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-Series 65- Practice Exam

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Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
www.FourthFinancialOnline.com

1. A high worth client has instructed you to liquidate all his positions that are
securities. You will liquidate all the following, except his:

A. Index Fund
B. REIT
C. Individual Retirement Account
D. Shares of Stock

Answer: C

An Individual Retirement Account is a tax designation for a retirement plan. Securities


are the “money at risk” that the plan encompasses. Hence the contents of an IRA can be
liquidated, but not the plan itself.

2. Use the stock ticker below to answer the next question.

…JENN 1.21…KLHM 3.78…OPP 1.11…OPP 1.23…OPP 1.21…KLHM 3.77…OPP


1.21…JENN 1.23…JENN 1.34…JENN 1.65…OPP 1.23…OPP1.22…KLHM 4.02…
OPP 1.21…OPP 1.20…JENN 1.24…JENN 1.25…JENN 1.19…KLHM 3.98…

You get a call from your client who tells you to sell short 100 shares of JENN as soon
as possible, at which price can you first execute her order?

A. JENN 1.65
B. JENN 1.19
C. JENN 1.21
D. ANY OF THE ABOVE

Answer: D

Historically short sales could only occur on an “uptick” - so if the first price given for JENN was 1.21,
the first uptick from that can only occur is JENN priced at 1.23 since you’re trying
to sell it short “as soon as possible.” This rule no longer applies, making any price OK to short from.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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3. The Federal Reserve Board draws its authority to regulate margin requirements
from what?

A. Securities and Exchange Commission


B. Securities Exchange Act of 1934
C. Insider Trading and Securities Enforcement Act of 1988
D. Trust Indenture Act of 1939

Answer: B

Obviously the answer isn’t “A” because the SEC doesn’t regulate the Fed, and though “C” and
“D” may look like good choices, try to remember the main purposes of the acts themselves. “C”
was a redefinition of “insider trading” and didn’t occur until 1988, while “D” has to do with
attaching things to bonds to somewhat guarantee bond holders.

4. You read an announcement in the Wall Street Journal that ABC Corporations, a
company in which you have a few clients invested, will be holding a “rights
offering”- what does this mean?

A. It gives shareholders the ability the exercise their right to convert their convertible
debentures to shares of common stock.
B. It gives shareholders the opportunity to sell their shares back to the company for a
predetermined gain.
C. It gives shareholders the opportunity to purchase new shares of a corporation at the
public offering price before those new shares are made available to the public
D. It gives shareholders the opportunity to purchase new shares of a corporation at the
subscription price before those new shares are made available to the public

Answer: D

While answer “C” is almost right, the new shares are always offered to shareholders of
record at the subscription price. Corporations grant a certain amount of rights per share
to current investors. They use a subscription ratio to determine how many rights are
required to buy each new share at the subscription price.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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5. Which procedures favor investors with less company holdings over investors with
greater company holdings?

I. Cumulative voting rights


II. Statutory voting rights
III. Reverse stock splits
IV. Forward stock splits

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

Answer: A

Cumulative voting allows minority shareholders to allot their votes to the candidates
(not candidate) they prefer, while forward stock splits lower the price per share, making
them more affordable to smaller investors who are looking to increase their positions.

6. ARR, a company that manufactures pirate eye patches, has recently issued
convertible preferred shares of stock at par of $100. ARR’s common stock trades at
$46. The convertible preferred shares have a conversion ratio of 4:1, so will trade at
parity with the common stock at which price?

A. $400
B. $8.68
C. $184
D. $54

Answer: C

To determine the parity price of convertible preferred stock, take the price of a common
share and multiply it by the conversion ratio. Here, this formula would give us:

46 * 4 = 184

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-Series 65- Practice Exam
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7. Your client owns 10 corporate bonds with a coupon of 8%. The face value of
corporate bonds is usually $1000. How much does he receive on each coupon date?

A. $800
B. $400
C. $66.67
D. $200

Answer: B

Corporate bonds pay interest semi-annually, meaning that the $800 annual interest
received would be split into two disbursements.
1000*10= 10,000….10,000*.08= 800…..800/2= 400

8. Which of these securities is not exempt from the 1933 Securities Act?

A. Municipal securities
B. Charitable organization securities
C. Bank securities
D. Corporate securities

Answer: D

All the others are specifically exempted in the act. Just memorize it and move on,
unless you’re really interested in this sort of thing, in which case, read the legislative
history of the act for more info.

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-Series 65- Practice Exam
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9. Which of the following is not a method for registering non-exempt securities with
the state?

A. Coordination
B. Debenturization
C. Filing
D. Qualification

Answer: B

Just memorize the three correct ones and know that sometimes if you can’t pinpoint an
answer, you can eliminate the obviously wrong ones to arrive at the correct choice.

10. Debentures are backed by what?

A. Name and good credit of the issuer


B. Property pledged against the bond by the issuer
C. All assets, including equities, property and equipment
D. Only equities and property

Answer: A

Debentures are unsecured bonds, so they are not backed by anything. Investors who
buy debentures speculate that the issuing company will be able to meet its obligations.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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11. Which of the following investment advisers would not have to register in the
state?

A. Adviser with no office in the state who advises 7 high net worth clients who are
residents of the state.
B. Adviser with an office in the state that advises 5 non-institutional clients who are
residents of the state.
C. Adviser with an office in the state who advises 11 pension funds located in the state.
D. Adviser with no office in the state who advises 11 pension funds located in the state.

Answer: D

Here, “B” and “C” have to register because they have an office in the state. In “A” the
adviser exceeds the maximum allowed and cannot qualify for a “Deminimus”
exemption. And since “D” is dealing with institutional investors, the # doesn’t matter.

12. Which of the following are prohibited practices for investment advisers?

I. Entering into a contract that compensate as a share of gains


II. Entering into a contract that compensates as a % of total managed assets
III. Entering into contract that does not require client consent for assignments
IV. Entering into a contract verbally

A. II, III, IV
B. I, IV
C. II, III
D. I, III, IV

Answer D

All are prohibited except fees as a % of managed assets, remember all contracts must
be written.

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-Series 65- Practice Exam
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13. TANs are backed by what?

A. Full faith and credit of a corporation


B. Property taxes
C. Income from projects funded by bonds
D. Urban development license taxes

Answer: B

Property taxes back TANs, because they are a GO note. “A”and “D” are VERY wrong
because corporations and license taxes have nothing to do with TANs. “C” is wrong
because income from projects funded is what backs “RANs.”

14. What is credit risk?

A. Risk that the issuing company will default on payments


B. Risk that interest rates will rise
C. Risk that interest rates will decline
D. Risk that new government legislation will cause a change to a company’s bond rating

Answer: A

“B” and “C” are interest rate risk, while “D” is regulatory risk. Easy stuff.

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-Series 65- Practice Exam
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15. Which of these is not a cyclical industry?

A. Automakers
B. Pharmaceutical company
C. Appliance manufacturer
D. None of these is a cyclical industry

Answer: B

Automakers and Appliance manufacturers are VERY cyclical, while Pharmaceutical


companies are considered defensive.

16. What is a “Red Herring?”

A. An industry newsletter published by a company about one of their products


B. An accounting register named for the “red ink” that company loses are written in
C. An informative letter that gives details about an upcoming public offering
D. The NASD name for a fraudulent letter that knowingly misstates material facts.

Answer: C

A Red Herring precedes a final prospectus.

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-Series 65- Practice Exam
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17. Which factor would be least important to an adviser employing a technical


analysis technique?

A. Advance/Decline lines
B. Price to Book ratio
C. Average Daily Volume
D. 20 Day moving average

Answer: B

All the answers look only to the market technicals, which is the basis of a technical
analysis- except B, which looks at accounting data, which is used for a fundamental
analysis. So any accounting data would be LEAST valuable to a technical analysis.

18. In the event a company is liquidated, in which order will the following be paid?

I. General creditors
II. Secured debt
III. Subordinated debentures
IV. common shareholders

A. I, II, IV, III


B. II, III, IV, I
C. II, I, III, IV
D. II, IV, I, III

Answer: C

Remember the order of payment: IRS, Secured Debts, Unsecured debts, Debentures,
Subordinated debentures, preferred shareholders, common shareholders

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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19. Which of the following is exempt from SEC registrations when issued by a
corporation?

A. Common stock
B. Commercial Paper
C. Debentures
D. None of these are exempt

Answer: B

A corporation does not need to register commercial paper. Though, they still need to
register preferred and common stock issues as well as issues of debentures.

20. Which is not a right of a common shareholder?

A. Receive a certificate of stock ownership


B. Receive a portion of assets if the company is liquidated
C. Inspect the company’s financial records
D. Vote to declare a dividend.

Answer: D

“A,B,C” are rights of the common shareholder, however, “D” is wrong because only
the boards of directors can vote to declare a dividend.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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21. YXZ corporation issues a bond at par that is convertible to common stock at
$50. What is the conversion ratio of the bond?

A. 20:1
B. 50:1
C. 40:1
D. 10:1

Answer: A

The conversion ratio is the number of shares a convertible bond can be converted to.
To determine this, we take the par value and divide it by the conversion price.

1000/50 = 20…..means a ratio of 20:1

22. An elderly customer wants their investments structured in a way that will allow
liquidity, limit risk, and provide them some growth in a time frame of less than a
year. Which is the most suitable for the client?

A. US Treasury bonds
B. Biotechnology stocks
C. Technology Index fund
D. Money market fund

Answer: D

Because of the liquidity requirements, we can eliminate “A.” Because of the


requirement to limit risk, we can eliminate “B” and “C” as they are relatively volatile.
We have only “D” left.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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23. You read an article in the Wall Street Journal that says “call rates” have been
increasing at banks, what does the article mean by “call rates?”

A. Banks have been increasing the amount of people they call about their services
B. The Fed has increased the amount it charges banks for overnight loans
C. The calling of callable bonds has increased
D. The interest rates banks charges brokers to back margin accounts has increased

Answer: D

“A” is just silly. “B” is the “discount rate.” “C” seems to make sense, but “D” is the
only one that is correct. “Call rates” on this exam are this and nothing else.

24. The minimum denomination of a “Jumbo” CD is:

A. $25,000
B. Set by the banks that issue them
C. $100,000
D. $50,000

Answer: C

Just memorize this one. They’re “jumbo” for a reason.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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25. Which interest rate does the Federal Reserve target with its open market
operations?

A. Fed funds rate


B. Prime rate
C. Discount rate
D. Call rate

Answer: A

The Fed uses matched sales and repo’s to move the rate to where it wants it to be.
These help control access to capital in the market.

26. “The Pink Sheets” reports quotes for what type of security?

A. NASDAQ
B. non-NASDAQ OTC
C. Options
D. NYSE DPTA

Answer: B

The pink sheets are published by the National Quotation Bureau, and they contain
dealer quotations for non-NASDAQ OTC stocks.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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27. A Collateral Trust Certificate is backed by what?

A. Issuer’s real estate holdings


B. Property Taxes
C. Assets belonging to the company such as vehicles and computers
D. A portfolio of securities

Answer: D

“A” backs a Mortgage Bond, “B” backs a General Obligation Bond, “C” is how an
Equipment Trust Certificate is backed.

28. Which of the below issuers would require their representative to register as an
agent?

A. Treasury Notes
B. City Of Newton Ice Skating Rink Bond
C. State Of California General Obligation Bond
D. IBM Preferred stock

Answer: D

Treasuries, municipal bonds, bank, and small business investment company securities
are exempt from registration. IBM, because it is none of these, has no such exemption.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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29. Which of these bonds are not trading at a discount or at par?

I. Current Yield 1%, Nominal Yield 3%


II. Nominal Yield 4%, Current Yield 3%
III. Nominal Yield 2%, Current Yield 2%
IV. Current Yield 8%, Nominal Yield 11%

A. I, III, IV
B. III
C. I, II, IV
D. I, II, III, IV

Answer: C

I, II and IV are trading at a premium, while III is trading at par. Since the question wants
trades at “not” discount or par, its asking for trades at premium.

30. You get a call from your client’s wife, she says that her husband wants you to
buy 100 shares of ABC but can’t get in touch with you because he is in the jungles of
Africa and can’t get a good cell phone signal. He emailed her a request from a
village he stayed in that she call you and place the order. What is needed in order
for you to execute this order?

A. She needs to forward the email to you and fax a statement signed by her swearing it is
legitimate.
B. You need to have a signed statement from him authorizing her to transact business for
this account on file.
C. You need to speak to him via telephone and get his approval.
D. You don’t need anything if you’ve known them both for years and can vouch for her.

Answer: B

No matter how long you have known them, you need to have the authorization on
file for ANY 3rd party to transact business for another’s account.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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31. Which of the following is most susceptible to a loss of purchasing power?

A. Fixed Annuities
B. Common Stock
C. Preferred Stock
D. Mutual Fund

Answer: A

Even though the other choices may be somewhat impacted by inflation and volatility,
because of the nature of the Fixed annuity, inflation would hurt it the most.

32. From New York, you make a call to a customer about buying some securities
who receives it via cell phone in California, she is in a car and while talking to you
about it, finally accepts your offer to buy while she is in Nevada. Which state would
the transaction be said to have occurred in for purposes of Administrative
jurisdiction?

A. New York, California and Nevada


B. New York and Nevada
C. Nevada
D. California and Nevada

Answer: A

Since the transaction crossed into all 3 jurisdictions, all 3 Administrators may get
involved if they choose.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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33. At what price are open end funds purchased?

A. NAV divided by POP


B. NAV minus EPS
C. At NAV or above
D. NAV minus P/E

Answer: C

Since the NAV is the minimum price for an open ended fund, anything that would
indicate a price below NAV can be eliminated, leaving only “C.”

34. Which definition most closely matches that of “Junk Bonds?”

A. Low Yield, High Risk of Default


B. High Yield, High Risk of Default
C. Moderate Risk of Default, High Yield
D. Low Risk, Moderate Risk of Default

Answer: B

Nothing special here, just remember them by the risk/reward they carry.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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35. Under the Uniform Prudent Investors Act, “risk” is assessed by looking at what
when evaluating investment opportunities?

A. Risk is assessed by looking at the entire portfolio


B. Risk is assessed by looking at only non-government securities
C. Risk is assessed by looking at individual stocks, but not bonds graded Baa or better
D. Risk is assessed by looking at the entire portfolio except federal government bonds

Answer: A

The Prudent Investors Act allows the fiduciary to balance risky investments with
others that are safer, making the risk of the entire portfolio considered. This is in
keeping with Modern portfolio theory.

36. What is the most important effect of NSMIA?

A. Directs bond backers to do so via CMOs


B. Directs that state securities laws will have precedence over federal laws
C. Directs that when there is a conflict between state and federal securities laws, the more
stringent will win out
D. Directs that federal securities laws will have precedence over state laws

Answer: D

Apparently, legislators wanted to remind people in case they forgot their civil
procedure.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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37. Which of these investment techniques would yield a lower dollar cost average
per share?

A. Buying a certain set dollar amount of a security once every month


B. Buying a certain set number of shares in a security once every month
C. Alternating between the above A and B techniques in an odd/even month pattern
D. Alternating between the above A and B techniques in a “6 month each” pattern

Answer: A

Buying with a set amount of dollars each month will allow you to always purchase
more shares when the stock is nearer a support level-this will give you the lowest
average cost per share. Any deviation from this will increase your average cost per
share, making any "alternating" method more costly (which takes out "C" and "D").

38. DRE has 10% bonds that are trading at 95. What is their current yield?

A. 9.5%
B. 10.5%
C. 1.05%
D. 8.95%

Answer: B

Remember bond values, unless otherwise stated, are 1000. The formula for current
yield here would be:

Step 1: $1000 * .10 = X


Step 2: 95 * 10 = Y
Step 3: X/Y = Current Yield

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-Series 65- Practice Exam
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39. Which Treasuries are sold on a discounted yield basis?

I. T-notes
II. T-bills
III. T- bonds
IV. T- funds

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

Answer: D

T-notes and T-bonds are quoted as a percentage of par. T-funds don’t exist. Leaving
“D”- T-bills- which are sold on a discounted yield basis.

40. What does a “beta” measure??

A. Measures the difference between an annuity’s actual return and its expected return
B. Measures the difference between a security’s average yield and its current yield
C. Measures how much the price of a stock changes when the market moves as a whole
D. Measures how much the price of an index changes when inflation slightly subsides

Answer: C

Beta measurement is created by tracking a stock’s movement as well as the market’s


movement as a whole over a specified time period and seeing how the two movements
correlate.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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41. How are breakpoints in a mutual fund structured?

A. The discounts increase as the purchase amount increases


B. The discounts decrease as the purchase amount decreases
C. Breakpoints are no longer legal because of Sarbanes-Oxley
D. Breakpoints only apply to an index fund, they are not used in mutual funds

Answer: A

Breakpoints are pre-determined levels of account value, when they are passed, they
qualify the investor for a discount in future purchases of shares in that fund. Simple stuff.

42. Your client, Jacob, is a 56 year old dock worker. What is his maximum
deductible Roth IRA contribution?

A. $4,000
B. $3,500
C. $6,000
D. $3,000

Answer: C

Roth IRAs used to allow a maximum deductible contribution of $5,000 per year.
Since Jacob is 56, he surpasses the 50 year mark that allows the maximum deductible
contribution to be increased to $6,000. Thus Jacob’s maximum deductible
contribution is $6,000. The deductible increase post 50 years is called a “catch up.”

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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43. Under a Keogh plan, what is the maximum deductible contribution a client can make if he
earns $100,000 per year in self-employed income?

A. $25,000
B. $30,000
C. $4,500
D. $100,000

Answer: A

Keogh contribution deductions are capped at either 25% of self-employed income or $46,000-
whichever is less. Here, 25% is 25K, which is less than the max cap of 46K, making
the answer A.

44. Which are not intangible assets?


I. Patent
II. Trademark
III. Inventory
IV. Goodwill

A. I, II, IV
B, I, III
C. IV
D. III

Answer: D

Not intangible means tangible, get used to this, the exam will throw “not” in there to
confuse you. Patents, Trademarks, Goodwill, and intellectual properties are all
intangible- anything of substance, like equipment, inventories, etc are considered
tangible. This question basically wants to know which of the 4 are tangible assets. Easy
stuff.

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-Series 65- Practice Exam
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45. Company A has current assets of $350,000. It has inventories of $50,000. It has
long term liabilities of $25,000. It has current liabilities of $150,000. What it
Company A’s net working capital?

A. $225,000
B. $175,000
C. $200,000
D. $175,000

Answer: C

Net working capital is current assets minus current liabilities. In this example, this
would be 250,000current assets – 150,000 current liabilities = 200,000 net working
capital.

46. What does Odd Lot trading theory assume?

A. That investors who trade in large blocks are usually wrong in their market timing
B. That investors who trade in small blocks are usually wrong in their market timing
C. That investors who trade in small blocks are usually very experienced
D. That investors who trade in large blocks are usually inexperienced

Answer: B

Odd Lot trading theory assumes that small block investors are inexperienced. And as
such are usually wrong in their market timing.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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47. Today, the NYSE had 1,878 advances and 1,213 declines, what is the
advance/decline index for the day?

A. 665.
B. .215
C. .645
D. 1.54

Answer: B

Practice this one a few times, it looks more complicated than it actually is.

The advance/decline index is calculated as follows:


(# advance) - (# decline) = Y
(# advance) + (# decline) = Z

Y/ Z= X

X= The advance/decline index

48. A believer in Efficient markets believes that?

A. All public information takes time to become fully priced into a stock.
B. All public information and analysis cannot ever be fully priced into a stock.
C. All public information and analysis of that information is already priced into a stock
D. All public information is priced into some stocks, others are undervalued

Answer: C

“A” is wrong because Efficient market theorists believe that as information becomes
public it is INSTANTLY priced into a stock. “B” is wrong for the same reason. “D” is
wrong because Efficient market theory says that NO stock can ever be undervalued, as
each stock is ALWAYS properly priced, due to the instant inclusion of public
information into the market price.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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49. What is the name for an investment company that sells interest bearing portions
in the income derived from a group of securities that have been placed in trust?

A. Unit Investment Trust


B. Front-end Mutual Fund
C. Real Estate Investment Trust
D. NAV Trust

Answer: A

“Front end” refers to sales charges, “C” is wrong because REITs deal with real estate
and not securities, “D” is just plain wrong because NAV stands for Net Asset Value-
which is a formula to determine the total market value of a pool of securities.

50. How many IRA rollovers does the IRS allow per year without penalty?

A. 1
B. 3
C. 2
D. Unlimited as long as rollover is completed within 60 days

Answer: A

The IRS allows 1 (one) IRA rollover a year, and it must be completed within 60 days
to avoid the applicable tax.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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51. Which of the following are actions commensurate with “fiscal policy?”

I. Decreasing the income tax


II. Increasing spending on education
III. Increasing the discount rate
IV. Decreasing the amount needed to meet reserve requirements

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

Answer: D

Tax law and budget allocations make up a country’s fiscal policy. While the supply of
money and access to capital are a country’s monetary policy. Here, I and II deal with
tax and spending, making them fiscal, while III and IV deal with supply of money and
access to capital, making them monetary.

52. If the value of the US dollar (USD) falls, which of the following will happen?

I. Imports into the US will increase


II. Exports from the US will increase
III. US goods will become less competitive in foreign markets
IV. US good will become more competitive in foreign markets

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

Answer: B

If the USD falls, US goods become cheaper to other currencies, making them more of
a bargain (more competitive) in foreign markets, as a result US exports will increase.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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53. When is “churning” in a client’s account allowed?

A. When clients aren’t trading enough to generate minimum fee levels


B. When clients have allowed it in writing, and the writing has been approved by the SEC
C. The SEC has not ruled on the practice, making its allowance dependant on state law
D. It is never allowed

Answer: D

Churning is the practice of excessive trading in order to generate commissions for the
adviser or firm, and it is NEVER allowed.

54. To qualify as “diversified,” what is the proper ratio a management company


must have?

A. Must have 50% of its assets invested in securities, no more than 5% of its assets in any
one security, and no more than 15% of the voting securities of any one issuer
B. Must have 75% of its assets invested in securities, no more than 2% of its assets in any
one security, and no more than 10% of the voting securities of any one issuer
C. Must have 75% of its assets invested in securities, no more than 5% of its assets in any
one security, and no more than 10% of the voting securities of any one issuer.
D. Must have 80% of its assets invested in securities, no more than 5% of its assets in any
one security, and no more than 10% of the voting securities of any one issuer

Answer: C

Just memorize the diversification ratio, you WILL be asked it on the exam.

Copyright 2009 Fourth Financial, LLC


-Series 65- Practice Exam
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55. What is paid by higher tax bracket individuals and companies when they use
deductions and passive loses to reduce their federal tax liability to zero?

A. They pay only the state tax, because they have no federal tax liability
B. They pay the Alternative Minimum Tax (AMT)
C. They pay the Congressional Corporate Flat Tax (CCFT)
D. They pay the Adjusted Gross Minimum Tax (AGMT)

Answer: B

The Alternative Minimum Tax (AMT) exists to keep the high income tax bracket
dwellers from using their vast resources to lower their tax burden to zero and thus
avoid paying their “fair share” of taxes.

56. When can a limit order be executed?

A. anytime at market once the limit price has been crossed in either direction
B. at the limit price or better
C. only at the limit price
D. at the limit price or worse

Answer: B

Limit orders are always placed away “from the market,” meaning a BUY limit order is
always at a price lower than current market price- while a SELL limit order is always
at a price higher than current market price.

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57. Which orders are usually employed by short-sellers?

A. market orders
B. sell stop limit orders
C. buy stop limit orders
D. buy limit orders

Answer: C

This trade is used to limit a loss on a short sale or protect a profit by its “limit” nature

58. An annuity that pays an annuitant for life, but also specifies a minimum period
over which payments are made, is considered which of the following?

A. Unit refund life annuity


B. Unit annuity post-life trust
C. Life annuity
D. Life annuity with period certain

Answer: D

“B” is made up. All others except “D” end their payments when the annuitant dies.
“D” pays its annuity payments out for a specified period, regardless of whether the
annuitant is alive or dead. If dead before the specified payment end date, the
beneficiaries of the annuitant will receive the payments.

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59. Which is not a direct advantage to the investor of investing with an investment
company?

A. Gross Revenue Pledge


B. Liquidity
C. Professional Management
D. Diversification

Answer: A

A “gross revenue pledge” is a pledge to pay all bondholders that funded a revenue
generating project before paying for maintenance and operations. You could get crafty
and claim that an investment company that invests in Muni’s MAY receive the
advantage of a gross revenue pledge if it owns any bonds of that nature- however-
note that the question wants DIRECT benefits to the investor, not to the investment
company, which would make the benefit to the investor INDIRECT.

60. While in Japan, your client calls you to tell you that she found a deal on a car
that she plans to purchase and ship home. The problem, as she explains, is that she’s
not entirely sure whether or not the deal is good because she doesn’t understand
exchange rates. She tells you the car and shipping cost 45000 yen, and that the yen is
trading at .2439 to the USD equivalent. What is the price of her car in USD? Round
to the nearest cent if necessary.

A. $184,501.85
B. $10,975.50
C. $44,999.76
D. $13,414.50

Answer: B

To determine the cost in USD, you only have to multiply the USD equivalent (.2439)
by the car’s price in yen (45000)…….so……(45000)*(.2439) = $10,975.50

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61. For a call option, which formula determines the intrinsic value of that option?

A. Option’s strike price minus Stock’s Market price


B. Stock’s Market price minus Option’s Strike price
C. Stock’s Market price plus Option’s Strike Price
D. Option’s time value plus Stock’s Market Price

Answer: B

Simply put, intrinsic value is the difference between the stock’s market price and the
option’s strike price. So, a simple subtraction will give the intrinsic value.

62. What are the Earnings Per Share for a stock with the following attributes:
Net Income = $ 100,000
Preferred Dividends Payout = $35,000
Common Dividends Payout = $20,000
Common Shares Outstanding = 500,000

A. 13 cents
B. 09 cents
C. 1 Dollar and 81 cents
D. 55 cents

Answer: A

If you chose answer B, you probably subtracted the preferred dividends payout AND
the common dividends payout from the net income before dividing by the common
shares outstanding…this would be correct if you were figuring out FULLY DILUTED
EPS, but here, when we are only trying to figure out EPS, we ONLY subtract the
preferred dividends payout from net income before we divide by the common shares
outstanding.

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63. Regarding options, what is a “straddle?”

A. When a call is placed at two prices on a security


B. When a put is placed at two prices on a security
C. When both a call and a put are placed on the same security
D. When a put and call are split between two different securities in the same market cap

Answer: C

Since both the put and call will be priced both above and below the market price of
the security, we say the arrangement is “straddling” the market price.

64. Which of these Investment Adviser acts are prohibited under the Securities Act
of 1934?
I. Cannot guarantee profit
II. Cannot share gains
III. Cannot commingle
IV. Cannot churn

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

Answer: D

All are prohibited under the act, memorize them.

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65. Which is not required to be included in a registration?

A. Amount of securities offered in a state


B. Names of other states the securities are offered in
C. Names of possible primary market purchasers
D. Anything adverse by a court or SEC

Answer: C

Beyond “A, B, D” registrations must also include a “filing fee.”

66. Which order would protect a long against loss?

A. Sell stop
B. Buy limit
C. Sell limit
D. Sell stop limit

Answer: A

A Sell stop would execute if the stock declined to the level the sell stop was set at. For
instance, you might have bought a stock for 50 and seen a gain of 20, bringing the
value to 70. To protect your gain against a decline in price, you might set the sell stop
at 60 or 65. This protects your profit by selling at a determined price (which is a still a
gain to you) as the market price declines.

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67. Which is not an unemployment stat the Fed uses as an economic indicator?

A. Average weekly new claims


B. Unemployment cost index
C. Average yearly new claims
D. Unemployment Rate

Answer: C

The Fed relies on the other 3, Average yearly new claims is not used by the Fed.
Unemployment cost index- released Quarterly
Average weekly new claims- released Weekly
Unemployment Rate, also known as Non-Farm Payroll- released Monthly

68. When an increase in the cost of raw materials pushes up the price of an item,
this is an example of which kind of inflation?

A. Supply Push Inflation


B. Cost Push inflation
C. Demand Pull Inflation
D. Consumption Pull Inflation

Answer: B

When raw materials cause the price of items to increase, this is cost push inflation,
because the raw material costs are inflating the price by pushing it up. When demand
has outpaced the supply, demand increases the price by pulling the price upward with
it as it increases, resulting in demand pull inflation.

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69. What happens if you cannot fill all of a “fill or kill” order?

A. Fill part and then cancel the rest


B. Cancel the entire order immediately
C. Fill part of it and if it is not filled completely within 12 hours, then cancel the rest
D. There is no such thing as a “fill or kill” order

Answer: B

The “fill or kill” order is not to be confused with its more friendly relative the
“immediate or cancel” order, which allows partial filling and cancellation of the
unfilled remainder.

70. Please put these dates in the order of their occurrence:

I. Ex-Date
II. Record Date
III. Payable Date
IV. Declaration Date

A. I, III, IV, II
B. III, IV, II, I
C. II, IV, I, III
D. IV, I, II, III

Answer: D

Declaration Date is the date the board declares the dividend. Ex-Date is the date
you must purchase by to get this dividend (purchasing by this date allows the buy
to settle in the regular way by the Record date). Record Date is the date your stock
must have settled in the regular way by to qualify for the dividend. Payable Date is
the day you receive your dividend.

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71. All of the following are funded with after-tax dollars except which?

A. 529 Plan
B. Roth IRA
C. Coverdell Education plan
D. 403b

Answer: D

403b is also known as a tax-sheltered annuity. It is basically a 401k for non-profit


agencies- and as such, is funded with a pre-tax salary allotment.

72. Income from Treasuries is taxed by the federal government as:

A. Passive income
B. Capital gains
C. Ordinary income
D. Treasuries are not taxed because of the “immunity doctrine” in the US Constitution

Answer: C

The “immunity doctrine” allows Treasuries (by their federal nature) to escape taxation
by local and state entities, however, it has nothing to do with taxes on federal
treasuries BY the federal government. Treasury note and bond income is taxed in the
year it is earned.

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73. Which sectors of the US economy are not supported by US government agency
securities?

A. Housing
B. Foreign Trade
C. Higher Education
D. None of the above

Answer: D

The US government supports all of these with agency securities to help meet its policy
objectives.

74. Are municipal bonds exempt from registration and prospectus rules under the
Securities Act of 1933?

A. No
B. Yes, but they are subject to the act’s anti-fraud and anti-manipulation rules
C. Yes
D. No, but they are exempt from the act’s anti-fraud and anti-manipulation rules

Answer: C

Municipal bonds are exempt from prospectus and registration requirements, making
answer “A” wrong as well as answer “D.” Also, though Muni’s are still subject to
anti-fraud and anti-manipulation rules- these rules are from the Securities Exchange
Act of 1934. Since answer “B” claims they are from the Securities Act of 1933, it is
also wrong.

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75. What is the MSRB?

A. The Municipal Securities Regulatory Board


B. The Municipal Securities Rulemaking Board
C. The Municipal Securities Registration Board
D. The Municipal Securities Regional Board

Answer: B

The Municipal Securities Rulemaking Board was established in 1975 as a self


regulatory organization charged with overseeing the municipal securities market.

76. Why do companies usually set the par value of common stock at a low value?

A. It becomes easier to issue future shares


B. Such low valued shares allow companies to qualify for an exemption to registration
C. The federal government bases its capital gains tax on the par value of this asset
D. States base their tax on the par value of this asset

Answer: D

Memorize it and move on.

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77. Which of the following are illegal actions?

I. Matched orders
II. Trading Pools
III. Wash Trading
IV. Early trading by underwriters

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

Answer: D

Memorize these because they WILL come up on the exam.

78. Someone who works for a company and maintains all their records of
shareholder names and addresses is called a:

A. Registrar
B. Transfer Agent
C. Two Dollar broker
D. Broker-Dealer

Answer: B

A registrar makes sure the company does not exceed its charter by issuing more shares
that it is authorized. A two dollar broker assists larger brokers by taking their smaller
orders when the broker gets too busy. And of course, we know what a broker-dealer
does/is- and it’s not what the question asks.

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79. What is a progressive tax?

A. Higher incomes are taxed at higher rates


B. Lower incomes pay a larger percentage in taxes than higher incomes
C. Higher incomes pay the same percentage as lower incomes
D. Lower incomes pay the same rates as higher incomes, but the percentage is greater

Answer: A

A progressive tax increases in both rate and percentage of total income as income
increases. The opposite is a regressive tax, where though the rates of the high and low
incomes may be equal, since the lower income is indeed lower, that set payment is a
higher percentage of the lower income. Put simply, a man with 10 dollars has a harder
time parting with 10% (1 dollar) than a man with 100 dollars (10 dollars).

80. What happens if capital losses exceed capital gains?

A. Remaining losses can be carried forward to other years


B. Remaining losses cannot fall below zero
C. Capital gains cannot exceed capital losses
D. Capital losses cannot exceed capital gains

Answer: A

If capital losses exceed capital gains, the losses can be deducted from other amounts,
and whatever is left can be carried over to subsequent years. Even if you did not
know this, you can eliminate “B,” “C” and “D” on the simple fact that you know
them to be untrue. “D” losses cannot exceed gains? Of course they can. “B” losses
cannot fall below zero? Of course they can, if losses can exceed gains, then the
number must go negative. “C” gains cannot exceed losses? Of course they can,
that’s the whole point!

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81. Your client is a limited partner in a local pizza delivery company. She receives
20% of her income from this venture. What kind of taxable income is this?

A. Earned Income
B. Passive Income
C. Investment Income
D. Capital Gains

Answer: B

Because she is a limited partner, and therefore has no managerial role, this income is
considered passive. This matters because in most cases passive losses can only be
written off against passive income.

82. Keeping the rules of the gift tax in mind, if your elderly client gives his wife a gift
of $100,000.00 – how much of this will he be responsible for paying tax on?

A. He would be taxed on zero.


B. He would be taxed on $89,000
C. He would be taxed on zero, because she would pay the tax on $89,000
D. He would taxed on the full $100,000

Answer: A

Although the gift tax allows $11,000 to be gifted with no tax, it does not matter here.
The rule between husband and wife is that either spouse can gift the other as much as
they choose and still COMPLETELY avoid the gift tax.

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83. Which is not a leading economic indicator?

I. S &P’s 500 Stock Index


II. Money Supply (M2)
III. Average Initial weekly claims for state unemployment insurance
IV. Industrial Production

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

Answers: C

Industrial Production is a coincident indicator; all the others are leading economic
indicators.

84. Which is not a coincidental economic indicator?

I. Manufacturing trade and sales


II. Commercial and Industrial loans
III. Agricultural payroll statistics
IV. Personal income

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

Answer: C

Commercial and industrial loans are a lagging economic indicator, all the others are
coincidental.

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85. Which is not a lagging economic indicator?

I. New orders for consumer goods


II. Average prime interest rate
III. Average duration of unemployment
IV. Ratio of inventories to sales in manufacturing

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

Answer: D

New orders for consumer goods is a leading economic indicator, all the others are
lagging economic indicators.

86. If the CPI is up 6.1 from last year, what does this mean?

A. That salaries and benefits are up 6.1 dollars from last year
B. That prices in general are up 6.1 cents from last year
C. That prices in general are up 6.1% from last year
D. That prices in specific areas are up 6.1% from last year

Answer: C

The CPI is the Consumer Price Index; it measures prices across a basket of goods in
many different areas and comes up with a measure of price that it compares to a
prior period and shows the changes in price over time.

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87. Why are changes to the money supply a leading economic indicator?

A. Because it is evidence that the Fed is trying to lower Government spending


B. Because it is evidence that the Fed is trying to cause expansion or contraction
C. Because it is evidence that the Fed is trying to lower income tax
D. Because it is evidence that the Fed is trying to create jobs

Answer: B

This may be the easiest question on this exam. “A” is wrong because the Fed has
nothing to do with Government spending. “C” is wrong because the Fed has nothing
to do with income tax. “D” is wrong because the Fed does not try to create jobs. The
Fed DOES try to cause expansion and contraction. Piece of cake.

88. To comply with regulations under the Investment Company Act of 1940, REITs
must:

I. Register with the SEC


II. Have 100+ owners of beneficial interest
III. Have less than 50% of the trust controlled by 5 or fewer investors
IV. Always pay corporate taxes on ordinary income from the underlying portfolio if
75% of their gross income is from rents

A. I
B. I, III
C. I, II, III
D. I, II, III, IV

Answer: C

REITs never pay corporate taxes on ordinary income from the underlying portfolio as
long as they meet certain requirements, one of which is that 75% of their gross income
is from rents. Otherwise, I, II, and III must all be complied with by REITs.

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89. All of the following are subject to systematic risk except which?

A. 401(k)
B. 403 (b)
C. fixed annuity
D. Index fund

Answer: C

Systematic risk merely means the risk that a security’s individual value will be impacted
by a market wide value decline. Since a fixed annuity will pay out a certain fixed
amount regardless of how the market moves around it, then it has no systematic risk,
and is thus the exception.

90. Which of these beta coefficients is the most volatile?

A. .05
B. .50
C. 1.0
D. 1.2

Answer: D

The higher the beta coefficient above zero, the more volatile the investment- making
1.2 an investment with much bigger up and down movements than .05 – and thus the
more volatile beta coefficient.

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91. To be legally compliant, an investment Adviser must send his clients account
statements:

A. Every month
B. Every month, but only if the account has changed value
C. Every quarter
D. Every quarter, but only if he has custody of accounts

Answer: D

So sayeth the law, if you have custody of a client’s accounts, you must send them a
statement quarterly.

92. Which of these fund probably has the lowest expense ratio?

A. Biotechnology mutual fund


B. Index fund
C. Emerging market fund
D. Gold ETF

Answer: B

Index funds usually have the lowest expense ratios since they do not buy and sell as
much as other funds. Index funds usually buy and then hold.

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93. Which of these is considered a derivative?

A. Options
B. Corporate bond
C. Mutual fund
D. Common stock

Answer: A

Derivatives get their value from an underlying security, and the only one of the four
listed here that does this is an option, as the others derive value from themselves.

94. The GDP has declined for the last 6 consecutive quarters; what part of the
economic cycle does this put the economy in?

A. Recession
B. Contraction
C. Depression
D. Expansion

Answer: C

This question is a “gimme.” We know a recession is defined as 2 consecutive quarters


of GDP decline. Contraction is the name for the overall decline, while expansion is the
name for overall gain, so neither is specifically defined to 6 consecutive quarters of
decline- leaving only depression.

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95. Buying a stock “away from market” means that you:

A. Want to buy a stock not listed on an exchange


B. Want to buy a stock at above or below its market value
C. Want to buy a stock OTC from a private dealer
D. Want to buy a stock from a primary issuer

Answer: B

Since market price is “market,” the term “away from market” basically means any
price BUT market price.

96. After a security has sold out of the primary market, it will trade on the
secondary on which of the following?

A. New York Stock Exchange


B. OTC Market
C. American Stock Exchange
D. The exchange where the company listed

Answer: D

I hope by this point the logic behind this makes perfect sense to you.

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97. Rick has purchased a convertible bond for James, Inc. at 120 and has a
conversion ratio of 30. If James is trading at 38, when is Rick most likely to convert
his bond?

A. Right now
B. When James falls below 33.33
C. When James rises to 40
D. When James rises above 40

Answer: D

Rick paid 1,200 for the bond (1,000*120). So it has a parity price of 40 (1200/30).
If the parity price is 40, Rick will want to convert his bond when the market price
moves above 40.

98. What is the earliest an annuitant can start receiving payments without incurring
a penalty?

A. 70 1/2
B. 62 1/2
C. 55 1/2
D. 59 1/2

Answer: D

59 ½ seems to be the age necessary to collect anything without the IRS taking some
kind of penalty. Maybe that’s worth remembering.

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99. What measure of national output includes all the goods and services produced
inside a country except those produced domestically by foreign companies.

A. GDP
B. GNP
C. GNMA
D. CPI

Answer: B

GNMA is short for Ginnie Mae, which has nothing to do with this. And CPI is the
Consumer Price Index, so that has nothing to do with this either. The key to this
question is that GNP does not measure the value of goods and services produced
inside a country by foreign companies, while GDP does.

100. The rise and fall of the GDP growth rate over time is known as what?

A. Volatility
B. The business cycle
C. Inflation
D. Macroeconomics

Answer: B

Volatility applies to movement inside a market, Inflation applies to price changes over
time, and Macroeconomics focuses on much more that the GDP growth rate. Leaving
only the lowly business cycle as an answer.

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