Series 65: Simulated Exam 4 || very Flawless.
A primary issue is
A. the first transaction between two parties in the over-the-counter market.
B. a new offering of an issuer sold to investors
C. a secondary market transaction in a security recently offered to the public.
D. a sale between investors of securities traded on the New York Stock Exchange. correct
answers A new offering of an issuer sold to investors
A primary issue is a new offering of securities by an issuer sold to investors. Transactions
between two investors in the over-the-counter market refer to secondary transactions (the market
between investors). A sale between investors of securities traded on the New York Stock
Exchange is another example of a secondary transaction.
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 that both receive
compensation, who must register as an investment adviser under the Uniform Securities Act?
A. Only George
B. Only Judy
C. Both
D. Neither correct answers Both
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 that both are). Even without recommending
specific securities, the fact that Judy suggests asset allocation percentages constitutes investment
advice. Both Judy and George provide advice regarding securities for compensation and must
register, unless specific exemptions apply.
Which of the following actions by an agent would be an unethical practice under the NASAA
Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents?
A. Recommending securities that result in losses in the customer's account
B. An agent with discretionary authority entering a buy order for a security when its price is
rising
C. Telling a customer that the investment being recommended will be sold from the inventory of
the agent's firm
D. Splitting commissions with a customer service representative who is not registered but works
for the same firm correct answers Splitting commissions w/ a customer service representative
who is not registered but works for the same firm
,Commissions can be received only by those with the appropriate registrations. A nonregistered
person cannot participate in transaction-based compensation. We can never guarantee that our
recommendations will be successful, and sometimes they do result in losses.
Which of the following statements regarding warrants is true?
A. Warrants' terms are generally shorter than rights' terms.
B. Warrants are safer than corporate bonds.
C. Warrants are often issued with other securities to make the offering more attractive.
D. Warrants give the holder a perpetual interest in the issuer's stock. correct answers Warrants
are often issued w/ other securities to make the offering more attractive
Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants
are long-term options to buy stock, and because they are equity securities, warrants, as
investments, are considered less safe than bonds.
Which of the following statements regarding provisions of the Investment Advisers Act of 1940
is true?
A. Pledging a client's contract as collateral for a loan to the adviser would not be considered an
assignment of the contract.
B. Five Partners Advisers, Ltd., must inform all clients that one of the five partners has retired
and been replaced by a new partner.
C. Big Gains Registered Investment Advisers must disclose its sources of information for
specific recommendations they make to their clients.
D. An investment adviser must obtain client permission to accept a buyout offer for all of the
adviser's stock. correct answers Five Partners Advisers, Ltd., must inform all clients that one of
the five partners has retired and been replaced by a new partner
Both state and federal law require advisers operating as partnerships to notify their clients of
changes in partners where it represents a minority interest in the firm. No adviser is required to
disclose the sources for a particular recommendation; that is not the same thing as the
requirement to disclose the use of material prepared by a third party. An advisory firm can be
sold without client permission. However, if the transaction results in a change that would be
deemed to be an assignment, the adviser must obtain the consent of the clients to maintain their
contracts. The regulatory bodies consider a pledge of clients' contracts to be an assignment.
Under modern portfolio theory (MPT), the optimal portfolio has
A. the least return for a given amount of risk
B. no risk for a given amount of return
C. the most return for a given amount of risk
D. the most return for the most amount of risk correct answers The most return for a given
amount of risk
,Under modern portfolio theory (MPT), the optimal portfolio is one that has the most return for a
given amount of risk.
An analyst uses a stock selection method that involves analyzing a specific corporation, followed
by evaluating where it fits in its industry and then viewing the overall economy. The term that
best describes this method is
A. efficient frontier.
B. capital asset pricing model.
C. bottom-up.
D. top-down. correct answers Bottom-up
The bottom-up method of stock selection goes from micro to macro—that is, identifying the
specific company and then working up through the overall economy. It is the opposite of top-
down.
Under the minimum distribution rules, Jason is required to take a minimum distribution of
$10,000 in 2023 from his IRA. However, a distribution of only $8,000 has been made. Assuming
that Jason does not correct the problem, what is the dollar amount of penalty that may be
assessed in this situation?
A. $4,000
B. $500
C. $200
D. $2,000 correct answers $500
The penalty for failure to make the correct amount of required minimum distribution is 25% of
the difference between the minimum required amount and the actual distribution. In this case,
this would be 25% of $2,000 ($10,000 − $8,000) or $500. Please note that the SECURE Act 2.0
reduced the penalty to 25% or even as low as 10% if promptly corrected.
A client in the 28% marginal federal income tax bracket invests in a corporate bond with an 8%
coupon. To calculate the client's after-tax rate of return,
A. divide 0.08 by 0.28.
B. multiply 0.08 by 0.72.
C. divide 0.08 by 0.72.
D. multiply 0.08 by 0.28. correct answers Multiply .08 by .72
To determine a taxable bond's after-tax rate of return, multiply the coupon rate by the
complement of the client's marginal federal income tax bracket. The client's tax bracket is 28%
(0.28), so the complement is 100% − 28% (1.00 − 0.28) = 0.72.
A mortgage-backed security (MBS), such as a Ginnie Mae, makes a combination principal and
interest payment to an investor. This payment will be
, A. taxed as a capital gain if underlying mortgage is prepaid.
B. taxed as ordinary income.
C. tax free.
D. partly taxed as ordinary income and partly a tax-free return of principal. correct answers
Partly taxed as ordinary income and partly a tax-free return of principal
All interest payments made on a mortgage-backed security (MBS) are taxed as ordinary income.
MBSs may make principal and interest payments to investors, which are partly taxed as ordinary
income and partly tax-free returns of principal.
A corporation sponsors a defined benefit pension plan. The assets of the plan are invested in a
diversified portfolio of large-cap stocks. Which of the following options positions would be most
appropriate if the corporation wished to protect their ability to meet their obligations to
employees?
A. Sell S&P 500 index calls
B. Sell S&P 500 index puts
C. Buy S&P 500 index puts
D. Buy S&P 500 index calls correct answers Buy S&P 500 index puts
In a defined benefit plan, the corporation is assuming the investment risk. Regardless of the
security, the best way to protect a long position is to buy a put, either on that security or on an
index with a close correlation. In this case, with a portfolio of large-cap stocks, the S&P 500
index would seem to be the appropriate option to use.
One of the reasons why the discounted cash flow method of valuation is useful in assessing the
value of fixed income instruments is
A. the predictability of income.
B. the known maturity date.
C. the priority of claim on earnings.
D. the availability of ratings. correct answers The predictability of income
Discounted cash flow evaluates the expected cash flow from an investment and then factors in
the time value of money. Obviously, if there is no predictable cash flow (not the case with the
fixed interest payments on a bond), there are no reliable numbers to plug into the formula.
A retired woman whose sole income comes from a portfolio of investments with a fixed rate of
return is most affected by
A. high income taxes
B. high inflation
C. bearish market conditions
D. volatile interest rates correct answers High inflation
