Series 65: Practice Exam || All Answers Are Correct 100%.
One would not typically place convertible bonds in the portfolio of an investor
A. who is bullish on the future for a specific issuer's common stock.
B. seeking a position senior to that of common stock.
C. seeking to maximize current income.
D. seeking capital gains. correct answers Seeking to maximize current income
A conversion feature is a benefit to the bondholder. It allows the bondholder a choice either to
continue holding the debt represented by the bond or to convert the bond into shares of common
stock of the underlying issuer. Everything that is done in the securities industry has to be a win-
win situation. The win for the bondholder in this instance is the ability to take advantage of the
capital appreciation potential the common stock may offer. The win for the issuer is that by
offering something extra to the bond purchaser, the bond purchaser is willing to accept a lower
interest rate on the bond (compared to a nonconvertible bond), therefore giving the issuer a lower
cost of capital.
In order to come under the SEC's requirement to file a Form 13F, an institutional manager must
have discretion over
A. an equity portfolio of at least $100 million.
B. an equity portfolio of at least $50 million in 13(f) securities.
C. an equity portfolio of at least $100 million in 13(f) securities.
D. more than 10% of the outstanding voting securities of a reporting company. correct answers
An equity portfolio of at least $100 million in 13(f) securities
Form 13F must be filed by institutional money managers with at least $100 million in 13(f)
equity securities under discretionary management.
To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on
the template, all of the following broker-dealer charges would be disclosed except
A. account transfer fees.
B. account maintenance fees.
C. brokerage commissions.
D. fees for issuance of stock certificates. correct answers Brokerage commissions
Not included in the fee disclosure documents are commissions, markups and markdowns, and
advisory fees.
Prudent Asset Construction Enterprises (PACE) has offices in States X, Y, and Z. On their last
annual updating amendment, they reported assets under management (AUM) of $218 million. In
which of the following instances would PACE be receiving a substantial prepayment of fees?
A. $600, paid six or more months in advance
,B. $1,600, paid one year in advance
C. $1,600, paid at the first of each quarter
D. $10,000, paid monthly correct answers $1,600, paid one year in advance
First of all, this is an SEC-registered investment adviser, so we have to go by the federal
numbers. Those are more than $1,200, six or more months in advance. The $600 would have
been substantial if PACE was state registered. Although the other two choices are above $1,200,
they are not prepaid for at least six months.
What is the current yield on ABC common stock that is selling for $60 per share with a
semiannual dividend of $0.75 per share?
A. 5.00%
B. 2.50%
C. 7.50%
D. 1.25% correct answers 2.5%
The formula for current yield is annual current dividend divided by current market value. The
trick with this question is that you are given a semiannual dividend as information. You must
multiply the dividend by 2 to find the annual dividend. Therefore, $ 0.75 × 2 = $1.50 annual
dividend and $1.50 ÷ $60 = 2.50%.
Irving Wilson works for Wall Street Limited (WSL), a registered investment adviser. He limits
his advice exclusively to equity securities listed on the NYSE. Under the Uniform Securities Act,
Irving
A. is not covered by the antifraud rules, as these are federal covered securities.
B. must register as an IAR.
C. need not register as an IAR.
D. would need registration as a federal covered IAR. correct answers Must register as an IAR
Because Irving works for a registered investment adviser and provides advice on securities
(where they are traded is irrelevant), he must register as an investment adviser representative
(IAR), regardless of the nature of the securities that are the subject of his advice. There is no
such thing as a federal covered IAR, only a federal covered investment adviser. If the advice
relates to securities, no one is exempt from the antifraud rules.
If a portfolio manager wished to reduce inflation risk, which of the following would be most
appropriate to add to the portfolio?
A. AAA bonds
B. Preferred stock
C. Fixed annuities
D. Tangible assets correct answers Tangible assets
,Tangible assets—such as real estate, precious metals, and other commodities—tend to keep pace
with inflation. Fixed-dollar investments do not.
A state-registered investment adviser maintaining custody of customer funds and securities
discovers that the firm's net worth is $32,000. Which of the following steps would not be
required?
A. Reporting to the administrator the number of client accounts being served by the investment
adviser
B. Returning the customer funds and securities within three business days of the discovery
C. Filing a financial report with the administrator by the close of business on the next business
day following notice
D. Notifying the administrator of the deficiency by the close of business on the next business day
correct answers Returning the customer funds and securities within 3 business days of the
discovery
Once the firm's net worth is below $35,000, notifications and reports must be sent to the
administrator. Unless ordered by the administrator, there is no requirement to return client assets
to clients.
A balance sheet shows that a corporation builds its capital structure with all of the following
except
A. retained earnings.
B. cash.
C. capital stock.
D. long-term debt. correct answers Cash
A corporation's capital structure consists of the capital raised through the issuance of long-term
debt securities (bonds), equity securities (stocks), and money reinvested in the business (retained
earnings)
Your client has a long position in a security that has had considerable appreciation since the date
of purchase. The client is concerned that speculation that the company's CEO may retire could
have negative implications for the stock. Wishing to protect those unrealized gains, which of the
following orders would be appropriate?
A. Sell limit
B. Buy limit
C. Sell stop
D. Buy stop correct answers Sell stop
Sell stop orders are frequently referred to as stop loss orders and are used either when a security
is purchased to offer downside protection or, as in this case, to preserve a gain that has not yet
been realized. Buy stops are used to protect against loss or to preserve the gain on a short
position.
, Popular strategies used by bond investors to mitigate the effects of changes in interest rates
include any of the following except
A. the laddering strategy.
B. the strategy of lengthening the maturities of their holdings.
C. the bullet strategy.
D. the barbell strategy. correct answers The strategy of lengthening the maturities of their
holdings
For those concerned about the effects of interest rate fluctuations on their portfolio, increasing
the length of the maturities would increase, rather than decrease, the risk.
An investor contacts you to say he is somewhat puzzled over the fact that he saw a newspaper
listing for the KAPLOW Fund where the net asset value per share was $10.27 and the asking
price was $14.14 per share. He wants to know why the difference between the two is so great.
You would respond, saying
A. the KAPLOW Fund is being investigated by the SEC for being sold with a sales charge in
excess of the 8.5% maximum limit.
B. that this is probably an unregistered hedge fund not subject to SEC rules.
C. the KAPLOW Fund is a closed-end company with a selling price based not on NAV, as is the
case with an open-end fund.
D. there is probably a misprint in the paper, and more than likely, the asking price is $11.22,
making the sales charge 8.5%. correct answers The KAPLOW is a closed-end company w/ a
selling price based not on NAV, as is the case w/ an open-end fund
Closed-end investment company shares trade like any other stock on the exchanges or Nasdaq.
That is, the price is determined by supply and demand, not by NAV.
When is an investment adviser representative (IAR) required to make disclosure to the client?
1. When the IAR, in preparing a recommendation, uses research provided by a third party with
whom the IAR is not affiliated
2. When the IAR recommends a specific insurance policy for the client's overall financial plan
where a commission will be received on that sale
3. When transactions recommended to a specific client are inconsistent with those for other
clients with objectives that are similar to that particular client
4. When transactions recommended to the client are inconsistent with those for the IAR's own
account correct answers When the IAR recommends a specific insurance policy for the client's
overall financial plan where a commission will be received on that sale and when transactions
recommended to the client are inconsistent with those for the IAR's own account
An investment adviser must provide full disclosure to his client if there would be even a hint of
conflict of interest. This includes the case where a recommended product will generate a
commission or other source of income to the adviser as well as full disclosure if a
