Quattro

Question 1

2. 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 1

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 2

5. Money market fund returns will fluctuate in relation to the yields of

a) Passbook savings rates.
b) Treasury bills.
c) Series EE savings bonds.
d) U.S. government bonds.

Answer 2

B

The returns on money markets will fluctuate in relation to the yields of the fund’s underlying securities. Money markets invest in short term maturity securities such as Treasury bills, commercial paper, bank certificates of deposit, and banker’s acceptances. They do NOT invest in longer term U.S. government bonds nor do they invest in non-negotiable Series EE savings bonds. Passbook savings rates offered by banks on savings account deposits are unrelated to money market investment portfolios.

Question 3

6. In September, Tatum sells her stocks from air conditioning manufacturers and buys stocks of snowmobile companies. This practice is called

a) Sector rotating.
b) Trend riding.
c) Rebalancing.
d) Asset allocation.

Answer 3

A

Sector rotating involves changing portfolio investments to favored market sectors based on economic conditions, or seasonal trends. Tatum is repositioning her portfolio from a slowing sector into an accelerating one.

Question 4

7. ABC Corporation originally authorized 1 million shares and has issued 600,000 shares. ABC Corporation has decided to buy 50,000 of their shares back and place them in treasury. How many shares are currently outstanding?

a) 400,000 shares
b) 550,000 shares
c) 600,000 shares
d) 1 million shares

Answer 4

B

The formula to calculate the number of outstanding shares is as follows: Total issued shares - Treasury stock = Number of outstanding shares (or in this scenario, 600,000 - 50,000 = 550,000 outstanding shares).

Question 5

8. A broker/dealer that is making a market in a particular security is said to be acting as

a) A principal.
b) An account executive.
c) A broker.
d) An issuer.

Answer 5

A

When a firm is a market maker in a security, that firm is selling from its own account, and acting as dealer or in a principal capacity.

Question 6

10. To calculate the after-tax yield on an investment, an investor takes the return on investment and multiplies that number by the

a) Reciprocal of the investor’s tax bracket.
b) Number of years the investment was held.
c) Investor’s current tax bracket.
d) Current FED funds rate of return.

Answer 6

A

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 7

12. A self-employed attorney has earned an income of $100,000 a year and her husband earns $30,000 a year as her accountant. How much can she contribute to a spousal option IRA?

a) $4,500
b) $6,000
c) $10,000
d) $11,000

Answer 7

B

They may each contribute $6,000.

Question 8

13. Which of the following are true regarding municipal offerings? I. Revenue bonds are usually offered through competitive bidding. II. Revenue bonds are usually offered through a negotiated process. III. General obligation bonds are usually offered through competitive bidding. IV. General obligation bonds are usually offered through a negotiated process.

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

Answer 8

C

II and III are correct. A “competitive bid” process is often required for GO bonds; revenue bond issues are typically negotiated.

Question 9

14. Which of the following best describes a benchmark portfolio?

a) Benchmark portfolios have rapid turnover.
b) A benchmark portfolio measures long term growth in constant dollars.
c) It establishes a baseline for comparison.
d) It is a commonly used forecasting tool.

Answer 9

C

Benchmark portfolios, or indices, are comparison tools which measure broad or narrow market performance.

Question 10

15. 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 10

A

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

Question 11

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

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

Answer 11

A

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

Question 12

17. 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 12

B

Tax liabilities belong to the minor in a custodian account.

Question 13

19. Which of the following are true with regard to provisions under the Uniform Securities Act? I. Civil courts can impose criminal penalties. II. The Act provides for civil liabilities. III. The Act provides for criminal penalties.

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

Answer 13

C

The Act provides for civil liabilities and criminal liabilities and penalties. Civil penalties are the judgment of the civil court system.

Question 14

20. 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 14

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 15

21. 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 15

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 16

22. What is the maximum 12-b1 fee a no-load mutual fund can charge?

a) 0.25 of average net assets per quarter
b) 0.25 of average net assets per year
c) 0.50 of average net assets per year
d) Zero

Answer 16

B

The maximum 12b-1 fee a no-load mutual fund can charge is 0.25 of average net assets per year.

Question 17

24. If representatives of a federal covered adviser terminate their employment, who is required to inform the state administrator?

a) The federal covered adviser
b) The adviser representatives
c) Neither the adviser nor the representatives because the representatives are employed by a federal covered adviser
d) Both the adviser and the representatives

Answer 17

B

Because the adviser is federal covered, the adviser has no obligation to inform the state administrator. The representatives, however, are required to inform the administrator.

Question 18

25. A bond with a 6 percent coupon is trading at a discount. Based on this information an investor could reasonably expect

a) At maturity the investor will receive par value minus the amount of the discount.
b) The yield to maturity will be less than 6 percent.
c) The current yield to exceed 6 percent.
d) The interest on a $1,000 bond to be less than $6.

Answer 18

C

If the bond is trading at a discount to par it indicates that market interest rates are greater than 6 percent; therefore, the bond’s price is below par ($1,000). Because the price is now lower, the current yield has increased. Annual interest payment/current bond price = current yield.

Question 19

26. The Uniform Prudent Investor Act

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

Answer 19

B

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

Question 20

27. Which of the following is false regarding municipal bond taxation?

a) 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 taxed at the federal level.
c) Capital gains from municipal bond trading are tax free if the investor lives in the same state as the issuer.
d) Municipal bond interest is tax free at the federal level if the investor lives in the same state as the issuer.

Answer 20

C

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.

Question 21

28. Ms. Curtis is a teacher in School District #12. The value of her TSA (Tax Sheltered Annuity) is $75,000. The district has contributed $35,000 and Ms. Curtis has contributed $20,000. What is Ms. Curtis’ cost basis?

a) $0
b) $75,000
c) $35,000
d) $20,000

Answer 21

A

Ms. Curtis’ contributions were made pre-tax, as were the employer contributions. Therefore, her cost basis is zero and all withdrawals will be taxed as income.

Question 22

29. 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 22

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 23

30. An engineering report would be used for which of the following?

a) Project note
b) General obligation bond
c) Hospital revenue bond
d) School bond

Answer 23

C

An engineering report or feasibility study would only be used in the analysis of a municipal revenue bond issue. School bonds, general obligation bonds, and project notes do not require feasibility studies.

Question 24

31. During an investigation the administrator may I. Subpoena records located in other states. II. Subpoena witnesses from any states. III. Convict for fraud. IV. Revoke registration on behalf of other state administrators.

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

Answer 24

A

During an investigation the administrator can subpoena records or witnesses within or outside the state. Administrators can also provide evidence to the proper authorities to file criminal charges.

Question 25

#32. If the Federal Reserve Board through the FOMC (Federal Open Market Committee) lowers the discount rate, which of the following will decline? I. T-Bill discount rate; II. Federal Funds rate; III. Prime rate; IV. Lending levels at banks a) I and II b) I and IV c) II and III d) II and IV

Answer 25

A The T-Bill and the Fed Funds rates will decline. The prime rate may not, and lending levels increase when rates are lower.

Question 26

#34. Assuming that a bond is purchased at a discount, then a) CY is greater than YTC. b) CY is greater than YTM. c) Nominal yield, or stated rate, is less than YTC. d) Nominal yield is greater than YTC.

Answer 26

C 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.

Question 27

#35. Which of the following is not affected by the declaration of a dividend? a) Working capital b) Net worth c) Assets d) Liabilities

Answer 27

C The declaration of a dividend increases current liabilities and reduces retained earnings. There is no impact on cash (assets) until the dividend is paid. When current assets are unchanged and current liabilities increase, working capital decreases.

Question 28

#36. 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 28

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

Question 29

#37. FINRA requires which of the following persons to sign the new account form? a) Registered Representative b) Account Owner c) Approving Principal d) All of the above

Answer 29

C FINRA requires the principal who approves the account to sign the new account form. The account owner’s signature is not required by FINRA but is required by most broker/dealers.

Question 30

#38. 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) Such statements may not be made since they imply a specific performance of a security for which advice is being given. b) 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. c) The adviser has not violated any provisions of securities law as he was only stating an opinion and not giving formal advice. d) This is considered an example of an adviser doing performance research which is part of the advisory services contract.

Answer 30

A 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 31

#39. 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 31

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 32

#41. 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 32

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 33

#42. Which of the following municipal entities does NOT issue overlapping debt? a) School district b) Turnpike authority c) Park district d) Library district

Answer 33

B The turnpike authority issues self-supporting revenue debt, not general obligation.

Question 34

#43. 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

Answer 34

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.

Question 35

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

Answer 35

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

Question 36

#45. Jennifer is saving for her first home. She plans to buy in about eight years. Which of the following investments is probably most appropriate? a) Tax-free money market fund b) Money market mutual fund c) Investment grade, medium maturity corporate bonds d) Growth stocks

Answer 36

C Jennifer’s intermediate time frame is best served by high quality debt instruments. A money market mutual fund has a lower yield, and its added safety is appropriate for shorter time frames. Growth stocks are appropriate for a long time horizon of 10 years or more.

Question 37

#49. 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 37

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

Question 38

#50. An investor who wants to find background information on their Investment Adviser Representative will find it in a) The investment advisory contract. b) Form ADV Part 1. c) Form ADV Part 2B. d) Form S-1.

Answer 38

C Form ADV Part 2B is used to provide information to clients and prospects about the investment adviser representative.

Question 39

#51. An investment adviser sells a security from inventory to a customer. Which of the following statements is true? a) Principal trades between investment advisers and their customers are not permitted. b) Such trades are not permitted without prior written customer consent. c) The adviser may not charge a markdown on the customer’s subsequent sale of the security. d) The adviser may not charge a markup on such trades without prior written customer consent.

Answer 39

B An investment adviser may not execute trades from inventory (principal trades) with a customer unless it has prior written consent from that customer.

Question 40

#53. 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 40

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

Question 41

#54. Which of the following statements are true regarding surety bonds that may be required of agents, broker/dealers and investment advisers? I. They are normally only required if the registrant has custody of customer assets or discretionary authority. II. The required amount of the bond is usually $25,000. III. Bonds may not be required of investment advisers who meet minimum net worth requirements. IV. A cash or security deposit may be required in addition to the bond. a) I and II b) I and III c) II and III d) II and IV

Answer 41

B Bonds are usually in the amount of $35,000. A cash or security deposit may be accepted instead of a bond, not required in addition to a bond.

Question 42

#55. 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.

Answer 42

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.

Question 43

#56. 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 43

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 44

#57. 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.

Answer 44

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.

Question 45

#58. 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 45

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 46

#59. 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 46

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 47

#60. 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 current financial status and goals b) The capital needs that the client is currently faced with c) The client's attitude toward money and risk d) The timeframe that the client has for retirement

Answer 47

C 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.

Question 48

#61. 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.

Answer 48

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.

Question 49

#62. Concerning minimum net worth requirements, which of the following is true? I. They are generally required when a broker/dealer may have custody of client assets or discretion over their accounts. II. A deposit of cash or securities may be accepted in lieu of the net capital requirement. III. Net capital requirements are normally higher for investment advisers who have custody of client assets. a) I and II b) I and III c) II and III d) I, II and III

Answer 49

B An appropriate deposit of cash or securities may be accepted in lieu of a surety bond but does not satisfy the net worth requirement.

Question 50

#63. 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

Answer 50

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.

Question 51

#64. What qualifies an individual to contribute to an IRA? a) Earned income b) Any income c) Investment income d) Retirement income

Answer 51

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.

Question 52

#65. The portfolio management style of selecting carefully chosen proportions of different assets and periodically adjusting the portfolio to maintain those proportions is a) Asset allocation. b) Index management. c) Sharpe Ratio management. d) Passive management.

Answer 52

A Strategic asset allocation is the practice of allocating a portfolio’s funds among different asset classes and periodically rebalancing to compensate for uneven asset class performance and maintain the original allocation.

Question 53

#66. 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 53

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

Question 54

#67. 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

Answer 54

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.

Question 55

#69. Which of the following is not a reason for changing asset allocation? a) A change in risk tolerance b) A change in income needs c) A change in commission rates d) A change in time horizon

Answer 55

C Changing commission structures might justify changing products or changing broker/dealers but has nothing to do with the investor’s asset allocation model.

Question 56

#70. What is the penalty for excess contributions to an IRA? a) 4% b) 6% c) 10% d) 15%

Answer 56

B An individual can contribute 100% of earned income up to a specified amount (currently $6,000). The excess contribution penalty for traditional IRAs is 6%.

Question 57

#71. An investment adviser is EXEMPT from registration under which of the following conditions? a) The adviser has no place of business in the state and its only clients are institutional investors. b) The adviser has an office in the state and its only clients are employee benefit plans (with assets of at least $5 million). c) The adviser deals with 15 or fewer clients in 12 months. d) Fewer than 10% of the adviser's clients are other investment advisers or investment companies.

Answer 57

A An investment adviser is exempt from registration if the following conditions exist: the adviser has no place of business in the state, and its only clients are other investment advisers, broker/dealers, banks, trust companies and other financial institutions, insurance companies, investment companies, employee benefit plans (with assets of at least $1 million), or government agencies.

Question 58

#73. Which of the following are issued with a specified, fixed rate of interest? a) U.S. government bonds and notes b) U.S. government bills and notes c) U.S. government bills and bonds d) All of the above

Answer 58

A Treasury notes and Treasury bonds are issued with specified or fixed interest rates. Treasury bills are OIDs; they are always purchased at discount. T-Notes and T-Bonds can be purchased at a discount and/or a premium in the secondary market.

Question 59

#74. Which best describes the Federal Funds Rate? a) Daily average rate of largest central banks b) Daily average rate of reserve member banks c) Weekly average rate of reserve banks d) Weekly average rate of yield auctions of member banks

Answer 59

B The Federal Funds Rate is overnight (daily) borrowings by Fed reserve member banks.

Question 60

#75. Which of the following are true regarding demand deposits? I. The owner has the right to receive the funds immediately upon demand II. The owner may only receive the funds according to the terms of the account III. Demand deposits are part of the M1 money supply IV. Demand deposits include FRB member overnight loans a) I and III b) I and IV c) II and III d) II and IV

Answer 60

A Time deposits allow the owner to receive the funds only according to the account terms. FRB member overnight loans are not part of the M1 money supply.

Question 61

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

Answer 61

B 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

#77. Which of the following is false regarding demand deposits? a) They allow the owner to receive the funds immediately upon demand. b) They include checking accounts and NOW accounts. c) They include fed funds and repos. d) They are a component of the M1 measure of the money supply.

Answer 62

C Fed funds and repos are not demand deposits.

Question 63

#78. 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

Answer 63

A Employee stock options are long-term incentives granted to employees or important nonemployees.

Question 64

#79. If two securities have a correlation coefficient of 0, the securities prices would a) Be moving in the same direction. b) Be moving in opposite directions. c) Be moving independent from each other. d) Not be moving at all.

Answer 64

C If the correlation coefficient is 0, then the two securities would have no correlation to each other as far as their price movement.

Question 65

#80. Which of the following is true regarding an insurance company’s general account? a) Because it is conservatively invested, all investment risk is assumed by the investor. b) Though it is invested primarily in equities, by law it may not deal in options or margin trading. c) It is conservatively invested because it holds assets associated with guaranteed insurance products. d) It holds assets invested in products that require insurance and securities licensing of representatives that sell them.

Answer 65

C Because the general account is invested to guarantee products such as whole life policies and fixed annuities, it is typically invested conservatively in long-term debt. A securities license is not required to sell guaranteed products.

Question 66

#81. 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 66

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

Question 67

#84. Which of the following is NOT considered a security? a) Mutual fund portfolio b) An endowment policy c) Commodity options contract d) Merchandise marketing scheme

Answer 67

B Fixed life insurance contracts, including endowment policies, are not considered securities. Option contracts are always considered a security, and merchandise marketing schemes have been defined as a form of “investment contract,” where money is invested in a common enterprise with expectation of profit primarily from the efforts of others.

Question 68

#86. Which of the following persons must register with a state as an investment adviser representative? a) An individual employed by an investment adviser to solicit advisory customers who does not give investment advice b) An attorney who writes investment advisory contracts for an investment adviser c) An agent with discretionary authority over a customer account d) An agent who gives investment advice that is incidental to his business

Answer 68

A Someone who solicits, offers, or negotiates the sale of investment advisory services for an investment adviser is included in the definition of investment adviser representative and must register.

Question 69

#87. 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.

Answer 69

B As defined by the Act of 1940, hedge funds are limited partnerships and not mutual funds.

Question 70

#88. An investor doubles her money by selling a security which she owned for eleven months. She will be a) Exempt from tax if she donates the proceeds to a nonprofit organization. b) Taxed at her ordinary income tax rate. c) Exempt from tax if this was a municipal bond. d) Taxed at a preferential capital gains rate.

Answer 70

B Because she held the investment for 1 year or less, the gain is short term, subject to tax at ordinary income rates.

Question 71

Ted is 39 years old and has been investing in mutual funds for his retirement since college. Ted is reviewing the performance of the equity funds in his investment portfolio. He is frustrated because the funds' investment advisers don’t seem to consistently achieve the returns that Ted sees forecast in the monthly business reports he follows. Which of the following actions would you recommend to Ted? Dollar cost average to achieve a lower cost Consider diversifying into limited partnerships Consider index funds Liquidate his equity funds and purchase bond funds

Answer 71

C The client's concern that a portfolio manager cannot consistently match or outperform market returns can be eliminated by investing in index funds. An index fund will consistently mirror the performance of a given market index. Bond funds are not the most suitable choice for this client, since he has a long-term goal (retirement). Dollar cost averaging does not eliminate the risk of portfolio manager performance. Limited partnerships are suitable for tax relief on passive income, not retirement saving.

Question 72

#90. Mortgage-backed issues are considered to be safe instruments. Which statement is INCORRECT concerning these securities? a) GNMA, FNMA (Fannie Mae), and FHLMC (Freddie Mac) will all hold FHA and VA loans in their portfolios. b) GNMA, FNMA, and FHLMC are all fully backed by the federal government. c) Interest received is subject to federal, state and local taxation. d) GNMA (Ginnie Mae) is a government-owned corporation.

Answer 72

B Only GNMA is fully backed by the full faith and credit of the U.S government guaranteed agency. FNMA and FHLMC are government-sponsored enterprises that may borrow from the Treasury.

Question 73

#91. 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 73

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 74

#92. 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.

Answer 74

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.

Question 75

#93. Efficient market hypothesis states that a) Trade costs are nominal due to automated systems and redundant information delivery. b) Markets are efficient with respect to value and pricing. c) Markets are efficient because of immediate information availability. d) Transaction costs are competitive due to the volume of broker/dealers.

Answer 75

B 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.

Question 76

#95. 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

Answer 76

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.

Question 77

#98. Which type of stock will generally pay little or no dividends? a) Growth stock b) Blue chip stock c) Income stock d) Cyclical stock

Answer 77

A Growth companies generally retain all or most of their earnings for research and expansion and therefore pay little or no dividends to shareholders.

Question 78

#99. 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.

Answer 78

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.

Question 79

#100. In accordance with the Uniform Gifts to Minors Act, a donor may a) Give cash gifts up to $15,000 annually. b) Give an unlimited amount of cash. c) Include the value of collectibles in the account. d) Only revoke gifts of cash.

Answer 79

B There are no restrictions on the amount of cash that may be given to a minor under the Act; however, gift taxes may apply. All gifts are irrevocable.

Question 80

#101. 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 positive. b) The yield curve is normal. c) The yield curve is inverted. d) The yield curve is bell-shaped.

Answer 80

C 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 81

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

Answer 81

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

Question 82

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

Answer 82

B 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 83

#104. 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 83

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

Question 84

#105. A corporation's capitalization consists of: Debenture - 7% - $1,000 par, maturity 2022: $4,000,000; Common stock - $1 par, 200,000 shares outstanding: $200,000; Capital in excess of par: $800,000; Retained earnings: $5,000,000. The corporation, for the current year, earns $1,500,000 before interest and taxes. The corporation is in the 50% tax bracket. What are the company's earnings per share? a) $0.25 b) $3.05 c) $3.75 d) $7.50

Answer 84

B Corporate profit of $1,500,000 minus $280,000 interest (7% X 4 million) = $1,220,000 X 50% = $610,000 divided by 200,000 shares = $3.05.

Question 85

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

Answer 85

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

Question 86

#109. Which type of mutual fund may be heavily invested in companies of cutting-edge industries or start-up companies with unproven earnings? a) Growth and income fund b) Income fund c) Aggressive growth fund d) Growth fund

Answer 86

C This is the basic definition and objective of an aggressive growth fund.

Question 87

#110. IRA contributions a) Are restricted only to individuals not covered by a qualified employer plan. b) Must be made in cash. c) Are available to anyone. d) May be made with securities.

Answer 87

B IRA contributions are limited to cash. The cash can then be used to purchase securities in the account. Individuals covered by qualified employer plans may also make IRA contributions but may be limited to after-tax dollars. Only persons with earned income and nonworking spouses of persons with earned income may make IRA contributions.

Question 88

#112. Reported total return figures on a mutual fund a) Reflects only the change in value of a share from the beginning to the end of the reporting period. b) Considers reinvested distributions as well as share appreciation/depreciation. c) Per SEC rules, must reflect actual inflation during the reporting period. d) Correlate to an investor’s actual ending account value only if the investor had been taking distributions in cash and was in the 28 percent tax bracket.

Answer 88

B To facilitate its use in comparing the performance of various investments, total return assumes reinvestment of all distributions and the effect of actual changes in share values during the period. It does not include the effect of taxes or inflation.

Question 89

#113. An investor buys 200 shares of ABC at 36 and 2 May 35 puts for $2.50. ABC falls to 30 and the investor exercises the puts. What is the gain or loss? a) Loss of $150 b) Loss of $350 c) Loss of $700 d) Gain of $350

Answer 89

C The investor lost $700. The investor bought stock at $36, and when the puts were exercised, the stock was sold at 35 for a $200 loss plus and the cost of the premium paid for the puts ($2.50 X 100 = $250 X 2 contracts= $500).

Question 90

#114. 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) Sole proprietorship. b) General partnership. c) Corporation. d) Limited partnership.

Answer 90

A 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.

Question 91

#115. All of the following are used to properly evaluate the yield-to-maturity of a bond investment EXCEPT a) Number of years to maturity. b) Par value realized at maturity. c) Current price of the bond. d) Annual interest paid in dollars.

Answer 91

C The factors taken into account when calculating yield-to-maturity of a bond are annual coupon payment in dollars; number of years to maturity; par (or face) value realized at maturity; initial price paid. The current price of the bond is not taken into account.

Question 92

#116. 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 92

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 93

#117. Which of the following statements is FALSE with respect to value mutual funds? a) They utilize a "buy and hold" strategy for the underlying securities. b) They tend to under-perform during a general market advance. c) They hold growth stocks and bonds that are deemed to be undervalued in price. d) They tend to out-perform the overall market in a general market decline.

Answer 93

C Value funds primarily hold value stocks that are deemed to be undervalued in price for any number of reasons and thus have significant upside potential. However these funds do not hold bonds.

Question 94

#118. A broker/dealer that has no office in a state is not required to register to conduct business with which of the following? a) Corporations b) Prospective clients who are nonresidents of the state c) Banks d) Wealthy individuals

Answer 94

C 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 95

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

Answer 95

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

Question 96

#121. An investor is considering a municipal bond yielding 3%. The investor is in the 35% tax bracket. To purchase a comparable corporate bond, the investor would demand a yield of at least a) 2.89 %. b) 4.62 %. c) 4.98 %. d) 5.02 %.

Answer 96

B To achieve an after tax yield of 3%, a corporate bond must yield at least 4.62 % for an investor in the 35 % tax bracket. The formula to convert a tax-free yield into a taxable yield is tax-free yield/(100% - tax rate %) .03 / .65 = 4.62%.

Question 97

#122. The following securities would be exempt from registration under the Uniform Securities Act EXCEPT a) Railroad stocks. b) Foreign government bonds. c) Foreign company stocks. d) Municipal bonds.

Answer 97

C Foreign and domestic government securities (bonds and government debt instruments) are exempt, but foreign common stocks are not-exempt and require registration. Railroad stocks are exempt because they are issues of companies regulated by the Interstate Commerce Commission.

Question 98

#123. 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

Answer 98

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.

Question 99

#124. The equation for outstanding stock is a) Issued shares minus treasury stock. b) Authorized shares minus treasury stock. c) Issued shares minus unissued shares. d) Authorized shares minus unissued shares.

Answer 99

A 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 100

#125. Which of the following is not a security? a) Collateralized Mortgage Obligation b) Fixed annuity contract c) Whiskey warehouse receipt d) Partnership subscription agreement

Answer 100

B A fixed annuity contract is not defined as a security since the owner does not bear the investment risk in the contract. The insurance company assumes the risk.

Question 101

#126. 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 101

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 102

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

Answer 102

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

Question 103

#129. Which of the following are characteristics of TIPS? I. Fluctuating interest rate; II. Fixed interest rate; III. Fluctuating principal; IV. Fixed principal a) I and III b) I and IV c) II and III d) II and IV

Answer 103

C TIPS have a CPI-adjusted, fluctuating principal and a fixed interest rate. Because this fixed rate is applied to a fluctuating principal each semiannual interest period, the interest payment fluctuates.

Question 104

#130. The benchmark index for ABC mutual fund is the S & P 500. The S & P 500 returned 5%, ABC mutual fund returned 7% and the beta is 1.2. The alpha of the ABC mutual fund is a) 1. b) 2. c) 4.8. d) 5.8.

Answer 104

A 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: .05 x 1.2 = 6%, 7% - 6% = 1.