Wiley Series 65 Exam Review 2016 + Test Bank: The Uniform Investment Advisor Law Examination

The go–to guide to acing the Series 65 Exam!

Consisting of 130 multiple–choice questions in the areas of ethics and legal guidelines, investment strategies, investment vehicles, and economics and analysis, the Uniform Investment Adviser Law Examination (Series 65) is designed to qualify candidates as investment adviser representatives.

An indispensable resource for anyone preparing to take this tough three–hour exam, Wiley Series 65 Exam Review 2016 was created by the experts at The Securities Institute of America, Inc. It arms you with what you need to score high and pass the Series 65 Exam on your first try.

Designed to let you build and fine–tune your knowledge of all areas covered in the exam and to guarantee that you′re prepared mentally and strategically to take the test, it features:

Dozens of examples Assorted practice questions for each subject area covered in the exam Priceless test–taking tips and strategies Helpful hints on how to study for the test, manage stress, and stay focused

Wiley Series 65 Exam Review 2016 is your ticket to passing the Uniform Investment Adviser Law Examination with flying colors!

Visit www.wileysecuritieslicensing.com for more information.

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ABOUT THE SERIES 65 EXAM xxi

ABOUT THIS BOOK xxv

ABOUT THE TEST BANK xxvii

ABOUT THE SECURITIES INSTITUTE OF AMERICA xxix

CHAPTER 1 EQUITY SECURITIES 1

What Is a Security? 1

Equity = Stock 2

Common Stock 2

Corporate Time Line 2

Values of Common Stock 4

Book Value 4

Par Value 5

Rights of Common Stockholders 5

Preemptive Rights 5

Characteristics of a Rights Offering 6

Determining the Value of a Right Cum Rights 7

Determining the Value of a Right Ex Rights 7

Voting 8

Limited Liability 9

Freely Transferable 9

The Transfer Agent 10

The Registrar 10

CUSIP Numbers 11

Inspection of Books and Records 11

Residual Claim to Assets 11

Why Do People Buy Common Stock? 11

Income 11

What Are the Risks of Owning Common Stock? 12

How Does Someone Become a Stockholder? 13

Preferred Stock 14

Features of All Preferred Stock 14

Types of Preferred Stock 16

Callable Preferred 17

Types of Dividends 17

Dividend Distribution 18

Taxation of Dividends 20

Selling Dividends 20

Dividend Disbursement Process 21

Warrants 21

How Do People Get Warrants? 21

American Depositary Receipts (ADRs)/American Depositary Shares (ADSs) 22

Currency Risks 23

Functions of the Custodian Bank Issuing ADRs 23

Real Estate Investment Trusts/REITs 23

Direct Participation Programs and Limited Partnerships 24

Limited Partnerships 24

Tax Reporting for Direct Participation Programs 28

Limited Partnership Analysis 28

Tax Deductions vs. Tax Credits 28

Other Tax Considerations 29

Dissolving a Partnership 29

Pretest 31

CHAPTER 2 CORPORATE AND MUNICIPAL DEBT SECURITIES 35

Corporate Bonds 35

Types of Bond Issuance 36

Bond Pricing 37

Par Value 38

Discount 38

Premium 38

Corporate Bond Pricing 38

Bond Yields 39

Yield to Maturity: Premium Bond 40

Yield to Maturity: Discount Bond 41

Calculating the Yield to Maturity 41

Calculating the Yield to Call 42

Realized Compound Yield Returns 42

Yield Spreads 43

The Real Interest Rate 43

Bond Maturities 43

Series Issue 44

Types of Corporate Bonds 44

Guaranteed Bonds 46

Convertible Bonds 46

Converting Bonds into Common Stock 47

Parity Price 47

Advantages of Issuing Convertible Bonds 48

Disadvantages of Issuing Convertible Bonds 48

Convertible Bonds and Stock Splits 48

The Trust Indenture Act of 1939 49

Bond Indenture 49

Ratings Considerations 49

Exchange Traded Notes (ETNs) 50

Euro and Yankee Bonds 50

Variable Rate Securities 51

Retiring Corporate Bonds 51

Municipal Bonds 53

Types of Municipal Bonds 54

Taxation of Municipal Bonds 58

Tax–Equivalent Yield 58

Purchasing a Municipal Bond Issued in the State in Which the Investor Resides 59

Triple Tax Free 59

Original Issue Discount (OID) and Secondary Market Discounts 59

Amortization of a Municipal Bond s Premium 60

Bond Swaps 60

Analyzing Municipal Bonds 60

Analyzing General Obligation Bonds 61

Duration 61

Convexity 62

Bond Portfolio Management 62

Pretest 65

CHAPTER 3 GOVERNMENT AND GOVERNMENT AGENCY ISSUES 69

Series EE Bonds 69

Series HH Bonds 70

Treasury Bills, Notes, and Bonds 70

Purchasing Treasury Bills 70

Treasury Notes 71

Treasury Bonds 71

Treasury Bond and Note Pricing 71

Treasury STRIPs 72

Treasury Receipts 72

Treasury Inflation Protected Securities (TIPS) 73

Agency Issues 74

Government National Mortgage Association (GNMA) 74

Federal National Mortgage Association (FNM) 75

Federal Home Loan Mortgage Corporation (FHLMC) 75

Federal Farm Credit System 76

Collateralized Mortgage Obligation (CMO) 76

CMOs and Interest Rates 76

Types of CMOs 77

Pretest 79

CHAPTER 4 INVESTMENT COMPANIES 81

Investment Company Philosophy 81

Types of Investment Companies 82

Open End vs. Closed End 83

Diversified vs. Nondiversified 84

Investment Company Registration 85

Registration Requirements 85

Investment Company Components 87

Mutual Fund Distribution 89

Selling Group Member 89

Distribution of No–Load Mutual Fund Shares 90

Distribution of Mutual Fund Shares 90

Mutual Fund Prospectus 90

Characteristics of Open–End Mutual Fund Shares 91

Mutual Fund Investment Objectives 92

Other Types of Funds 94

Bond Funds 94

Alternative Funds 96

Valuing Mutual Fund Shares 96

Sales Charges 98

Other Types of Sales Charges 100

Recommending Mutual Funds 100

Calculating a Mutual Fund s Sales Charge Percentage 101

Finding the Public Offering Price 102

Sales Charge Reductions 102

Breakpoint Schedule 103

Letter of Intent 103

Breakpoint Sales 104

Rights of Accumulation 104

Automatic Reinvestment of Distributions 105

Other Mutual Fund Features 105

Dollar Cost Averaging 106

Mutual Funds Voting Rights 108

Mutual Fund Yields 109

Portfolio Turnover 109

Pretest 111

CHAPTER 5 VARIABLE ANNUITIES AND RETIREMENT PLANS 115

Annuities 115

Bonus Annuity 117

Equity–Indexed Annuity 118

Recommending Variable Annuities 119

Annuity Purchase Options 120

Accumulation Units 121

Annuity Units 121

Annuity Payout Options 122

Factors Affecting the Size of the Annuity Payment 123

The Assumed Interest Rate (AIR) 123

Taxation 124

Types of Withdrawals 124

Annuitizing the Contract 125

Sales Charges 125

Investment Management Fees 125

Variable Annuity vs. Mutual Fund 125

Retirement Plans 126

Individual Plans 126

Individual Retirement Accounts (IRAs) 126

Corporate Plans 135

Types of Plans 136

Rolling Over a Pension Plan 138

Employee Stock Options 138

Employee Retirement Income Security Act of 1974 (ERISA) 139

Erisa 404C Safe Harbor 140

Life Insurance 141

Tax Implications of Life Insurance 143

Pretest 145

CHAPTER 6 FUNDAMENTAL AND TECHNICAL ANALYSIS 149

Fundamental Analysis 149

Balance Sheet 150

Capitalization 152

Changes in the Balance Sheet 152

The Income Statement 156

Industry Fundamentals 158

Top–Down and Bottom–Up Analysis 158

Dividend Valuation Models 159

Technical Analysis 159

Market Theories and Indicators 163

Efficient Market Theory 164

Statistical Analysis 165

Market Capitalization 166

Pretest 167

CHAPTER 7 ECONOMIC FUNDAMENTALS 169

Gross Domestic Product 169

Recession 171

Depression 171

Economic Indicators 171

Schools of Economic Thought 173

Economic Policy 174

Tools of the Federal Reserve Board 174

Interest Rates 174

Reserve Requirement 176

Changing the Discount Rate 176

Federal Open Market Committee 176

Money Supply 177

Disintermediation 178

Moral Suasion 178

Fiscal Policy 178

International Monetary Considerations 180

London Interbank Offered Rate / Libor 180

Yield Curve Analysis 181

Pretest 183

CHAPTER 8 RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION 187

Professional Conduct by Investment Advisers 188

The Uniform Prudent Investors Act of 1994 188

Fair Dealings with Clients 189

Recommending Mutual Funds 193

Periodic Payment Plans 193

Disclosure of Client Information 194

Borrowing and Lending Money 194

Developing the Client Profile 194

Types of Advisory Clients 195

Investment Objectives 200

Capital Asset Pricing Model (CAPM) 202

Risk vs. Reward 203

Alpha 205

Beta 205

Expected Return 206

Time Value of Money 207

Weighted Returns 209

Modern Portfolio Theory 211

Predicting Portfolio Income 212

Tax Structure 214

Investment Taxation 214

Calculating Gains and Losses 214

Cost Base of Multiple Purchases 215

Deducting Capital Losses 216

Wash Sales 216

Taxation of Interest Income 217

Inherited and Gifted Securities 217

Donating Securities to Charity 217

Trusts 218

Gift Taxes 220

Estate Taxes 220

Withholding Tax 221

Corporate Dividend Exclusion 221

Alternative Minimum Tax (AMT) 221

Taxes on Foreign Securities 221

Pretest 223

CHAPTER 9 SECURITIES INDUSTRY RULES AND REGULATIONS 227

The Securities Act of 1933 227

The Prospectus 228

The Final Prospectus 228

SEC Disclaimer 229

Misrepresentations 229

The Securities Exchange Act of 1934 230

The Securities Exchange Commission (SEC) 230

Extension of Credit 231

Public Utilities Holding Company Act of 1935 231

Financial Industry Regulatory Authority (FINRA) 231

The Trust Indenture Act of 1939 232

Investment Advisers Act of 1940 232

Investment Company Act of 1940 233

FINRA Member Communications with the Public 233

FINRA Rule 2210 Communications with the Public 234

Corporate Websites 236

Blind Recruiting Ads 237

Generic Advertising 237

Tombstone Ads 238

Testimonials 238

Free Services 239

Misleading Communications 240

Securities Investor Protection Corporation Act of 1970 (SIPC) 240

Net Capital Requirement 240

Customer Coverage 241

Fidelity Bond 241

The Securities Acts Amendments of 1975 242

The Insider Trading and Securities Fraud Enforcement Act of 1988 242

Firewall 243

The Telephone Consumer Protection Act of 1991 243

Exemption from the Telephone Consumer Protection Act of 1991 244

National Securities Market Improvement Act of 1996 244

The Uniform Securities Act 245

Currency Transactions 245

The Patriot Act 246

Pretest 249

CHAPTER 10 TRADING SECURITIES 253

Types of Orders 253

The Exchanges 257

Priority of Exchange Orders 257

The Role of the Specialist/DMM 257

The Specialist/DMM Acting as a Principal 258

The Specialist/DMM Acting as an Agent 258

Crossing Stock 260

Do Not Reduce (DNR) 261

Adjustments for Stock Splits 261

Stopping Stock 262

Commission House Broker 263

Two–Dollar Broker 263

Registered Traders 263

Super Display Book (SDBK) 263

Short Sales 264

Regulation of Short Sales/Regulation SHO 264

Rule 200 Definitions and Order Marking 264

Rule 203 Security Borrowing and Delivery Requirements 265

Over the Counter/Nasdaq 266

Market Makers 267

Nasdaq Subscription Levels 267

Nasdaq Quotes 268

Nominal Nasdaq Quotes 269

Nasdaq Execution Systems 269

Nasdaq Market Center Execution System (NMCES) 269

Nasdaq Opening Cross 270

Non–Nasdaq OTCBB 270

Pink OTC 270

Third Market 270

Fourth Market 271

Broker vs. Dealer 271

FINRA 5% Markup Policy 272

Markups/Markdowns When Acting as a Principal 272

Riskless Principal Transactions 273

Proceeds Transactions 274

Arbitrage 274

Pretest 275

CHAPTER 11 OPTIONS 279

Option Classification 279

Option Classes 280

Option Series 280

Bullish vs. Bearish 280

Possible Outcomes for an Option 281

Characteristics of All Options 282

Managing an Option Position 282

Buying Calls 283

Maximum Gain Long Calls 283

Maximum Loss Long Calls 283

Determining the Breakeven for Long Calls 284

Selling Calls 284

Buying Puts 286

Selling Puts 287

Option Premiums 289

In–the–Money Options 289

At–the–Money Options 289

Out–of–the–Money Options 290

Intrinsic Value and Time Value 290

Using Options as a Hedge 291

Long Stock Long Puts/Married Puts 291

Long Stock Short Calls/Covered Calls 293

Short Stock Long Calls 295

Short Stock Short Puts 298

Futures and Forwards 301

Correlation 301

Pretest 303

CHAPTER 12 DEFINITION OF TERMS 307

Security 307

Person 309

Broker Dealer 310

Agent 311

Issuer 311

Nonissuer 312

Investment Adviser 312

Pension Consultants 312

Investment Counsel 313

Form ADV 313

Investment Adviser Registration Database IARD 314

Investment Adviser Representative 315

Solicitor 315

Access Person 315

Institutional Investor 316

Accredited Investor 316

Qualified Purchaser 317

Private Investment Company 317

Offer/Offer to Sell/Offer to Buy 317

Sale/Sell 317

Guarantee/Guaranteed 318

Contumacy 318

Federally Covered Exemption 318

Power of Attorney 319

Negotiable Certificate of Deposit 319

Pretest 321

CHAPTER 13 REGISTRATION OF BROKER DEALERS, INVESTMENT ADVISERS, AND AGENTS 327

Registration of Broker Dealers and Agents 327

Changes in an Agent s Employment 332

Mergers and Acquisitions of Firms 332

Renewing Registrations 332

Canadian Firms and Agents 332

Investment Adviser Registration 333

Advertising and Sales Literature 337

Brochure Delivery 338

The Role of the Investment Adviser 339

Additional Compensation for an Investment Adviser 339

Agency Cross Transactions 340

Disclosures by an Investment Adviser 340

Investment Adviser Contracts 343

Additional Roles of Investment Advisers 343

Private Investment Companies/Hedge Funds 344

Fulcrum Fees 344

Wrap Accounts 344

Soft Dollars 344

Pretest 347

CHAPTER 14 SECURITIES REGISTRATION, EXEMPT SECURITIES, AND EXEMPT TRANSACTIONS 353

Exempt Securities 353

Securities Registration 354

Exempt Securities/Federally Covered Exemption 357

Exempt Transactions 358

Private Placements/Regulation D Offerings 358

RULE 144 359

RULE 147 Intrastate Offering 360

Transactions with Financial Institutions 360

Transactions with Fiduciaries 361

Transactions with Underwriters 361

Unsolicited Orders 361

Transactions in Mortgage–Backed Securities 361

Pledges 362

Offers to Existing Securities Holders 362

Preorganization Certificates 362

Isolated Nonissuer Transactions 362

Nonissuer Transactions 363

Pretest 365

CHAPTER 15 STATE SECURITIES ADMINISTRATOR: THE UNIFORM SECURITIES ACT 369

North America Securities Administrators Association 369

Actions by the State Securities Administrator 370

Cancelation of a Registration 371

Withdrawal of a Registration 371

Actions Against an Issuer of Securities 371

Rule Changes 372

Administrative Orders 372

Interpretive Opinions 373

Administrative Records 373

Investigations 374

Civil and Criminal Penalties 374

Jurisdiction of the State Securities Administrator 375

Administrator s Jurisdiction over Securities Transactions 376

Radio, Television, and Newspaper Distribution 378

Right of Rescission 378

Statute of Limitations 379

Pretest 381

ANSWER KEYS 387

GLOSSARY OF EXAM TERMS 401

INDEX 467