NASAA Series 65 — All Questions

Under the SEC's brochure rule, a registered adviser must give a new client its Form ADV Part 2A brochure:

• a.Only when the client requests it in writing after signing
• b.Before or at the time the advisory contract is entered into✓
• c.Within 30 days after the advisory contract is signed by the client
• d.Within 120 days after the end of the client's first year

The brochure goes to a prospective client before or at the time the contract is signed. The 30-day period belongs to Form CRS requests. Delivery on request only would defeat disclosure. The 120-day deadline governs the annual update for existing clients, not new ones.17 CFR 275.204-3

An SEC-registered adviser's assets under management have grown to $105 million. Under the SEC's rules, the adviser:

• a.Must withdraw immediately, because assets are below the $110 million threshold
• b.Must move to state registration, because assets are below $125 million
• c.Must file an entirely new SEC registration for each fiscal year
• d.May remain SEC-registered unless assets fall below $90 million✓

The buffer lets an SEC adviser remain registered between $90 million and $110 million, with registration optional from $100 million. Withdrawing at $105 million is not required. A $125 million threshold does not exist, and annual re-registration is not needed.17 CFR 275.203A-1

Under the Uniform Securities Act, an adviser with no place of business in a state is exempt from registration there if, in the preceding 12 months, it advised how many resident clients?

• a.No more than fifteen
• b.No more than ten
• c.No more than five✓
• d.No more than three

The de minimis exemption in Section 403 covers an adviser without a place of business in the state that has no more than five resident clients in the preceding 12 months. Ten and fifteen exceed the cap. Three is below it, so it would exempt fewer advisers than the Act does.USA 2002 s.403(b)(2)

An investment adviser representative leaves a registered advisory firm and does not join another one. The representative's state registration:

• a.Stays effective through the end of the calendar year of departure
• b.Transfers to the representative's personal name and stays in effect
• c.Continues in effect until the state takes formal action to revoke it
• d.Is ineffective until the representative joins another adviser✓

Under Section 404(c), an IAR's registration lapses in effect while the person is not employed by or associated with a registered or notice-filed adviser. It does not run on calendar time, convert to a personal registration, or stay in force until revoked.USA 2002 s.404(c)

Under the SEC's interpretation of the adviser's fiduciary duty, a client's consent can:

• a.Remove the duty of care if the client is sophisticated
• b.Shape the scope of the relationship, but cannot waive the duty itself✓
• c.Remove only the duty of loyalty
• d.Waive the duty entirely when the client signs a hedge clause

The SEC states the fiduciary duty applies to the whole relationship and cannot be waived, though informed consent can set its scope. A clause purporting to waive the duty is not effective, and neither element of the duty can be dropped for sophisticated clients.SEC Release IA-5248

An adviser accepts oral discretionary instructions from a client to start trading. The adviser must obtain written discretionary authority within:

• a.Ten business days after the first transaction✓
• b.Five business days before the first transaction
• c.Thirty days after the account is opened
• d.One year after the first transaction

NASAA's rule on unethical business practices requires written authority within 10 business days after the first transaction made under oral authority. It does not require advance writing in every case, and 30 days or one year is too long.NASAA Model Rule 102(a)(4)-1(b)

An adviser's compensation will depend on which product a client chooses. The adviser must disclose the conflict in writing:

• a.After the client accepts the recommendation
• b.Only when the client asks
• c.Before any advice is given✓
• d.Within 30 days of the sale

NASAA's rule requires written disclosure of material conflicts before advice is rendered, so the client can weigh the incentive. Disclosure after the sale or on request would leave the client without that information when it matters.NASAA Model Rule 102(a)(4)-1(k)

An adviser wants to sell a security from its own inventory to a client. The adviser must:

• a.Disclose its principal role in writing and get consent before completion✓
• b.Disclose the role only after the trade settles, in the next quarterly report
• c.Obtain the client's verbal consent once a year to cover all later trades
• d.Skip disclosure whenever the price equals the prevailing market price on that day

A principal trade requires written disclosure of the capacity and the client's consent before completion of the transaction. Disclosure after settlement is too late, an annual verbal consent is not enough, and a fair price does not remove the requirement.Advisers Act s.206(3)

An adviser proposes a fee equal to 20% of the capital appreciation in a client's account. This fee is generally prohibited unless the client:

• a.Receives quarterly performance reports from the adviser
• b.Has kept the account open with the adviser for more than one year
• c.Signs a waiver releasing the adviser from any liability for losses
• d.Is a qualified client under the rule's asset or net worth tests✓

Section 205 bars fees based on capital gains or appreciation, with exceptions including qualified clients under Rule 205-3, whose dollar thresholds the SEC adjusts for inflation. A waiver cannot override the prohibition, and neither reports nor account age create an exception.Advisers Act s.205(a)

Under an adviser's code of ethics, an access person must submit transaction reports no later than how many days after the end of each calendar quarter?

• a.10 days
• b.60 days
• c.30 days✓
• d.45 days

The code of ethics rule requires quarterly transaction reports within 30 days after the quarter ends. The 10-day figure is for the initial holdings report, and 45 days is the currency requirement for the information in it. The 60-day period is not used.17 CFR 275.204A-1

An adviser's advertisement shows a model portfolio's gross performance. The adviser must also show:

• a.Net performance with equal prominence✓
• b.Net performance in a footnote
• c.Performance of an unrelated index only
• d.The adviser's best-year results

The marketing rule requires that gross performance be accompanied by net performance, presented with at least equal prominence and over the same period. An index alone does not meet that, a footnote is not equally prominent, and best-year results are the opposite of balanced.17 CFR 275.206(4)-1

A client signs an advisory contract. Which clause must it contain?

• a.A fixed term of at least three years before the client may cancel
• b.A requirement that the client prepay a full year of fees up front
• c.A guarantee that the account will earn a minimum annual return
• d.A bar on assigning the contract without the client's consent✓

Section 205(a)(2) requires an advisory contract to provide that no assignment occurs without the client's consent. A guaranteed return is itself improper, and neither a minimum term nor prepaid fees is mandated.Advisers Act s.205(a)(2)

In a year when an unmarried investor has $15,000 of net capital losses and no capital gains, the loss deductible against ordinary income is:

• a.$15,000 in full
• b.$3,000, with the rest carried forward✓
• c.$0, since losses offset only gains
• d.$1,500, with the rest lost

Net capital losses exceeding gains can offset up to $3,000 of ordinary income per year ($1,500 for married filing separately), and the excess carries forward. Deducting the whole amount or none of it misstates the limit.IRC 1211(b)

A client inherits stock that the decedent bought for $20 and that was worth $50 at death. The client sells it eight months later for $55. The client reports:

• a.A $35 short-term gain per share
• b.A $35 long-term gain per share
• c.A $5 short-term gain per share
• d.A $5 long-term gain per share✓

Inherited property takes a basis equal to the value at death ($50) and is treated as long-term, so the gain is $55 - $50 = $5. Using the decedent's $20 basis gives $35. The eight-month holding does not make the gain short-term.IRC 1014

A client receives a gift of stock that the donor bought at $10 per share and that was worth $40 at the time of the gift. The client later sells it for $55. The client's gain per share is:

• a.$30
• b.$45✓
• c.$15
• d.$55

For a gain, the donee takes the donor's basis of $10, so the gain is $55 - $10 = $45. Using the $40 gift-date value gives $15. $30 subtracts the gift value from the donor's basis in the wrong direction, and $55 is the proceeds with no basis.IRC 1015

A client invests $20,000 today at 5% compounded annually and makes no other deposits. After 10 years the account will be closest to:

• a.$32,578✓
• b.$33,000
• c.$31,250
• d.$30,000

FV = $20,000 x 1.05^10 = $20,000 x 1.62889 = about $32,578. Simple interest would give $30,000. The $33,000 and $31,250 figures are rounded guesses that do not compound five percent over ten years.

A retiree spends $60,000 a year in today's dollars. If inflation averages 3% a year, the spending needed in 20 years is closest to:

• a.$60,000
• b.$96,000
• c.$120,000
• d.$108,400✓

$60,000 x 1.03^20 = $60,000 x 1.8061 = about $108,400. Simple (non-compounded) inflation of 60% gives $96,000. Leaving spending unchanged ignores inflation, and doubling it overstates it.

A client's target allocation is 60% stocks and 40% bonds. After a stock rally the portfolio is 70% stocks and 30% bonds. To rebalance, the adviser should:

• a.Sell some stocks and buy bonds to return to the target mix✓
• b.Sell bonds, to hold more in the best-performing asset
• c.Buy more stocks, since they are performing well
• d.Leave the portfolio, since the target has been exceeded

Rebalancing restores the agreed risk level by trimming the overweight asset and adding to the underweight one. Buying more stocks increases the drift. Ignoring the drift leaves the client with more risk than planned, and selling bonds worsens it.

A client invests $500 each month in a fund and buys at prices of $10, $8, $12 and $10. The client's average cost per share, compared with the average price of $10, is:

• a.About $10.20, above the average price
• b.Exactly $10.00, the same as the average price
• c.About $8.00, the lowest price paid
• d.About $9.80, below the average price✓

The $2,000 buys 50 + 62.5 + 41.67 + 50 = 204.17 shares, so the average cost is $2,000 / 204.17 = $9.80. Fixed dollar amounts buy more shares at low prices, so the cost sits below the average price. It does not equal the lowest price paid.

A client needs $40,000 in 18 months for a down payment and has a low tolerance for loss. Which choice is most suitable for that money?

• a.Short-term Treasury bills and insured deposits✓
• b.A diversified stock fund, for long-run growth
• c.A long-term corporate bond fund, for higher yield
• d.A small-cap value fund, for the premium it has earned

Money needed within 18 months must be protected from loss, so short-term Treasury bills and insured deposits fit. Equity funds can fall sharply in that window. Long-term bonds have interest rate risk, and small-cap funds are more volatile still.

A client has a fixed obligation of $100,000 due in exactly five years and wants to remove interest rate risk. The best fit is a bond portfolio whose:

• a.Coupons are as high as possible regardless of maturity
• b.Duration is about five years, matching the date of the obligation✓
• c.Holdings are all in a single issuer
• d.Maturity is as long as possible to maximize yield

Matching portfolio duration to the liability date immunizes it, because price and reinvestment effects offset one another. A long maturity adds price risk, coupon size by itself does not control risk, and concentration adds default risk.

For a client with both taxable and tax-deferred accounts, which approach is generally the most tax-efficient asset location?

• a.Hold taxable bonds in the tax-deferred account and broad index stock funds in the taxable account✓
• b.Hold index stock funds in the tax-deferred account and taxable bonds in a brokerage account
• c.Hold municipal bonds in the tax-deferred account and high-turnover funds outside it
• d.Split each asset class evenly between the two accounts so every holding is taxed the same way

Interest from taxable bonds is taxed at ordinary rates each year, so bonds belong in the tax-deferred account, while broad index stock funds produce few taxable events and mostly qualified dividends and deferred gains in the taxable account. Reversing the placement puts the heavily taxed income in the taxable account. Municipal bonds in a tax-deferred account waste their exemption, high-turnover funds throw off the most taxable distributions in a taxable account, and splitting every asset class evenly gives up the benefit of matching each asset to the account that taxes it least.

A client in the 24% bracket weighs a Roth IRA against a traditional IRA. The client expects to be in a higher bracket in retirement. The Roth is generally better because:

• a.Withdrawals are taxed at 24% in retirement
• b.Contributions are taxed now at 24% and qualified withdrawals are tax-free later✓
• c.Contributions can be made only after age 59 1/2
• d.Contributions are deductible now and withdrawals are tax-free

A Roth locks in today's lower rate by taxing contributions now and allowing qualified withdrawals tax-free. Roth contributions are not deductible. Taxable withdrawals describe a traditional IRA, and Roth contributions have no minimum age.

A client over the required beginning age failed to take a required minimum distribution from a traditional IRA. The excise tax on the shortfall is:

• a.10%, with no further reduction
• b.6% of the account balance each year
• c.50%, with no correction period
• d.25%, reduced to 10% if corrected within two years✓

The IRS states the excise tax on a missed RMD is 25% of the shortfall, reduced to 10% if the client corrects it within two years. A flat 50% with no cure period, a 10% rate with no reduction, and a 6% annual tax on the balance are not the rule.IRC 4974

An IRA owner named a niece as beneficiary on the custodian's form, but the will leaves everything to a charity. At the owner's death, the IRA goes to:

• a.Both equally, because of the conflict
• b.The estate, to be divided by the executor
• c.The charity, because the will is the later document
• d.The niece, because the beneficiary designation controls the account✓

IRAs pass by contract under the beneficiary designation, not under the will, so the niece receives the account. The date of the will does not override the form, and there is no equal split.

A parent opens a UTMA custodial account for a child and contributes $5,000. Who has the right to the assets once the child reaches the age of majority?

• a.The custodian, who can keep managing it
• b.The parent's estate, if the parent dies first
• c.The parent, who can reclaim the account
• d.The child, because the gift is irrevocable✓

Assets placed in a UTMA account are an irrevocable gift to the minor and belong to the child at the age set by state law. The parent cannot reclaim them, the custodian's role ends, and the parent's death does not change ownership.

A client wants a 7% return but states she cannot tolerate losses greater than 5% in a year. A reasonable course for the adviser is to:

• a.Promise that broad diversification will achieve both of her goals together
• b.Set the loss limit aside as unrealistic for a client with her goal
• c.Explain the conflict and help the client choose which goal to adjust✓
• d.Recommend the high-risk portfolio since the return goal governs

When return needs and risk tolerance conflict, the adviser must show the trade-off and let the client revisit the goals. Overriding the tolerance would be unsuitable, discarding it is dishonest, and promising both results is a guarantee.

Two years before retirement, a client's portfolio falls 30% just as withdrawals begin. This danger, which depends on the order of returns rather than the average, is called:

• a.Purchasing-power risk
• b.Liquidity risk
• c.Reinvestment risk
• d.Sequence-of-returns risk✓

Early losses combined with withdrawals shrink the base, and later gains cannot rebuild it, even if the average return is unchanged. Reinvestment risk concerns lower rates on proceeds, liquidity risk concerns trouble selling, and purchasing-power risk concerns inflation.

The Federal Reserve raises the interest rate it pays banks on their reserve balances. This tends to tighten credit because banks:

• a.Lose access to the discount window until market rates have fallen again
• b.Must hold a larger percentage of their deposits in required reserves
• c.Will not lend reserves for less than they can earn at the Fed, so short-term rates rise✓
• d.Earn less on idle reserves and so lend more to businesses

The rate on reserve balances acts as a floor: a bank has no reason to lend reserves to another bank for less than the Fed pays, so market short-term rates move up with it. Reserve requirements are set at zero and are a different tool. Paying more makes holding reserves more attractive, not less, and the discount window stays open to eligible banks.

The Fed lets maturing Treasury securities on its balance sheet run off without reinvesting the proceeds. Over time this tends to:

• a.Shrink bank reserves and tighten financial conditions✓
• b.Expand bank reserves and ease financial conditions
• c.Leave reserves unchanged, because the Treasury repays the Fed in kind
• d.Lower the federal funds target range directly

When a security matures and is not replaced, the Treasury's payment drains reserves from the banking system, which reverses the effect of earlier asset purchases. It does not add reserves and it does not leave them untouched. The target range is a separate policy decision made by the Federal Open Market Committee.

A fund's monthly returns show an R-squared of 0.92 against its benchmark index. This means that:

• a.The fund outperformed the benchmark in 92% of the months measured
• b.The fund earned an alpha of 0.92 percentage point a year
• c.About 92% of the variation in the fund's returns is explained by the benchmark's movements✓
• d.The fund's beta relative to the benchmark equals 0.92

R-squared is the share of a fund's return variation that is explained by movements in the benchmark, so 0.92 means a close fit to the index. It says nothing about how often the fund won, which is a hit rate. Beta measures sensitivity and alpha measures excess return; each is a separate statistic.

Fund X has a mean return of 10% and a standard deviation of 15%. Fund Y has a mean return of 6% and a standard deviation of 6%. Using the coefficient of variation, which fund has less risk per unit of return?

• a.Fund X, because its coefficient of variation of 1.5 is the lower figure
• b.Fund X, because its 10% mean return is the higher return of the two
• c.Fund Y, with a coefficient of variation of 1.0✓
• d.Neither fund, because the two means differ and cannot be compared

Coefficient of variation = standard deviation / mean. Fund X: 15 / 10 = 1.5. Fund Y: 6 / 6 = 1.0. The lower figure means less risk for each unit of return, so Fund Y wins. A higher mean return alone ignores risk, and the statistic exists precisely so funds with different means can be compared.

A bond has a Macaulay duration of 5.4 years and a yield to maturity of 8%, compounded annually. Its modified duration is:

• a.4.3 years
• b.5.0 years✓
• c.5.4 years
• d.5.8 years

Modified duration = Macaulay duration / (1 + yield) = 5.4 / 1.08 = 5.0. Multiplying by 1.08 gives 5.83, and leaving duration unchanged gives 5.4. Multiplying by 0.8 gives 4.32, which misreads the 8% yield as a factor.

A savings account pays 12% nominal annual interest, compounded monthly. The effective annual rate is closest to:

• a.12.36%
• b.12.55%
• c.12.68%✓
• d.12.00%

Effective annual rate = (1 + 0.12/12)^12 - 1 = 1.01^12 - 1 = 12.68%. The 12.00% figure ignores compounding. Semiannual compounding gives 12.36% and quarterly compounding gives 12.55%, both of which compound less often than the account does.

A firm's cost of goods sold is $900,000 and its average inventory is $150,000. Using a 365-day year, it takes about how many days to sell its inventory?

• a.61 days✓
• b.30 days
• c.122 days
• d.6 days

Inventory turnover = $900,000 / $150,000 = 6.0 times a year, so days to sell = 365 / 6 = about 61. The figure 6 is the turnover itself, not a number of days. The 122-day and 30-day answers do not follow from the data given.

A company has total liabilities of $600,000 and shareholders' equity of $400,000. Its debt-to-equity ratio is:

• a.0.6
• b.2.5
• c.1.5✓
• d.0.67

Debt-to-equity = total liabilities / shareholders' equity = $600,000 / $400,000 = 1.5. Inverting the fraction gives 0.67. Dividing liabilities by the $1,000,000 of total capital gives 0.6, and dividing total assets by equity gives 2.5, the equity multiplier.

Under the expenditure approach to GDP, a manufacturer's purchase of new machinery for its plant is counted in which component?

• a.Gross private domestic investment✓
• b.Personal consumption expenditures
• c.Government purchases
• d.Net exports

The expenditure approach adds consumption, investment, government purchases and net exports. Business purchases of new capital goods such as machinery are gross private domestic investment. Household spending is consumption, purchases by governments are government spending, and exports minus imports make up net exports.GDP expenditure approach

Heavy federal borrowing to finance a deficit raises market interest rates and reduces private investment. Economists call this effect:

• a.A liquidity trap
• b.Stagflation
• c.Crowding out✓
• d.The wealth effect

Crowding out describes government borrowing competing for savings and pushing up rates, which discourages private investment. A liquidity trap describes a state where lower rates fail to stimulate spending. Stagflation pairs inflation with weak growth, and the wealth effect links asset values to consumer spending.

A mutual fund's Class A shares carry a front-end sales charge that falls at set purchase amounts, such as $50,000 and $100,000. These purchase levels are called:

• a.Breakpoints✓
• b.Twelve-b-1 fee tiers
• c.Contingent deferred sales charges
• d.Wrap fee schedules

A breakpoint is the purchase amount at which the sales charge percentage on a front-end load fund drops. A contingent deferred sales charge is a back-end fee for selling early. A 12b-1 fee is an annual distribution expense, and a wrap fee is a bundled advisory charge.

A bond with a 6% coupon trades at 104. Its yield to maturity is:

• a.Equal to 4%, the amount of the premium over par
• b.Below 6%, because the investor pays more than par and gets par back✓
• c.Above 6%, because a higher price signals a higher return
• d.Equal to 6%, because the coupon is fixed for the life of the bond

A bond bought above par returns less than its coupon rate, because the premium is lost at maturity, so yield to maturity is under 6%. A higher price lowers yield. The coupon is fixed, but yield depends on the price paid. The 4% figure is a price premium, not a yield.

An investor buys one call and one put on the same stock with the same strike price and expiration date. The position profits if the stock:

• a.Moves far enough up or down to cover both premiums paid✓
• b.Stays near the strike price until expiration
• c.Rises sharply but loses money on any decline
• d.Falls sharply but loses money on any increase

A long straddle pays off from a large move in either direction, once the gain on one option exceeds the combined cost of both. The call alone would profit from a sharp rise only, and the put alone from a sharp fall only. A stock near the strike leaves both options near worthless, which is the maximum loss.

If a corporation liquidates, which group has the last claim on its assets?

• a.Common stockholders✓
• b.Employees owed unpaid wages
• c.Preferred stockholders
• d.Holders of the company's debentures

Common stockholders are residual owners and are paid only after creditors and preferred holders. Preferred stock ranks ahead of common, debenture holders are creditors with claims above all equity, and employees owed wages have priority claims under bankruptcy law.

During the accumulation phase of a variable annuity, the investment risk of the subaccounts is carried by:

• a.The state guaranty association, which backs subaccount returns
• b.The insurer, which guarantees a minimum value for every subaccount
• c.The broker-dealer that sold the contract to the owner
• d.The contract owner, whose value rises and falls with the subaccounts✓

In a variable annuity the owner picks subaccounts and bears their investment results, which is why the contract is a security. The insurer guarantees the fixed account and optional riders, not subaccount values. A state guaranty association protects against insurer failure, and the selling firm does not underwrite returns.

Under NASAA's model rule, a state-registered adviser's written advisory contract must disclose, among other items:

• a.The amount of prepaid fee returned if the contract ends before the term✓
• b.The adviser's expected annual rate of return on the account
• c.A list of the other clients that the adviser serves
• d.The client's net worth and income during the previous year

The model rule requires the contract to state the services, term, fee and fee formula, the amount of prepaid fee to be returned on termination or non-performance, whether the adviser has discretion, and that the contract cannot be assigned without consent. Expected returns would be a forbidden guarantee, and client lists and client finances are not contract terms.NASAA Model Rule 102(a)(4)-1(p)

An investment adviser's duty regarding material nonpublic information is to:

• a.Establish, maintain and enforce written policies reasonably designed to prevent its misuse✓
• b.Report each instance of such information to FINRA within 10 days
• c.Refuse to employ anyone who has previously had access to it
• d.Pass it to every client at the moment the adviser receives it

Section 204A requires written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, and NASAA's model rule treats a failure to do so as unethical. There is no FINRA reporting requirement of that kind, no bar on hiring, and passing inside information to clients would itself be misuse.Advisers Act s.204A

Under the Advisers Act, which description fits an investment adviser?

• a.A person who trades securities only for the person's own account
• b.A person who advises close friends about securities without any pay
• c.A person who, for compensation, is in the business of advising others about securities✓
• d.A person who sells securities to the public and gets no special pay for advice

The definition combines advice about securities, a business of giving it, and compensation. Trading only for oneself involves no advice to others, free informal advice involves no compensation or business, and a broker-dealer whose advice is solely incidental and paid no special compensation is excluded.15 USC 80b-2(a)(11)

A client holds stock bought years ago for $3,000 and now worth $10,000. The client wants to give $10,000 to a public charity. Compared with selling the stock and giving cash, giving the stock itself generally:

• a.Allows no deduction, because gifts of securities are not deductible
• b.Allows a deduction of the full $10,000 value and avoids tax on the $7,000 gain✓
• c.Allows a deduction of only the $3,000 basis and avoids gain tax
• d.Allows a $10,000 deduction but triggers tax on the $7,000 gain

Long-term appreciated stock given to a public charity is generally deductible at fair market value, within the usual AGI limits, and the gain is never realized. A basis-only deduction does not apply to stock held long term and given to a public charity. Triggering the gain describes selling first. Gifts of securities are deductible.IRC 170(e)

An account names a woman's three children as beneficiaries per stirpes. One child dies before the owner, leaving two children of her own. At the owner's death, the deceased child's share goes to:

• a.The owner's estate, to pass under the owner's will
• b.The deceased child's spouse, who inherits it outright
• c.Her two children, who divide her share equally✓
• d.The two surviving children, who split it between them

Per stirpes means a deceased beneficiary's share passes down to that person's descendants, so the grandchildren divide their parent's one-third. Giving it to the surviving siblings is the per capita approach. The estate and the spouse are not the designated takers.

A client deposits $5,000 at the end of each year for three years into an account that earns 6% a year. The balance right after the third deposit is closest to:

• a.$5,955
• b.$15,000
• c.$16,873
• d.$15,918✓

Future value of an ordinary annuity = $5,000 x (1.06^3 - 1) / 0.06 = $5,000 x 3.1836 = $15,918. The $15,000 figure ignores interest. $16,873 treats the deposits as made at the start of each year, and $5,955 compounds only a single deposit for three years.

A bond has a modified duration of 7. If market yields fall by 0.5 percentage point, the bond's price should rise by approximately

• a.0.5%
• b.7%
• c.3.5%✓
• d.14%

Price change is roughly modified duration times the yield change: 7 x 0.5% = 3.5%. A 0.5% price change would confuse the yield move with the price move. A 7% gain would apply the duration to a full 1-point drop. A 14% gain would multiply duration by 2 for no reason.Bond duration