Series 65 Practice Exam 9

1. Which one of the following represents the practice of buying and selling securities in a cash account without having the money to cover the trade?

2. The Charter Principal Brokerage (CPB) firm is failing and about to close. Webster has been a client of CPB for five years and has an individual brokerage account with $400,000 in fully-paid stocks and a joint brokerage account with his spouse, Casey, with $500,000 in fully-paid stocks. In addition, Casey has an individual brokerage account at CPB with $400,000 in fully-paid stocks. Which of the following best describes how these accounts will be covered by the Securities Investor Protection Corporation (SIPC)?

3. Which one of the following represents an example of fiscal policy?

4. Which of the following retirement plans typically permit loans?

• I. 401(k) plan.
• II. Defined benefit plan.
• III. Roth IRA.
• IV. 403(b) plan.

5. Which of the following types of interest expense would be deductible for federal income tax purposes?

6. A hypothecation agreement would be required for which one of the following types of accounts?

7. JoBlo Enterprises reported the following information:

• Short-term debt - $200,000
• Long-term debt - $600,000
• Shareholders Equity - $1,200,000

What is JoBlo Enterprises’ debt-to-capital ratio?

8. Which one of the following measures the level of trading activity within a mutual fund?

9. Which one of the following represents a characteristic of a variable annuity?

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

11. Rod, age 60, 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?

12. All of the following individuals have $125,000,000 of assets under management. Which one of the individuals would be required to register with the SEC as an investment adviser?

13. Kevin, an agent of a broker/dealer, receives an order from a major client to sell 5,000,000 shares of ABC Company stock. Kevin realizes this large sale will most likely cause the price of ABC Company stock to decline. As a result, prior to selling the stock in his client’s account, Kevin short sells 10,000 shares of ABC Company stock for his own personal investment account. Kevin’s actions represent the unethical business practice of:

14. ABC Company stock has an ex-dividend date of Tuesday, October 15. When is the last day an investor can purchase the stock and receive the dividend?

15. All of the following are considered securities under the Uniform Securities Act, EXCEPT:

16. ABC Company experiences constant dividend growth at a rate of 5% per year. Its required rate of return is 11%. Assuming ABC just paid a dividend of $1 per share, what is the value of the ABC Company’s common stock, using the constant dividend growth model?

17. A city in California is issuing tax-exempt bonds to build a public school. Interest payments made by the city on the bonds will be payable from the taxes collected from residents living in the city. Which one of the following types of bonds were issued by the city?

18. Which one of the following would be a permitted investment in an IRA?

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

20. If an investor buys 100 shares of stock at $45 per share and simultaneously sells a call option on the stock with an exercise price of $50 for $3, what is the investor’s maximum gain?

21. An Administrator can suspend or restrict the activities of a registrant under any of the following situations EXCEPT:

22. Which one of the following statements is correct regarding different types of risk?

23. Which one of the following is covered by Federal Deposit Insurance Corporation (FDIC) insurance?

24. Which one of the following statements is correct regarding inverse exchange-traded funds?

25. Tom, a self-employed individual, had the following items of income and expense:

• Self-employment income - $120,000
• Self-employment tax - $14,000
• Capital loss - $8,000
• Health insurance premiums - $10,000
• Charitable contributions - $9,000
• Medical expenses - $6,000

What is Tom’s adjusted gross income for federal income tax purposes?

26. Which one of the following represents a type of investor that does not buy and sell securities with enough frequency and volume to obtain discounted fees?

27. The financial statements of Happy Sky, Inc. reflected the following:

• Revenue - $1,000
• Net income before taxes - $100.
• Taxes - $30

What is Happy Sky’s pre-tax profit margin?

28. An investor purchases $10,000 of a mutual fund at $20 per share on January 1, 20X1. All distributions from this investment will be received in cash (not reinvested). On December 11 20X1, they receive a capital gain distribution of $0.50 per share, a non-qualified dividend payment of $0.20 per share, and an interest payment of $0.10 per share. They sell the entire investment on December 31, 20X1 at $25 per share. How will the income from this investment be taxed?

29. A couple is planning on paying for their son’s wedding in six months, and they want to invest the money for that wedding in the meantime. Which one of the following would be the best option?

30. Which one of the following individuals would need to register as an investment advisor representative?

31. Which one of the following is a Federal Reserve activity that affects the financial markets?

32. The annual contribution limit to a Coverdell education savings account is:

33. An investment adviser makes a $1,000 donation to the campaign for a Boston city council candidate, and the candidate subsequently wins their election. How long must the adviser wait before they can be awarded an investment advisory contract from the city of Boston?

34. Which one of the following statements is correct regarding the regulation of investment advisers?

35. Margaret purchased shares of ABC Company stock for $5,000. After 10 years, the shares increased in value to $10,000, and she gifted the shares to her adult son, Ronnie. Ronnie owned the stock for two years, and then sold all the shares for $7,500. For federal income tax purposes, Ronnie must recognize a:

36. Which one of the following types of life insurance policies is characterized by a fixed cash value, fixed premiums, and fixed death benefit?

37. What shape does a normal yield curve take?

38. Is it lawful for an investment adviser to charge their clients both a commission and a wrap fee?

39. If the tax-exempt municipal bond yield is 7% and the investor’s marginal tax rate is 24%, what is the tax equivalent yield?

40. A bond is rated “BBB” by Standard and Poor’s. This bond would be considered:

41. Elizabeth, age 40, has a traditional IRA with a balance of $100,000. Elizabeth can withdraw money from the IRA without paying a 10% penalty if she:

42. Roger sold a May 24.50 put option, receiving a $2 premium on the sale. The stock is currently trading for $25.50 per share. Roger will break even on this transaction if the stock price on the option expiration date is:

43. ABC Company stock is currently trading for $55 per share. Valerie would like to purchase the stock but is only willing to pay $50 per share. Valerie should execute a:

44. Which of the following types of interest expense would be deductible for federal income tax purposes?

45. Horace is a 53-year-old attorney with a 19-year-old son who just graduated from high school. His son will start college after the summer break. Horace is considering retiring early and going back to school to become a teacher. He has a $25,000 CD that just matured. He would like to place this money into an account that would allow the contributed funds to grow on a tax-advantaged basis and could be used to help pay either of their tuition costs. Which one of the following accounts would be best for Horace to establish?

46. Mena invested $100,000 for a 10% interest in Super Duper Partnership, a general partnership. The partnership recently purchased a small building, which has a mortgage outstanding in the amount of $500,000. The mortgage represents the only liability of the partnership. What is Mena’s maximum liability with respect to her partnership interest?

47. Sally has an annuity with a 10-year guaranteed payout. She lists her husband as the primary beneficiary and her brother as the contingent beneficiary. Assume the following:

• Sally passes away in 20X4, one day after beginning the annuity payout.
• Sally’s husband passes away in 20X3.
• Sally’s brother passes away in 20X7.

How does the annuity benefit pay out?

48. Becky, age 60, owns a modified endowment contract with a cash value of $60,000 and a basis of $40,000. If she withdraws $30,000 from the policy, how much will she pay in taxes, assuming a marginal income tax rate of 30%?

49. How many continuing education (CE) credits must an investment adviser representative (IAR) attain to maintain their IAR registration?

50. Under ERISA, if employees are permitted to select investments in their 401(k) plan, the employer must generally offer the employees at least:

51. Use of insider information is consistent with:

52. An investment adviser representative sends an email to his top 10 clients to tell them about a new investment he has just found out about. This practice is considered:

53. An Investment Adviser is analyzing common stock of QWR Company, a publicly traded company. When performing the research, the IA reviews the company’s management, financial statements, financial ratios, and credit rating. What type of analysis is the IA performing?

54. An investment adviser firm has offices in States A, B, & C. An investment adviser representative employed by the firm conducts business in States A & B only. Where must the IAR register?

55. Jenna is starting a business with $100,000 of her own capital. She believes the business will not be profitable until the third year of operation. Which one of the following business models would provide Jenna with liability protection and would allow her to deduct losses from the business on her personal income tax return?

56. If an individual’s current assets doubled and their current liabilities quadrupled, what would be the effect on their current ratio?

57. An advantage of an exchange-traded fund over an index mutual fund is that an exchange-traded fund:

58. A farmer just finished planting their corn crop in July, and they’re concerned the price of corn will fall before they have a chance to harvest it in October. Which would be the most appropriate strategy for the farmer?

59. Which one of the following violations of the Uniform Securities Act is most likely to result in criminal penalties?

60. Marybeth borrowed 300 shares of BigCo Company stock and immediately sold the shares at the market price of $35 per share. Six months later, the stock price of BigCo Company stock dropped to $30 per share, so Marybeth purchased 300 shares and returned the shares to the lender. Returning the shares to the lender represents the act of:

61. Jerry is an agent of a broker/dealer. He does not have discretionary trading authority over his client Suzanne’s account. Suzanne asks Jerry to purchase 500 shares of ABC Company stock at the price of his choosing. ABC Company is publicly traded. Is Jerry permitted to place this order?

62. An executive received restricted stock from a company that is subject to the reporting requirements of the SEC. What is the mandatory holding period required before the executive is permitted to sell the stock?

63. Which one of the following types of employer-sponsored retirement plans utilizes an actuary to determine the retirement benefit a participant will receive upon attaining a specified age?

64. ABC Company had revenue of $10,000,000, salary expense of $1,000,000, rent expense of $500,000, and a gross profit margin of 25%. What is the company’s cost of goods sold?

65. An investor is looking to purchase an equity exchange-traded fund. Based on the return and risk characteristics of the funds listed below, which one of the following would be the most appropriate investment?

66. The USA Patriot Act requires financial institutions to develop a Customer Identification Program (CIP) that implements reasonable procedures to:

67. Naming a child as the beneficiary of a retirement plan can help avoid:

68. All of the following would be considered an associated person of an investment adviser, EXCEPT:

69. Given the following information regarding Joker Corporation:

• Total assets - $12,000,000
• Accounts receivable - $3,000,000
• Net income - $4,000,000
• Shareholder’s equity - $10,000,000
• Shares outstanding – 300,000

What is the return on equity for Joker Corporation?

70. Which one of the following represents the best definition of opportunity cost?

71. Which one of the following statements is correct regarding a business continuity plan?

72. Which one of the following would be the most appropriate investment for an investor with a goal of current income?

73. Which one of the following statements is correct regarding the different forms of the efficient market hypothesis (EMH)?

74. The prudent investor rule of the Uniform Prudent Investor Act requires a fiduciary to:

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

76. Joanna, age 57, would like to set up an account for her 4-year-old grandson, Andrew. She would like to make gifts to the account each year equal to the gift tax annual exclusion. Which one of the following accounts would be most appropriate for Joanna to establish for Andrew, if the primary objective is for Andrew to use the funds to purchase a rental property when he is an adult?

77. Investing in a mutual fund that replicates the performance of the securities in the Russell 2000 Index would be an example of:

78. Which one of the following statements is correct regarding asset-backed securities?

79. Matthew does not meet the requirements to be considered an accredited investor. Which one of the following investments would most likely be available for Matthew to purchase?

80. After an investment adviser representative completes an order for a client, he realizes that one of the securities was unregistered. The client has the right to recover:

• I. The current fair market value of the securities purchased.
• II. Interest on the money invested.
• III. Reasonable attorney fees.
• IV. Punitive damages.

81. If an investment advisor provides Form ADV, Part 2 (or an investment adviser brochure) to a client at the time the contract is signed, the client:

82. Which one of the following represents the best definition of an RIA?

83. Which one of the following statements is correct regarding market-linked certificates of deposit (MLCDs)?

84. Which one of the following statements is correct regarding the Employee Retirement Income Security Act of 1974 (ERISA)?

85. Discounting represents the process of:

86. A farmer promising to deliver 30,000 bushels of corn in three months can reduce his price risk by:

87. Which one of the following statements is correct regarding a testamentary trust?

88. Which one of the following would be used by an investor practicing fundamental analysis?

89. A correct statement regarding Modern Portfolio Theory is that it:

90. Which one of the following statements is correct regarding risk?

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

92. A broker/dealer firm:

93. Mara indicates that her investment goals, in order of importance, are as follows:

• Growth
• Tax advantage
• Safety

Which of the following portfolios has the LEAST appropriate asset allocation for Mara?

Portfolio	Small Company Stock	Large Company Stock	Corporate Bonds	Tax-Exempt Bonds
A	10%	30%	25%	35%
B	10%	30%	15%	45%
C	25%	25%	25%	25%
D	30%	25%	25%	20%

94. Which of the following items are subject to inflation risk?

• I. Social Security benefit received before normal retirement age.
• II. AAA-rated 7-year corporate bond with a 4% coupon rate.
• III. Treasury inflation protected security (TIPS).
• IV. 15-year period certain immediate annuity.

95. An investor purchased 1 share of Alpha Company stock for $180 and sold it for $170. If a $3 dividend was paid during the holding period, what was the total return?

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

97. Carlos, an agent of a broker/dealer, is registered in State A, his state of residence. The compliance department of the broker/dealer instructs Carlos to solicit business from new clients in State B. Although Carlos is not registered in State B, the compliance department asks him to wait to register with State B until after a few clients in State B give Carlos business. Is this a violation of securities laws?

98. The NASAA Model Rule on Business Continuity and Succession Planning is designed to:

99. A bond with a par value of $1,000 is currently trading for $980. The bond earns semiannual interest of $20. What is the annual rate of return for the bond?

100. Which one of the following statements is correct regarding margin accounts?

101. Belinda purchased the following options on ABC Company stock:

• Put option – strike price of $20, premium of $3.
• Call option – strike price of $30, premium of $4.

Both options will expire in two months. She would break even if ABC Company stock was trading for either:

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

103. Which one of the following statements is correct regarding different types of risk?

104. An investment adviser is generally not permitted to borrow money from or lend money to a client. However, an investment adviser would be permitted to borrow money if their client is:

105. Unit investment trusts typically have:

106. Charlie is a customer of a broker/dealer. Charlie purchased 500 shares of ABC Company common stock through the broker/dealer. The trade confirmation sent to Charlie must include:

107. Which of the following statements is correct regarding coverage under the Social Security system?

108. A performance-based fee may be charged:

109. Don, a resident of Louisiana, received various types of income during the current year. Which one of the following items of income would be taxable on Don’s federal income tax return, but would not be taxable on Don’s Louisiana tax return?

110. Which one of the following represents the market manipulation activity of illegally selling stock for the purpose of keeping the price low?

111. Tommy is an investment advisor. He believes inflation will begin to accelerate and interest rates will remain flat. Which one of the following would be the most appropriate addition to his client’s investment portfolio, which is currently weighted 60% stocks and 40% bonds?

112. Which one of the following individuals would be considered an agent under the Uniform Securities Act (USA)?

113. Which of the following are considered advantages of open-end investment companies (mutual funds)?

• I. They are regulated by the Securities and Exchange Commission.
• II. They are extremely efficient for income tax purposes.
• III. They offer reduced portfolio risk through the use of diversification.
• IV. They can be sold short and options can be purchased and sold on the mutual fund.

114. A broker/dealer wants to pay out a small percentage of year-end profits to the clerical staff as a bonus for hard work. Under the Uniform Securities Act:

115. A broker/dealer has a principal office in Illinois. The broker/dealer mails three solicitations to potential customers in the nearby Michigan town of Ann Arbor. The return address on the mailings is that of the broker/dealer’s satellite office in Ann Arbor. Which one of the following statements is correct regarding the broker/dealer’s registration requirements?

116. Under the Uniform Securities Act, the term “person” would include a:

117. Which one of the following metals would be considered a precious metal?

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

119. Tommy works for EasyCo, a Fortune 500 company. He receives common stock from the company as part of his compensation package. Currently, EasyCo stock represents 75% of Tommy’s investment portfolio. Tommy should be most concerned with which one of the following types of risk?

120. All of the following would be permitted investments in a Section 403(b) plan EXCEPT:

121. Ron is an investment adviser living and practicing in Michigan. He currently has assets under management of $108,000,000. Which one of the following best represents Ron’s registration requirements?

122. An investment adviser promises to refund part of his fee in the first year if it is higher than the return on the portfolio he is managing. This most likely represents:

123. Which one of the following represents a method of accounting in which revenue is recorded on the books when it is earned, and expenses are recorded on the books as they are incurred?

124. Which one of the following mutual fund share classes would be best for investors who have a long-term time horizon and can afford a high initial investment?

125. Celia’s client, Ted, is a university professor who contributes the maximum amount each year to a traditional IRA. What type of retirement plan is Ted most likely to have access to through his employer?

126. When considering the time value of money, the term describing the difference between the initial cash outflow and the present value of future cash flows is:

127. Which one of the following items, if paid for with soft dollars, would fall within the safe harbor rules of Section 28(e) of the Securities Exchange Act of 1934?

128. A U.S. business has been selling their product in Japan. Similar products produced in other countries can also be purchased in Japan. Over the span of a year, the U.S. dollar loses value compared to the Japanese Yen. What is the most likely effect of the weakening U.S. dollar in this situation?

129. Marge, age 45, established a grantor trust for the benefit of her two children, ages 23 and 15. Income from the trust is payable to the children at the discretion of the trustee. Income earned by the trust assets each year is taxed to:

130. Ian is an agent for ABC Brokerage. Tommy is Ian’s client. Tommy wants to purchase stock of RGP Company, which is a private company not traded on public exchanges. RGP is offering stock directly through an agency that underwrites private placements. ABC Brokerage has not performed the necessary due diligence on RGP Company, so their private stock is not on the list of approved products for sale. Ian, however, wants to earn the commission associated with the sale of RGP Company stock, so Ian completes the transaction on behalf of Tommy by using a third-party broker, Discount Securities, who has approval for RGP Company stock. Ian has engaged in: