Testing Time

Question 1

2. Buy 200 shares of XYZ at 35. Sell 2 XYZ June 40 calls for 2. Sell 2 XYZ June 30 puts for 1.50. What is the maximum loss?

a) $6,700
b) $7,000
c) $12,300
d) $13,000

Answer 1

C

The position should be treated as a covered call, long the stock, short the call, and a short put X 200. Long the stock at 35 = -35. Duty to buy on short put = -30 Market = -65. Premium received = +3 1/2 Breakeven is -61.50 X 200 = $12,300 loss

Question 2

8. FINRA requires which of the following persons to sign the new account form?

a) Registered Representative
b) Account Owner
c) Approving Principal
d) All of the above

Answer 2

C

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

Question 3

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

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

Answer 3

B

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

Question 4

10. ERISA qualified pension plan fund managers’ fiduciary responsibilities regarding plan investments are determined by

a) SEC.
b) “Prudent Man” rules in the state where the fund operates.
c) The Investment Company Act of 1940.
d) FINRA.

Answer 4

B

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

Question 5

22. 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.

Answer 5

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.

Question 6

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

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

Answer 6

B

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

Question 7

30. A convertible preferred is convertible at $20 per share. The stock is currently selling on the market at $120. Which of the following are correct statements is correct?

a) It makes sense to convert at $22.
b) The common stock must be selling at $24 to be at parity with the preferred stock.
c) The common stock must be selling at $20 to be at parity with the bond.
d) The preferred stock’s conversion ratio is 1:6.

Answer 7

B

The conversion ratio is the par value of the preferred stock divided by the conversion price, or in this case, 1:5. It identifies the number of common shares received upon conversion. The parity price of the common stock is determined by dividing the conversion ratio into the market value of the preferred stock, or 120/5 = $24. It only makes sense to convert at a price above the parity price.

Question 8

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#33. 	Mortgage-backed issues are considered to be safe instruments. Which statement is INCORRECT concerning these securities?

a) Interest received is subject to federal, state and local taxation.
b) GNMA (Ginnie Mae) is a government-owned corporation.
c) GNMA, FNMA (Fannie Mae), and FHLMC (Freddie Mac) will all hold FHA and VA loans in their portfolios.
d) GNMA, FNMA, and FHLMC are all fully backed by the federal government.

Answer 8

D

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

Question 9

34. An investment adviser wants to name a successor firm to fill an unexpired portion of a yearly registration. The application is submitted, and the registration is granted. Shortly thereafter, the administrator learns that the successor firm was not in existence at the time of application. Which of the following will most likely happen?

a) Charges will be filed against the successor firm.
b) The registration of both the investment adviser and the successor firm will be revoked.
c) The successor adviser will need to file a new independent registration.
d) Nothing. This is legal.

Answer 9

D

If a broker/dealer or investment adviser wants to name a successor firm to fill an unexpired portion of a yearly registration, a new application is required, but no additional fees are due. It is not required that the successor firm be in existence at the time of the application.

Question 10

39. 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.

Answer 10

B

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

Question 11

40. Richmond Rails is currently trading at 65.50-65.62. Richmond Rails is probably

a) An exchange-traded security.
b) A load mutual fund.
c) A regional OTC security.
d) A limited partnership.

Answer 11

A

Securities with a narrow spread (in this case $0.12) are usually widely traded, most likely on an exchange or on NASDAQ. A thinly traded security, such as a small OTC security, typically has a wide spread between the bid and offer. 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.

Question 12

43. Which of the following are considered market manipulation? I. Matched orders; II. Wash trades; III. Stopping stock; IV. Wash sales

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

Answer 12

D

Matched orders and wash trades are market manipulation. Wash sales are trades in which tax losses are disallowed by the IRS. Stopping stock is when a DMM (specialist) guarantees the execution price for a customer order.

Question 13

44. 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

Answer 13

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.

Question 14

45. An Administrator can deny registration to a person who

a) Has a conviction for a securities violation from foreign country within last 5 years
b) Been convicted of misdemeanor shoplifting within the last 3 years in the Administrator’s state.
c) Has filed for bankruptcy within the last 5 years.
d) Lacks investment experience

Answer 14

A

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

Question 15

47. A registered investment adviser paid a large sum of money to settle a lawsuit. As a result, the firm’s net worth fell to $22,000. The adviser has discretion over customer accounts; however, the client’s funds are held at a large custodian bank. Under these circumstances, what is the adviser required to do?

a) Do nothing
b) File a report with the state administrator by the end of the next business day
c) File a report with the state administrator on the day that the net worth falls below $35,000
d) Notify all of the clients that the adviser’s net worth has fallen below $35,000

Answer 15

A

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

Question 16

48. 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) $35,000
b) $20,000
c) $0
d) $75,000

Answer 16

C

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

Question 17

53. Which of the following is correct with regard to the withdrawal of funds from a tax-qualified retirement plan?

a) Funds may be withdrawn at retirement tax free.
b) All early withdrawals are subject to a penalty.
c) Contributions can be deducted from that year’s taxable income.
d) The employee will be taxed at the ordinary income rate on his cost basis.

Answer 17

C

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

Question 18

56. Assuming a face value of $1,000, a 10% bond quoted at 820 has a current yield of

a) 8.6%.
b) 10%.
c) 12.2%.
d) 14.5%.

Answer 18

C

The nominal yield is 10%; the face value of the bond is $1,000. The annual interest is $100 (10% of $1,000). Therefore, the current yield is $100 / $820 = 12.2%.

Question 19

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

a) $0
b) $6,000
c) $10,000
d) $16,000

Answer 19

A

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

Question 20

61. A customer shorts one ABC Jan 65 call for a premium of 4 and holds one ABC 70 call for a premium of 1. What is the customer’s maximum potential loss?

a) $0
b) $200
c) $300
d) Unlimited

Answer 20

B

On this credit spread, if the option is exercised, the customer will lose $200. This is equal to the difference in the strike prices minus the net premiums. BUY 70 call for 1 minus SELL 65 call for 4 = 5 market minus 3 premium = 2 OR Premium = +4 minus 1 = +3 Market = +65 minus 70 = -5 = -2 loss

Question 21

62. A customer has the objective of maximizing current income. Under which conditions would you recommend that the customer sell long-term debt positions and buy short-term obligations?

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

Answer 21

A

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

Question 22

69. Sell short 100 shares of XYZ at 46 in a margin account. Buy an XYZ July 45 call for 4. XYZ is at 50 when the call is exercised. What is your gain or loss?

a) $300 loss
b) $500 loss
c) $400 gain
d) $500 gain

Answer 22

A

Paid premium of $400, then paid $4,500 when call exercised, $4,900 total paid. Received $4,600 when sold stock. So $4,600 received minus $4,900 paid = $300 loss

Question 23

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

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

Answer 23

A

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

Question 24

74. An inexperienced conservative investor is selecting his first equity fund. He wants to limit his risk while acquiring equity exposure. Which fund is most suitable for this investor?

a) Value fund
b) Balanced fund
c) Allocation fund
d) Growth fund

Answer 24

A

Value investing is a conservative long-term strategy of investing in undervalued equities. Growth investing is an aggressive strategy of choosing young, unproven companies. Asset allocation funds and balanced funds hold bonds along with stocks, and the investor has not expressed interest in bonds.

Question 25

#77. With regard to mutual funds, switching occurs when a) The registered representative recommends moving assets from one fund family to another to generate commissions. b) An investor frequently moves assets from one fund to another within a family of funds. c) The rep recommends moving assets in or out of money market accounts based on market conditions. d) The fund’s adviser “churns” the fund portfolio without discretionary authority.

Answer 25

A Moving of fund assets between families of funds generates additional sales commissions that represent a cost to the customer. Such a recommendation is rarely appropriate and to do so for the purpose of generating commissions is a violation known as “switching."

Question 26

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

Answer 26

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

Question 27

#79. Which of the following is defined as a security? a) Voting trust certificate b) Insurance policy c) Commodities futures contract d) Fixed annuity

Answer 27

A A voting trust certificate is a form of ownership in common stock and thus is defined as a security under the Act.

Question 28

#90. Which of the following is NOT true concerning bid and ask quotes? a) The ask, or “offer,” is the larger number and may be referred to as the “POP” when discussing mutual fund shares. b) The difference between the bid and the ask is the “spread” and represents the market maker’s mark-up or gross profit. c) When buying or selling for the accounts of others, a broker/dealer is remunerated by a commission. d) The bid is the smaller number and is defined as the lowest price a seller is willing to accept for the security at a particular time.

Answer 28

D Although the bid is the lower of the two numbers, it is defined as the highest price that a buyer of a security is willing to pay at a given time.

Question 29

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

Answer 29

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

Question 30

#94. 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

Answer 30

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.

Question 31

#95. 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

Answer 31

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.

Question 32

#97. A specialist on the NYSE I. Is charged with maintaining a fair and orderly auction market in a security. II. Deals in only one specific security. III. Is an employee of the NYSE. IV. Is employed by a member firm of the NYSE. a) I and IV b) II and III c) II and IV d) I and II

Answer 32

A A specialist is an employee of a member firm. There is only one specialist designated for a given stock, but a dealer may be a specialist for several stocks.

Question 33

#98. A prospectus can no longer be used if financial information is older than a) 90 days. b) 12 months. c) 13 months. d) 16 months.

Answer 33

D A prospectus must contain current information about the investment company and therefore a prospectus that includes financial information more than 16 months old can no longer be sent out to prospective customers.

Question 34

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

Answer 34

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

Question 35

#103. Which of the following are required to open a margin account? I. Customer loan agreement; II. Margin risk disclosure; III. Margin account agreement; IV. Margin interest disclosure a) I and III b) I and IV c) II and III d) II and IV

Answer 35

A The margin account agreement or hypothecation agreement must be completed prior to the first margin trade. The customer loan consent, including risk and interest charge disclosures, is completed upon opening the account.

Question 36

#104. One of your customers enters a limit order good for one month. Your firm has entered the order as a GTC order. The responsibility for canceling the order, if not executed by the end of that month, is that of the a) Customer. b) Specialist. c) Firm's commission broker. d) Firm.

Answer 36

D When a member firm accepts an order of this type, it accepts ultimate responsibility for follow-through. The firm's commission broker is commonly known as the "floor broker" and is on the floor of the exchange. The specialist has no responsibility in this case because the specialist doesn't know that the order was only good until the end of the month.

Question 37

#105. Where must an agent be registered? a) In the same states that his broker/dealer is registered b) In the state where his business is located c) In each state in which he effects securities transactions d) In the state in which the majority of his business is transacted

Answer 37

C Agents are required to be registered in each state in which they effect securities transactions.

Question 38

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

Answer 38

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

Question 39

#111. Which of the following is measured by the yield-to-maturity? a) The return on a bond up to the call date b) The return of an investment in relation to the degree of risk c) The total return of a bond from the time of purchase until maturity d) The return on a bond based on its current market value

Answer 39

C The yield-to-maturity measures the total return of a bond from the time of purchase until maturity. The return of an investment in relation to the degree of risk taken is called the risk-adjusted return. The current yield measures the interest rate that a security with a fixed income is generating to the holder based on its current market value. The yield-to-call measures the return on a bond similar to the yield-to-maturity, except that the ending period is not the maturity date but the call date.

Question 40

#112. According to the Uniform Securities Act, investment adviser advertising must a) Not violate the Investment Advisers Act of 1940. b) Be submitted to FINRA within 10 days of first use. c) Adhere to the advertising provisions of the USA. d) Be pre-approved by the SEC.

Answer 40

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

Question 41

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

Answer 41

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

Question 42

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

Answer 42

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

Question 43

#117. An employee quits her job where she has a balance of $10,000 in her employer-provided qualified plan. If she decides to move the balance to a traditional IRA through a direct transfer, how much will be transferred from one plan administrator to another, and what is the tax consequence? a) $8,000, no tax consequence b) $8,000, tax on growth only c) $10,000, tax on growth only d) $10,000, no tax consequence

Answer 43

D During an IRA custodian-to-custodian transfer, the full amount gets reinvested from one plan to the other, and there is no tax consequence.

Question 44

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

Answer 44

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

Question 45

#123. The following are prohibited practices under the Uniform Securities Act (USA) EXCEPT a) Soliciting excessive trading to increase commissions. b) Failing to disclose all known facts in a transaction. c) Effecting private securities transactions for customers. d) Commingling customer funds with agent funds.

Answer 45

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

Question 46

#124. An investor wants a fund that will reflect the performance of a broad sample of larger American companies. The investor is also concerned about fund expenses, so he would most likely select a) A growth and income fund. b) An S&P 500 Index fund. c) A blue chip stock fund. d) An income fund.

Answer 46

B The best answer is the index fund. Its performance will mirror the S&P 500 Index, which is an index of large domestic corporations. Index funds have low expense ratios because they are passively managed. The other three funds are actively managed, which results in a higher expense ratio.

Question 47

#125. Which of the following is not a characteristic of Brady Bonds? a) Pay semiannual interest b) Collateralized by U.S. Treasury zero coupon bonds c) Issued in U.S. dollars d) Issued by debt-troubled developing nations

Answer 47

A Brady Bonds are OIDs.

Question 48

#126. Which of the following best describes total return? a) The cumulative total return from the beginning to the end of a stated period b) Cumulative total return net of taxes from beginning to end of the period c) Holding period return expressed as an annual figure d) Annual dividend and net market value change over the year

Answer 48

A Total return does not consider taxes, and it considers the entire holding period.

Question 49

#128. 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

Answer 49

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.

Question 50

#129. 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 markdown on the customer’s subsequent sale of the security. b) The adviser may not charge a markup on such trades without prior written customer consent. c) Principal trades between investment advisers and their customers are not permitted. d) Such trades are not permitted without prior written customer consent.

Answer 50

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

Question 51

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

Answer 51

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.

Question 52

#3. Which of the following needs voter approval? a) GO b) Sewer revenue bond c) Special assessment bond d) IDB

Answer 52

A Only GO bonds (general obligations) require voter referendums.

Question 53

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

Answer 53

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

Question 54

#5. 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

Answer 54

B 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.

Question 55

#6. All of the following must be included within a prospectus EXCEPT a) Per share income and capital changes. b) Sales loads and fees. c) The individual securities that make up the portfolio. d) An expense table.

Answer 55

C A prospectus must contain, among other requirements, the sales charges and fees, an expense table, and the per share income and capital changes. The fund’s portfolio holdings are not found in a prospectus.

Question 56

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

Answer 56

C 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.

Question 57

#8. In order for a retirement plan to be qualified, what type of qualifications must be met? a) Industry b) Federal c) State d) Health

Answer 57

B In order for a retirement plan to be qualified, certain federal requirements must be met.

Question 58

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

Answer 58

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

Question 59

#11. 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) 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. b) This form of alliance is considered a unilateral agreement since the broker must rely on the adviser’s goodwill to secure any future compensation. c) This is considered a soft dollar alliance and must be monitored periodically to avoid the potential for conflicts of interest. d) Randy must file a Form AD-1 with his broker/dealer listing Andy as his advisory partner for the “mated” transactions.

Answer 59

C 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.

Question 60

#12. An agent living in Iowa solicits a customer living in Minnesota about a security. The customer finally decides to purchase the security while on vacation in Florida. Which Administrator(s) has(have) authority over the transaction? a) Iowa, Minnesota and Florida b) Minnesota only c) Minnesota and Florida only d) Iowa and Florida only

Answer 60

A The scope of authority is very broad for administrative jurisdiction. All three state Administrators have jurisdiction because some form of the transaction happened within their boundaries.

Question 61

#14. An agent hears a rumor that a large corporation will be launching a hostile takeover on a competitor. Based on the rumor, the agent liquidates all his clients' positions. Which of the following is true? a) This action is prohibited. b) The agent must let the clients know they are selling based on a rumor. c) As long as the agent informed his supervisor prior to the trades his actions are allowed. d) None of the above is true.

Answer 61

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

Question 62

#15. If a broker/dealer has no place of business in a state, transactions are exempt as long as the broker/dealer limits its offers in that state to no more than a) 3 in a 12-month period. b) 10 in a 12-month period. c) A limited number of unsolicited clients in a 12-month period. d) No transactions can be performed unless the broker/dealer first registers in the state.

Answer 62

C Exempted transactions for a broker/dealer are a limited number of unsolicited clients within a 12-month period.

Question 63

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

Answer 63

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

Question 64

#18. Buy 100 shares of LMN at 44 Sell LMN May 45 call. At what market price could there be a loss? a) Above 44 b) Above 45 c) Below 44 d) Below 45

Answer 64

C Loss is in the stock market price going down below the purchase price of the long stock, so below 44 is the price point there could be a loss, depending on the premium received for the 45 call.

Question 65

#21. The term for active stock that represents the number of shares owned by the public is a) Authorized stock. b) Outstanding stock. c) Treasury stock. d) Issued stock.

Answer 65

B "Outstanding stock" is the term for issued stock less any treasury stock reacquired by the corporation.

Question 66

#22. The Investment Company Act of 1940 states that a certain percentage of a mutual fund's board of directors be unaffiliated with the fund. This minimum percentage of unaffiliated members must be at least a) 30%. b) 40%. c) 50%. d) 60%.

Answer 66

B The board of directors is elected by fund shareholders and 40% of these board members must be unaffiliated with the fund. The remaining 60% may be employees, underwriters or advisers of the fund.

Question 67

#24. A mutual fund portfolio returned 3.5%, it has a beta of 1.5, and its benchmark index returned 3%. The alpha of the portfolio is a) (-1.5). b) (-1). c) 1.5. d) 2.

Answer 67

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

Question 68

#25. 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.

Answer 68

A 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.

Question 69

#26. Which of the following is defined as a security under the Uniform Securities Act? I. Real Estate Investment Trust; II. Credit Union account; III. Fixed life insurance contract; IV. Certificate of Interest in a Real Estate Condominium a) I and III b) I and IV c) II and III d) III and IV

Answer 69

B A credit union account and fixed life insurance contracts are not securities under the Act.

Question 70

#27. 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 IRS requires that FIFO be used to identify the shares sold in order to maximize the customer's tax liability. b) The investor is allowed to specify which shares are being sold to minimize his capital gain. c) His capital gain is $5,000. d) The IRS requires that LIFO be used to identify the shares sold in order to maximize the customer's tax liability.

Answer 70

B 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.

Question 71

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

Answer 71

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

Question 72

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

Answer 72

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

Question 73

#31. 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

Answer 73

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

Question 74

#32. An agent commits a violation under the Act if he or she I. Makes a material misrepresentation in the offer or sale of a security. II. Files a fraudulent application. III. Offers or sells a security that is unregistered. IV. Omits immaterial facts regarding an investment. a) II and IV b) I and II c) I and III d) II and III

Answer 74

B Information presented in the sales process must be truthful and complete. It is not a violation to offer an unregistered security if that security is exempt. It is a violation of the Act to file a fraudulent application for registration as an agent, broker/dealer, issuer, or investment adviser. It is fraudulent to omit material facts, but not immaterial facts.

Question 75

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

Answer 75

B The client’s attitude is an important non-financial consideration in any investment recommendation. Economic background, attitude toward money itself, level of investment experience, and ability to endure the volatility of the marketplace will determine, to an equal degree as the amount of money the client has to invest, what types of investment are suitable for the client.

Question 76

#34. 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.

Answer 76

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

Question 77

#35. A self-employed attorney has earned an income of $100,000 a year and her husband earns $30,000 a year as her accountant. How much can she contribute to a spousal option IRA? a) $4,500 b) $6,000 c) $10,000 d) $11,000

Answer 77

B They may each contribute $6,000.

Question 78

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

Answer 78

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

Question 79

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

Answer 79

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

Question 80

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

Answer 80

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

Question 81

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

Answer 81

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

Question 82

#43. Which of the following is true of regional securities exchanges? I. Historically they were localized venues for smaller, regional stocks. II. They provide local trading of OTC securities. III. Several have closed or consolidated with national exchanges. IV. They were negotiated markets. a) I and III b) I and IV c) II and III d) II and IV

Answer 82

A Regional exchanges are smaller, local exchanges. Regional exchanges provided an auction market for securities which it listed for trading.

Question 83

#44. Bill is considering a mutual fund with a high portfolio turnover. Bill’s agent tells Bill that he should not expect a) Greater transaction costs. b) A higher sales load. c) A higher expense ratio. d) A higher capital gains distributions.

Answer 83

B The sales load assessed by the fund is unrelated to portfolio turnover. The other three alternatives are symptoms of a fund with a high portfolio turnover.

Question 84

#45. Which of the following securities acts governs the variable annuity separate account? a) The Securities Exchange Act of 1934 b) Dodd Frank c) The Investment Company Act of 1940 d) The Trust Indenture Act of 1939

Answer 84

C The variable annuity separate account is considered an investment company under the Investment Company Act of 1940. The Trust Indenture Act of 1939 governs corporate bonds. The Securities Exchange Act of 1934 governs the people involved in the broker/dealer registered routes as well as the exchanges and the secondary markets. Dodd Frank is a recent act dealing with financial reform and does not address the variable annuities separate account.

Question 85

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

Answer 85

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

Question 86

#47. Which of the following types of securities would be found in a money market portfolio? I. Common stock; II. Treasury bills; III. Treasury bonds; IV. Bank certificates of deposit a) II and IV b) I and II c) I and IV d) II and III

Answer 86

A Money market instruments are always debt securities; treasury and bank CDs are the most common securities found in a money market portfolio. Treasury notes and bonds, having 1 year or less remaining until maturity, can also be included within a money market portfolio, though they would not be the first instruments typically applied.

Question 87

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

Answer 87

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

Question 88

#49. Sell an ABC May 55 call and buy an ABC May 60 call. At what market price will every dollar of loss on the 55 call be offset by a dollar of gain on the 60 call? a) Above 60 b) Below 55 c) 60 d) 55

Answer 88

C At 60, this credit spread reaches maximum loss. The gain is narrowing around 55 with a maximum loss at 60.

Question 89

#51. Which of the following is the most appropriate scenario for executing a limit order? a) Trying to lock in a profit of a particular security b) Buying a security when the market price has fallen to a specified limit c) Buying a security at the most advantageous price d) Selling a security that the seller does not own

Answer 89

B A limit order is an order to buy at or below a specified price, or to sell a stock at or above a specified price. It is a conditional order.

Question 90

#52. 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

Answer 90

A Opens at -8 + 3 = -5 Closes at +5 minus 1 = +4 -5 + 4 = -1 X 100 X 10 = $1,000 loss

Question 91

#53. 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

Answer 91

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

Question 92

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

Answer 92

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

Question 93

#55. Which of the following are subject to AMT? I. GO municipal bond interest; II. IDR bond interest; III. Incentive stock options; IV. ESOPs a) II and III b) II and IV c) I and II d) I and III

Answer 93

A Industrial development revenue bonds serve a private, rather than public purpose. Therefore, interest on IDRs is subject to AMT. A tax-qualified incentive stock option plan is also subject to AMT.

Question 94

#56. 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.

Answer 94

A If a customer buys 100 shares of stock and sells a call against that stock, this creates an opening covered sale.

Question 95

#57. All of the following are contained in the CPI EXCEPT a) Consumer spending on entertainment. b) Consumer purchases of mutual funds. c) Consumer spending on apparel. d) Consumer spending on medical care.

Answer 95

B CPI does not measure savings and investment.

Question 96

#58. An agent instructed his administrative assistant to mail letters containing investment recommendations to his customers. It turns out that the recommendations were unsuitable for most of the customers and many of them lost money on the investments. Who can be held civilly liable for the customer’s losses? a) Only the agent b) Only the broker/dealer c) The agent and the broker/dealer d) The agent, the broker/dealer and the administrative assistant

Answer 96

C If an agent commits a violation that his or her broker/dealer should have been aware of, then the broker/dealer can also be held liable. Broker/dealers have to supervise their agents, which includes reviewing their correspondence and pre-approving investment recommendations.

Question 97

Sarah has been an investor for the past 10 years, but has only made investments in government bonds and treasury bills and notes. She is now considering investments that are more risky but have a higher potential for a greater return. Which of the following indicators would give Sarah a way to compare her current investment and the investment she is considering for risk to return? Risk-adjusted return Net present value Total return Yield to maturity

Answer 97

A The risk-adjusted return allows investors to compare investments that have different levels of risk for the equivalent ratio of return.

Question 98

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

Answer 98

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

Question 99

#61. Buy 200 shares of XYZ at 35. Sell 2 XYZ June 40 calls for 2. Sell 2 XYZ June 30 puts for 1.50. What is the maximum loss? a) $6,700 b) $7,000 c) $12,300 d) $13,000

Answer 99

C The position should be treated as a covered call, long the stock, short the call, and a short put X 200. Long the stock at 35 = -35. Duty to buy on short put = -30 Market = -65. Premium received = +3 1/2 Breakeven is -61.50 X 200 = $12,300 loss

Question 100

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

Answer 100

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

Question 101

#64. 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

Answer 101

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

Question 102

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

Answer 102

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

Question 103

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

Answer 103

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

Question 104

#68. Which of the following circumstances would result in the assignment of an investment advisory contract? a) A majority partner of the investment adviser buys out a minority partner. b) An investment adviser representative who administers over half of the adviser’s client accounts resigns. c) An investment adviser is bought out by a competitor. d) A minority partner of the investment adviser retires.

Answer 104

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

Question 105

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

Answer 105

C 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.

Question 106

#71. 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

Answer 106

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.

Question 107

#72. A 35-year-old employee and first-time home buyer wishes to withdraw $10,000 from her IRA account for the purchase. This provision is available in a) Traditional and Roth IRAs. b) No IRA: buying a home is not a qualifying event. c) Traditional IRAs only. d) Roth IRAs only.

Answer 107

A This hardship provision is available to owners of both traditional and Roth IRA accounts, without penalty.

Question 108

#74. 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

Answer 108

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

Question 109

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

Answer 109

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

Question 110

#76. Overlapping debt excludes the following, EXCEPT a) Hospital board. b) School district. c) Port authority. d) Housing authority.

Answer 110

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

Question 111

#78. 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

Answer 111

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.

Question 112

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

Answer 112

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

Question 113

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

Answer 113

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

Question 114

#82. Which of the following are required to open a margin account? I. Customer loan agreement; II. Margin risk disclosure; III. Margin account agreement; IV. Margin interest disclosure a) I and III b) I and IV c) II and III d) II and IV

Answer 114

A The margin account agreement or hypothecation agreement must be completed prior to the first margin trade. The customer loan consent, including risk and interest charge disclosures, is completed upon opening the account.

Question 115

#83. Broker/dealers effect transactions in securities for a) Their own account only. b) For neither their own account nor the account of others. c) For both their own account or the accounts of others. d) Accounts of others only.

Answer 115

C Broker/dealers engage in transactions for their own accounts and the account of others, but it may not act in both capacities in the same transaction.

Question 116

#86. 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

Answer 116

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

Question 117

#87. The broker call rate is based on a) Rate governing bond call provisions. b) Broker/dealer investment in Treasury Securities. c) Rate banks charge broker/dealers for loans secured by securities. d) Debit balances in customer margin accounts.

Answer 117

C The broker call rate is the rate banks charge broker/dealers for loans to customers for margin account purchases.

Question 118

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

Answer 118

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

Question 119

#89. Which of the following is not a characteristic of Brady Bonds? a) Pay semiannual interest b) Collateralized by U.S. Treasury zero coupon bonds c) Issued in U.S. dollars d) Issued by debt-troubled developing nations

Answer 119

A Brady Bonds are OIDs.

Question 120

#90. The death benefit payable during the accumulation period of an annuity contract I. Is based on the greater of the gross payments to date or the value of the account at the time of death. II. Is not payable after annuity payments have started. III. Is the annuity feature that guarantees payments for the life of the annuitant. IV. Is available only with fixed annuity contracts. a) II and III b) III and IV c) I and II d) I and IV

Answer 120

C The death benefit during the accumulation period protects the beneficiary in case the annuity owner dies before receiving annuity payments. After payments have begun, the annuity option chosen will determine what, if any, payments are made to the beneficiary upon the death of the annuitant.

Question 121

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

Answer 121

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

Question 122

#93. 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

Answer 122

A If the holding period measured is seasonally skewed, converting it to an annualized return provides an inaccurate result. Annualized return is not necessarily more accurate, and does not consider a longer time period. Holding period return is not required disclosure.

Question 123

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

Answer 123

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

Question 124

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

Answer 124

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

Question 125

#97. 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

Answer 125

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.

Question 126

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

Answer 126

A 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.

Question 127

#100. Which of the following is NOT true regarding the net present value? a) It is used to calculate holding period return. b) It works best for long-term investments. c) It considers profits and losses from a today’s value perspective. d) It expresses the future value of an investment in today’s dollars.

Answer 127

C The Net Present Value (NPV) is the future value of an investment expressed in today's dollars. The net present value considers the future cash flows from a today's-value perspective. The net present value only considers cash flows but not profits and losses.

Question 128

#101. 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.

Answer 128

C 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.

Question 129

#102. Which of the following withdrawal circumstances subject the retirement plan participant to a premature withdrawal penalty? a) A loan from the plan b) Participant's debt c) Participant's disability d) Death of participant

Answer 129

B The following are considered exceptions to the early distribution rule: death of the participant, the participant's disability, a divorce decree, as a series of equal payments (at least annually) over the participant's life expectancy, a loan from the plan, as part of a qualified rollover.

Question 130

#104. A customer shorts one ABC Jan 65 call for a premium of 4 and holds one ABC Apr 70 call for a premium of 1. If the market price of the underlying security is 62, what is the probable result? a) $300 loss b) $300 gain c) $800 gain d) $800 loss

Answer 130

B If the market price remains at 62, the options should expire since they're both out-of-money. This would give the customer a $300 profit.

Question 131

#107. An employee quits her job where she has a balance of $10,000 in her employer-provided qualified plan. If she decides to move the balance to a traditional IRA through a direct transfer, how much will be transferred from one plan administrator to another, and what is the tax consequence? a) $8,000, tax on growth only b) $10,000, tax on growth only c) $10,000, no tax consequence d) $8,000, no tax consequence

Answer 131

C During an IRA custodian-to-custodian transfer, the full amount gets reinvested from one plan to the other, and there is no tax consequence.

Question 132

#108. On which of the following forms would a publicly held corporation file details concerning a 10% change in ownership with the SEC? a) 8K b) 8Q c) 10K d) 10Q

Answer 132

A Annual information is filed on the 10K, quarterly information is filed on the 10Q, and details concerning significant changes are filed on the 8K.

Question 133

#109. A corporation offers its shareholders the privilege of obtaining its shares at a fixed price. What type of product is the corporation issuing? a) Calls b) Cumulative preferred stock c) Rights d) Puts

Answer 133

C Corporations issue rights to allow shareholders to maintain their same ownership percentage in a corporation when new shares are issued. These shares are purchased at a fixed price (subscription price), which is lower than the public offering price.

Question 134

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

Answer 134

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

Question 135

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

Answer 135

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

Question 136

#112. The Administrator has the right to request examination of all broker/dealer records for the previous a) 3-year period. b) 5-year period. c) 7-year period. d) 10-year period.

Answer 136

A Broker/dealers are required to maintain all customer files for 3 years, and the Administrator may examine all broker/dealer files.

Question 137

#113. An issuer may use which registration method if the same offering is registered simultaneously with the SEC under the Securities Act of 1933? a) Registration by coordination b) Registration by qualification c) Registration by filing d) Registration by notification

Answer 137

A An issuer may submit a registration by coordination if the same offering is registered simultaneously with the SEC under the Act.

Question 138

#114. A broker/dealer that is making a market in a particular security is said to be acting as a) A principal. b) An account executive. c) A broker. d) An issuer. When a firm is a market maker in a security, that firm is selling from its own account, and acting as dealer or in a principal capacity.

Answer 138

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

Question 139

#116. Which of the following have the highest monthly payment guaranteed by the government? a) GNMA b) T-note c) GO d) T-bond

Answer 139

A T-bonds and notes pay semiannually, as does a General Obligation municipal bond. GNMA is a monthly pass-through of interest and principal with payment that is government-guaranteed.

Question 140

#117. 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

Answer 140

B Duration is the measure of a bond’s expected volatility in a changing interest rate environment. It identifies the period of time during which an investor can expect return of principal. Duration factors in the weighted average of all cash flows until the investor realizes repayment of the loan. A zero coupon bond’s duration equals its maturity

Question 141

#118. XYZ Corporation is evaluating a proposed business project using IRR. Which of the following is true? a) If the IRR is greater than the project's cost of capital, or hurdle rate, the project will add value. b) IRR measures growth over defined time periods and does not factor in cash inflows which the manager cannot control. c) The IRR method is always superior to the benchmark portfolio comparison. d) The project’s IRR must exceed the risk-free rate of return to add value for the company.

Answer 141

A The internal rate of return evaluates an investment by factoring the total of all cash inflows and outflows and their timing, discounted to a required rate of return, or hurdle rate.

Question 142

#120. Which of the following is not a component of the capital asset pricing model? a) Market return b) Internal rate of return c) Beta d) Risk-free rate of return

Answer 142

B The CAPM identifies a security’s expected risk-adjusted return. The formula is RR = RF + beta(market return – RF).

Question 143

#121. Which of the following is NOT true concerning bid and ask quotes? a) When buying or selling for the accounts of others, a broker/dealer is remunerated by a commission. b) The bid is the smaller number and is defined as the lowest price a seller is willing to accept for the security at a particular time. c) The ask, or “offer,” is the larger number and may be referred to as the “POP” when discussing mutual fund shares. d) The difference between the bid and the ask is the “spread” and represents the market maker’s mark-up or gross profit.

Answer 143

B Although the bid is the lower of the two numbers, it is defined as the highest price that a buyer of a security is willing to pay at a given time.

Question 144

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

Answer 144

C 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.

Question 145

#123. The sale of a security to an insurance company is called a) Qualified exemption. b) Dealer exemption. c) Sophisticated investor exemption. d) Insurance exemption.

Answer 145

C Among exempt transactions are those offerings directed to insurance companies; these transactions are considered institutional transactions and fall under exemptions available to sophisticated or accredited investors.

Question 146

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

Answer 146

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

Question 147

#127. 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

Answer 147

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

Question 148

#128. A customer sells an ABC July 50 put for 1.50 and buys an ABC July 55 put for 3. The market value of ABC is 45, and the options are trading at their intrinsic value. What is the gain or loss? a) Loss of $350 b) Gain of $350 c) Loss of $750 d) Gain of $750

Answer 148

B Premium is -3 + 1.50 = -1.50; Market is +55 minus 50 = +5; -1.50 + 5 = +3.50 X 100 = $350 gain.

Question 149

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

Answer 149

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

Question 150

#130. When comparing the IRR of two investments yielding the same amount, which provides the most value to an investor? a) The lower dollar value over the term of the investment. b) Highest IRR above “0”. c) The higher dollar value over the term of the investment. d) Lowest IRR as it represents the discounted value to investors.

Answer 150

B 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.