Test Time 26th Flashcards by Carl Ton

1. When an agent of a broker/dealer files for state registration, the agent’s registration

a) Becomes effective in 60 days.
b) Becomes effective in 30 days, unless the state administrator approves the registration earlier.
c) Becomes effective in 60 days, unless the state administrator notifies the broker/dealer that it is effective earlier.
d) Is effective immediately.

When an agent applies for registration in a particular state, the registration becomes effective 30 days later unless the broker/dealer receives notification from the administrator that the agent is properly registered within the state before the 30-day period has elapsed. The administrator will contact the broker/dealer and not the agent directly.

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2. 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.

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.

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4. A “buy and hold” approach to portfolio management could be expected to do which of the following?

a) Result in a lower portfolio turnover rate than alternative portfolio management styles.
b) Have lower management expense but yield inferior overall performance over the long term.
c) Minimize the potential for loss due to a much lower portfolio turnover rate.
d) More closely mirror the performance of the overall stock market.

A passive investment style minimizes overall expenses due to reduced trading and research costs. A “buy and hold” management style does not necessarily produce performance results different than an “active” style or that the overall market would experience. It does, however, reduce portfolio turnover, which may result in lower management expense.

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5. 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

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.”

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8. Which is true of restricted stock? I. The purchase must be paid for in entirety. II. It must be held for 2 years before resale. III. A broker/dealer can act as an agent. IV. Shares are registered with the SEC.

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

If a selling company is subject to the SEC reporting requirements, the securities must be held at least 6 months. Otherwise, they must be held at least 1 year. The holding period begins when the securities are bought and fully paid for. A broker/dealer can act as an agent, but restricted stock is not registered with SEC.

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9. Which type of mutual fund may be heavily invested in companies of cutting-edge industries or start-up companies with unproven earnings?

a) Aggressive growth fund
b) Growth fund
c) Growth and income fund
d) Income fund

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

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10. Which of the following is not a characteristic of tactical portfolio management?

a) Dividing funds among different asset classes
b) Market timing
c) Active management focused on short term results
d) Identifying industry sector cycles

Dividing funds among different asset classes is strategic asset allocation.

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11. 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

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.

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12. All of the following are agency issues backed by government-guaranteed or insured mortgages, EXCEPT

a) SLMA.
b) FNMA.
c) GNMA.
d) Federal Home Loan.

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

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13. Any adviser that wants to exercise discretionary authority over a client’s account must do which of the following? I. Have written authorization from the client. II. Have approval to exercise such control by the administrator. III. File a Form ADV with the Securities Administrator. IV. Post a bond in the amount of the client’s account value.

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

Any investment adviser that wishes to exercise discretionary authority over a client’s account must have authorization from the owner of that account, approval for such authority from the broker/dealer (not the administrator), and file a Form ADV for the account with the Securities Administrator.

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14. 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

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.)

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16. 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

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.

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18. Which of the following statements regarding diversification is false?

a) Diversification reduces selection risk.
b) Asset allocation involves diversification.
c) Diversification reduces system risk.
d) A portfolio should be diversified between and among asset classes.

Diversification does not reduce market, or system risk. If the entire market declines, even a diversified portfolio declines.

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19. Which of the following statements is true about tax-qualified annuities?

a) They must meet IRS requirements.
b) Employee contributions are not tax deductible.
c) They can discriminate.
d) Withdrawals are not taxed.

In qualified annuities, IRS approval is required; contributions are tax deductible; accumulations are tax-deferred and withdrawals are taxed. Qualified annuities cannot discriminate among policyowners.

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20. Alternative investments are investments that

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

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

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21. The shareholders of a mutual fund have certain rights associated with the ownership interests they hold in the company. These rights include all of the following EXCEPT

a) Approval authority for the company’s annual report.
b) Approval of investment advisory agreement.
c) Voting rights/proxy rights regarding company issues.
d) Election of board.

Mutual fund shareholders have the right to receive annual/semiannual reports; however, the company itself has approval authority for its publication. Additionally, the shareholders and the board of directors must approve all of the expenses for the operation of the mutual fund.

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22. Which of the following is true regarding an insurance company’s general account?

a) Though it is invested primarily in equities, by law it may not deal in options or margin trading.
b) It is conservatively invested because it holds assets associated with guaranteed insurance products.
c) It holds assets invested in products that require insurance and securities licensing of representatives that sell them.
d) Because it is conservatively invested, all investment risk is assumed by the investor.

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.

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23. If a stop order for a registration statement is issued by the Administrator, the registrant is entitled to have the matter set before a hearing within how many days of written request to the Administrator?

a) 5 days
b) 15 days
c) 30 days
d) 90 days

The registrant is allowed to have the matter set before a hearing within 15 days of written request to the Administrator.

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24. A Canadian broker/dealer has customers who winter in Florida and Texas. Which of the following is true?

a) Both the broker/dealer and its agents who service the customers must be registered in Florida and Texas.
b) If the broker/dealer has no office in Texas or Florida, it does not have to register in those states to transact business with its existing customers.
c) The broker/dealer but not the agent must register in those states.
d) The agent but not the broker/dealer must register in those states.

When a broker/dealer from Canada or another qualifying foreign country with no place of business in the United States has an existing customer who is only temporarily in the United States, neither the broker/dealer nor its agent must register in the United States to transact business with that existing customer or customers. The broker/dealer or its agents may not, however, solicit new business with U.S. citizens without proper registration.

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26. If an agent commits a violation of the Act, civil liabilities may be applied to the broker/dealer under what conditions?

a) If the broker/dealer, in the exercise of reasonable care, should have been aware of the action.
b) Never. The broker/dealer may only be held liable in cases of criminal liability.
c) Civil liabilities may not be applied to violations of the Uniform Securities Act.
d) Only if the agent’s manager knew of the action and did not act to prevent it.

For violations of the act without willful intent, civil liabilities may apply to the person committing the violation as well as to “controlling persons” if, in the exercise of reasonable care, the controlling person should have been aware of the action.

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28. A U.S. government bond quoted at 108.06 - 109.09 has an asking price of

a) $108.60.
b) $1,081.88.
c) $1,092.81.
d) $1,099.00.

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

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29. A mutual fund pays a 5 percent dividend during the year and pays a 5 percent realized capital gain at the end of the same year. What is the Total Return for the year?

a) 5% percent
b) 7.5% percent
c) 10% percent
d) None

The Total Return is the cumulative return for the period. Therefore, 5 percent dividend plus 5 percent capital gain = 10 percent.

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30. An investor bought 100 shares of XYZ stock at $55 in January of 20XX. Today, with the stock trading at $75, the investor donated it to a charitable institution. What are the tax consequences of this gift?

a) A $5,500 deduction is allowed.
b) A $7,500 deduction is allowed.
c) The investor must pay a gift tax.
d) No deduction is allowed.

The value of a charitable gift that is deductible by the donor is the appreciated value of the securities.

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31. Frederick sells a municipal bond at 103 which he held for 13 months. He originally purchased the bond at 101. What is the consequence of this sale?

a) $20 gain is taxed at Frederick’s top marginal rate.
b) The gain is taxed at 15%.
c) The gain is an AMT preference item.
d) The gain is tax-free at the federal level and maybe at the state level.

Because Frederick held the bond for more than one year, he experiences a long-term capital gain, taxed at 15%. Only municipal bond interest is tax-free; capital gains are taxed. IDR interest is an AMT preference item.

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#32. 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

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

#33. An employee quits her job where she has a balance of $10,000 in her employer-provided qualified plan. If she requests that the plan distribution is paid to her so that she can roll the proceeds into an IRA, how much will she receive from the plan administrator, and how long does she have to complete the tax-free rollover? a) $8,000, 30 days b) $8,000, 60 days c) $10,000, 30 days d) $10,000, 60 days

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

#34. An agent was found guilty of a criminal liability; however, he also proved he had no prior knowledge of the rule. What are his maximum penalties? a) $5,000 fine b) 3 years in prison c) 5 years in prison d) $10,000 fine

A There can be a $5,000 fine but no prison sentence if the agent proves he has no prior knowledge of the rule that was violated.

#35. A client purchases 100 XYZ at 47 and later writes a Nov 50 call at 4. The client will break even when the underlying stock is at a) $40. b) $43. c) $51. d) $54.

B Price paid for stock $47 - $4 premium received = $43.

#36. 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.

#37. ABC broker/dealer bought DEF stock at 35 for its inventory position. Three months later, when the inter-dealer market for DEF was 32.50 - 33.25, the broker/dealer sold DEF stock to a customer from the inventory. What was the basis for the dealer's markup? a) 32.50 b) 33.25 c) 35 d) 36

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

#39. An investor buys one DEF May 60 call for a premium of 6 and sells one DEF May 70 call for a premium of 3. The investor will break even at expiration of LDEF if trading at which of the following prices? a) $60 b) $63 c) $66 d) $67

B Premium = -6 + 3 = -3 Market = -60 (call = right to buy) = 63

#41. When a brokerage firm is acting as a dealer, it is acting in the capacity of a/an a) Fiduciary. b) Broker. c) Principal. d) Agent.

C As a dealer, a firm is acting as a principal while buying and selling securities for its own account.

#42. 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

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.

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

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

#44. Which of the following are NOT required to file an annual report with the SEC? a) Publicly held corporations b) Privately held corporations c) Broker/dealers engaging in interstate business d) National securities exchanges

B Privately held companies are not required to file information with the SEC for public distribution.

#45. Which of the following best fits the definition of an "issuer"? a) A person proposing to issue a security b) A market maker in an over-the-counter security c) A company director selling new shares to the public d) A trader on a national exchange floor

A An "issuer" is defined as a person who issues or proposes to issue a security.

#46. 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.

#47. Sunny Sails is currently trading at 12.50-14.25. Sunny Sails is probably a) A load mutual fund. b) A regional OTC security. c) A limited partnership. d) An exchange-traded security.

B A thinly traded security, such as a small OTC security, typically has a wide spread between the bid and offer. Securities with a narrow spread are usually widely traded, most likely on an exchange or on NASDAQ. Limited partnerships are illiquid, are sold through a subscription agreement, and do not have a market quote expressed as a bid/ask. Mutual funds are purchased directly from the fund at the POP and are redeemed by the fund at the NAV.

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

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

#49. 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

B They may each contribute $6,000.

#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.

#53. If a customer is short a stock, which of the following would lower risk and increase income? a) Buy puts b) Buy calls c) Sell puts d) Sell calls

C A short stock position is bearish. You would sell puts, which is bullish and would give a partial hedge and income.

#55. Mr. & Mrs. Hardy want to contribute into their IRAs. Mr. Hardy earns $35,000 a year as an employee of XYZ Insurance Company. Mrs. Hardy is currently not working. What is the maximum they can currently contribute into their IRAs? a) $12,000, with not more than $6,000 for Mr. Hardy and $6,000 for Mrs. Hardy b) $12,000, with any combination of contributions by the 2 of them c) $12,000 only for Mr. Hardy d) $12,000 into one account

A The maximum amount an individual can contribute annually to an IRA is up to 100% of earned income not to exceed $6,000. Married couples can contribute a total of $12,000 split between two accounts, even if one spouse is not working.

#56. Retirement account rollovers must be completed within a) 20 days. b) 30 days. c) 60 days. d) 90 days.

C Rollovers are subject to 20% withholding and must be completed within 60 days, or they are classified as permanent withdrawals, and income taxes apply. Only one rollover per year is permitted. There is no annual limit on custodian-to-custodian transfers.

#57. All of the following employees of a broker/dealer are considered an agent under the Uniform Securities Act (USA) with the EXCEPTION of a person who a) Transacts business only in exempt securities. b) Transacts business only in nonexempt securities. c) Gives securities quotations over the phone. d) Performs the function of accepting customer orders.

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

#58. A technical analyst would be most interested in which indicator? a) 200-day moving average b) Price earnings ratio c) Current ratio d) Quick ratio

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

#59. A client is planning on retiring in the next 2 years. His current investments consist of equity funds. For increased retirement income, he should begin to move his investments from equity funds to an a) Value fund. b) Blend fund. c) Income fund. d) Money market fund.

C The income fund will most likely provide the investor with the highest income of these choices. Income funds invest in blue chip and other dividend-paying stocks.

#61. A customer buys one ABC Mar 110 put at 8 and sells one ABC Mar 100 put at 1. Which two of the following describe the spread? I. Credit; II. Debit; III. Bearish; IV. Bullish a) I and II b) I and IV c) II and III d) II and IV

C Long at the higher strike price indicates debit put spread, which is bearish.

#63. How often does a mutual fund calculate NAV? a) Daily b) As stipulated in the prospectus c) Hourly d) Weekly, as stipulated in the statement of additional information

A A mutual fund calculates NAV at least daily at the close of NYSE trading.

#64. Which type of investment companies do NOT charge a management fee? a) Face amount certificates b) Unit Investment Trusts c) Open-end investment companies d) Closed-end investment companies

B The portfolio of a Unit Investment Trust (UIT) is fixed and does not require an investment adviser. The portfolio is supervised, not managed.

#66. Which of the following is subject to current taxation? a) Keogh plan b) Incentive stock option plan c) Employee stock option plan d) Individual retirement account

C Unlike an incentive stock option plan, an ESOP is a nonqualified stock option plan. Therefore, the difference between the stock option price and the stock’s current market price at exercise is considered taxable income.

#67. Which of the following transactions requires for an individual to be registered as an agent? a) A CFO issuing company stock for the company pension plan and is not compensated for the transaction b) A city employee initiating a municipal bonds transaction with an underwriter on behalf of the city c) An agent of a broker/dealer selling U.S. Treasury Bills to a money manager d) A bank officer selling bank shares to an institutional investor

C Broker/dealer representatives are required to be registered to sell securities even when the securities are exempt. The other individuals are exempt from registration as an agent because they represent the issuer in exempt securities or exempt transactions.

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

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

#69. A securities registration contains misstatements of material facts. All of the following may be held responsible for this violation of the Uniform Securities Act (USA) EXCEPT a) Directors of issuers. b) Agents. c) Underwriters. d) Issuers.

B Agents are not involved in securities registrations and therefore cannot be held responsible for this violation.

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

#71. 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.

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

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

#73. When an agent terminates an association with a broker/dealer a) The firm must notify the State Administrator within 30 days. b) The agent must promptly submit a revised U-4 form to the Administrator unless he or she is associating with another registered broker/dealer firm. c) The broker/dealer and agent must promptly file a notice of termination with the Administrator. d) Both the agent and the firm must promptly notify FINRA unless the agent is moving from one broker/dealer to another, in which case the agent, the prior employer and the new employer must notify FINRA.

C When an agent terminates employment, both the agent and the firm must promptly notify the Administrator.

#74. A broker/dealer charged a commission on a trade. The broker/dealer acted I. As broker. II. As dealer. III. In a principal capacity. IV. In an agent capacity. a) I and II b) I and IV c) II and III d) II and IV

B Alternately, when a broker/dealer asks as dealer in a principal capacity, it charges a markup or markdown.

#77. What is the most commonly used FRB tool? a) Fed funds rate b) FOMC c) Reserve requirement d) Discount window

B The Federal Open Market Committee meets approximately once a month and usually buys or sells treasury securities in the secondary market afterward. Because the reserve requirement is the most powerful FRB tool, it is least often used. FRB member banks borrow at the discount window from the central Federal Reserve Bank in New York. The fed funds interest rate is the rate FRB member banks charge each other for overnight loans.

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

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

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

A 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.

#80. Which of the following statements are true regarding asset allocation? I. As investors approach their goal, they typically adjust their allocation. II. Different allocations are appropriate for different time horizons. III. Sector performance differences have no effect on allocation. IV. Once an allocation is chosen, it does not require adjustment. a) I and II b) II and III c) II and IV d) III and IV

A As investors approach their goal, their time horizon changes, which generally necessitates an allocation change. Time horizon is an important factor in selecting an appropriate allocation. Because of differing market sector performance, the portfolio requires regular rebalancing to maintain allocation. An investor’s allocation should be periodically reconsidered and adjusted. This is often done annually.

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

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

#82. 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.

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.

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

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

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

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

#85. All of following are characteristics of high frequency trading EXCEPT a) Has high portfolio turnover. b) Utilizes electronic trading tools. c) Requires a Series 66 registration. d) Looks at algorithmic trading patterns.

C High frequency traders are not required to take a Series 65 or 66 examination to trade. They do, however, have high portfolio turnover, use algorithmic trading patterns, and utilizes electronic trading tools.

#87. 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

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.

#88. 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) $20,000 b) $0 c) $75,000 d) $35,000

B 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.

#89. A mutual fund's redemption fee is based on the a) Offering price. b) Net asset value. c) Net asset value plus the sales charge. d) Offering price less the sales charge.

B Mutual funds redeem at net asset value (NAV). If there is a redemption fee, the funds would redeem at NAV minus the redemption fee.

#90. Which Administrator has jurisdiction if a violation of the Act has occurred? I. The state where the customer resides; II. The state where the agent's office is located; III. The state where the transaction occurred, regardless of where the customer resides or where the agent is registered a) II and III b) III only c) I and II d) I and III

B An Administrator has jurisdiction over any transaction that has occurred in his state.

#91. 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.

#92. 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

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

#94. 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.

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

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

#96. 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.

#97. 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 IRA and Roth IRA will be subject to taxation before his daughter receives them. b) Stanley’s wife and daughter will each pay taxes on the assets that she receives. c) All assets are taxed before they are distributed to Stanley’s wife and daughter. d) Stanley’s daughter will pay taxes on the IRA but not the Roth IRA.

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

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

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

#99. 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.

#101. A person may appeal an administrative order within what time period after the entry of the order? a) 30 days b) 60 days c) 90 days d) 1 year

B Any person may obtain a review of the Administrative order by filing a written petition asking the court to set aside the order within 60 days after the order was entered.

#103. 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

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

#104. A Canadian broker/dealer has a client who relocated to California. The client has a tax-qualified account. To transact business in California, the broker/dealer must meet which of the following requirements? I. Register with the SEC, FINRA and the California state administrator; II. Be in good standing with Canadian SROs; III. Submit a Consent to Process to the California State Administrator; IV. Only transact business in the client’s tax-qualified account. a) II and IV b) II, III and IV c) I, II and III d) I and IV

B Canadian broker/dealers in good standing with Canadian SROs may transact business with clients who relocate to the United States in tax-qualified accounts ONLY. They are not required to register; but must submit a Consent to Process to the state administrator. If the customer opens a taxable account, the Canadian broker/dealer must register with the state in which the customer resides.

#105. Randy is a broker who enjoys doing investment research much more than prospecting for sales. His friend Andy is just the opposite as he loves talking to new people and hates numbers. They have agreed that Randy will do all the research work if Andy will send sales Randy’s way when possible. Which of the following is true regarding this relationship? a) This is considered a soft dollar alliance and must be monitored periodically to avoid the potential for conflicts of interest. b) Randy must file a Form AD-1 with his broker/dealer listing Andy as his advisory partner for the “mated” transactions. c) Such a relationship must be tied to a written contract between the broker/dealer and the advisory firm involved and must be binding for all transactions. d) This form of alliance is considered a unilateral agreement since the broker must rely on the adviser’s goodwill to secure any future compensation.

A Since this is a soft dollar alliance, the risk of a conflict of interest is inherent regardless of the parties involved and must be monitored for such.

#106. 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.

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.

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

A 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.

#109. 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

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.

#110. Which of the following would most distinguish a growth from a value stock? a) IRR b) NPV c) P/E ratio d) Sharpe Ratio

C Growth stocks have high, and value stocks have low P/E and price-to-book ratios. The Sharpe Ratio compares return to risk. Internal rate of return quantifies the value of an investment by factoring the total of all cash inflows and outflows and their timing, discounted to a required rate of return. Net present value is the discounted rate at which the net present value of all cash flows and final market value of an investment becomes zero.

#112. 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.

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

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%.

#115. 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

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.

#116. Which of the following statements regarding standard deviation is true? a) Standard deviation finds the most frequently occurring number in a range. b) A smaller standard deviation indicates less risk. c) Larger standard deviation indicates less risk. d) Standard deviation includes range.

B Since standard deviation measures variance from an average outcome, it is a risk measure of achieving an outcome which differs greatly from the average outcome.

#117. 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.

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.

#118. 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.

#122. When does the Administrator have the right to subpoena the records of an agent or broker/dealer? a) If there is suspicion that a violation has occurred b) Only upon the receipt of written customer complaints c) Only if criminal charges are being filed d) After a violation has occurred

A The Administrator has subpoena rights of records if there is any suspicion that a violation has occurred. This is the most correct answer of the choices given.

The Administrator has subpoena rights of records if there is any suspicion that a violation has occurred. This is the most correct answer of the choices given.

If the correlation coefficient is (-1), it would be that the securities are moving in opposite directions. For example, if one security was up by 1%, the other security would be down by 1%.

#124. Which of the following is true regarding estate taxes? a) All assets not passed on to a spouse are subject to estate taxes b) IRAs are not taxed as part of an estate. c) Real estate is excluded from estate taxes. d) Estates are taxed at preferential capital gains rates.

A Any assets left to a spouse or left to charity are not subject to estate tax until the spouse also dies.

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

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

#126. Adjusting a portfolio to adapt to a seasonal market trend is an example of a) Tactical management. b) Contrarian management. c) Risk-adjusted management. d) Strategic management.

A Tactical allocation involves market timing, identifying and reacting to current market trends, and focusing on short term results.

#127. 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.

#130. To calculate taxes due on mutual fund shares being sold using the average cost basis for the shares, what must the investor account for? a) Only the capital gains received in cash during the holding period. b) The taxes paid on dividend and capital gain reinvestments made for additional shares. c) Any cash dividends paid out to the investor during the holding period. d) All dividend and capital gains paid out to the investor in cash after the shares were purchased.

All of the following are true regarding commercial paper EXCEPT that (A) Any discount is taxable as ordinary income. (B) It is issued by corporations. (C) It can be issued either at a discount or with a coupon rate. (D) Registration is required by the SEC.

D Commercial Paper does NOT need to be registered with the SEC. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months, or 270 days, making it a very cost-effective means of financing.

#1. The Investment Company Act of 1940 allows the 12b-1 fee to cover normal operating expenses of a mutual fund, which includes all of the following EXCEPT a) Fees for printing prospectuses. b) Sales material. c) Management fees. d) Sales commissions.

C Section 12b-1 of the Investment Company Act of 1940 allows the imposition of a distribution fee to cover expenses associated with the promotion and distribution of fund shares, known as a 12b-1 fee. This fee covers such costs as printing of prospectuses and sales materials as well as certain sales commissions.

#2. Net present value represents a) The discounted sum of all future cash flows plus the final market value. b) The final market value of the investment, discounted by a risk-adjusted rate of return. c) The discount rate at which the net present value of all cash flows and final market value of an investment becomes zero. d) The discounted sum of all future cash flows generated by an investment.

C Zero is considered breakeven and a value above zero indicates value in excess of the NPV of the investment.

#6. A stock dividend affects which of the following? I. Assets; II. Liabilities; III. Shareholder's equity; IV. Net worth a) I and III b) I and IV c) II and III d) III and IV

D A stock dividend reduces retained earnings and increases shares outstanding proportionately.

#9. A customer in a variable annuity assumes which of the following risks? a) Contract performance b) Investment c) Mortality d) Expense

B Investment risk is assumed by the annuitant for products that depend on separate account performance. Contract performance is related, but the risk is with the investment.

#22. An investor is long XYZ stock at 50 and writes a 55 call for 3. What is the result when the investor closes this position at the current market price of 57? a) $400 gain b) $600 gain c) $800 gain d) $1,000 gain

C The investor bought stock at $50 (debit), sold a call @$3 (credit) and sold stock at $55 (credit). Total credits $58 - $50 debit = $8 X 100 = $800.

#27. Which form of registration is available only to seasoned companies in certain states? a) Registration by declaration b) Registration by qualification c) Registration by coordination d) Notification filing

D Registration by filing is available only to well-established companies that can meet stringent financial requirements.

#28. Which of the following describe the interbank system? I. National banks under supervision of the FRB II. Central banks and large multi-national corporations III. Borrowing and lending dollars overnight IV. Foreign currencies traded in large blocks a) I and III b) I and IV c) II and III d) II and IV

D The interbank system is an international, decentralized unregulated, market. Consequently, the interbank system is a high risk market. The major participants in the interbank market are central banks and large multi-national corporations trading foreign currencies in large blocks, generally of $1-5 million.

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

#31. If a security has a negative correlation coefficient of (-1), then the securities would have a) Prices that would move up equally but not equally down. b) Prices moving an opposite directions. c) Prices moving in the same direction equally. d) No relationships in price.

B If the correlation coefficient is (-1), it would be that the securities are moving in opposite directions. For example, if one security was up by 1%, the other security would be down by 1%.

#33. Which of the following funds subjects the investor to added legislative risk? a) Growth fund b) International fund c) Government bond fund d) Balanced fund

B International funds are subject to foreign as well as domestic legislative risk. In addition, they carry currency exchange risk.

#36. Which provisions apply to persons who effect isolated non-issuer transactions on their own behalf? a) Securities registration provisions b) Agent registration provisions c) Broker/dealer registration provisions d) Anti-fraud provisions

D Isolated non-issuer transactions are usually exempt from registration requirements for both the agent and the security. However, the anti-fraud provisions apply to anyone effecting any securities transaction.

Which of the following statements is most correct concerning a mutual fund's contingent deferred sales charges (CDSC)? (A) The sales charge will automatically be refunded upon sale of the fund shares. (B) The earlier the fund shares are sold, the lower the sales charge percentage. (C) Funds with a CDSC will be offered at the net asset value plus the maximum allowable sales charge. (D) The longer the fund shares are held, the lower the sales charge percentage.

If a securities trade is in violation of the Uniform Securities Act, who has the option to void the transaction? (A) The Administrator (B) The purchaser (C) The seller (D) Any of the above

B A transaction that is in violation of the Act is voidable at the discretion of the purchaser

Which of the following does NOT affect a corporation’s reported net income per share? (A) The decrease in the number of shares outstanding (B) A declaration of the dividend (C) A change in accounting method for valuing inventory (D) The discontinuance of operations of a company plant or division

B A declaration of the divided

Which of the following is accurate regarding gift taxes? (A) Above a stated annual maximum, gifts are taxable to the donor. (B) Above a stated annual maximum, gifts are taxable to the recipient. (C) The recipient will be taxed at the donor’s rate. (D) The recipient will be taxed at the recipient’s rate.

A Above a published limit which is updated regularly to reflect inflation, the donor is taxed on gifts. The limit applies per individual recipient.

All of the following are classified as an offer to sell a security EXCEPT (A) The offer of a warrant of an underlying security. (B) The gift of an assessable security. (C) A bonus security given as incentive to purchase another security. (D) The distribution of a stock dividend to owners of the security.

Registration of corporate bonds at the state level is mandated by (A) Maloney Act. (B) The Uniform Securities Act. (C) The Trust Indenture Act. (D) The Securities Act of 1933.

The form filed by limited partnerships with the IRS that discloses each limited partner's share of the partnership’s income or loss is called a (A) 1099 misc. (B) K-1. (C) 1099 part. (D) W-2.

B The form limited partnerships file with the IRS is called the K-1.

Under ERISA, a fiduciary is prohibited from engaging in certain types of transactions. Each of these transactions specifies that the fiduciary may not engage, directly or indirectly, with which of the following? (A) A member of the Federal or State government (B) Any banking or lending institution (C) A party in interest (D) An employee of the plan itself

C ERISA specifies 5 categories of transactions that a fiduciary may not cause the plan to engage in, directly or indirectly, with a “party in interest.”

If an investor cannot specifically identify redeemed shares, IRS assumes that reporting will be on the basis of (A) Determined on a case by case basis. (B) Average cost. (C) Last-In, First-Out. (D) First-In, First-Out.

An offer to sell a security is made by a California television station. The ad is also viewed in Arizona. The offer to sell would fall under which state's jurisdiction? (A) California (B) Arizona (C) Both (D) Neither

Which of the following will best describe the major difference between a defined benefit and a defined contribution plan? (A) Person making contributions (B) Amount of contributions made to the plan (C) Defined benefit plan is qualified (D) Person receiving benefits

Which of the following would increase U.S. exports? I. Strengthening dollar; II. Weakening dollar; III. Balance of payment deficits; IV. Balance of payment credits (A) I and IV (B) II and III (C) II and IV (D) I and III

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

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.

Joe wants to expand his auto body shop business through a private placement of securities that is subject to state securities laws. Which of the following statements about this type of offering is correct? I. Joe can solicit up to 10 investors in a 12-month period without being required to register the securities. II. Joe can charge any investor a commission. III. Joe can solicit an unlimited number of institutional investors. IV. Joe can solicit an unlimited number of accredited investors. (A) I only (B) I and II (C) I and III (D) II and IV

A stock dividend affects which of the following? I. Assets; II. Liabilities; III. Shareholder's equity; IV. Net worth (A) I and III (B) I and IV (C) II and III (D) III and IV

D A stock dividend reduces retained earnings and increases shares outstanding proportionately

In early May, a customer buys 100 SOP at 27 and writes one SOP Oct 30 call for 3. This is his first option transaction and takes place in his cash account. The initial option order ticket must be written as an opening (A) Covered sale. (B) Uncovered purchase. (C) Uncovered sale. (D) Covered purchase.

Under what circumstances may the Administrator issue a stop order denying the effectiveness of a registration statement? I. The security is subject to a stop order in another state. II. The issuer's method of business includes illegal activities in the state of domicile. III. The issuer is ineligible for the registration method applied for. IV. The agents are inexperienced. (A) I and II (B) I and III (C) II and III (D) II and IV

B A stop order is issued if the activity is illegal where performed, not where the issuer is domiciled

Which provisions apply to persons who effect isolated non-issuer transactions on their own behalf? (A) Securities registration provisions (B) Agent registration provisions (C) Broker/dealer registration provisions (D) Anti-fraud provisions

An agent originates a fraudulent transaction in Florida with an offer directed to a client in Arizona. The client is traveling in California when he accepts the offer. Which Administrator(s) have authority over the transaction? (A) Florida and Arizona (B) Florida, California, and Arizona (C) California (D) California and Florida

Which of the following best fits the definition of an "issuer"? (A) A person proposing to issue a security (B) A market maker in an over-the-counter security (C) A company director selling new shares to the public (D) A trader on a national exchange floor

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) I and IV (B) II and III (C) II and IV (D) I and III

An investor buys 500 shares of XYZ at 38 and writes 5 XYZ January 40 calls. This position is referred to as: (A) Full hedge. (B) Straddle. (C) Covered call writing. (D) Uncovered call writing.

Common methods of minimizing one’s estate value and the subsequent taxation on the estate are I. Making nontaxable gifts. II. Establishing irrevocable trusts. III. Transferring assets into individual retirement accounts. IV. Establishing nontaxable annuity contracts. (A) I and II (B) I and III (C) II and III (D) II and IV

A By utilizing estate planning methods, people can reduce the value of their estates through various strategies. These can include making nontaxable gifts and establishing irrevocable trusts.

Which is true of restricted stock? I. The purchase must be paid for in entirety. II. It must be held for 2 years before resale. III. A broker/dealer can act as an agent. IV. Shares are registered with the SEC. (A) I and II (B) I and III (C) II and III (D) II and IV

B If a selling company is subject to the SEC reporting requirements, the securities must be held at least 6 months. Otherwise, they must be held at least 1 year. The holding period begins when the securities are bought and fully paid for. A broker/dealer can act as an agent, but restricted stock is not registered with SEC.

All of the following statements regarding Form 13D are correct EXCEPT (A) It must be filed with the SEC within 10 days of an applicable stock purchase. (B) It must be filed when a person acquires over 5% of the voting stock of a company registered under the 1934 Act. (C) It must accompany all rights offerings. (D) It is frequently used in tender offers.

C Form 13D is filed with the SEC when a person or group acquires over 5% of the voting stock of a company registered under the Act of 1934. It is not required to accompany a rights offering.

Randy bought 500 shares of ABC stock @ 34. He wrote 5 ABC Aug 35 straddles @ $6.15. At August expiration, ABC closes at 37.50 and Randy is exercised on his short calls. What is his profit or loss? (A) $3,575 profit (B) $3,075 loss (C) $1,250 loss (D) $500 profit

A Randy’s profit is $3,575. At expiration, he was assigned and had to sell his long stock @ 35 for a one point profit plus the premium received for the short straddle. $1 + $6.15 = $7.15 X 100 = $715 X 5 (straddles & stock) = $3,575.

Which of the following are specifically excluded from the definition of a security? I. Fixed annuities; II. Commodities futures contracts; III. Multilevel distributorships; IV. Commodity Options contracts (A) I and II (B) I and III (C) II and III (D) II and IV

Which Administrator has jurisdiction if a violation of the Act has occurred? I. The state where the customer resides; II. The state where the agent's office is located; III. The state where the transaction occurred, regardless of where the customer resides or where the agent is registered (A) I and III (B) II and III (C) III only (D) I and II

C An Administrator has jurisdiction over any transaction that has occurred in his state.

A broker/dealer who is making a market in a security is (A) Acting in a dealer/principal capacity, incurring risk and is compensated by the mark-up or “spread”. (B) Standing ready to buy at the ask and sell at the bid. (C) Acting in a broker/agency capacity, incurring no risk and is compensated by commission. (D) Acting in a broker/agency capacity and is incurring risk.

A key difference between a C Corp and an S Corp is that (A) A C Corp is limited to 30 shareholders while an S Corp may have up to 100 shareholders. (B) S Corps are limited to 100 shareholders. (C) S Corps are not taxed like a partnership, i.e. single taxation rules. (D) S Corp shareholders are personally liable for business operations.

A customer has purchased $15,000 worth of XYZ Corporation over a period of time. Which of the following is true about his subsequent sale of $5,000 of XYZ stock? (A) The investor is allowed to specify which shares are being sold to minimize his capital gain. (B) His capital gain is $5,000. (C) The IRS requires that LIFO be used to identify the shares sold in order to maximize the customer's tax liability. (D) The IRS requires that FIFO be used to identify the shares sold in order to maximize the customer's tax liability.

A The investor can specify the security identification method of particular shares sold, or, in the absence of choice, the IRS will use FIFO. Therefore, security the identification method is most common.

You bought 100 shares of XYZ at 50 and, on the next day, bought an XYZ June 50 put for 1.50. You closed your position by letting the put expire and selling XYZ at 58. What is your gain or loss? (A) $650 loss (B) $950 loss (C) $650 gain (D) $800 gain

C Premium Open - 1.50. Market: -50 = -51.50. Close: +58. Market: +6.50 X 100 = $650 gain

When is a policyholder allowed to surrender a variable annuity contract? (A) During the accumulation period (B) During either the accumulation or annuity period (C) During the grace period (D) During the annuity period

A A variable annuity can only be redeemed (surrendered) during the accumulation period. Once a settlement option is selected and the contract is annuitized (the annuity period), the choice is irrevocable.

An appeal of a State Administrator's decision must be filed (A) Immediately. (B) Within 15 days. (C) Within 30 days. (D) Within 60 days.

D An appeal of an Administrator's decision needs to be filed in the appropriate court within 60 days of the order.

USA gives state administrators all of the following powers EXCEPT (A) Issue a cease and desist order. (B) Issue a permanent injunction. (C) Bring an action in court to request the issuance of a temporary or permanent injunction. (D) Subpoena records and witnesses.

Which of the following is false regarding coupon bonds? (A) They have an attached coupon for each interest payment. (B) They are traded in the secondary market. (C) They are book entry. (D) They are in bearer form.

C Coupon (bearer) bonds are not book entry but are issued in the form of paper certificates. They are no longer issued in the U.S. but continue to trade in the secondary market.

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.

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.

Which of the following applies to a call option contract? (A) The call writer has the obligation to buy at the strike price. (B) The call holder has the obligation to buy at the strike price. (C) The call writer has the right to sell at the strike price. (D) The call holder has the right to buy at the strike price.

D A call option is a contract that gives the call holder the right to purchase 100 shares of the underlying security, at the strike price (also called the exercise price), until expiration. The call writer has the obligation to sell 100 shares of the underlying security at the strike price. Long call – right to buy. Short call – obligation to sell.

An unsolicited non-issuer transaction effected through a broker/dealer qualifies as an exempt transaction. What will the Administrator normally require the broker/dealer to retain on file in such instances? (A) A registration statement (B) A registration by qualification (C) A documented non-solicitation statement by the client (D) All of the above

C The Administrator will normally require the broker/dealer to retain on file a documented non-solicitation statement from the client.

The concept of capital needs-based financial planning relates to the (A) Client's ability to maintain a monthly balance sheet of income and expenses. (B) The adviser's calculation of all plant and equipment asset valuations into the overall portfolio. (C) Adviser helping a client plan for financially devastating catastrophic events such as poor asset allocation, unsecured investment risk, and creditor default. (D) Client's preparation for financial events such as the death or disability of a primary income earner.

Which of the following statements is INCORRECT concerning convertible preferred stock? (A) Dividends must be paid before common stock dividends. (B) It can be converted into common stock. (C) It has a higher claim than common in a corporate bankruptcy. (D) It can be called by the corporation.

D Only callable preferred stock can be called by the corporation.

According to the Uniform Securities Act, the person responsible for enforcement of the Act's provisions is the (A) Administrator. (B) State commissioner. (C) Chairman of the Board of Governors. (D) District attorney.

Which of the following are true of duration? I. A zero coupon bond’s duration equals its maturity. II. Duration is a measure of credit risk. III. It identifies when an investor can expect return of principal. IV. It quantifies the relationship between maturity and credit risk. (A) I and II (B) I and III (C) II and III (D) II and IV

Which of the following would require the delivery of a prospectus at the time of sale? I. Variable universal life; II. UIT; III. Mutual fund; IV. Closed-end bond fund (A) I, II and III only (B) I and III only (C) II and IV only (D) I, II, III and IV

Which of the following is true regarding a portfolio manager’s style? (A) Style is the more important than asset allocation. (B) Within an allocation model, style is always the same. (C) Management style has little effect if asset allocation is chosen carefully. (D) The style a manager applies to the allocation model will create wide variances in performance.

An issuer may be I. An investment adviser representative. II. A corporation. III. An agent. IV. A joint venture. (A) II and III (B) II and IV (C) I and II (D) I and III

Which form of registration is available only to seasoned companies in certain states? (A) Notification filing (B) Registration by declaration (C) Registration by qualification (D) Registration by coordination

A Registration by filing is available only to well-established companies that can meet stringent financial requirements.

Railroad and common carrier issues regulated by the Interstate Commerce Commission are considered what type of securities? (A) Intrastate (B) Exempt (C) Nonexempt (D) Federal covered

An option contract that gives the holder of the contract the right to sell the underlying security at the strike price is a (A) Put option. (B) Strike option. (C) Short stock position. (D) Call option.

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

Which of the following is least suitable for a retired couple looking for preservation of capital with a reasonable rate of return? (A) Asset allocation fund with 70% in AAA rate bond and 30% in large cap companies (B) A specialized fund investing in emerging markets in South America (C) An U.S. government bond fund (D) Balanced fund where part of the money is invested in bonds and the other part in large cap companies

B A specialized fund in emerging markets is very high risk and not suitable for retired investors looking for capital preservation and income.

Which of the following is FALSE regarding ERISA 404(c), which addresses the investment options offered by a retirement plan? (A) Investment information must be communicated to participants. (B) It relieves the sponsor of liability for selecting the investment options (C) The plan must offer at least three investment alternatives. (D) The investment alternatives must allow diversification.

The theory that reducing taxes and limiting government involvement in business activities stimulates economic growth is called (A) Monetarism. (B) Supply side. (C) Cost-pull, demand-push. (D) Keynesianism.

A "Supply side" economics is defined by this question. It is considered the opposite of the Keynesian theory

A Canadian broker/dealer has customers who winter in Florida and Texas. Which of the following is true? (A) The agent but not the broker/dealer must register in those states. (B) Both the broker/dealer and its agents who service the customers must be registered in Florida and Texas. (C) If the broker/dealer has no office in Texas or Florida, it does not have to register in those states to transact business with its existing customers. (D) The broker/dealer but not the agent must register in those states.

Which of the following securities is NOT exempt from the USA? (A) Municipal bonds (B) An intrastate offering of nonexempt securities (C) A stock listed on NASDAQ (D) A bond from a company listed on the NYSE

B 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.

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.

Overlapping debt excludes the following, EXCEPT (A) Housing authority. (B) Hospital board. (C) School district. (D) Port authority.

During an investigation the Administrator may NOT (A) Go to court to request enforcement of a subpoena. (B) Subpoena witnesses and records from other states. (C) Initiate criminal liabilities. (D) Revoke a registration without providing the opportunity for a hearing.

D Although the Administrator can revoke a registration, the opportunity for a hearing must be provided

A customer wants to give her daughter all of the shares in her growth mutual fund. Since the initial purchase of the shares, the value of the shares has increased steadily over the life of the investment. When the shares are gifted, the daughter's cost basis will be (A) The NAV of the shares on the day they are “gifted” to her. (B) The same cost basis that Rhonda had for the shares. (C) The difference between the initial purchase price for the shares and the current NAV of the shares. (D) The initial NAV price Rhonda paid for the shares originally.

B When a security is received as a gift, the cost basis depends on the relationship of the market value of the securities to the donor’s cost basis. If the market value is higher than the donor’s basis, the recipient’s cost basis is equal to the donor's. If the market value is lower than the donor’s cost basis, the recipient’s basis is equal to the market value of the securities at the time of the gift.

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

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.

Which of the following is true about the CBOE? I. It is an exchange for options on NYSE and NASDAQ securities. II. It is a negotiated market. III. It is centralized. IV. Trading hours mirror the NYSE. (A) II and III (B) II and IV (C) I, III and IV (D) I and III

Duration is best described as (A) The measure of a bond’s expected volatility in a changing interest rate environment. (B) A bond’s beta coefficient. (C) Being shorter than maturity on a zero coupon bond. (D) Being synonymous with maturity.

The consumer price index is a (A) Leading indicator. (B) Lagging indicator. (C) Retail indicator. (D) Coincident indicator.

An individual set up a trust for his children giving up all his ownership rights and control over the assets of the trust. What kind of trust did he create? (A) Irrevocable (B) Living trust (C) TOD trust (D) Revocable

A In an irrevocable trust, the grantor gives up title and ownership rights to the trust assets.

All of the following are correct facts concerning an UGMA (minor) account EXCEPT (A) Margin transactions are not allowed. (B) Gifts made to the minor are irrevocable. (C) Securities are registered in the name of the minor. (D) Only one custodian per minor is permitted.

C Securities are registered in the name of the custodian in an UGMA account. Only one custodian and one minor may be named per account. Gifts made to the minor are irrevocable. Margin accounts are not permissible for UGMA accounts.

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.

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) Growth stocks (B) Tax-free money market fund (C) Money market mutual fund (D) Investment grade, medium maturity corporate bonds

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

Stimulating the economy through spending policies is known as (A) Supply side. (B) Open market. (C) Monetarism. (D) Keynesianism.

Net present value represents (A) The final market value of the investment, discounted by a risk-adjusted rate of return. (B) The discount rate at which the net present value of all cash flows and final market value of an investment becomes zero. (C) The discounted sum of all future cash flows generated by an investment. (D) The discounted sum of all future cash flows plus the final market value.

Compared to holding period return, which of the following are true about annualized return? I. Annualized return has more value to an investor who holds investments over an extended period of time. II. Annualized return for a short term investment may not be indicative of return if the investment was held for one year. III. Annualized return is more accurate, since it considers a longer period of time. IV. Holding period return is required mutual fund prospectus disclosure. (A) I and II (B) I and IV (C) II and III (D) II and IV

#1. Complete personal responsibility for an owner’s proportionate share of any liabilities or debts of the company is a feature of I. A sole proprietorship. II. A general partnership. III. A C corp. IV. A limited partnership. a) I and II b) I and III c) II and III d) II and IV

A Like a sole proprietorship, a partnership is not a separate legal entity from its owners, and partners have full liability.

#2. Which of the following is not subject to federal and state security registration requirements? a) Debentures b) Municipal securities c) Preferred stock d) Open-end investment companies

B U.S. Government and municipal securities are exempt from the Securities Act of 1933 registration requirements.

#3. 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

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.

#5. Which of the following does NOT issue overlapping debt? a) Water district b) Library district c) School district d) State

D The state has no direct role in the property tax.

#10. One of the biggest differences between a C corporation and a Subchapter S corporation is that a) C corporation owners have limited liability; Sub S owners have unlimited liability. b) C corporations are not subject to double taxation. c) A C corporation is ongoing and a Sub S corporation has a predetermined liquidation date. d) Sub S corporation earnings and expenses are reported on form K1.

D Subchapter S corporation earnings and expenses flow through directly to the owners, who report them on form K1. Both entities are perpetual and offer their owners limited liability. C corporations experience double taxation.

#11. If a securities trade is in violation of the Uniform Securities Act, who has the option to void the transaction? a) The Administrator b) The purchaser c) The seller d) Any of the above

B A transaction that is in violation of the Act is voidable at the discretion of the purchaser.

#13. Which of the following is accurate regarding gift taxes? a) Above a stated annual maximum, gifts are taxable to the donor. b) Above a stated annual maximum, gifts are taxable to the recipient. c) The recipient will be taxed at the donor’s rate. d) The recipient will be taxed at the recipient’s rate.

A Above a published limit which is updated regularly to reflect inflation, the donor is taxed on gifts. The limit applies per individual recipient.

#18. The form filed by limited partnerships with the IRS that discloses each limited partner's share of the partnership’s income or loss is called a a) 1099 misc. b) K-1. c) 1099 part. d) W-2.

B The form limited partnerships file with the IRS is called the K-1.

#19. Under ERISA, a fiduciary is prohibited from engaging in certain types of transactions. Each of these transactions specifies that the fiduciary may not engage, directly or indirectly, with which of the following? a) A member of the Federal or State government b) Any banking or lending institution c) A party in interest d) An employee of the plan itself

C ERISA specifies 5 categories of transactions that a fiduciary may not cause the plan to engage in, directly or indirectly, with a “party in interest.”

#20. A client places an order to sell short 100 shares of XYZ at 35.50 stop limit. At which trade was the order elected? 36, 35.75, 35.13, 34.88, 35, 35.62 a) 35.62 b) 34.88 c) 35.00 d) 35.13

D Sell stop and sell stop limit orders are triggered (elected) when the stock price trades at or through (below) the trigger price, which is 35.50 in this example. This stop limit order then becomes a live limit order to sell at 35.50 or better. This order is triggered at 35.13. Then it becomes a live limit order to sell at 35.50 or better. Therefore, it would be executed at 35.62.

#30. 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.

#34. A stock dividend affects which of the following? I. Assets; II. Liabilities; III. Shareholder's equity; IV. Net worth a) I and III b) I and IV c) II and III d) III and IV

D A stock dividend reduces retained earnings and increases shares outstanding proportionately.

#37. Under what circumstances may the Administrator issue a stop order denying the effectiveness of a registration statement? I. The security is subject to a stop order in another state. II. The issuer's method of business includes illegal activities in the state of domicile. III. The issuer is ineligible for the registration method applied for. IV. The agents are inexperienced. a) I and II b) I and III c) II and III d) II and IV

B A stop order is issued if the activity is illegal where performed, not where the issuer is domiciled.

#38. Which provisions apply to persons who effect isolated non-issuer transactions on their own behalf? a) Securities registration provisions b) Agent registration provisions c) Broker/dealer registration provisions d) Anti-fraud provisions

#42. The Administrator has the authority to amend or rescind a provision of the Uniform Securities Act a) If deemed appropriate and in the public's best interest. b) With prior consent from the SEC. c) With prior consent from FINRA. d) None of the above is correct.

A The Administrator has been empowered under the Act to amend or rescind any provision deemed in the public's best interest.

#43. Which of the following best fits the definition of an "issuer"? a) A person proposing to issue a security b) A market maker in an over-the-counter security c) A company director selling new shares to the public d) A trader on a national exchange floor

A An "issuer" is defined as a person who issues or proposes to issue a security.

#49. Common methods of minimizing one’s estate value and the subsequent taxation on the estate are I. Making nontaxable gifts. II. Establishing irrevocable trusts. III. Transferring assets into individual retirement accounts. IV. Establishing nontaxable annuity contracts. a) I and II b) I and III c) II and III d) II and IV

A By utilizing estate planning methods, people can reduce the value of their estates through various strategies. These can include making nontaxable gifts and establishing irrevocable trusts.

#50. 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

C 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.)

#51. Which is true of restricted stock? I. The purchase must be paid for in entirety. II. It must be held for 2 years before resale. III. A broker/dealer can act as an agent. IV. Shares are registered with the SEC. a) I and II b) I and III c) II and III d) II and IV

#54. All of the following statements regarding Form 13D are correct EXCEPT a) It must be filed with the SEC within 10 days of an applicable stock purchase. b) It must be filed when a person acquires over 5% of the voting stock of a company registered under the 1934 Act. c) It must accompany all rights offerings. d) It is frequently used in tender offers.

C Form 13D is filed with the SEC when a person or group acquires over 5% of the voting stock of a company registered under the Act of 1934. It is not required to accompany a rights offering.

#58. Randy bought 500 shares of ABC stock @ 34. He wrote 5 ABC Aug 35 straddles @ $6.15. At August expiration, ABC closes at 37.50 and Randy is exercised on his short calls. What is his profit or loss? a) $3,575 profit b) $3,075 loss c) $1,250 loss d) $500 profit

#60. Which Administrator has jurisdiction if a violation of the Act has occurred? I. The state where the customer resides; II. The state where the agent's office is located; III. The state where the transaction occurred, regardless of where the customer resides or where the agent is registered a) I and III b) II and III c) III only d) I and II

C An Administrator has jurisdiction over any transaction that has occurred in his state.

#65. A customer has purchased $15,000 worth of XYZ Corporation over a period of time. Which of the following is true about his subsequent sale of $5,000 of XYZ stock? a) The investor is allowed to specify which shares are being sold to minimize his capital gain. b) His capital gain is $5,000. c) The IRS requires that LIFO be used to identify the shares sold in order to maximize the customer's tax liability. d) The IRS requires that FIFO be used to identify the shares sold in order to maximize the customer's tax liability.

#66. You bought 100 shares of XYZ at 50 and, on the next day, bought an XYZ June 50 put for 1.50. You closed your position by letting the put expire and selling XYZ at 58. What is your gain or loss? a) $650 loss b) $950 loss c) $650 gain d) $800 gain

C Premium Open - 1.50. Market: -50 = -51.50. Close: +58. Market: +6.50 X 100 = $650 gain

#68. When is a policyholder allowed to surrender a variable annuity contract? a) During the accumulation period b) During either the accumulation or annuity period c) During the grace period d) During the annuity period

#69. An appeal of a State Administrator's decision must be filed a) Immediately. b) Within 15 days. c) Within 30 days. d) Within 60 days.

D An appeal of an Administrator's decision needs to be filed in the appropriate court within 60 days of the order.

#72. Which of the following is false regarding coupon bonds? a) They have an attached coupon for each interest payment. b) They are traded in the secondary market. c) They are book entry. d) They are in bearer form.

C Coupon (bearer) bonds are not book entry but are issued in the form of paper certificates. They are no longer issued in the U.S. but continue to trade in the secondary market.

#73. 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.

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.

#74. Which of the following applies to a call option contract? a) The call writer has the obligation to buy at the strike price. b) The call holder has the obligation to buy at the strike price. c) The call writer has the right to sell at the strike price. d) The call holder has the right to buy at the strike price.

#75. An unsolicited non-issuer transaction effected through a broker/dealer qualifies as an exempt transaction. What will the Administrator normally require the broker/dealer to retain on file in such instances? a) A registration statement b) A registration by qualification c) A documented non-solicitation statement by the client d) All of the above

C The Administrator will normally require the broker/dealer to retain on file a documented non-solicitation statement from the client.

#78. Which of the following statements is INCORRECT concerning convertible preferred stock? a) Dividends must be paid before common stock dividends. b) It can be converted into common stock. c) It has a higher claim than common in a corporate bankruptcy. d) It can be called by the corporation.

D Only callable preferred stock can be called by the corporation.

#91. Which form of registration is available only to seasoned companies in certain states? a) Notification filing b) Registration by declaration c) Registration by qualification d) Registration by coordination

A Registration by filing is available only to well-established companies that can meet stringent financial requirements.

#99. Which of the following best describes rebalancing? I. Regularly selling off appreciated investments from over-weighted asset categories and using the proceeds to purchase investments from under-weighted asset categories. II. Altering the portfolio contributions so that more investments go to under-weighted asset categories until the portfolio is back in balance. III. Dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. IV. Rotating among sectors to take advantage of seasonal and other economic trends. a) I and II b) I and IV c) II and III d) III and IV

A These are classic definitions of rebalancing. Dividing an investment portfolio among different asset categories defines strategic asset allocation. Sector rotation takes advantage of seasonal and other economic trends.

#100. Which of the following is least suitable for a retired couple looking for preservation of capital with a reasonable rate of return? a) Asset allocation fund with 70% in AAA rate bond and 30% in large cap companies b) A specialized fund investing in emerging markets in South America c) An U.S. government bond fund d) Balanced fund where part of the money is invested in bonds and the other part in large cap companies

B A specialized fund in emerging markets is very high risk and not suitable for retired investors looking for capital preservation and income.

#102. The theory that reducing taxes and limiting government involvement in business activities stimulates economic growth is called a) Monetarism. b) Supply side. c) Cost-pull, demand-push. d) Keynesianism.

B "Supply side" economics is defined by this question. It is considered the opposite of the Keynesian theory.

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

#109. During an investigation the Administrator may NOT a) Go to court to request enforcement of a subpoena. b) Subpoena witnesses and records from other states. c) Initiate criminal liabilities. d) Revoke a registration without providing the opportunity for a hearing.

D Although the Administrator can revoke a registration, the opportunity for a hearing must be provided.

#110. A customer wants to give her daughter all of the shares in her growth mutual fund. Since the initial purchase of the shares, the value of the shares has increased steadily over the life of the investment. When the shares are gifted, the daughter's cost basis will be a) The NAV of the shares on the day they are “gifted” to her. b) The same cost basis that Rhonda had for the shares. c) The difference between the initial purchase price for the shares and the current NAV of the shares. d) The initial NAV price Rhonda paid for the shares originally.

#111. 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

#112. Which is false regarding the federal tax advantages of a qualified plan? a) Employer contributions made to a qualified plan are tax deductible as ordinary business expense. b) Funds accumulate on a tax-deferred basis. c) Contributions made to a qualified plan are not counted as income to the employee for income tax purposes. d) At distribution, all amounts received by the employee are free of taxes.

D Funds in a qualified plan accumulate on a tax-deferred basis; however, at distribution any amount received by the employee will be treated as ordinary income for tax purposes.

#114. Which of the following is true of GNMA? a) Interest payments are semi-annual. b) It issues $25,000 bonds. c) It lends funds to savings institutions. d) It is a direct obligation of the government.

B GNMA is a serial, pass-through certificate making monthly payments of principal and interest. It is also a government agency which buys only government-guaranteed mortgages.

``` #117. The consumer price index is a a) Leading indicator. b) Lagging indicator. c) Retail indicator. d) Coincident indicator. When CPI increases, it is reflecting an increase in the total price of those goods; conversely, if CPI decreases, it is an indication that prices are falling. CPI is used to monitor inflation or deflation. It is a lagging indicator because it follows a change in the total price of goods. ```

B When CPI increases, it is reflecting an increase in the total price of those goods; conversely, if CPI decreases, it is an indication that prices are falling. CPI is used to monitor inflation or deflation. It is a lagging indicator because it follows a change in the total price of goods.

#118. An individual set up a trust for his children giving up all his ownership rights and control over the assets of the trust. What kind of trust did he create? a) Irrevocable b) Living trust c) TOD trust d) Revocable

A In an irrevocable trust, the grantor gives up title and ownership rights to the trust assets.

#120. All of the following are correct facts concerning an UGMA (minor) account EXCEPT a) Margin transactions are not allowed. b) Gifts made to the minor are irrevocable. c) Securities are registered in the name of the minor. d) Only one custodian per minor is permitted.

#125. A corporation has issued 10 million shares of common stock that are currently trading for $5 per share. There are 2 million shares of treasury stock. What is the total value of outstanding common stock shares? a) $8 million b) $10 million c) $40 million d) $60 million

C Ten million issued shares minus 2 million treasury shares equals 8 million shares outstanding. Eight million outstanding shares x $5 / share = $40 million. Remember: Outstanding Stock = Issued Shares - Treasury Stock

Your client wrote 5 XYZ June 60 straddles @ $8.25. What is the potential maximum gain and loss? (A) Maximum gain is $4,125 and maximum loss is unlimited. (B) Maximum gain is unlimited and maximum loss is $4,125. (C) Maximum gain is $4,125 and maximum loss is $25,875. (D) Maximum gain is $4,125 and maximum loss is $30,000.

Chose B

During an investigation the Administrator may NOT (A) Revoke a registration without providing the opportunity for a hearing. (B) Go to court to request enforcement of a subpoena. (C) Subpoena witnesses and records from other states. (D) Initiate criminal liabilities.

Chose A

An investor purchases 100 shares at $100 per share and, on the same day, sells a 100 call for 4.25. What is the maximum loss that could be realized by the investor? (A) $425 (B) $9,575 (C) $10,425 (D) The investor would lose nothing.

Chose D

Open market operations of the Federal Reserve Board cause direct changes in (A) Dollar exchange rates. (B) M1. (C) Interest rates. (D) Velocity of money.

Chose C

An agent who is registered in Illinois works for a broker/dealer that is registered in all 50 states. One of her Illinois clients owns a vacation home in Wisconsin and invites the agent to Wisconsin for a summer vacation. A Wisconsin neighbor meets the agent and wants the agent to handle his investments. Under what circumstances may the agent transact business with this neighbor? (A) The agent must file for registration in Wisconsin prior to doing business with the neighbor in Wisconsin. (B) The agent must wait until she returns to Illinois. (C) The agent may transact business with the individual if she had fewer than 3 customers in Wisconsin during the past 12 months. (D) The agent may immediately transact business with the neighbor in Wisconsin.

Chose C

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

Chose A

Which of the following positions holds the most risk for an investor? (A) Sell short 100 shares of ABC stock and buy 1 ABC call (B) Sell short 100 shares of ABC stock and sell 1 ABC put (C) Buy 100 shares of ABC stock and buy 1 ABC put (D) Buy 100 shares of ABC stock and sell 1 ABC call

Chose B

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

Chose D

One of the biggest differences between a C corporation and a Subchapter S corporation is that (A) C corporation owners have limited liability; Sub S owners have unlimited liability. (B) C corporations are not subject to double taxation. (C) A C corporation is ongoing and a Sub S corporation has a predetermined liquidation date. (D) Sub S corporation earnings and expenses are reported on form K1.

Chose D

An investor is most interested in current yield from her investment. She should purchase a(n) (A) Income fund. (B) Sector fund. (C) No-load fund. (D) Growth fund.

Chose A

The best definition of “current yield” is (A) A debt security’s annualized dollar amount of income, divided by the face (or “par”) value. (B) The most recent annualized dollar amount of income, divided by the security’s current market value and expressed as a percentage. (C) The most recent annualized dollar amount of income, as opposed to any past payout or an anticipated future payout. (D) The most recent annualized dollar amount of income, divided by the security’s purchase price and expressed as a percentage.

Chose C

Which of the following positions subjects the investor to unlimited risk? (A) Long a limited partnership interest with recourse debt. (B) Long 5 PDQ April 75 calls. (C) Long 300 shares of unsecured bonds. (D) Short 300 shares of a listed equity.

Chose D

The Federal Reserve Board is purchasing securities through open market operations. What are the likely effects of these transactions? (A) Bond prices increasing, yields increasing (B) Bond prices and yields remaining stable (C) Bond prices increasing, yields decreasing (D) Bond prices decreasing, yields increasing

Chose C

An investor buys 10 XYZ May 40 calls for 8 and sells 10 XYZ May 50 calls for 3. He closes his positions by selling the 40 calls for 5 and buying the 50 calls for 1. What is his gain or loss? (A) $1,000 loss (B) $900 loss (C) $500 gain (D) $100 gain

No idea

An investor made an opening purchase of 5 ABC Nov 70 straddles @ $7.25 ($3.25 for the calls and $4 for the put). ABC dropped to $52 and the investor sold the 5 straddles. Assuming only intrinsic value, what is the investor’s profit? (A) $0 (B) $5,375 (C) $7,250 (D) $9,000

No Idea

Jim is covered by a high deductible health plan. He makes regular contributions to this HSA. How are those contributions treated in regards to taxation? (A) The contributions are considered pre-tax (B) The contributions are not deductible (C) The contributions are taxed as income (D) The contributions are tax-deductible

Chose D

If a securities trade is in violation of the Uniform Securities Act, who has the option to void the transaction? (A) The Administrator (B) The purchaser (C) The seller (D) Any of the above

Chose B

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

Chose A

An investment adviser receives a fee for his services. This fee is classified as (A) An operating expense of the fund (B) A percentage of the sales charges paid by purchasers. (C) A portion of a fund’s CDSC. (D) A cost to the sponsor.

Chose A

If a foreign country's currency is weakening against the U. S. dollar, what would the foreign country do to support its currency? I. Buy U.S. dollars; II. Buy the foreign currency; III. Sell the foreign currency; IV. Sell U.S. dollars (A) I and II (B) I and III (C) II and IV (D) III and IV

Chose C

Chose A

On April 25, a customer buys 100 XYZ at 62.25 and, on the next day, buys one XYZ July 60 put at 1.50. At expiration, XYZ is selling at 68.38. The customer allows the put to expire and sells the XYZ shares at 68.38. What would be his profit on the overall transactions? (A) $350.50 (B) $463 (C) $612.50 (D) $762.50

Chose B

The current ratio in corporate finance measures approximately the same corporate information as (A) Current leverage. (B) Cash ratio. (C) Total working capital. (D) Current assets.

Chose B

Sophia, a wealthy widow in the 35% tax bracket has a large bond portfolio that she hopes to leave to her grandchildren. She has principal to reinvest and is considering a 5% corporate bond and a 2.4% municipal bond. Which is a better investment for Sophia? (A) The municipal bond (B) The returns are equal; Sophia should choose her favorite. (C) A tax-free money market fund yielding 1.80% (D) The corporate bond

Chose A

Bob sold short 100 shares of PQP at 56 and wrote a PQP Oct 55 put for 3.50. What's the maximum loss? (A) Unlimited (B) $450 (C) $59.50 (D) $52.50

Chose A

#12. The current ratio in corporate finance measures approximately the same corporate information as a) Current leverage. b) Cash ratio. c) Total working capital. d) Current assets.

C Total working capital (current assets vs. current liabilities) addresses the same concept as the current ratio.

#13. Sophia, a wealthy widow in the 35% tax bracket has a large bond portfolio that she hopes to leave to her grandchildren. She has principal to reinvest and is considering a 5% corporate bond and a 2.4% municipal bond. Which is a better investment for Sophia? a) The municipal bond b) The returns are equal; Sophia should choose her favorite. c) A tax-free money market fund yielding 1.80% d) The corporate bond

D The corporate bond’s after-tax yield is 3.25% for Sophia (.65 x 5%), which is better than the municipal bond yield of 2.4%.

#15. All of the following statements regarding broker/dealer retail communications that appear on a broker/dealer’s website are correct EXCEPT a) Website communications are subject to the same rules and standards as any other broker/dealer retail communications. b) Websites may never refer to past investment performance. c) Blanket recommendations made on a website are a violation of suitability standards. d) Exaggerated claims are a violation of content standards.

B Communications on broker/dealer websites may refer to past investment performance as long as the proper legends and disclosures are made.

#18. A customer wants to give her daughter all of the shares in her growth mutual fund. Since the initial purchase of the shares, the value of the shares has increased steadily over the life of the investment. When the shares are gifted, the daughter's cost basis will be a) The NAV of the shares on the day they are “gifted” to her. b) The same cost basis that Rhonda had for the shares. c) The difference between the initial purchase price for the shares and the current NAV of the shares. d) The initial NAV price Rhonda paid for the shares originally.

#19. Which of the following activities constitutes “selling away”? I. An agent sells Tupperware on the side. II. An agent sells variable annuities not offered by his broker/dealer without the broker/dealer’s knowledge or consent. III. An agent opens a brokerage account for herself at a broker/dealer other than her own. IV. An agent opens a mutual fund account for himself without the knowledge or consent of her broker/dealer. a) II & III b) II only c) I, II, III & IV d) II, III & IV

B Selling away occurs when an agent sells securities not offered by his or her broker/dealer without the knowledge and consent of the broker/dealer.