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Bond durations

it's used to measure the sensitivity of a DEBT security when faced with changes in interest rates. The longer the duration, the greater the market price movement.

Two components: interest rate and maturity. Basically, measures the time it takes for investor to get back their principal. The higher the coupon rate, the quicker i get back my principal payment. Therefore, the higher the coupon rate, the SHORTER the duration is. The lower the coupon rate...the LONGER the duration is..

The longer a bond's maturity, the longer the bonds duration. For coupon bonds, duration is always less than the bond's maturity.

Duration for a zero-coupon bond is always equal to its maturity.

The longer a bond's duration, the more its value will change 1% change in interest rates, the shorter the duration, the less it will change.

The general rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. ( In this Q, the price would've gone up twice as much the 30 yr vs the 15 yr)Furthermore, discounted bonds, with their lower coupon rates, have a longer duration than a bond selling at a premium and will respond more favorably to falling rates than will those premium bonds. (in this Q, if sold at a discount, the coupon payment will be higher, than a bond sold at a premium.. basic function of a bond. My coupon rate will market better than coupon rate sold w/bond a premium)Thus, the 30-year discounted bond will move faster than the others.


Bond duration...continued

Duration is the tool that helps investors gauge these price fluctuations that are due to interest rate risk. Duration is expressed as a number of years from the purchase date. In simple terms, a bond's duration will determine how its price is affected by interest rate changes. In other words, if rates move up by one percentage point--for example, from 6% to 7%--the price of a bond with a duration of 5 years will move down by 5%, while a bond with a duration of 10 years will move down by about 10%. You will notice that all components of a bond are duration variables. That is, the bond's duration, coupon, and yield-to-maturity, as well as the extent of the change in interest rates, are all significant variables that ultimately determine how much a bond's price moves.


Technical Analyst Q:

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's: SUPPORT LEVEL

Sell stops are entered below the market. They are used to turn an order into a market order if the current market value falls below the stop level. In technical analysis, support levels are theoretical levels where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.


Which of the following regarding the registration of investment advisers and their representatives is TRUE? A)An investment adviser representative, terminated his employment with ABC Advisers and, 6 months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event. B)ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. C)ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator. D)XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator.

Only state registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s) unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator.


USA - BD, surety bond requirement

Unlike investment advisers where the USA specifies posting a surety bond in the amount of $35,000, the Uniform Securities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator may not require a broker-dealer be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of broker-dealers that maintain a specified net capital.


Under the Uniform Securities Act, which of the following circumstances would exempt a security from registration?

  1. The security is exempt from registration under the act.
  2. The transaction in which the security is sold is exempt under the act.

It is illegal to sell securities that are not registered unless the security or the transaction itself is exempt from state registration requirements. This applies to new issues (primary distributions) and secondary market transactions.

Reference: 2.8 in the License Exam Manual


gnma - taxation

Income received by investors in Government National Mortgage Association (GNMA) securities is subject to both state and federal income tax, and the asset backing them is residential mortgages.


Which of the following would be considered a nonissuer transaction as defined in the Uniform Securities Act?

  1. Gates Williams, the largest shareholder in Maxihard Corporation, sells 100,000 shares in a registered secondary transaction.
  2. Buffy Warren, the largest shareholder in Barkshire Mathaway, purchases an additional 50,000 shares on the NYSE.
  3. In its capacity as a market maker, XYZ Securities sells 200 shares of Gemco common stock to the corporate treasurer of Gemco, buying for the company's investment account.
  4. Gemco, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to XYZ Securities, a registered market maker in Gemco stock. The stock was donated to Gemco by a former officer of the firm.

answer: 1 2 3

A nonissuer transaction is one in which the issuer does not receive the proceeds of the sale. When a stockholder sells his shares, he is the one who receives the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. When an issuer sells shares, whether in a primary or secondary transaction (as is the case with the donated shares), if it receives the proceeds, it is an issuer transaction.


KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Jones has ten clients who reside in Ohio; IAR Cohen has six clients who live in Kentucky; and IAR Brown has three clients who are Georgia residents. In addition, Brown conducts a quarterly presentation at the Augusta (GA) National Golf Club where he discusses current market developments. The seminar is restricted to Club members only. Which of the following is CORRECT?

  1. Jones must register in OH.
  2. Cohen must register in KY.
  3. Brown must register in GA.
  4. Because all three are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs.

III Only (be careful SEC rule! State requires IAR to register even if less than 5 clients in the state, assuming IAR is registered in the State, that is)

Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state even when the number of clients they have in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to Club members only – they are still members of the general public).

Reference: 3.7.1 in the License Exam Manual


stop orders

buy stop bullish (protects the short seller - - places an order to stop the trade at a ceiling to stop the bleeding - - makes the security look even more booming those as 'buy orders' are being place)

sell stops bearish (protects those in a long position -- sell the stock at a floor to make certain you don't lose your shirt if stock plummets)


market maker vs specialist

market maker OTC; specialist trades on exchanges


margin call or Reg T vs maintenance margin call

margin call or Reg T is used when establishing the margin acct -- maintenece margin call is used for adding add'l $



ERISA qualified plan intended for self employeed individuals and owners-employees (sole proprietor) of UNICORPORATED business

can contribute much more than in an IRA - - ($53,000) and those elgible can also have an IRA. if business had ee's must cover at same contribution rate as owners in order for the plan to be non discriminatory.


A client enters an order as follows: Sell stop 100 shares of LTC at 45 limit 45.50. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05. More than likely, the client received

A)45.97 B)45.28 C)44.97 D)46.05

This is really two orders. The first is to stop at 45. That is, once the stock trades at 45 or lower, enter the order. The second order is a sell, but with a limit of 45.50. So, the first time the stock hits 45 (or less), is the trade at 44.97. That triggers the sell limit. The next trade is at 45.28 and that is not acceptable to the limit order at 45.50. Since the limit order is saying, "get me 45.50 or higher,” the 45.97 is an acceptable price.

Reference: in the License Exam Manual


Page 162, big book, Q2. Who excluded form IA definition per IA 1940...

read and re-read, say ALL banks regardless of role, are excluded as or any securities that deal with Direct Obligations of the US govt.

ONLY LATE professionals excluded from the definition...other professions are NOT excluded ie...a geologist is NOT excluded if getting paid for advise


an investment contract

is synonymous with SECURITY


under STATE law, who is responsible for proving a security is exempt from registration

the person requesting the registration


Under STATE transaction exemptions, keep in mind,

that the most common exempt transaction is a unsolicited order by a client. Anytime an agent suggests a transaction, even if the security is exempt - like a govt bond, the transaction will not be exempt. Just remember, if sale is to an individual, the transaction is likely NOT exempt.


Question 34 under Unit Test 1: which transactions (WHO) are exempt from STATE registration...

be so VERY careful with these questions....fiduciaries , such as a trustee in a bankruptcy reorg, are exempt. BUT on a TRUSTEE for a family trust - - the security sale would NOT be an exempt transaction.

Also,AGAIN, if ANY commission paid - - the transaction is NOT exempt.



REMEMBER, the if the issue OR propose to issue, they are an issuer...if they will be receiving the money...they are the issuer..


a bd's trade blotter must be maintained for how many years...



Recovery of damages lawsuits must start within...

under State: 3 yrs from occurance, 2 years of discovery

under Federal: 3 yrs from occurrence, 1 yr from discovery


Who is exempt from being an IA

..look in book, but intrastate only (# of client not relevant) - none of the clients can be private funds. advertising is permitted. However, no advice can be given on exchange securities.

for federal law, ane exempton from registration applies if the advicers only clients are insurance companies.

If Advisers ONLY clients are private funds and AUM in US is less than $150m, exempt as well.


IA Balance Sheet Rule

if require more than $1200 pre-payment ,6 months or more in advance, must submit Balance Sheet per ADV.

Also, STATE stays custody also can lead to the balance sheet rule


rules about Custody, page 259 Q 72 AND 73, PER STATE

adviser can have legally have custody if an administrator does NOT have a rule prohibiting it. IA must notify Administrator in writing that custody is maintained. Most all state require NW / Bonding.

Discretionary and Custody are 2 different things.


Delivery requirements of Brochure

same state and federal...must be given to each client AT or BEFORE entering advisoring contract - small difference, STATE says AT or 48 hours before...STATE also says client has 5 days to terminate without penalty after receiving the brochure.

there after within 120 days of fiscal y-e deliver free brochure if material modifications made, don't have to deliver annually if only offering impersonal advise or aren't required to provide 2A of the form..


Among the powers granted to the Administrator under the Uniform Securities Act (USA) is the power to

  1. audit the books of a federal covered adviser​ with clients in his state​ if he suspects fraudulent business behavior
  2. permit an investment adviser to charge performance-based fees on an account of a client with net worth of $750,000 and an account balance of $200,000
  3. require a federal covered adviser who has individual clients in his state, to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrator wishes
  4. require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the ​investment ​adviser has a place of business in the state

Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC. IARs associated with federal covered advisers are only required to register in a state in which they​ (the IAR)​ have a place of business.

Reference: 3.14 in the License Exam Manual


During the application process for registration as an agent, the Administrator may request information about the applicant’s:

  1. financial condition
  2. citizenship
  3. record involving a non-securities misdemeanor conviction 5 years ago
  4. proposed method of doing business

answer is 2 & 4

The Administrator asks all registrants about their proposed method of doing business. Individual registrants may be asked about their citizenship. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers.

Reference: 2.4.1 in the License Exam Manual


States may require investment advisers who are registered with the SEC to do each of the following EXCEPT

A)pay state notice filing fees B)maintain net capital requirements C)file any documents with the state that are filed with the SEC D)file a consent to service of process

The state may require federal covered advisers to pay notice filing fees, provide a consent to service of process, and submit copies of documents filed with the SEC, but cannot determine net worth or net capital requirements for federal covered IAs. The Administrator can require minimum net worth for state registered advisers, but, under the NSMIA, cannot do so for federal covered ones.


Gibraltar Investment Advisers opened for business last week. Because of the clients brought over from previous affiliations of their IARs, they have started with $94 million under management for various individual and corporate clients. They also signed a contract to manage an additional $10 million for a wealthy individual. Gibraltar will begin managing that individual's portfolio at the beginning of the next calendar quarter. Which of the following best describes Gibraltar's investment adviser registration requirements?

A)Gibraltar's only option is to register at the state level because it currently manages less than $100 million in client funds. B)Gibraltar need not register as an investment adviser because it will manage funds for an institutional investor. C)Gibraltar must register with the state(s) and then, within 90 days of the receipt of the additional $10 million, must register with the SEC. D)Gibraltar would be eligible to register at the federal level.

If an investment adviser anticipates having at least $100 million under management within its first 120 days, it is eligible to become a federal covered adviser by registering with the SEC. Even though Gibraltar will have AUM in excess of $100 million by the beginning of the next quarter, registration with the SEC is not mandatory until AUM reach $110 million. That the advisory will manage some institutional funds does not exempt the organization from investment adviser registration.

Reference: in the License Exam Manual


insider information

contact administrator immediately


record keeping USA

all below are TRUE:

A)Broker-dealers must maintain records of electronic communications for a minimum of three years.

B)Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of five years.

C)Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of THREE years.

D)Broker-dealers must maintain records of trade blotters for a minimum of three years.


USA - right to withdrawal from IA contract...

The problem here is that the client has five days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed.


Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser?

A)An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities. B)A bank that charged a fee for providing investment advice. C)A broker-dealer that managed clients' portfolios for a fee. D)The publisher of an investment advisory newsletter that plans issues based on market events.

A blanket exclusion from the definition of investment adviser applies to most banks. Broker-dealers are excluded only if the advice is within the scope of their brokerage business and they receive no special compensation, such as an additional fee, for that advice. Publishers must have general, regular circulation to be excluded under the Advisers Act. Publishing based on market events would not qualify. Advice relating to types of securities is specific enough to qualify as investment advice, even if mention of particular securities is avoided.

Reference: 3.2.2 in the License Exam Manual


A broker-dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent a(n): A)Sale.

The USA states that "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered part of the subject of the purchase and to have been offered and sold for value."

Reference: in the License Exam Manual


The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state?

  1. Agents.
  2. Broker-dealers.
  3. Investment Advisers.

Only broker-dealers and investment advisers are required to maintain financial records. Agents must maintain sales records, but there are no financial inspections of agents or investment adviser representatives as there are with broker-dealers and advisers.

Reference: in the License Exam Manual


Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that:

  1. no contract may be terminated with more than 60 days notice in writing.
  2. the initial contract is for a maximum of 1 year and then may be renewed on either an annual or biannual basis.
  3. unless a specific exemption applies, the fund may not engage in margin trading.
  4. the contract must be in writing.

A)II and IV. B)I and III. C)II and III. D)I and IV.

Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether the fund can trade on margin is not a function of the management contract.

Reference: 1.10.9 in the License Exam Manual


Federal covered securities, as defined under the Uniform Securities Act:

  1. must be registered with the SEC before they can be offered in the state.
  2. must be registered in the state before they can be offered within the state.
  3. include shares of an investment company registered with the SEC under the Investment Company Act of 1940.

A)I and III. B)III only. C)I only. D)I and II.

Included in the NSMIA's definition of federal covered security are those securities issued by investment companies that are registered with the SEC under the Investment Company Act of 1940. One of the purposes of the NSMIA was to separate state and federal registrations and that is why covered securities are exempt from registration on the state level. The term federal covered does not mean SEC registered. Although many covered securities are registered with the SEC, (those on the exchanges, for example), the term also includes government and municipal securities which are never SEC registered.

Reference: 2.6.2 in the License Exam Manual


Which of the following are accredited investors?

  1. An individual with a net worth, excluding the value of her primary residence, is greater than $1 million.
  2. An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year.
  3. Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million.
  4. A newly registered open-end investment company with net assets of $600,000.


An accredited investor can take different forms; an individual with a net worth, excluding the value of the primary residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.

Reference: 1.5.1 in the License Exam Manual


An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted:

A)properly because the agent saved the client money. B)improperly; the order cannot be placed without prior written authorization allowing discretion. C)properly because the agent used discretion as to price and time. D)improperly; the order should have been placed on Thursday.

In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day – those are considered “day” orders, so the agent is able to use judgment, but the order must be placed during the day it was received.

Reference: in the License Exam Manual


How much can an advisor contribute to a political campaign...

There is a de minimis level that is considered an exception from the pay-to-play restriction on investment advisers for political contributions. If the covered employee can vote for the person, the maximum contribution is $350 per election cycle. If the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle.

Reference: 3.21.1 in the License Exam Manual


Window for placing discrectionary trades:

IA IAR Federally Covered, can receive a verbal and has 10 days to get the signed document back

BD - Agents (3-17 in book) must have authorization in writing BEFORE discretion can be taken. State AND Federal Law

Under both state and federal law, it is prohibited for any broker-dealer or agent to exercise discretion in a client's account prior to receiving the discretionary account authorization in writing. The written discretionary power must be received prior to taking control of the account. SEC commissioners may not engage in any securities transactions during their term of office unless the security is one issued by the U.S. government. The SEC must notify the POTUS when suspending trading on an exchange and the "bad actors" provision is found in the Securities Act of 1933.


Revoking a state registration can be done..if

agent was CONVICTED of a FELONY, even if not securities related. When registration is revoked, wrongdoing has occurred.

Cancellation happens when incompetent, can't be located, no longer in business..


Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are:

  1. mutual funds are only allowed to maintain joint accounts with other funds that are members of the same "family" of funds.
  2. no public offering may commence unless the fund has at least $100,000 in net assets.
  3. no registered investment company may own more than 3% of the voting shares of another registered investment company.
  4. shares of the fund will not have any margin loan value until the 30th day after purchase.

The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Because the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940.

Reference: 1.10.6 in the License Exam Manual


if you want income , you invest in...

The only choice that provides stability of capital is the money market fund, but that is not one of the investor's objectives and the monthly income is quite low. Although the two other funds don't offer stability, they certainly don't provide a high income (even the growth and income fund). If you want income, you invest in bonds, especially those with longer maturities.


Alternative investments...

There are a number of investments referred to as alternatives. Among them are DPPs (direct participation programs) and exchange-traded notes (ETNs). Preferred stock and closed-end investment companies (CEFs) are not considered alternative investments.

Reference: 10.2 in the License Exam Manual


You are meeting with a relatively unsophisticated investor who doesn’t understand very much about stocks and bonds. When asked, “can you list the advantages of owning common stock as compared to bonds?” among other reasons, you could reply

A)bonds must be surrendered at maturity or at a call while the owner of common stock can pick when to sell and realize a capital gain

B)income payments are more reliable C)there is limited liability D)bonds have priority over any equity security in the event of liquidation

Although there are many positive benefits to owning bonds compared to common stock, among them priority in the event of liquidation and regular payment of interest, one negative is that the bond will ultimately mature or be called and the bondholder has no choice but to surrender the security. With common stock, the investor has total control over when to sell the stock. Yes, common stock has limited liability, but the same is true of the bondholder – if the company goes under, the bondholder’s maximum loss is the investment. Even then, because of its seniority, it is less likely that the entire investment will be lost.

Reference: in the License Exam Manual


All of the following characteristics are advantages of a REIT EXCEPT


B)tax deferral


D)professional management

A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. Please note: We recognize that, over the past few years, there has been an enormous growth in non-traded REITs (exactly what that says – they don't trade; there is no liquidity). However, we have received no feedback about that issue and, unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC.

Reference: 7.1.7 in the License Exam Manual


Varible Annuities...

One of the most attractive features of variable annuities is that all earnings are tax-deferred until withdrawal. The sub-accounts are usually invested in equities (although there are some with fixed income as the primary component of the portfolio), but the expenses are generally higher than for a mutual fund with similar goals. There are no guarantees on the amount of income when the VA is annuitized.


While listening to a commentator on cable TV, you hear the statement, “the flight to quality has ended.” What would you expect the effect of this to be?

A)yield spreads are narrowing B)airline stocks are in for a beating C)pessimism is spreading D)yield spreads are widening

The term yield spread refers to the difference in yield between very high quality debt instruments, such as US government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won’t demand as much in return from the lower rated instruments.

Reference: 5.1.4 in the License Exam Manual


how are us govn't obligations taxed...

Interest earned on U.S. government obligations is subject to federal tax. This bond is trading at a premium ($1,020), so its yield to maturity is lower than the nominal yield of 7-½%. The nominal yield is the same as the coupon rate (7-½%). Interest on U.S. government obligations is exempt from state and local taxes.

Reference: in the License Exam Manual


Collatoralized Mortgage Obligations, what are their risks...

CMOs are a form of mortgage-backed security. When interest rates fall, there is an increase in refinancing causing the mortgages to be paid off ahead of schedule. This results in the investor receiving a return of principal ahead of time, but only able to reinvest at the current lower rate. This is called prepayment risk.

Reference: in the License Exam Manual


Similarities and Differences bw closed end and open end funds

Open-end companies do not trade shares in the secondary market. However, both open-end and closed-end companies compute their net asset values, actively manage their portfolios, and have stated investment objectives.

Reference: in the License Exam Manual


Variable Annuity characteristics..

The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates.


Direct participation requirements (dpp)

DPPs, such a real estate limited partnership offering, are passive investments because the investor takes no part in the management or running of the enterprise. In each of the other choices, the investor must do some work.

Reference: 10.3 in the License Exam Manual


A residual right of a common stock holder is...a

claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid.


Negotiabel jumbo CDs are...

Negotiable jumbo CDs are issued for $100,000 to $1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay interest on a semi-annual basis, not monthly.

Reference: in the License Exam Manual


Which of the following regarding U.S. government agency obligations are TRUE?

  1. They are direct obligations of the U.S. government.
  2. They generally have higher yields than direct U.S. obligations.
  3. The Federal National Mortgage Association is a publicly traded corporation.
  4. Securities issued by GNMA trade on the NYSE floor.

U.S. government agency debt is an obligation of the issuing agency. This causes agency debt to trade at slightly higher yields reflecting this greater risk. FNMA was created as a government agency but was spun off in 1968 and is now (because of the problems it had during mortgage meltdown of 2008-9), traded on the OTC Bulletin Board rather than the NYSE, part of it is privately owned now too. GNMA pass-through certificates trade OTC. GNMAs are the only agency whose securities are direct US government obligations.

Reference: 5.1.1 in the License Exam Manual


Options positions can either create rights or obligations. In which option position has the investor created the possible obligation to purchase stock?

Selling a PUT. see page 403


MNO is planning to raise capital through an offering of 30-year bonds. Which call price would be most beneficial to MNO?

A)106 B)104 C)102 D)110

MNO would benefit most from the ability to call bonds at the lowest possible price. The call feature enables MNO to buy the bonds before maturity to reduce their fixed interest costs. A call price of 102 requires the lowest call premium of the options shown.

Reference: 5.2.1 in the License Exam Manual


inflation inertia

concept that inflation doesn't kick in right until an economic shock occurs...prices will stay the same for a bit, perhaps a couple of quarters...most firms don't want to lower the price of their products afterall..

The concept of inflation inertia is that prices will rise slowly during an initial period of inflation and then begin to "pick up steam" (move at a faster rate).

Reference: in the License Exam Manual


calculate projected income in perpetuity

Want $1000 per month cash, assume earn 4%, convert monthly to annual and divide by interest rate.

12000/.04=$300,000 is needed to invest...


what instrument is not very liquid

Any stock listed on the NYSE or traded on Nasdaq has high liquidity. Municipal bonds tend to be thinly traded, thereby exposing their holders to a higher degree of liquidity risk. UITs, regardless of their portfolio, stand ready to redeem their units so liquidity is not a problem for the investor.

Reference: 13.2.6 in the License Exam Manual


An investor using yield curve analysis would expect to view:

bonds of a single issuer over varying maturities


npv of greater than zero...

...means the project will be profitable as the calculation says firms required rate of return is exceeded and the expenses of the projects are covered


leading economic indicators in the License Exam Manual page 454

money supply, building permits, unemployement claims, new manuafacturer orders, interest rate spread bw 10 yr treasury bond and fed fund rate, stock prices, vendor performances


When giving advice to a large pension plan invested heavily in large-cap stocks on how to reduce their systematic risk, you would probably recommend that they:

  1. hedge by purchasing broad index puts.
  2. increase their portfolio diversification.
  3. raise the correlation coefficient of the securities in the portfolio.
  4. reduce the standard deviation of the portfolio.

Buying broad index put options, such as on the S&P 500, gives an effective hedge against the downside movement in the market. Another choice, although not necessarily as effective, would be to lower the standard deviation of the portfolio by switching into securities with a lower volatility. Diversification does not protect against systematic (market) risk and reducing the correlation would work, not increasing it.

Reference: 13.1.1 in the License Exam Manual


cash flow from operations

calculated by adding depr back to net income


With respect to the fiscal policy of the United States, the annual budget request is submitted by the....

The President of the United States is responsible for submitting the country's annual budget request to the Congress for their approval and ultimately sent back to the POTUS for signature.


If the value of the U.S. dollar decreases:

  1. domestic goods become more competitive.
  2. domestic goods become less competitive.
  3. foreign goods become more competitive.
  4. foreign goods become less competitive.

When the U.S. dollar decreases against other currencies, foreign goods become more expensive, whereas our domestically produced goods are cheaper for those buying with foreign currencies.

Reference: 11.3.4 in the License Exam Manual


Portfolio has a beta of 1.0 and has returned 8% over the past year. Portfolio B has a beta of 1.5 and, over that same period, has returned 16%. Based on this information, an analyst would conclude that portfolio B has..positive alpha

Positive alpha is when a portfolio (or security) outperforms another portfolio (or the market) by more than is expected based upon its beta coefficient. Although we could calculate the alpha, it should be clear that when one portfolio with a beta that is 50% higher than the other outperforms it by 100%, there is positive alpha.

Reference: 12.2.5 in the License Exam Manual



used to measure variability between a particular stock's or portfolio's movement and the market in general. a stock with a beta of 1 will tend to move like the market, have similar market risk as a whole.. 1.5 beta would be much more volatile than the market; .7 would be much less volatile than the market. Negative beta's can be used to diversify portfolio.

clients more aggressive with higher beta's ; more conservative with lower beta's


Economic indicators are used by analysts in an attempt to forecast future economic conditions. Which of the following would reveal an indication of an expected reduction in the rate of inflation?

A)Increased consumer demand B)An increase in manufacturer’s orders for durable goods C)A reduction in interest rates D)High unemployment

The unemployment figure is a leading indicator, a predictor of the future. With high unemployment, there is less money to go around in the economy tending to cause a decreased demand for goods and services. This demand is one of the leading causes of inflation. Lower interest rates are a result of inflation, not a cause or a predictor.

Reference: 11.3.6 in the License Exam Manual


If the required rate of return is less than anticipated in a present value calculation, the effect would be that the:

A)present value would be lower. B)present value would be higher. C)yield to maturity would decrease. D)future value would be lower.

Try to follow me on this one. The present value computation is used to determine how much money must be deposited NOW (present) to reach a specified future goal when you know how many years you have to reach that goal. One critical component of the formula is the rate of return used in the formula. As a simple example, if you need $100,000 eighteen years from now for your newborn’s college education and you expect to earn 8%, you’ll have to deposit $25,000 now (present value) to reach the goal. However, if it turns out that the earnings rate is less than anticipated, say only 4%, then you would have to deposit twice as much presently. Therefore, we answer this question by indicating that a lower rate of return will require a higher present value.

Reference: 12.1.1 in the License Exam Manual


According to most fundamental analysts, examining a company’s price/earnings ratio gives an indication of :

A)current cash flows B)the degree to how liberal the company’s dividend policies are C)the parity price of the issuer’s convertible bonds D)how much investors value the stock as a function of earnings to the company’s market price

The two components of the price/earnings ratio are the current market price and the earnings per common share. When a company has a high P/E ratio, it means that investors are placing greater value on expected growth in earnings. That is one of the reasons why growth stocks carry higher P/E’s than to value stocks.

Reference: 12.3.1 in the License Exam Manual


Which of the following describes an investment management style? A)Current income B)Large capitalization C)Rebalancing D)Margin

Large capitalization style distinguishes between investing in a small cap company versus a large capitalization company. Current income is an investment objective and not an investment management style. Rebalancing is used to bring asset allocations back to their desired weightings. Margin can be used in a number of investment management styles.

Reference: 16.4.1 in the License Exam Manual


An investor does not wish to attempt to time the market, so she invests $300 each month into the GEMCO Growth Fund. Over the past 5 months, her purchase prices have been $10, $12, $15, $20, and $25. On the basis of this information, if she were to stop investing at this point and sell her shares 2 months from now when the NAV is $15 per share and the public offering price is $15.79, it would be correct to state that her

  1. average cost per share was $16.40.
  2. average price paid per trade was $16.40.
  3. cost basis for tax purposes was $14.71.
  4. realized loss would be $1.40 per share.

This client is taking advantage of dollar cost averaging. Each month, the $300 investment acquires a different number of shares. In order, she bought 30 shares ($300 divided by $10), 25, 20, 15, and 12 shares for a total of 102 shares. Her total investment was $1,500, giving her an average cost per share (cost basis) of $14.71. If we take the 5 different purchase prices and divide them by 5, the average price paid per visit to the market was $16.40. There is no loss here because the proceeds of $15 per share exceed the cost of $14.71.

Reference: 16.7.1 in the License Exam Manual


An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened:

A)under a discretionary power. B)as a joint account with tenants in common. C)as a joint account with right of survivorship. D)as an individual TOD account.

TOD (payable on death) , Transfer on Death is easiest way to keep assets in brokerage acct from going to probate. Doesn't avoid estate taxes if applicable. owner while alive has complete control over acct and can change beneficiaries. Only Individual accts and jtwros may by opened with TOD.

Tenants in common (JTIC) lets that tenants keep their amount of the account should the die and also lets the owner divide the account Unequally.

Joint Accounts give control to each person. only 2 choices on a form TIC and JTWROS. One owner can transact business on the acct, but all checks must be made out to all the names on the acct and must be endorsed by all names on the acct before the check can be cashed..can only be divided equally.

Suitability requirements on Joint Accounts are the SAME as individual account...must put clients interest first...


Otto and Lucy Wright set up a 529 plan to save funds for the college education of their daughter, Marangue, who is 14. What is the most suitable investment for the largest portion of their contribution?

A)A long-term bond fund. B)A large-cap stock fund. C)An intermediate term bond fund. D)A growth stock fund.

This is a straight suitability question; match the time horizon to the investment offered, and an intermediate term bond fund is the only logical answer.

Reference: 15.3.10 in the License Exam Manual


first choice for capital preservation goal should be

bank insured CD's (should always be the answer on the test). These local bank CD's are not traded on the money market, like the Jumbo CD's are). AND, they have no interest rate risk. B/C their value it FIXED, you can always redeem at Face Value, regardless of the interest rates. Exam often ignores the fact that there can be a penalty for cashing in before maturity.

Conserviative investors, reduce market risk with these instruments, but, sacrifice the chance to earn higher income and are exposed to inflation (purchasing power risk)


investors seeking current income focus on

individual sec or mf that invest in fixed income instruments like:

gove bonds notes and agency bonds; corp bond notes; preferred income stock and utility company stock

for purpose of exam gov't treasury issues have no default risk

when picking which income producing investments, the time the investor expects to remain in the holding is the PRIMARY consideration.

>2 years - - money market offers positive return on investment w/ no fluctuation of principal and ready access via check writing privilges. T Bill and T notes would work too.

3-5 years - - an intermediate gov't bond can provide relative safety of principal and a competitive interest rate

5-10 years - - corp bond would produce much greater returns


Capital Growth objective

stock investments normally offer a means to preserve and increase buying power of investor's money over and beyond inflation rate. Can be volatile short term, but over the long haul tend to provide higher returns.

growth stocks good for those with high risk tolerance

large capitalization funds good for perhaps older investors as these are large respected companies with less risk - - good for person needing to use funds in 3-5 years.


Speculation objective

client may be game for high risk at chance to get high returns...

highly volatile stocks

high yield junk bonds

options on stock or options on stock indexes

commodity futures


College Tuition

many invest in zero coupon bonds that mature when tuition expenses are due..

Options Coverdall Educations IRA's and Section 529 plans bc of tax advantages.


Capital Needs analysis

used to see how much life insurance is needed to pay off mortgages and other debt, income for survivors for reasonable period, college tuition, estate taxes if over 5.45 million in 2016

First try to project earnings, the estimate life expectancy, and acct for inflation. not concerned about market volatility with life insurance as its death benefit is generally fixed. Finally, look at savings investments ira's 401ks etc


retirement planning suitability

one way to minimize longevity risk is via annuities


Tax Planning suitability

3 strategies:

asset & income shifting (old days would shift to kids names, now could work to shift income and assets to parents as living so much longer and children having to care for their folks..)

tax deferral - not taxed to withdrawn and gains grow tax free until withdrawn

tax-free income - most muni bonds pay interest free from federal taxes (capital gains are NOT), no state, unless they are a resident. pay lower interest rate, but depending on clients tax bracket, my net a higher return. 529s Coverdell ESA's and ROth IRA;s are tax free earnings...

Capital gains from any source are always taxable.


Time Horizon suiability

time horizon and liquidity needs determine the level of volatility the client should assume Over a 20/30 yr time frame, even risk averse is ok with dramatic short term volatility.

$ needed within 3-5 yers should be inveseted for safety and liquidity ; time horizon very important when planning for retirement and college tuition


Assuming all withdrawals are equal, which of the following would subject a 60-year-old investor to the least amount of tax? A)Non-qualified variable annuity B)403(b) plan C)Traditional IRA D)Roth IRA

As long as the Roth has been opened a minimum of five years, once the investor has reached 59 ½, withdrawals are free of any tax. Generally, the most tax would be with the traditional IRA (assuming it was funded exclusively with pretax funds) and the 403(b). Because the non-qualified VA is funded with post-tax funds, a portion of the amount withdrawn might be the original principal and there is no tax due on that.

Reference: in the License Exam Manual


In which of the following business entities is an owner jointly and severally liable for the obligations of the business? A)A limited liability company (LLC). B)A general partnership. C)A sole proprietorship. D)An S corporation.

Joint and several liability is typical (and a drawback) of the general partnership, in which its partners/owners are jointly and severally liable for the obligations of the partnership. This means that each partner is liable for the wrongdoing of the other. A sole proprietorship is liable but not jointly or severally with anybody else.

Reference: 17.3.2 in the License Exam Manual


Sharpe ratio, beta, correlation, standard deviation

The Sharpe ratio is used to measure risk-adjusted returns. Beta does enable one to evaluate the potential market risk, but, strictly speaking, does not measure risk-adjusted return. Correlation measures the movement of one security in relationship to the movement of another. Standard deviation measures the volatility of a security, not its risk-adjusted returns. Standard deviation has input in the Sharpe ratio but it is the ratio itself that measures risk-adjusted returns.

Reference: 19.2.7 in the License Exam Manual


An estate planning tool that may be used to take advantage of the lifetime estate tax exclusion is the:

A)complex trust. B)living trust. C)testamentary trust. D)bypass trust.

The bypass trust is most commonly used to maximize estate tax savings by having the first to die of a married couple leave the lifetime exclusion (currently $5.34 million for 2014) to their children with the balance taken against the unlimited marital deduction. This results in saving estate taxes on that $5.34 million. With the "portability" provisions of the tax law signed on December 17, 2010, this is currently of limited value.

Reference: 17.4.2 in the License Exam Manual


Which tax documents do businesses file

C-corp - - Forom 1120

Sole proprietor - - Schedule C

LLC members / S corp shareholders, receive K-1


Simple Trust

Complex Trust

Living Trust

Simple - all income earned placed in trust and distributed during the yr received. otherwise it becomes a complex trust; trustee cannot distribute principal

Complex - may acculmulate income, is permitted deductions for distribution of net income or principal. capital gains are deemed par of the distributable net income of a complex trust unless reinvested. trustee may distribute prinicipal.

Living - inter vivos trust - established will maker is alive.

Testamentary trust - - settlor retains control over assets until death



is legal entity that offers flexibility to person wanting to transfer property.

Settlor -- supplies property, aka principal/corpus, maker, grantor ,trustor, donor

Trustee administers trust per will or trust agreement

Beneficiary - not cold be a a minor or incompetent adult.

settlor/trustee/beneficiary in some rate situations could be same person


taxation of retirement plan withdrawl

In the case of death or total disability of the participant, funds can be withdrawn early from retirement plans. All qualified plans must be in written form as outlined by the Internal Revenue Code. All taxation on qualified plan withdrawals is at ordinary income tax rates, never capital gain. ​If all contributions are on a pre-tax basis, 100% of the funds withdrawn are taxed. If there are after-tax contributions, then the tax is due on everything above the cost basis. ​The only way to avoid taxes on funds withdrawn from a qualified plan is to rollover the proceeds into an IRA within the allowable 60-day period.

Reference: 20.5 in the License Exam Manual


Deferred comp plans

Deferred compensation plans can be offered to select employees, including corporate officers; directors are not considered employees.


Using the following information, compute the real rate of return for an investor holding the ABC Corporation's 20-year bond:
Coupon rate 5%, paid semi-annually
Rating Aa
Maturity date December 1, 2026
CPI 2%
Par value $1,000
Purchase price 90
Call date December 1, 2023
Call price 101

The real rate of return is the actual return (income received divided by the purchase price) less the inflation rate as measured by the CPI. In this example, the bond pays $50 per year on an investment of $900. That is an actual return of 5.56%. Subtracting the CPI of 2% gives us an inflation-adjusted, or real, rate of return of 3.56%.

Reference: 19.2.4 in the License Exam Manual


Tactical and Sector rotation are really one in the same investment styles

Sector rotation is the practice of moving portfolio assets from those industries that have reached their peak in the current economic cycle to those that are now on the upswing. Buy and hold, as the name implies, does not involve constant trading and strategic is a passive technique as well. Contrarian investors go opposite the trend which is not the case here.

Reference: 16.6.3 in the License Exam Manual


always access risk tolerance first

when determining suitability


Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A)an apartment building B)a growth stock C)a corporate bond D)an S&P 500 index fund

Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency and investors in growth stocks anticipate long term capital gains which are taxed at a lower rate than ordinary income.

Reference: in the License Exam Manual


Optimal Porfolio lies on the efficient frontier..the goal of modern portfolio theory is to construct most efficient portfolio. one that offers the most return for a given amount of risk, or the least risk for a given amount of return....

the objective is to lie on the curve...

MPT tries to quantify and control portfolio risk -- uses Capital Asset Pricing Model which provides expected on a security based on the level of risk...focus' on diversifying both hsystematic and non systematic risk via diversification of uncorrelated holdings..

In portfolio design, the collection of efficient portfolios is called the efficient set or the efficient frontier. This efficient frontier is plotted as a curve. The objective is for the portfolio to lie on the curve. Then, by being on the efficient frontier, the optimal portfolio has been created; one in which there is the highest return for the least risk.

Reference: in the License Exam Manual


Alpha and Beta not used in Capital Market Line equation

Standard Deviation is


Constant Dollar plan

Constant Ratio Plan

page 552

In a constant dollar plan, an investor keeps a constant dollar amount of the portfolio in equity securities. If the equities' market value rises, the excess is transferred to fixed-income securities.

Constant Ratio - rebalances to keep debt equity or other asses classes in same type of relationship


According to the efficient market hypothesis, information found when reading the Wall Street Journal would be considered

A) strong-form market efficiency (means market reflects all info from both public & private sources-- nothing works -- random walk, throw a dart at it!)

B) random walk (all info is fully reflected in stock price - - throw a dart would be as good as any other method, per the Efficient Market Hypothesis

C) semi-strong form market efficiency (pricing reflects all publicly available info - - technical and fundamental analysis DONT work, but insider info would work)

D) weak-form market efficiency (pricing reflects all currently available market data - - technical analysis won't work, but fundamental and insider info would work)

The closer to inside information, the stronger the information. Anything published in widely read media would be considered very weak. Random Walk

Reference: 16.5.5 in the License Exam Manual


efficient market hypothesis - -

maintains that security prices adjust rapidly to new info with security prices fully reflecting all available info are efficiently priced as a result...

3 versions...theory says no way to accurately predict stock prices, and a passive strategy is probably the most suitable for investment success...


Value investor vs Growth investor

maintains that security prices adjust raidly to new info with security prices fully reflecting all available info are efficiently priced as a result...


S corp characteristics

S corporations are flow-through vehicles, so any earnings are taxable to shareholders, whether or not they are paid out as dividends. An S corporation may have no more than 100 shareholders and may issue only one class of stock so its ability to raise large amounts of capital is rather limited.

Reference: 14.3.5 in the License Exam Manual


True statements about retirement plans

A)all corporate pension and profit-sharing plans must be established under a trust agreement.

B)defined contribution plans have the same contribution limits as Keogh plans.

C)all qualified retirement plans are either defined contribution or defined benefit plans.

D) with defined BENEFIT plans, employer bears the investment risk.


When a security purchased on margin suffers a decline in market value, it may cause the equity in the account to fall to a level such that additional funds are required under the terms of the margin agreement between the client and the broker-dealer. The term that describes the request by a broker-dealer rather than an SRO for more money is: A)regulation T call. B)sell-out. C)margin call. D)house call.

When the account value drops to a certain level, SRO rules require a maintenance call. When the broker-dealer sets that level more stringently (above that of the SRO), it is known as a house call. A margin call and Regulation T call are the same thing – the initial call for funds when purchasing on margin. A sell-out occurs when the maintenance (or house) call is not met.

Reference: in the License Exam Manual


Mrs. Wright wishes to set up a trust where income must be annually distributed to her son. She wants the son to pay any income taxes since he is in a lower tax bracket than she is. What should she do?

A)Use a complex trust with him as irrevocable beneficiary. B)Use a simple trust with him as revocable beneficiary. C)Use a complex trust with him as revocable beneficiary. D)Use a simple trust with him as irrevocable beneficiary.

Simple trusts must annually distribute income to the beneficiaries. Complex trusts do not. If Mrs. Wright makes the beneficiary revocable, the trust is subject to grantor trust rules and the income will be taxed to Mrs. Wright.

Reference: in the License Exam Manual


In many cases, the exceptions from the early distribution tax penalty of 10% are the same for both IRAs and qualified plans. However, 1 exception granted to those with qualified plans that is not available to IRA owners is distributions A)for certain medical expenses B)use for higher education expenses C)under a QDRO D)for a first-time home purchase

Only in the case of a qualified (employer sponsored) plan are distributions from a qualified domestic relations order (QDRO) exempt from the 10% early distribution penalty. The home purchase and higher education exception applies only to IRAs, and certain medical expenses qualify for the exemption under both.

Reference: 20.5.1 in the License Exam Manual


In preparing a financial plan for a client couple, you are asked about the role of certificates of deposit available at their local bank branch. You could state that the bank CD:eliminates interest rate risk. (it is NOT a like a savings acct with a maturity...)

Interest rate risk, the uncertainty that the price of a security will rise or fall based upon changes in interest rates, is eliminated with a certificate of deposit. Regardless of changes in the market, the CD’s value remains fixed. It is not the same as a savings account because regular additions and withdrawals are not made. Minimums are set by the bank itself as are any minimum time periods and can be as low as $100 and one week. This is not the negotiable (jumbo) CD traded in the money market.

Reference: in the License Exam Manual