ask in a given security and stands ready to trade at least one round lot at its published quote is called a
a) Broker’s broker.
b) Specialist.
c) Market maker.
d) Floor broker.
C
A market maker makes a market and maintains an inventory in an OTC security. A specialist specializes in one listed stock on the NYSE and maintains an orderly market in that stock.
79
#93. Which of the following statements is INCORRECT concerning convertible preferred stock?
a) It can be converted into common stock.
b) It has a higher claim than common in a corporate bankruptcy.
c) It can be called by the corporation.
d) Dividends must be paid before common stock dividends.
C
Only callable preferred stock can be called by the corporation.
80
#94. When comparing the IRR of two investments yielding the same amount, which provides the most value to an investor?
a) Highest IRR above “0”.
b) The higher dollar value over the term of the investment.
c) Lowest IRR as it represents the discounted value to investors.
d) The lower dollar value over the term of the investment.
A
The highest IRR (above zero) offers the most value to an investor. Zero represents breakeven and a value above zero represents value above the NPV of the amount invested.
81
#95. Net present value represents
a) The discount rate at which the net present value of all cash flows and final market value of an investment becomes zero.
b) The discounted sum of all future cash flows generated by an investment.
c) The discounted sum of all future cash flows plus the final market value.
d) The final market value of the investment, discounted by a risk-adjusted rate of return.
A
Zero is considered breakeven and a value above zero indicates value in excess of the NPV of the investment.
82
#96. Which of the following is FALSE regarding the information on the registration application of an investment adviser?
a) Only the fingerprints of the applicant’s officers are required at the time of application.
b) Investment advisers must submit information to be furnished to their clients.
c) Administrative orders and convictions must be stated on the application.
d) It must include the location and type of business.
A
The state administrator may require that fingerprints for the applicant, as well as for any partners, officers, representatives or agents, in addition to all other information that must be included on the registration application for an investment adviser.
83
#97. Which of the following does ERISA 404(c) require that plan sponsors provide to participants? I. Annual consultation with an investment adviser regarding asset allocation; II. Statement that the plan is intended to comply with ERISA section 404(c); III. 1-, 5-, and 10-year performance returns for each investment alternative; IV. Description of the risk and return characteristics of each investment alternative.
a) II and IV
b) I and II
c) I and IV
d) II and III
A
ERISA 404(c) also requires explanation of how to give instructions, disclosure of all fees and expenses, and current prospectus for each investment alternative.
84
#98. Which type of investment companies do NOT charge a management fee?
a) Closed-end investment companies
b) Face amount certificates
c) Unit Investment Trusts
d) Open-end investment companies
C
The portfolio of a Unit Investment Trust (UIT) is fixed and does not require an investment adviser. The portfolio is supervised, not managed.
85
#99. Josie made an opening purchase of 10 XYZ May 40 straddles @ $3 ($2 for the calls and $1 for the put). At May expiration, XYZ is 40. What is Josie’s profit or loss?
a) $3,000 loss
b) $40,000 profit
c) $300 loss
d) $3,000 profit
A
If XYZ is 40 at May expiration, both the May 40 puts and calls will expire worthless and Josie will lose the entire premium she paid for the straddles. $3 X 100 = $300 X 10 straddles = $3,000
86
#100. A bond is considered to be speculative (a "junk bond") when its Standard and Poor's rating is no higher than
a) C.
b) B.
c) BB.
d) BBB.
C
Bonds with a rating of BBB and higher are considered to be "investment grade," while bonds rated BB or lower are speculative or high yield, also known as junk bonds.
87
#101. Under which of the following circumstances may a state administrator cancel an investment adviser representative’s (IAR) registration? I. The IAR is deceased. II. The IAR has been found guilty of a securities related felony. III. Letters the administrator sent to the IAR are returned marked “addressed unknown” and the IAR’s phone is disconnected. IV. The IAR’s investment adviser filed Form ADV-W.
a) I and III
b) I, II and III
c) II and IV
d) I and II
A
The administrator may cancel a registered person’s registration of a person who is no longer in existence, found to be mentally incompetent or cannot be located.
88
#102. Sell an ABC May 55 call and buy an ABC May 60 call. At what market price will every dollar of loss on the 55 call be offset by a dollar of gain on the 60 call?
a) Below 55
b) 60
c) 55
d) Above 60
B
At 60, this credit spread reaches maximum loss. The gain is narrowing around 55 with a maximum loss at 60.
89
#103. What should an investor consider before establishing a 529 plan in a neighboring state?
a) Whether or not the child will attend college as the plan cannot be transferred after it is established
b) Tax consequences for establishing the plan while the child is so young
c) The possible tax consequences of investing in an out-of-state plan
d) Which university the child would have to attend based on this particular 529 plan
C
When an investor establishes a 529 plan outside of his or her state, there could be tax consequences that would make the plan less attractive, including the loss of state income tax deductions. 529 plans do not limit a student’s choice of universities. If the child for whom a 529 plan is established decides not to attend college, the beneficiary can be changed to another person in the same family. Tax consequences are of no concern since earnings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. In fact, establishing a plan when a child is very young allows funds to grow for a longer period of time.
90
#104. 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.
A
In registration by filing, issuers communicate their intention to sell securities in that state and that they meet the eligibility requirements.
91
#105. An issuer may be I. An investment adviser representative. II. A corporation. III. An agent. IV. A joint venture.
a) II and IV
b) I and II
c) I and III
d) II and III
A
Natural persons are not issuers. Partnerships, corporations, and joint ventures can all be issuers.
92
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#107. Which of the following is NOT a “qualified custodian”?
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a) Investment adviser representative
b) Registered futures commission merchants
c) Bank
d) Registered broker/dealer
A
An investment adviser representative is not a “qualified custodian.” A qualified custodian is an institution such as a bank or broker/dealer.
93
#108. Under the Uniform Securities Act, which of the following would be considered a person? I. The beneficial owner of an UGMA; II. A government; III. A joint stock company; IV. A recently deceased individual
a) I and II
b) I and IV
c) II and III
d) II and IV
C
Under the Act, a person is defined as an organization or group, as well as an individual. The definition excludes minors and deceased individuals.
94
#109. Preemptive rights allow a stockholder to
a) Purchase warrants and call options.
b) Serve as a board member.
c) Maintain proportionate interest in the company.
d) All of the above are correct.
C
Preemptive rights allow the stockholder to maintain proportionate ownership in the company by having the first opportunity to buy new shares.
95
#111. Which efficient market hypothesis rejects both technical and fundamental analysis?
a) Strong hypothesis
b) Acid test hypothesis
c) Bilateral hypothesis
d) Semi-strong hypothesis
A
The strong hypothesis disregards all information (known and unknown) about a security. It rejects both technical and fundamental analysis.
96
#112. Which of the following statements is INCORRECT in regard to broker/dealers?
a) A dealer makes a profit by charging a commission on the security transaction.
b) An agent is a broker and trades securities for a customer. As an agent, a firm does not own the security.
c) Securities firms may act in the capacity of both a principal and an agent and are referred to as broker/dealers.
d) A principal is a dealer and sells securities from its own inventory.
A
Dealers do not profit by charging a commission; they make their profit by charging markups on sales and markdowns on purchases.
97
#114. An investment adviser is NOT required to deliver a brochure when providing
a) Investment advice to an institutional investor.
b) Advice to a client when the adviser does not have custody of the client’s assets.
c) Impersonal investment advice for less than $500 per year.
d) Investment advice to an individual with a net worth in excess of $2 million.
C
Advisers are not required to deliver a brochure if they enter into a contract with an investment company or for impersonal investment advice or if an adviser charges less than $500 a year.
98
#115. Which of the following are required to open a margin account? I. Customer loan agreement; II. Margin risk disclosure; III. Margin account agreement; IV. Margin interest disclosure
a) I and III
b) I and IV
c) II and III
d) II and IV
A
The margin account agreement or hypothecation agreement must be completed prior to the first margin trade. The customer loan consent, including risk and interest charge disclosures, is completed upon opening the account.
99
#117. All of the following are differences between qualified and nonqualified retirement plans EXCEPT
a) Taxation on accumulation.
b) Taxation of withdrawals.
c) Taxation of contributions.
d) IRS approval requirements.
A
Taxation on accumulation is deferred in both types of plans. The rest of the characteristics differ.
100
#118. 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.
B
Under the USA, investment adviser advertising that violates the Investments Adviser Act of 1940 is illegal.
101
#119. Which of the following best describes the efficient market hypothesis?
a) Inefficiencies result from arbitrage opportunities.
b) Markets become more efficient over time.
c) Markets are efficient; no one can gain an advantage by using analysis or trends.
d) Inefficiencies are temporary.
C
In its purest interpretation, the efficient market hypothesis says that markets are efficient and no one can gain advantage by using analysis or trends.
102
#120. Stanley is working with a client who recently received a lump-sum settlement from an insurance company. The only thing Stanley knows at this time is the amount that the client received. Which of the following best describes a non-financial consideration that Stanley should keep in mind in making any investment recommendation?
a) The client's attitude toward money and risk
b) The timeframe that the client has for retirement
c) The client's current financial status and goals
d) The capital needs that the client is currently faced with
A
The client’s attitude is an important non-financial consideration in any investment recommendation. Economic background, attitude toward money itself, level of investment experience, and ability to endure the volatility of the marketplace will determine, to an equal degree as the amount of money the client has to invest, what types of investment are suitable for the client.
103
#121. A security in which the payment of principal, interest, and/or dividends is assured is called a(an)
a) Non-issuer transaction.
b) Non-assessable security.
c) Guaranteed security.
d) Assessable security.
C
A guaranteed security is one in which the payment of principle, interest, and/or dividends is assured.
104
#122. Technical analysis is used for which of the following for an investor?
a) Trade timing
b) Earnings per share
c) Stock selection
d) Price-earnings ratio
A
Buy/sell price and time are technically determined. Security selection, ratios, and EPS are fundamental.
105
#123. If the Federal Reserve Board switched from a tight money policy to an easy money policy, which of the following bonds would increase the most in price?
a) Short-term bonds
b) Intermediate term bonds
c) Long-term bonds
d) None of these. Easy money would cause the price to decline.
C
Switching to easy money means that money supply increases, pushing interest rates down and bond prices up. The rule of thumb here is that the bonds with the longest term to maturity (in this case, the long-term bonds) will change the most in price as measured in dollars.
106
#125. Meredith is withdrawing money from her variable life insurance policy. Meredith’s withdrawal will be treated on a
a) Weighted average assumption.
b) LIFO basis.
c) FIFO basis.
d) Exclusion ratio assumption.
C
Unlike annuities, dollars distributed from a life insurance policy prior to death are withdrawn assuming FIFO.
107
#126. When must an adviser become federally registered?
a) Advisers must be registered when assets exceed a certain amount.
b) State registration is required, but federal registration becomes an option when assets exceed a certain amount.
c) All advisers must be registered on both the state and federal levels.
d) All advisers must be registered on the federal level; state registration is optional.
A
Currently, advisers with assets in excess of $110 million are required to register at the federal level. Federal registration is the adviser’s option when assets are between $100 million and $110 million.
108
#127. Capital market theory I. Is based on the premise that capital markets are essential to economic growth. II. Blends the Keynesian and supply side economic theories. III. Adds validation to the analysis and selection of securities in a managed investment strategy. IV. Seeks to provide optimum returns as a given risk level.
a) I and III
b) I and IV
c) II and III
d) II and IV
A
Capital market theory sets the stage for investment management and adds validation to the analysis and selection of securities in a managed investment strategy. It is based on the premise that capital markets are essential to economic growth.
109
#128. On which of the following forms would a publicly held corporation file details concerning a 10% change in ownership with the SEC?
a) 8K
b) 8Q
c) 10K
d) 10Q
A
Annual information is filed on the 10K, quarterly information is filed on the 10Q, and details concerning significant changes are filed on the 8K.
110
#129. Which of the following is false regarding municipal bond taxation?
a) Capital gains from municipal bond trading are taxed at the federal level.
b) Capital gains from municipal bond trading are tax free if the investor lives in the same state as the issuer.
c) Municipal bond interest is tax free at the federal level if the investor lives in the same state as the issuer.
d) Municipal bond interest is tax free at the state level if the investor lives in the same state as the issuer.
B
Capital gains from municipal bond trading are always taxable at the federal and state level if applicable, regardless of the investor’s state of residence. Municipal bond interest is tax free at the federal level if the investor lives in the same state as the issuer and when the investor does not live in the same state as the issuer.
111
#130. Efficient market hypothesis states that
a) Transaction costs are competitive due to the volume of broker/dealers.
b) Trade costs are nominal due to automated systems and redundant information delivery.
c) Markets are efficient with respect to value and pricing.
d) Markets are efficient because of immediate information availability.
C
The efficient market theory states that markets are efficient with respect to value and pricing; all factors have been priced into the market and nobody can obtain an investing advantage because all trends and information have been factored in.
112
What is a CREDIT SPREAD?
A credit spread involves selling, or writing, a high-premium option and simultaneously buying a lower premium option. The premium received from the written option is greater than the premium paid for the long option, resulting in a premium credited into the trader or investor's account when the position is opened.
When traders or investors use a credit spread strategy, the MAX PROFIT they receive is the NET PREMIUM.
The credit spread results in a PROFIT when the options' spread NARROWS
113
What is a DEBIT SPREAD?
A debit spread—most often used by beginners to options strategies—involves buying an option with a higher premium and simultaneously selling an option with a lower premium, where the premium paid for the long option of the spread is more than the premium received from the written option.
Unlike a credit spread, a debit spread results in a premium debited, or paid, from the trader's or investor's account when the position is opened. DEBIT SPREADS are primarily used to OFFSET COSTS associated with owning LONG OPTIONS positions.
For example, a trader buys one May put option with a strike price of $20 for $5 and simultaneously sells one May put option with a strike price of $10 for $1. Therefore, he paid $4, or $400 for the trade. If the trade is out of the money, his max loss is reduced to $400, as opposed to $500 if he only bought the put option.
