All of the following investments are eligible for a traditional IRA EXCEPT:
A)works of art.
B)limited partnerships.
C)growth-oriented securities.
D)covered call writing.
Ans. A
Gems, intangibles, and works of art are ineligible investments for an IRA. Covered call writing is allowed, but speculative options strategies are not. Limited partnerships are permissible investments for an IRA. Growth-oriented securities, and sec
If a company with 10 million shares outstanding with total earnings of $50 million pays a $2 dividend, the dividend payout ratio is:
A) 40%.
B) 20%.
C) 4%.
D) 25%.
Ans. A 40%
Dividend payout ratio is determined by dividends paid per share divided by earnings per share. In this case, earnings per share (EPS) is $50 million � 10 million shares = $5 per share. The company paid out in dividends $2 for each $5 earned for
All of the following are general principles of the prudent investor standard EXCEPT
A)liquidity of investment
B)reasonable expected returns
C)profit guarantees
D)diversification
Ans. C Profit guarantees
The prudent investor standard does not require a guarantee of profit, but it does include using skill and caution to achieve diversification, liquidity, and the goal of obtaining a reasonable return based on a reasonable amount of
Creative Wealth Management (CWM), an investment adviser registered in five states, has a preferred brokerage arrangement with Bullish Bobbie Brown Securities (BBBS), a FINRA member broker-dealer. If one of CWM's clients chooses to use a broker-dealer othe
Ans. i and iii
Because of preferred arrangements between the IA and the BD, it is likely that larger orders will be combined (with a concurrent cost saving) and there may be a better commission schedule available for the adviser's clients. This would not
All of the following statements regarding an investment's internal rate of return (IRR) are true EXCEPT:
A)IRR can easily be calculated for investments with uneven cash flows.
B)IRR expresses the rate of interest that matches the initial investment with t
Ans. A
IRR is the rate of interest that equates the initial investment with the present value of future cash flows; it is the rate of return that results in an investment having a net present value of zero. It is possible, although difficult, to calculate
An IAR with a state-registered adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this
Ans. A
These brochures must be delivered at the time of the sales presentation. As a practical matter, the signing of the contract won't take place until the prospective client decides to engage the services of the IA.
Which of the following vehicles make use of the unified estate tax credit?
i. bypass trust.
ii. generation skipping trust.
iii. living trust.
iv. simple trust.
A)I and II.
B)III and IV.
C)II and III.
D)I and IV.
Ans. A
Both the bypass trust and the generation skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually gran
A broker-dealer registered with State A created a website 2 years ago to promote their services. Recently, they hired a new media person who totally redesigned the site. Under the recordkeeping requirements of the Uniform Securities Act,
A) there are no r
Ans. D.
Websites are treated as would be any other advertisement. So, the original site design is kept for three years and, whenever revised, the new copy is maintained and starts a new retention requirement for that copy. Therefore, you will likely have
Judy is in the business of giving general investment advice, suggesting appropriate asset allocation percentages, but not recommending specific securities. George's business model is giving investment advice and recommending specific securities. Assuming
Ans. B
Two of the three critical elements in the definition of investment adviser are whether the person provides advice regarding securities and receives compensation for doing so. (The third element is "being in the business" and the question states tha
An agent is using social media to try to build her business. If her Facebook page allows for followers to "like" her, that would be considered
A) misleading content
B) illegal content
C) interactive content
D) static content
Ans. C.
One of the things that differentiate interactive content from static content is the ability for persons other than the originator of the content to have access. Posting a like to a Facebook page is an example of this.
Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of:
A) the majority vote of the noninterested directors.
B) the majority vote of the outstanding shares.
C) the m
Ans. C.
The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority
The present value of a dollar:
A) cannot be calculated without knowing the level of inflation.
B) indicates how much must be invested today at a given interest rate, to equal a specific cash value in the future.
C) is equal to its future value if the leve
Ans. B.
The present value of a dollar will indicate how much must be invested today at a given interest rate, to equal a cash amount required in the future.
Reference: 12.1.1.2 in the License Exam Manual
With regard to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, proscribed actions would include:
i. accepting an order from a third party after written trading authorization has been received
ii. fo
Ans. C.
Prohibited actions under the policy would be guaranteeing a client against loss by agreeing to repurchase a security at its cost and borrowing money from a client who is not in the money-lending business.
Reference: 2.11.25 in the License Exam Man
A "margin account" is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities using marginable securities in the account as collateral. Which of the account documents authorizes the use of those securities as
Ans. D.
It is the credit agreement, sometimes referred to as the margin agreement, which contains all of the terms of the loan. In addition to explaining how the interest is charged and the right of the firm to liquidate collateral if a call for additiona
All of the following are leading indicators for economic growth EXCEPT:
A) stock prices as measured by the S&P 500 index.
B) average weekly initial claims for state unemployment compensation.
C) orders for durable goods.
D) average prime rate.
Ans. D
The average prime rate is a lagging indicator. The duration of unemployment is also a lagging indicator, but the number of initial unemployment claims is a leading indicator. The S&P 500 index and orders for durable goods are leading economic indic
An investor who resides in New York reads a newspaper ad for advisory services in a newspaper published in New Jersey. More than 80% of the newspaper's circulation is in the state of New York. According to the Uniform Securities Act, an offer has been mad
Ans. C
An offer is not made when a newspaper is circulated but not published in the state, or if it is published in the state but has more than 2/3 of its circulation outside of the state.
Reference: 2.13.1 in the License Exam Manual
Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any distributed income will be taxable to
A) the beneficiary
B) the grantor
C) the tru
Ans. A
In most cases, the income distributed from any trust is taxed to the beneficiary (Sylvia). If the income is retained in a revocable grantor trust, then it will be taxed to the grantor. In most other trusts, if the income is retained, it is taxed to
One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the c
Ans. A
Under IRS rules, if part of your retirement plan assets includes company stock, taking that as a distribution (not rolling it over into an IRA) subjects the cost basis to ordinary income tax and any unrealized appreciation is taxed as long-term cap
An investment adviser is doing some research on a company and notices that the current market price is $21 per share. The most recently reported EPS is $3 and the company is paying a 19 cent quarterly dividend. On the balance sheet, the company is carryin
Ans. B.
This is an example of the kind of company appealing to those who follow a value style of portfolio management. The company is selling at a low P/E ratio of 7 to 1 ($21/3) with a liberal dividend yield of 3.62% (.76/$21). The high cash balance only
Under which of the following circumstances would it most likely be presumed that an adviser holds custody of client property?
A) Harold, a client, makes a check intended for his investment account payable to Gibraltar Advisers, which is dually registered
Ans. A
When fees are automatically withdrawn from the client's account, custody of client funds can be presumed. Merely handing an adviser a check payable to a third party, such as a retirement account custodian, does not represent custody, nor are direct
The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations?
A) The policy is surre
Ans. B
Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the
It would be CORRECT to state that variable annuities
A) rarely impose surrender charges
B) generally have somewhat lower operating expenses than mutual funds with the same investment objective
C) offer a way to accumulate funds on a tax-deferred basis
D)
Ans. C
One benefit of the variable annuity is the tax deferral of all earnings in the account. However, in almost all cases, the expense ratio of a VA is higher than that of a mutual fund pursuing a similar investment objective. There are no guaranteed re
Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery which was covered in the new offering prospectus when explaining why he felt
Ans. B.
NASAA considers it to be an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading. Examples of such practices would be:
i. a distribution of any nonfactual data;
ii. any materia
An individual has borrowed $500,000 for a business loan. The loan agreement requires payment in one lump sum at the end of 7 years and stipulates that protection be provided in the form of a life insurance policy on the individual. Which type of insurance
Ans. B
Term insurance is frequently referred to as temporary insurance, because it is often used to cover a specific need. In this case, because the payback is in a lump sum, level term is most appropriate. If it were being amortized over the seven years
Included in the definition of derivative would be all of the following EXCEPT
A) options
B) rights
C) leveraged ETFs
D) futures
Ans. C.
ETFs, whether leveraged or not, are investment companies and are not included in the definition of derivative.
Reference: 9.2.2 in the License Exam Manual
Which of the following is guaranteed by a variable life policy?
A) Cash value.
B) Policy loans after the policy has been in effect for at least 24 months.
C) Minimum separate account performance.
D) Minimum death benefit.
Ans. D.
A variable life policy has a minimum guaranteed death benefit, but there is no minimum guaranteed cash value. There is no performance guarantee on separate accounts and policy loans are required after the policy has been in effect for at least 3 y
An IAR with a state covered adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, a
Ans. A
In this example, the IA brochure and solicitor brochure are required to be delivered with the sales presentation. The contract is not signed until the client agrees to engage the services of the IA If these are not delivered at least 48 hours prior
Which of the following statements is NOT true?
i. A broker-dealer must be a firm or corporation (legal person) as opposed to a natural person (human being).
ii. An investment adviser must be a firm or a corporation as opposed to a natural person.
iii. An
Ans. A.
A broker-dealer or investment adviser can be either a natural person (i.e., organized as a sole proprietorship) or a legal person (i.e., a corporation or partnership). There is no prohibition against an investment adviser representative also being
A new customer has a $35,000 CD maturing in 2 weeks. With the objective of maximizing his income on capital invested, he wishes to invest the proceeds in a mutual fund. Which of the following types of funds should be recommended?
A) An income fund.
B) A s
Ans. A
An income fund is just what the name implies; it invests for income (regular payments of interest and/or dividends).
Reference: 7.1.3 in the License Exam Manual
One of your customers purchased a variable life insurance contract through your firm. After 14 years, he had deposited $15,000 in premiums, and his death benefit had grown to $80,000. Shortly after taking out a loan against cash value of $10,000, he was k
Ans. A
A death benefit payable on a life insurance policy or contract is not subject to taxation. The insurance company will deduct the balance of the $10,000 loan before it releases the death benefit to the beneficiary.
Reference: 17.1.11 in the License
One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of a:
A) AAA corporate bond.
B) small-cap stock.
C) large-cap stock.
D) cumulative preferred stock.
Ans. C
The dividend growth model is a method to value the common stock of a company on the basis of assumed constant growth of dividends in the future. Therefore, it can only be applied to a corporation whose dividends might be expected to increase. It is
An agent taking which of the following actions would be committing a violation?
A) Buying securities in a joint account at the request of one party only.
B) Selling securities from a minor's custodial account without the custodian's consent but with the b
Ans. B
The custodian, not the beneficial owner (minor), is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.
Reference: 20.8 in the License Exam Manual
An investment adviser representative's client lost her father to lung cancer. Among the assets bequeathed to her were 2,000 shares of a tobacco stock. Which of the following is NOT a consideration when recommending to her what to do with the stock?
A) Her
Ans. C
An adviser's recommendations to a client are not impacted by the degree of someone else's investment experience or knowledge. In this case, one could expect some resentment towards holding shares of a tobacco company when the cause of a loved one's
Which of the following is NOT a valuation method for a fixed-income security?
A) Conversion parity
B) Price-to-earnings ratio
C) Dividend discount model
D) Discounted cash flow
Ans. B.
The P/E ratio is only used with common stock. The parity price is a way to value a convertible bond or convertible preferred stock. DCF is one of the most popular ways to value bonds. The DDM can be used with preferred stock, which, because of its
If having discretion over $100 million or more in 13(f) securities, which of the following would be exempt from filing a Form 13F?
A) A natural person who exercises investment discretion over the account of any other natural person or entity
B) A trustee
Ans. C
An institutional investment manager is also a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. For example, an investment adviser that manages private accounts, mutual fund ass
Which of the following are considered to be exempt issuers under the Uniform Securities Act?
i. State of Georgia.
ii. City of London, Ontario.
iii. City of London, England.
iv. Kapco Income Fund, an open-end investment company registered with the SEC.
A)
Ans. A.
Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign governments with whom the United States has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-re
An investment adviser wishes to engage the services of a third party to solicit new clients for the firm. To be in compliance with the Investment Advisers Act of 1940:
i. the solicitor must be registered as an IAR.
ii. compensation may not be sales relate
Ans. B. II and III
Third-party solicitors are not required to be registered as IARs and therefore may not receive sales-related compensation. However, they must not be subject to statutory disqualification that would prevent them from becoming registered.