Trading
Investors open margin accounts to
A)
leverage their investment dollars
B)
save on taxes
C)
increase the reliability of returns
D)
obtain reduced commissions
A)
leverage their investment dollars
Margin accounts employ the use of leverage—borrowed money. If the investment is successful, the leverage magnifies returns. However, if unsuccessful, the losses are magnified and can even be greater than the amount invested.
If a person who is not an agent or broker-dealer makes a false statement of material fact in connection with the sale of a security, that person
The Uniform Securities Act makes it illegal for any person to commit a fraudulent act in connection with the sale or offer for sale of a security, not just agents and broker-dealers. The Administrator does not have the power to arrest anyone but may bring the case to the attention of the attorney general of the state, who can issue a warrant for the arrest.
Which of the following statements are true about both an individual Roth IRA and a Roth 401(k) plan?
1. Contributions are made with after-tax dollars.
2. One must have AGI below a certain level in order to maintain either Roth.
3. If all the conditions are met, withdrawals are tax free.
4. There are no RMDs at age 73.
A)
I and II
B)
II and IV
C)
I, III, and IV
D)
III and IV
C)
I, III, and IV
In any Roth plan, contributions are made with after-tax dollars, and assuming all conditions are met, withdrawals are tax free. However, unlike the individual Roth IRA, there are no earnings restrictions on participants in a Roth 401(k) plan. Furthermore, effective 2024, the Roth 401(k) account joins the Roth IRA with respect to there being no required minimum distributions (RMDs) starting at age 73.
Which of the following statements regarding a 100% stock dividend are true?
1. The cost basis per share is reduced by half.
2. The total market value of the outstanding stock decreases.
3. The total market value of the outstanding stock will increase as a result of the dividend.
4. The number of shares doubles.
A)
II and IV
B)
I and IV
C)
I and III
D)
II and III
B)
I and IV
In a 100% stock dividend, which is essentially the same as a 2:1 stock split, the number of outstanding shares is doubled and the cost basis per share is reduced by half. That is, if an investor purchased 100 shares at $60 per share and several years later receive a 100% stock dividend, that initial purchase of $6,000 now represents a holding of 200 shares. That makes the adjusted cost basis $30 per share. The total market value (market cap) of the issuer's stock will generally remain the same.
Which of the following are not considered money market instruments?
1. American depositary receipts
2. Commercial paper
3. Corporate bonds
4. Jumbo (negotiable) certificates of deposit
A)
III and IV
B)
I and III
C)
II and IV
D)
I and II
B)
I and III
A money market instrument is a high-quality, short-term debt security with maturity of one year or less. American depositary receipts (ADRs) are equity, and corporate bonds are long-term debt instruments.
Which of the following could accelerate a rise in a bull market?
A)
Sell stop
B)
Buy stop
C)
Buy limit
D)
Sell limit
B)
Buy stop
Buy stop orders are placed above the market, and as prices increase, the stops are hit, creating additional buying.
To register a sole proprietorship as an investment adviser in a state, the application for initial registration (Form ADV) must be filed with the appropriate party. This application must include all of the following except
Articles of incorporation only apply to corporations. Sole proprietorships are not incorporated. To register as an investment adviser in a state, Form ADV is filed with the Administrator or with a central registration depository designated by the Administrator. The application must include, among other things, a consent to service of process, appropriate fees, and the brochure or any other information that will be used to solicit clients.
If Janet established a Coverdell Education Savings Account for her grandson, in each successive year, she may contribute
A)
$4,000.00
B)
$2,000.00
C)
$3,000.00
D)
$1,000.00
B)
$2,000.00
Under current regulations, the maximum contribution to a Coverdell Education Savings Account is $2,000 annually.
Which of the following statements best describes cumulative preferred stock?
A)
Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend.
B)
Owners lose any claim to dividends that are not paid in any one year.
C)
Owners are allowed to vote for directors using the cumulative voting procedures.
D)
Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.
D)
Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.
Owners of cumulative preferred stock have a continuing claim to their dividends, even when the directors pass a dividend. Their claim accumulates, which means that all past dividends (arrears), as well as current dividends, must be paid before any dividend can be paid on common stock. By contrast, the owners of noncumulative preferred stock lose their claim to dividends that are not paid in any one year.
The bond document that states the issuer's obligation to pay the investor a specific rate of interest for the use of the funds as well as any collateral pledged as security for the loan and all other pertinent details might be referred to by all of these terms except
A)
the deed of trust.
B)
the indenture.
C)
the debenture.
D)
the bond contract.
C)
the debenture.
A debenture is an unsecured long-term debt security. Whether it is a debenture or a secured bond (such as a mortgage bond) there is, in essence, a contract between the borrower (the issuer) and the lender (the investor). The terms of the loan are expressed in a document known as the bond's indenture. The indenture (sometimes also referred to as the deed of trust) states the issuer's obligation to pay back a specific amount of money on a specific date. The indenture also states the issuer's obligation to pay the investor a specific rate of interest for the use of the funds as well as any collateral pledged as security for the loan and all other pertinent details.
Which of the following transactions on the NYSE in ABC common stock would meet the minimum size requirement to be considered a block trade?
A)
200,000 shares
B)
100,000 shares
C)
$100,000 total market value
D)
10,000 shares
D)
10,000 shares
A block trade is defined as at least 10,000 shares of stock or a trade with a total market value of at least $200,000.
Under the Securities Act of 1933, commercial paper is exempt from the prospectus delivery requirements or registration, unless its maturity is more than how many months?
For exemption under the Securities Act of 1933, commercial paper must mature in nine months or less.
Which of the following is an allowable early withdrawal from a traditional IRA without penalty?
A)
A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence.
B)
A single parent supplements a home equity loan with $5,000 from her IRA to pay for an additional home (a vacation home).
C)
A person withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses.
D)
A single parent withdraws funds from her IRA to pay for the education of a nephew.
A)
A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence.
Any individual withdrawing $10,000 from his IRA to purchase his first principal residence would have the penalty waived. The wealth of the individual is not relevant. The purchase must be a first-time purchase as well as the primary residence. A single parent who withdraws funds from her IRA to pay for the education of a nephew will pay a 10% tax penalty. Educational withdrawals are limited to the taxpayer or a spouse, child, or grandchild. A single parent who supplements a home equity loan with funds from her IRA to pay for an additional home will pay a penalty because only a primary residence can be purchased with early withdrawal funds. A person who withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses will pay a penalty because the purchase is not for his first principal residence.
One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote
A)
the stock must be paid for in full before the annual meeting.
B)
the company must be current on its dividends to preferred stockholders.
C)
ownership must be established by the record date.
D)
the stockholder must be a natural person.
C)
ownership must be established by the record date.
Only stockholders who are on the company's books by the record date are eligible to vote.
GHI currently has earnings of $4.00 and pays a $0.50 quarterly dividend. If GHI's market price is $40.00, the current yield is
A)
15.00%.
B)
10.00%.
C)
5.00%.
D)
1.25%.
C)
5.00%.
The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 market price = 5% current yield.
Which of the following positions would create the most risk for an investor?
A)
Sell short 100 shares of SSS and sell 1 SSS put.
B)
Buy 100 shares of SSS and sell 1 SSS call.
C)
Buy 100 shares of SSS and buy 1 SSS put.
D)
Sell short 100 shares of SSS and buy 1 SSS call.
A)
Sell short 100 shares of SSS and sell 1 SSS put.
In the securities industry, there are two strategies that present an unlimited loss potential. Those two are a short sale of stock and selling an uncovered call option. In a short sale, the investor has borrowed stock, and that stock must eventually be returned. That means buying it in the open market, and, because there is no limit on how high the price of a stock can go, the potential loss is infinite. If the short seller also sells a put option, a premium will be received. If the stock price rises above the strike price, the put option will expire and the seller will keep the premium. Even though the premium is now in the pocket of the short stock seller, the potential loss is infinity minus the premium and that is still infinite. Short stock sellers protect themselves from this problem by going long a call option in the stock. That gives them a guaranteed buy-back price (the strike price of the call). Buying 100 shares of a stock and then writing a call on it is a covered call with limited loss. Buying stock and buying a put carries a maximum loss of the combined purchase prices.
As written in the Investment Advisers Act of 1940, a "person associated with an investment adviser" is any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser. Persons associated with an investment adviser whose functions are clerical or ministerial are not included in this definition. Based on that definition, all of the following would be associated persons except
Graphic design would be considered a clerical function. All of the other choices describe persons who meet the definition.
All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan except
A)
the nonqualified plan provides greater flexibility.
B)
the nonqualified plan provides an immediate income tax deduction for the employer.
C)
the nonqualified plan can discriminate in favor of highly-compensated employees.
D)
the nonqualified plan is not subject to ERISA reporting and disclosure requirements.
B)
the nonqualified plan provides an immediate income tax deduction for the employer.
The answer is the nonqualified plan provides an immediate income tax deduction for the employer. Nonqualified plans do not provide a tax deduction to the employer until the employee receives the economic benefit as income at some point in the future. They are, however, more flexible because they do not have to comply with ERISA reporting and non-discrimination requirements.
Which of the following statements regarding preemptive rights is true?
A)
Neither common nor preferred stockholders have the right to subscribe to a rights offering.
B)
Preferred stockholders do not have the right to subscribe to a rights offering.
C)
Common stockholders do not have the right to subscribe to a rights offering.
D)
Both common and preferred stockholders have the right to subscribe to a rights offering.
B)
Preferred stockholders do not have the right to subscribe to a rights offering.
Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.
A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct?
When interest rates go down, bond prices will go up. As far as which bond will sell at the higher premium using the discounted cash flow method, it is clear that the bond with the longer duration will be worth more.
All of the following statements about short sales are true except
A)
risks can be minimized by confining short sales to cash accounts rather than margin accounts.
B)
in a short sale, an investor sells securities she does not own.
C)
the potential loss to the investor is unlimited
D)
in a short sale, an investor hopes that the price of a security will go down.
A)
risks can be minimized by confining short sales to cash accounts rather than margin accounts.
Because borrowing is involved, all short sales must take place in a margin account, never in a cash account. In a short sale, an investor sells securities she does not own. The investor must later purchase securities to cover the short sale. If the price of the securities drops, the investor profits by being able to buy back (cover) the short position for less than the sale proceeds. The investor realizes a loss if the price of the securities goes up. And, that loss is potentially unlimited because there is no ceiling on the upper limit of a stock's price.
According to the Investment Advisers Act of 1940, how can records of the investment adviser's business be stored during the first two years?
The act requires certain records of business activities to be kept for five years (the first two in a readily accessible place subject to SEC examination at any time). Records originated on paper may be microfilmed or microfiched, and records originated on computer may be stored electronically. The USA has the same rule, and in both cases, the key point is that any storage vehicle used must be able to generate a hard copy while the examiner is present. One other requirement applies to computer disks, and that is that they cannot be rewritten.
A 45-year-old employment counselor has a Keogh plan for himself and 3 full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA?
A)
He may invest any amount up to 100% of his earned income.
B)
He may not have an IRA.
C)
He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less.
D)
He may have an IRA but may not make a contribution for this year.
C)
He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less.
Regardless of how much is invested in a Keogh plan, an investor may still invest in an IRA if he has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible.
Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except
A)
the holder of an ISO can recognize capital gain (loss) as a result of exercise and sale, whereas ordinary income (loss) is the result with an NSO.
B)
there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO.
C)
ISOs are the less common of the two.
D)
at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation.
D)
at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation.
Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. . One of the differences is that ISOs are not used as often as NSOs; they are less common. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.
A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The investment adviser representative suggests a stock paying a $0.28 quarterly dividend. That stock will exactly meet the income objective if it has a current market price of
The first thing to do is annualize the dividend by multiplying the $0.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666, or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the choices by 6% to see which one is closest to $1.12.