Series 65 Practice Exam 8

1. Which one of the following would be considered an investment adviser?

2. Tara purchases 100 shares of XYZ Company stock at $50 in a margin account. Tara must deposit:

3. At what point in the business cycle does low economic growth intersect with peak unemployment?

4. Which one of the following bond ratings is the highest?

5. Which one of the following measures the amount of each sales dollar remaining after deducting all expenses for the period?

6. Which one of the following investments is most likely to be vulnerable to interest rate risk?

7. Which of the following statements is correct regarding the federal income taxation of business entities?

8. The Efficient Market Hypothesis (EMH) is an investment theory that asserts it is:

9. Craig, age 57, just retired and rolled over his employer-sponsored 401(k) plan to a traditional IRA. He began taking substantially equal periodic payments from the plan over his remaining life expectancy. Which of the following statements is correct regarding his distributions?

10. Which one of the following represents a mutual fund that only invests in securities of companies outside the United States?

11. If an investment adviser (IA) fails to provide a brochure to a prospective client at least 48 hours prior to the signing of the advisory contract, the client can cancel the contract and receive a full refund of advisory fees paid within:

12. Which one of the following would be considered a qualified custodian under NASAA Custody rules?

13. Joanna purchased a call option, giving her the right to purchase 100 shares of ABC Company common stock at $20 per share. She paid a $2 premium to purchase the option. ABC Company stock increased in value to $28 per share, at which time Joanna exercised the call option. She immediately sold the stock for $28. On her federal income tax return, she will be required to report a capital gain in the amount of:

14. Which one of the following represents a type of dividend that is taxed at favorable long-term capital gain rates?

15. Stacy owned 500 shares of preferred stock of Super Company. Super Company declared a 3-for-2 stock dividend on its common shares. As a result of this transaction, Stacy now owns:

16. Which one of the following represents an option strategy that attempts to maximize an investor’s profit when the price of an underlying security decreases in value?

17. A partner, officer, director, or other individual associated with an investment adviser who gives advice regarding securities is known as a(n):

18. Which one of the following is a prohibited investment in an IRA?

19. Which one of the following would be considered an agent of a broker/dealer?

20. Which one of the following investments has the largest amount of prepayment risk?

21. An investment-grade bond with a par value of $1,000 is currently selling for $900. The bond’s coupon rate is 6% and the yield to maturity is 8.5%. What is the current yield of the bond?

22. Which one of the following is a permitted investment in an Individual Retirement Account?

23. All of the following are required to be on an order ticket, EXCEPT:

24. A period of high economic growth paired with low unemployment will most likely lead to which one of the following?

25. Tommy owns an investment that provides a pre-tax rate of return of 12%. If Tommy is in the 35% federal income tax bracket, and he lives in a state that does not impose an income tax, what is his after-tax rate of return on this investment?

26. Judy has $100,000 to invest. She invests $25,000 in a one-year bond at 5%, $25,000 in a two-year bond at 5.5%, $25,000 in a three-year bond at 6%, and $25,000 in a four-year bond at 6.25%. What type of bond strategy has Judy implemented?

27. The Federal Reserve has control over which one of the following?

28. XYZ Company stock experienced a 9% return. Assuming the following:

• Risk-free rate = 2%
• XYZ Company stock beta = 1.1
• Market return = 8%
• Market beta = 1.0

What is the alpha of XYZ Company stock?

29. What is included in a country’s Gross Domestic Product?

30. ABC Company bonds have a coupon rate of 3%. The bonds have a face value of $1,000 and are selling currently for $900. What is the current yield of these bonds?

31. What risk is most associated with mortgage-backed securities in an environment of falling interest rates?

32. Which one of the following types of property ownership is only available to spouses?

33. Charles is a resident of Illinois. Last year, he purchased a State of Louisiana municipal bond paying 2.5% interest. Which one of the following statements is correct regarding the federal and state taxation of the interest income received by Charles from the bond?

34. A put option is considered “in the money” when the:

35. Charlie has the following tax items for the CURRENT tax year:

• Salary: $100,000
• Short-term capital gain: $10,000
• Long-term capital loss: ($12,000)

What is the amount of capital loss that will be carried forward to NEXT year?

36. BigCo reports the following information as of December 31:

• Sales revenue - $300,000
• Salaries - $180,000
• Cash - $50,000
• Accounts receivable - $130,000
• Equipment - $280,000
• Investments - $100,000
• Accounts payable - $60,000
• Loan payable - $75,000
• Shareholders equity - $425,000

What is the amount of BigCo’s total assets reported on their balance sheet as of December 31?

37. A corporate bond has a coupon rate of 6%. The bond has a 5% yield to maturity. The bond is trading at:

38. Which one of the following statements is correct regarding a Section 457(b) plan?

39. Ray repositions his investment assets during a recession. Ray is exhibiting the behaviors of:

40. Which of the following represents an advantage of an index mutual fund over an exchange traded fund (ETF)?

41. Which one of the following statements is correct regarding an S corporation?

42. Mega Company stock will pay a dividend in one year in the amount of $1 per share. The dividend will increase at a constant rate of 4% thereafter. If investors have a required rate of return of 7%, what is the value per share of Mega Company stock under the constant dividend growth model?

43. Which of the following statements is correct regarding a non-durable power of attorney?

44. Which one of the following represents an insurance product that offers a cash value as well as unbundling of various cost elements?

45. On February 1 of the current year, Charlie purchased 1,000 shares of ABC Company stock for $100 per share, paying a commission of $1 per share at the time of purchase. On December 15 of the current year, he sold all 1,000 shares for $130 per share, paying a commission of $2 per share at the time of sale. What is the amount of the short-term capital gain that must be reported on Charlie’s federal income tax return for the current year?

46. Which of the following statements is correct regarding bond yields?

47. Which one of the following would be considered a federal covered security?

48. Which one of the following represents a type of risk that cannot be eliminated through diversification?

49. Stan, age 61, and Linda, age 50, are a married couple. They are risk averse and are considering the purchase of a $600,000 life insurance policy on Stan’s life. In addition, they might use the cash value of the policy during retirement as supplemental income. Which one of the following could be an appropriate policy for the couple to purchase?

50. Tom borrowed 100 shares of ABC Company common stock in his margin account and sold the shares in the secondary market for $15 per share. Two months later, the price of ABC Company common stock declined to $11 per share, at which time Tom purchased 100 shares. This represents which one of the following transactions?

51. Maria is the custodian for her 17-year-old son’s UTMA account. She wants to give her son experience making financial decisions and has given him permission to make trades in his account. The 17-year-old calls his registered representative (RR), requests to sell 100 shares of Stock A and buy 100 shares of Stock Z. What should the RR do with this request?

52. Which one of the following best describes the difference between monetary and fiscal policy?

53. Malcolm wants to purchase shares in his favorite tech company that will grant him the right to vote for the board of directors. Which one of the following is most likely to meet this criteria?

54. A wheat grower enters into a contract to sell their crop to a cereal company at a set price at a date later in the year. What kind of contract is this?

55. The most common method used to register non-federally covered securities is:

56. An individual had margin interest expense of $12,000. The individual also had the following income:

• Salary - $80,000
• Rental income - $11,000
• Taxable interest income - $3,000
• Tax-exempt interest income - $4,000

How much of the margin interest expense is deductible for federal income tax purposes in the current year?

57. A rational decision maker has the choice between the following two investments, each requiring the same capital contribution:

• Investment A: 50% probability of earning a $20,000 profit
• Investment B: 65% probability of earning a $16,000 profit

Which of the following statements is correct?

58. Jerry is an agent of a broker/dealer. He does not have discretionary trading authority over his client Suzanne’s account. Would it be permissible for Jerry to execute an order on behalf of Suzanne without first obtaining her approval?

59. All of the following are required to register with the SEC, EXCEPT:

60. Rod, age 62, is nearing retirement. He is interested in purchasing an investment that will provide him with a steady income stream. Which one of the following investments would be most appropriate to satisfy his income objective?

61. Which one of the following would be considered a taxable gift for gift tax purposes?

62. Tommy is an investment adviser living and practicing in California. He currently has assets under management of $85,000,000. Which one of the following best represents Tommy’s registration requirements?

63. Which one of the following statements is correct regarding alternative investments?

64. Which one of the following would be considered a security under the Uniform Securities Act?

65. Bob is an investment adviser that has discretionary authority over his clients’ securities. Bob, however, does not have custody of the clients’ securities. Bob is required to maintain a minimum net worth balance of:

66. Currently, a put option on ABC Company stock is selling for a premium of $4. The put option has a strike price of $30. If ABC Company stock is trading at $29 per share, what is the intrinsic value and the speculative value of the put option, respectively?

67. Johnny believes the price of Acme Co stock will decline in the future. Since he did not own any shares of Acme Co stock, he borrowed 1,000 shares and then sold those shares immediately at the current market price. Johnny has engaged in:

68. According to the semi-strong form of the efficient market hypothesis, which one of the following should allow investors to consistently outperform the market?

69. Which one of the following statements is correct regarding mutual funds?

70. Which one of the following is a characteristic of strategic asset allocation?

71. All of the following people would be considered an investment adviser representative (IAR), EXCEPT:

72. Catalina inherited $50,000 from her great-aunt and wants to invest the money in a product that will generate current income. Which one of the following is the best option for Catalina to meet those goals?

73. Which one of the following is required when an investment adviser maintains custody of customer funds and securities?

74. Barry is a sole proprietor with no employees. In the current tax year, he had the following income and deductions:

• Net Schedule C income – $108,000
• Self-employment tax deduction (50% of total self-employment tax) – $8,000

Barry just established a simplified employee pension (SEP) plan for his business. What is the maximum deductible contribution he can make to the plan for the current tax year?

75. Under the Securities Exchange Act of 1934, if a FINRA member is convicted of a DUI felony, this could lead to:

76. Form U4 is used for the registration of a(n):

77. Which one of the following represents the illegal practice of selling stock for the purpose of keeping the price low?

78. Reagan, age 30, plans on opening a bakery in three months. She expects the bakery to experience losses for the first 2-3 years, after which time she expects the bakery to earn a profit. Which one of the following would be the most appropriate form of business for Reagan to select for the bakery, with liability protection and tax efficiency being her primary goals?

79. The average P/E ratio of stocks in the S&P 500 index is currently 22. ABC Company stock currently has a P/E ratio of 41. Based upon this information, ABC Company stock can best be classified as:

80. Laura has a savings account at the local bank that has a current balance of $200,000. The bank is paying her 2% annual interest on the account. On January 1 of the current year, Laura was offered an opportunity to invest in a hedge fund that has an annual rate of return of 11%. Her plan was to invest all but $80,000 of her savings account balance into the hedge fund, but she decided not to invest in the hedge fund due to the risk. Assuming the hedge fund rate of return was as expected, what is Laura’s opportunity cost for the calendar year resulting from her decision not to invest in the hedge fund?

81. Neha wants to buy 2,500 shares of XYZ Company. Fun Bank is the market maker for this stock and advertises at 10:00 a.m. on Tuesday that the bid for XYZ Company’s stock is $35.67 and its asking price is $36. Neha places an order to buy 2,500 shares at $36, but Fun Bank suddenly immediately claims the bid is now $35.97 and the ask is now $36.50. This violates the firm-quote rules established by the SEC and FINRA, and is an example of:

82. Wallace is an investment advisor representative (IAR). He manages the assets of the 401(k) plan for Raycon Corporation. The plan trustee contacts Wallace, asking for a check for $200,000 from the plan to purchase equipment that will be used to produce Raycon’s summer inventory. The IAR should:

83. Dove Corporation is issuing new securities. They have filed a registration statement with the Securities and Exchange Commission (SEC). After the registration is effective, an agent can state that the:

84. A European option can be exercised:

85. Which one of the following statements is correct regarding open-end mutual funds?

86. Which one of the following can be accepted by a professional or firm on a soft-dollar basis?

87. Which one of the following statements is correct regarding preferred stock?

88. Which one of the following individuals would most likely be required to register as an investment adviser?

89. Which one of the following is a permissible performance guarantee that can be made by an agent or investment adviser representative?

90. If the return on a security is normally distributed, with a mean rate of return of 12% and a standard deviation of 3%, the probability of a rate of return being less than 6% is approximately:

91. Donnie is an agent of a broker/dealer. Donnie is licensed in Maryland, and the broker/dealer is registered in all 50 states. One of Donnie’s long-term customers, Sally, retires and decides to move to Florida. Assuming Donnie submits the registration forms to register in Florida, he:

92. A financial manager’s research indicates that a stock being evaluated has a current return of 6%, while the market rate of return is 5%. Based on this information, the stock being evaluated likely has a beta of:

93. Which one of the following statements is correct regarding the registration of investment advisers?

94. Which one of the following statements is correct regarding the characteristics of American Depositary Receipts (ADRs)?

95. Which one of the following statements is correct regarding futures contracts?

96. Given the following series of numbers:

• 4, 9, 16, 9, 9, 23, 2, 8

What is the range statistic?

97. Employer contributions to which one of the following retirement plans must be immediately vested to the employee?

98. Which one of the following statements is correct regarding the Uniform Prudent Investor Act (UPIA)?

99. Which one of the following statements is permitted to be made by an investment adviser representative?

100. Which one of the following represents the definition of a dealer?

101. A front-end load is commonly charged by which one of the following mutual fund share classes?

102. According to FINRA, all of the following elements must be addressed in a firm’s business continuity plan relating to an emergency or significant business disruption, EXCEPT:

103. An investment adviser has been registered with the SEC for the last 10 years. Two years ago, their assets under management (AUM) began consistently declining and has now dropped to $85,000,000 AUM. Which one of the following statements is correct?

104. Which one of the following statements is correct regarding real estate investment trusts (REITs)?

105. Which of the following statements is correct regarding a Section 529 savings plan?

106. What is the net worth requirement for an adviser or broker/dealer to maintain custody of client funds?

107. Ralph is a federally registered investment advisor with $160,000,000 of assets under management. Ralph has recently met with a prospect and is interested in doing business with them. Ralph must provide the prospect with Part 2 of his Form ADV:

108. Which one of the following actions would be considered market manipulation under the Uniform Securities Act?

109. Shelley purchased stock in Johnson Company for $150,000 seven years ago. Shelley died earlier this year, when the stock was worth $220,000. Shelley left the stock to her son, Tom, who sold the stock for $210,000 two months later. For federal income tax purposes, Tom must recognize a:

110. Which one of the following statements is correct regarding the registration of investment adviser representatives (IARs)?

111. According to the investment adviser marketing rules set forth by the SEC, all of the following are prohibited from being used in advertisements, EXCEPT:

112. Solomon, an investment adviser representative, advises his clients to include commodities in their portfolios as a form of diversification. His rationale for this advice is because commodities:

113. According to the NASAA Model Rule concerning Unethical Business Practices, an adviser shall not engage in trading in a client’s account that is excessive in size or frequency in view of the financial resources, investment objectives, and character of the account. This forbidden practice is typically referred to as:

114. An investment adviser must provide prospective clients with Form ADV, Part 2 at least:

115. Investment Advisers are required to retain most of their records for a period of:

116. An individual has an investment account with a current balance of $60,000. In six years, the individual would like to make a 20% down payment on a $600,000 home. Ignoring taxes, approximately what rate of return would the individual need to earn on their investment account to be able to fund the down payment in six years?

117. What entity is responsible for enforcing securities laws and regulating the securities markets?

118. Which one of the following is included in shareholder’s equity?

119. Kai believes that interest rates will be rising over the next year. He wants to invest his money now, but he doesn’t want to miss out on the ability to take advantage of higher rates in the future. Which of the following would be the best place to put his money today?

120. Enrique is in a long position with Stock A. He wants to issue an order with his broker/dealer to minimize any losses with this investment. Which one of the following orders should he make?

121. When considering the time value of money, the term for the process of increasing a present value into a larger future value is known as:

122. Which one of the following statements is correct regarding mutual funds?

123. Which one of the following is the best reason to invest in foreign markets?

124. Reid and Tara Smith, a married couple, have an adjusted gross income of $450,000. Which of the following education funding techniques would be most appropriate to help fund the education of their daughter, Maya?

125. Other things being equal, which of the following actions would increase a client’s net worth?

126. Bob had the following events occur during the year. Which one of the events would be covered by the Securities Investor Protection Corporation (SIPC)?

127. A participant in a traditional IRA must begin taking required minimum distributions:

128. All of the following items would be included on an investor’s personal balance sheet, EXCEPT:

129. A closed-end fund has a net asset value of $19.50. Currently, the bid price is $19.95 and the ask price is $20. Gina invested $20,000 into the fund today. How many shares of the fund did Gina receive in return for her $20,000 investment?

130. Mike is starting a new business. He wants to establish a business entity that provides him with liability protection and allows him to manage the business. Mike is projecting business losses for the first few years, and he would like to deduct these losses on his personal income tax return. To satisfy these objectives, Mike should form a: