NASAA Series 65 — All Questions

A plan automatically enrolls employees who make no investment election. Which default investment can qualify as a QDIA for the long term?

• a.A money market fund held as the plan's default investment for participants indefinitely
• b.A target-date fund appropriate to the employee's expected retirement age✓
• c.The plan's highest-returning actively managed equity fund over the past five years
• d.The employer's own stock fund

A qualified default investment alternative can be a target-date or life-cycle fund, a balanced fund, or a managed account. A capital-preservation product qualifies only for the first 120 days after enrollment. Employer stock is a concentrated holding and not a QDIA. Past performance is not a QDIA criterion.ERISA s.404(c)(5), 29 U.S.C. s.1104; 29 CFR 2550.404c-5

A plan that holds no employer securities handles $8 million in funds. What is the minimum ERISA fidelity bond?

• a.$1,000,000, the higher cap that applies only when a plan holds employer securities
• b.$80,000, which is 1% of the funds handled
• c.$800,000, which is 10% of the funds handled, since the bond has no dollar ceiling
• d.$500,000, the maximum required, because 10% of funds handled exceeds the cap✓

The required bond is at least 10% of the funds handled, but no less than $1,000 and no more than $500,000, so the cap controls at $500,000. Ten percent of $8 million is $800,000, but that exceeds the cap. The $1,000,000 cap applies only when the plan holds employer securities. One percent is not the required percentage.ERISA s.412(a), 29 U.S.C. s.1112

An employer funds a rabbi trust to pay an executive's nonqualified deferred compensation and then enters bankruptcy. What is the executive's position?

• a.She is a general unsecured creditor, because the trust assets remain subject to the employer's creditors✓
• b.She has first claim on the trust assets, because the trust is irrevocable
• c.She is protected by the anti-alienation rule that applies to qualified plans
• d.She is protected by the PBGC, which insures nonqualified deferred compensation

Assets in a rabbi trust stay reachable by the employer's creditors, so the executive ranks as a general unsecured creditor. A trust that is irrevocable does not put her ahead of other creditors. The PBGC insures qualified defined benefit plans, not nonqualified arrangements. Anti-alienation protection belongs to qualified plans and is the reason such plans are safe.IRC s.409A; Rev. Proc. 92-64 (model rabbi trust)

Which retirement benefit is insured by the Pension Benefit Guaranty Corporation, up to statutory limits?

• a.Account balances in a 401(k) plan, which the PBGC guarantees up to a statutory dollar limit
• b.Account balances in a traditional IRA
• c.Promised benefits under a nonqualified deferred compensation plan sponsored by a large employer
• d.Benefits under a private-sector single-employer defined benefit pension plan✓

The PBGC insures benefits in covered private-sector defined benefit plans, up to guarantee limits. It does not insure defined contribution accounts such as a 401(k), which depend on investment results. IRAs are not insured by the PBGC. Nonqualified promises are only an employer's unsecured obligation.ERISA s.4021, 29 U.S.C. s.1321

A cash balance plan reports each participant's benefit as a hypothetical account that grows with pay credits and an interest credit. How is it classified?

• a.As a defined contribution plan, because participants see an account balance
• b.As a nonqualified plan, because the account balance is hypothetical
• c.As a defined contribution plan, because participants direct how the money in their individual accounts is invested
• d.As a defined benefit plan, so the employer bears the investment risk and the PBGC insures it✓

A cash balance plan is a defined benefit plan: the promised benefit is stated as a hypothetical account, but the employer funds it, guarantees the credits, and bears the investment risk, and the PBGC insures it. An account balance alone does not make it defined contribution. Participants do not direct the investments. It is a qualified plan, not a nonqualified one.ERISA s.3(34)-(35), 29 U.S.C. s.1002

A nonqualified deferred compensation plan lets an executive choose any time to receive her deferred pay, which violates Section 409A. What is the consequence for her?

• a.Only the portion actually distributed is taxed, and no additional tax applies
• b.The employer loses its deduction, but the executive's tax is unchanged
• c.The deferred amounts are taxed when vested, with a 20% additional tax plus interest✓
• d.The amounts are taxed when vested, with a 10% additional tax, as with early IRA withdrawals

When a plan fails Section 409A, the vested deferrals become taxable in that year, plus a 20% additional tax and interest. Limiting tax to distributions ignores the acceleration. The failure falls on the executive, not just on the employer. The additional tax is 20%, not the 10% that applies to IRAs.IRC s.409A(a)(1)(B)

Two unmarried friends hold a brokerage account as tenants in common, each owning half. One dies. What happens to the deceased owner's half?

• a.It passes to the survivor, but only if the decedent's will approves the transfer
• b.It passes under his will or intestacy, and the survivor keeps only her own half✓
• c.It is divided equally between the surviving friend and the decedent's estate for probate
• d.It passes automatically to the surviving friend, who then owns the whole account

Tenants in common have no right of survivorship, so a decedent's share goes to his estate and is distributed under his will or by intestacy. Automatic transfer to the survivor describes joint tenancy with right of survivorship. Splitting the share again would give her more than half of his portion without a basis. A will cannot create survivorship by approving it; the account title governs.Uniform Probate Code s.6-101; common-law tenancy rules

A client's revocable trust opens an advisory account. Whose authority controls what the trustee may do with the account?

• a.The trust instrument, which names the trustee and defines the trustee's investment powers✓
• b.The adviser's discretionary advisory agreement, which supersedes the terms of the trust instrument
• c.State law alone, since the trust document is private and the firm need not review it before acting
• d.The beneficiary's instructions, since the beneficiary owns the account

A trustee's powers come from the trust instrument and applicable law, so the firm needs the instrument or a certification of trust to see who may act and what they may do. An advisory agreement cannot enlarge the trustee's authority. A beneficiary does not direct the trustee unless the instrument says so. The document must be reviewed, because it defines the trustee's powers.Uniform Trust Code s.801; s.815

An account holder dies. Her son, named as executor in her will, asks the firm to sell her securities. What does the firm need first?

• a.A signed instruction from all of the heirs
• b.A death certificate alone, since he is the closest relative
• c.A certified copy of the will, since it names him as executor and states his powers
• d.Letters testamentary issued by the probate court, along with a death certificate✓

An executor's authority begins when the court issues letters testamentary, which the firm reviews with a death certificate. A will only nominates the executor. Heirs cannot take over trading authority by consent. A death certificate shows the owner died but gives the son no power to act for the estate.Uniform Probate Code s.3-701; s.3-715

A client with $300,000 is offered a 1.25% annual wrap fee that covers all trading costs. She trades about six times a year, and commissions in a commission account would be about $250 a trade. Ignoring other costs, how do the annual costs compare?

• a.The wrap costs about $3,750 more, since the commission account has no ongoing fee
• b.The wrap costs about $1,500 more, which is the commission cost
• c.The wrap costs about $2,250 more, so her low trading volume may not justify it✓
• d.The wrap costs about $2,250 less, because it covers all trading costs

A 1.25% wrap fee on $300,000 is $3,750 a year, against about $1,500 of commissions for six trades, so the wrap costs $2,250 more. A wrap fee suits an active trader. Covering trading costs does not make it cheaper at low volume. The $3,750 and $1,500 figures each omit the other side of the comparison.Advisers Act s.206; Form ADV Part 2A Item 5 (fees and compensation)

Which asset of a deceased client is subject to probate?

• a.A brokerage account in the decedent's sole name with no transfer-on-death designation✓
• b.An IRA whose owner completed a beneficiary designation form naming an individual beneficiary
• c.A life insurance policy with a named beneficiary
• d.A brokerage account registered jointly with right of survivorship with her husband, who survives her

An account in one person's name alone with no beneficiary or survivorship feature passes under the will, so it goes through probate. A survivorship account passes automatically to the survivor, and a named beneficiary on an IRA or policy overrides the will. Those are non-probate assets.Uniform Probate Code s.6-101; s.6-201

Spouses in a community property state own stock bought for $100,000 and now worth $500,000, held as community property. One spouse dies. What is the survivor's basis?

• a.$500,000, because both halves receive a stepped-up basis✓
• b.$250,000, because only half of the current value is stepped up
• c.$100,000, because the original basis carries over between spouses
• d.$300,000, because only the decedent's half is stepped up at death

For community property, both halves get a basis equal to fair market value at death, so the survivor's basis is $500,000. A $300,000 basis is the result for common-law joint property, where only the decedent's half is stepped up. The original basis does not carry over. Half the value ignores the survivor's own half.IRC s.1014(b)(6)

In 2026 a husband dies having used $5 million of his $15 million basic exclusion. His executor makes the portability election on a timely filed estate tax return. What total exclusion can his widow apply, assuming she has used none of her own?

• a.$20 million, her own $15 million plus the $5 million he already used
• b.$30 million, because both spouses' full exclusions are combined for the survivor
• c.$25 million, her own $15 million plus his $10 million unused amount✓
• d.$10 million, because the election transfers only his unused amount to her

Portability adds the deceased spouse's unused exclusion ($15 million - $5 million = $10 million) to the survivor's own $15 million, for $25 million. The full $30 million ignores the amount he used. Adding the amount used rather than unused gets $20 million. The unused amount is added to her own exclusion, not substituted for it.IRC s.2010(c)(4)-(5); Treas. Reg. s.20.2010-2

A grantor funds a five-year GRAT and dies in year three. What is the estate tax result?

• a.Only the annuity payments already received are included, and the trust assets pass tax free
• b.Some or all of the trust assets are included in the grantor's gross estate, so the planned transfer is undone✓
• c.The assets are excluded, because the trust is irrevocable and the gift was complete
• d.The assets are excluded because the grantor survived the three-year lookback period

A grantor retains an annuity interest during the term, so if she dies in the term the trust assets needed to produce the annuity are brought back into her estate, and the planned estate savings fail. Irrevocability does not matter when an interest is retained. Payments already received are not the only item included. The three-year rule concerns transfers of life insurance, not retained interests.IRC s.2036; Treas. Reg. s.20.2036-1(c)

A client transfers an existing $1 million life insurance policy to an irrevocable life insurance trust and dies two years later. What is the estate tax result?

• a.The proceeds are excluded only if the trust was funded with premium gifts under the annual exclusion
• b.Only the policy's cash value at transfer is included, not the proceeds
• c.The proceeds are excluded, because an irrevocable trust owns the policy
• d.The proceeds are included in her gross estate because she died within three years of the transfer✓

Life insurance transferred within three years of death is brought back into the gross estate at its full proceeds value. Ownership by an irrevocable trust helps only after the three years have passed. The cash value is not the measure. Premium gifts do not change the three-year rule.IRC s.2035(a)

A client in a second marriage wants her husband to receive income for life, wants her children from her first marriage to receive the principal afterward, and wants the transfer to qualify for the unlimited marital deduction. Which tool fits?

• a.A QTIP trust, which qualifies for the marital deduction and fixes who receives the remainder✓
• b.A testamentary special-needs trust for the husband
• c.A credit shelter trust, which also qualifies for the unlimited marital deduction
• d.An outright bequest to the husband, with a request that he leave the principal to her children

A QTIP trust pays all income to the surviving spouse for life and still qualifies for the marital deduction, while the grantor decides who receives the remainder. A credit shelter trust uses the exclusion amount and does not qualify for the marital deduction. An outright bequest gives up control of the remainder. A special-needs trust is for a beneficiary with a disability.IRC s.2056(b)(7)

A client's adult son receives means-tested government benefits because of a disability. How should she leave him an inheritance so as to protect his eligibility?

• a.By naming him directly as beneficiary of her IRA, since retirement accounts are never counted as his resources
• b.Through a joint account with the son as co-owner
• c.Outright through her will, since inheritances received by a person with a disability are never counted as resources
• d.Through a third-party supplemental needs trust whose trustee has discretion over distributions✓

A properly drafted third-party supplemental needs trust with a discretionary trustee keeps the assets from being counted as his resources while still paying for extras. Outright gifts and beneficiary designations leave the money in his hands and can disqualify him. A joint account makes the funds his, which would also be counted.SSA POMS SI 01120.200 (trusts and SSI resource counting)

Which document names another person to make medical decisions for the client if she cannot speak for herself, rather than only stating her wishes about life support?

• a.A durable power of attorney for finances
• b.A health care proxy (durable power of attorney for health care)✓
• c.A living will
• d.A last will and testament

A health care proxy names an agent to make medical decisions when the client is incapacitated. A living will states treatment wishes but does not name a decision maker. A financial power of attorney covers property and not medical care. A will operates only after death.Uniform Health-Care Decisions Act s.2

A client asks her adviser representative to prepare a will for her after reviewing her estate. What is the proper response?

• a.Prepare a standard form for her, since a will for her own benefit is not legal advice
• b.Draft it if she signs a waiver acknowledging that the adviser is not an attorney
• c.Draft it if the firm's compliance department approves the template
• d.Decline to draft it and refer her to an attorney, since drafting legal documents could be the unauthorized practice of law✓

Drafting a will is the practice of law, which an adviser representative who is not an attorney should not do. The proper course is to coordinate with her attorney. Calling it a standard form does not change that. A waiver does not authorize unlicensed practice. Compliance approval of a template does not license the representative to draft legal documents.State unauthorized-practice-of-law statutes

Under U.S. GAAP, a corporation pays $2 million of interest on its bonds during the year. Where does the cash paid appear on the statement of cash flows?

• a.Within financing activities, because the interest is a cost of borrowed capital
• b.Within investing activities, because the bonds fund long-term asset purchases
• c.It is excluded, because interest is shown only on the income statement
• d.Within operating activities, because interest expense is part of net income✓

U.S. GAAP classifies interest paid (and interest received) as an operating cash flow because the expense flows through net income. Classifying it as financing is a common mistake: principal borrowed and repaid is financing, but the interest cost is not. Investing covers purchases and sales of long-term assets and investments, not the cost of funding them. Every cash flow, including interest, is reported on the cash flow statement; the income statement does not replace it.FASB ASC 230-10-45 (Statement of Cash Flows classification)

A company reports net income of $300,000, depreciation of $90,000, and an increase in accounts receivable of $40,000. It spent $120,000 on new equipment. Using cash from operations less capital expenditures, its free cash flow is:

• a.$310,000
• b.$230,000✓
• c.$350,000
• d.$180,000

Cash from operations = 300,000 + 90,000 (non-cash depreciation added back) - 40,000 (receivables rose, so sales not yet collected are subtracted) = 350,000. Free cash flow = 350,000 - 120,000 = 230,000. Rechecking: 300 + 90 - 40 - 120 = 230. The $310,000 figure adds the receivables increase instead of subtracting it. The $180,000 figure forgets the depreciation add-back and the receivables change. The $350,000 figure is operating cash flow before capital spending.CFA Institute curriculum, Financial Statement Analysis (free cash flow)

A firm has current assets of $600,000 and current liabilities of $400,000. It uses $100,000 of cash to pay off accounts payable. Its current ratio after the payment is closest to:

• a.about 1.25
• b.1.50
• c.1.67✓
• d.roughly 1.20

Before: 600,000 / 400,000 = 1.50. Paying a $100,000 payable with cash lowers both sides: (600,000 - 100,000) / (400,000 - 100,000) = 500,000 / 300,000 = 1.67. When the ratio starts above 1.0, removing equal amounts from numerator and denominator raises it. The ratio does not stay at 1.50 just because one current item replaced another. A result of 1.25 reduces assets but forgets to reduce liabilities. A result of 1.20 (600,000 / 500,000) leaves assets alone and adds the payment to liabilities instead of subtracting it.CFA Institute curriculum, Financial Statement Analysis (liquidity ratios)

An issuer's annual report includes an auditor's report with an unqualified (unmodified) opinion. This opinion states that the financial statements:

• a.Are guaranteed by the auditing firm to be free of any fraud or material error
• b.Were prepared by independent accountants without any management estimates
• c.Present fairly the position and results in all material respects✓
• d.Show the company is a sound investment compared with its industry peers and rivals

An unqualified or unmodified opinion is the cleanest audit opinion: the statements fairly present the company's financial position, results and cash flows in all material respects in conformity with GAAP. It is reasonable assurance, not a guarantee against fraud or error. Auditors do not opine on investment merit or peer comparisons. Management prepares the statements and makes the estimates; the auditor tests them rather than replacing them.PCAOB AS 3101 (auditor's report on financial statements); AICPA AU-C 700

A client owns bonds of a manufacturer. The latest annual report contains an auditor's explanatory paragraph raising going-concern doubt. This most nearly means the auditor believes:

• a.The auditor resigned before finishing the examination of the year-end books
• b.The statements violate GAAP, so the audit opinion is automatically adverse
• c.There is substantial doubt the company can meet obligations for about a year✓
• d.The company has already filed for bankruptcy protection under Chapter 11

A going-concern paragraph signals that conditions raise substantial doubt about the entity's ability to continue operating and meet its obligations as they come due within one year after the financial statements are issued. It is a warning, not a bankruptcy filing. It can accompany an otherwise unqualified opinion, so it does not mean the statements violate GAAP (that would point to an adverse opinion). It also differs from an auditor withdrawing or a disclaimer of opinion.FASB ASC 205-40 (going concern); PCAOB AS 2415

In December a consulting firm delivers $80,000 of services and bills the clients, but collects only $30,000 by year end. It pays $45,000 of expenses, all incurred in December. Under accrual accounting, December results are:

• a.A profit of $35,000✓
• b.A profit of $80,000
• c.A loss of $15,000
• d.A profit of $5,000

Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of cash timing: 80,000 - 45,000 = 35,000 profit. The cash-basis result would be 30,000 collected - 45,000 paid = a $15,000 loss. The $80,000 figure ignores expenses. The $5,000 figure takes the uncollected 50,000 (80,000 - 30,000) and subtracts the expenses, which treats the receivable as the revenue instead of the full amount earned.CFA Institute curriculum, Financial Statement Analysis (accrual accounting)

Which statement about a listed company's Form 10-Q is accurate?

• a.It is filed only after a material event and within four business days of that event
• b.It is filed once a year and replaces the annual report for smaller reporting companies
• c.It covers the first three fiscal quarters and carries unaudited statements✓
• d.It is filed for all four fiscal quarters and carries fully audited financial statements

Form 10-Q is the quarterly report. It covers the first three fiscal quarters (the fourth quarter is captured in the Form 10-K) and its financial statements are unaudited. The annual report on Form 10-K contains audited statements. The four-business-day filing belongs to the Form 8-K current report, not the 10-Q. No company replaces the annual report with a 10-Q.Securities Exchange Act Rule 13a-13; SEC Form 10-Q

A listed company's chief financial officer unexpectedly resigns. Which SEC filing is generally required and how soon?

• a.A Form 10-K amendment, within thirty days of the resignation
• b.A Form 10-Q, at the end of the next calendar quarter
• c.A Form 8-K, generally within four business days of the event✓
• d.A Form 4, within two business days by the departing officer

Form 8-K is the current report for material events such as the departure of certain officers (Item 5.02), and the general deadline is four business days after the event. Form 10-Q is a scheduled quarterly report and does not give timely notice. A 10-K amendment is not the vehicle for a mid-year event. Form 4 reports insider transactions in the company's securities, not the departure of the officer.Securities Exchange Act Rule 13a-11; Form 8-K, General Instruction B.1

A U.S. investor converts $110,000 into euros at $1.10 per euro and buys a euro bond. One year later the bond is worth EUR 104,000 including interest, and the euro has fallen to $1.05. The investor's return in dollars is closest to:

• a.about +4.0%
• b.around +0.7%
• c.-4.5%
• d.approximately -0.7%✓

Start: 110,000 / 1.10 = EUR 100,000. End: 104,000 x 1.05 = $109,200. Return = (109,200 - 110,000) / 110,000 = -0.73%. Cross-check: 1.04 x (1.05 / 1.10) - 1 = 1.04 x 0.9545 - 1 = -0.73%. The 4.0% figure is the euro-denominated return only. The -4.5% figure is the currency loss alone, ignoring the 4% earned on the bond. The positive 0.7% is a sign error.CFA Institute curriculum, Economics (exchange rates and returns)

A basket of goods costs $200 in the United States and EUR 160 in the euro area. The spot rate is $1.10 per euro. Absolute purchasing power parity implies a rate of:

• a.$1.25 per euro, which suggests the euro is overvalued at $1.10
• b.$0.80 per euro, which suggests the euro is undervalued against the dollar
• c.$1.25 per euro, which suggests the euro is undervalued at $1.10✓
• d.$1.10 per euro, which suggests the euro is fairly valued against the dollar today

Absolute PPP sets the exchange rate so the same basket costs the same: $200 / EUR 160 = $1.25 per euro. The actual rate of $1.10 buys fewer dollars per euro than PPP implies, so the euro is undervalued against the dollar under this measure. Calling it overvalued reads the gap backwards. The $0.80 figure inverts the ratio (160/200). Saying $1.10 is fair ignores that the basket costs more in the United States when converted at the spot rate.CFA Institute curriculum, Economics (purchasing power parity)

A U.S. investor owns shares of a foreign company. The foreign government suddenly forbids converting local currency to dollars and sending dividends abroad. This risk is best described as:

• a.Call risk, a form of issuer-specific business risk
• b.Transfer (capital control) risk, a form of political risk✓
• c.Reinvestment risk, a form of interest rate risk
• d.Liquidity risk, a form of exchange trading risk

Restrictions on converting and repatriating funds are capital controls, and the chance of them is transfer risk within political (country) risk. Reinvestment risk is about having to reinvest cash flows at lower rates. Call risk applies to bonds the issuer can redeem early. Liquidity risk concerns the ability to trade without moving the price; the investor's problem here is access to the proceeds, not the ability to find a buyer.CFA Institute curriculum, Economics (country and political risk)

Why is a government's debt denominated in a foreign currency generally considered riskier for default than the same government's debt in its own currency?

• a.The government cannot create the foreign currency and must earn or hold it✓
• b.Foreign-currency bonds are never rated by the major credit rating agencies
• c.Foreign courts automatically seize the government's assets upon any late payment
• d.Local-currency bonds carry no inflation risk because the central bank backs them

A government that borrows in its own currency can, in principle, always create more of it to pay (at the cost of inflation or currency weakness), so rating agencies often rate local-currency debt higher. Foreign-currency debt must be serviced from export earnings, reserves or new borrowing. It is false that such bonds are unrated. Local-currency bonds do carry inflation risk. Courts do not automatically seize assets on a late payment; sovereign immunity makes enforcement difficult.CFA Institute curriculum, Fixed Income (sovereign credit risk)

A skilled worker loses a job when software permanently replaces the task, and no local employer needs the worker's remaining skills. This is best classified as:

• a.Cyclical unemployment
• b.Frictional unemployment
• c.Structural unemployment✓
• d.Seasonal unemployment

Structural unemployment results from a mismatch between workers' skills or location and available jobs, often after technological change. Cyclical unemployment rises in recessions and falls in expansions as demand changes. Frictional unemployment is the short search time between jobs even when skills match. Seasonal unemployment follows predictable calendar patterns, such as harvest or holiday work.BLS Current Population Survey definitions (unemployment categories)

A survey of 1,000 civilian adults finds 600 employed, 40 actively looking for work, and 360 neither working nor searching. The unemployment rate is:

• a.64.0%
• b.6.67%
• c.4.0%
• d.6.25%✓

The labor force is employed plus unemployed = 600 + 40 = 640. The unemployment rate = 40 / 640 = 6.25%. Dividing by all 1,000 adults gives 4.0%, which wrongly includes people outside the labor force. Dividing by the 600 employed gives 6.67%. The 64% figure is the labor force participation rate (640 / 1,000), a different statistic.BLS Current Population Survey definitions (labor force measures)

The one-year spot rate is 3.0%, and the market expects the one-year rate a year from now to be 5.0%. Under the pure expectations theory, the two-year annualized spot rate is closest to:

• a.around 3.0%
• b.about 5.0%
• c.8.2%
• d.roughly 4.0%✓

Under pure expectations, the two-year spot rate is the geometric average of the expected one-year rates: sqrt(1.03 x 1.05) - 1 = sqrt(1.0815) - 1 = 3.995%, about 4.0%. The 8.2% figure is the two-year cumulative return (1.0815 - 1), not an annualized rate. The 5.0% figure is only the expected forward rate for year two. The 3.0% figure is only the first year's rate.CFA Institute curriculum, Fixed Income (expectations theory)

Suppose investors expect short-term interest rates to stay flat for the next ten years. According to the liquidity preference (liquidity premium) theory, the yield curve will most likely be:

• a.Flat, because long yields equal the average of the expected short rates
• b.Humped, because demand clusters in the intermediate maturity range
• c.Upward sloping, because lenders require extra yield for committing funds longer✓
• d.Downward sloping, because investors expect to profit from falling rates

Liquidity preference theory adds a term (liquidity) premium that rises with maturity to the average of expected short rates. With flat expectations the curve therefore slopes upward. A flat curve is what pure expectations theory would predict in this situation. Inversion would require expected falling rates, which the question rules out. A hump is the type of shape associated with other theories or changing rate expectations, not a premium for maturity.CFA Institute curriculum, Fixed Income (term structure theories)

The 2-year Treasury yields 4.60% and the 10-year Treasury yields 4.25%. The 10-year minus 2-year spread and the curve shape are:

• a.-35 basis points; the curve is inverted between those maturities✓
• b.+35 basis points; the curve is upward sloping
• c.-350 basis points; the curve is inverted between those maturities
• d.+0.35 basis points; the curve is essentially flat between those maturities

Spread = 4.25% - 4.60% = -0.35 percentage points = -35 basis points (one basis point is 0.01%, so 0.35% = 35 bp; recomputed: 0.35 / 0.01 = 35). Long yields below short yields mean an inverted curve. A positive 35 reverses the subtraction order. The -350 figure shifts the decimal two places too far. The 0.35 basis-point figure confuses percentage points with basis points.U.S. Treasury yield curve conventions (CFA Institute, Fixed Income)

An investor deposits $10,000 at 8% nominal annual interest compounded semiannually for 3 years. The ending balance is closest to:

• a.about $12,653✓
• b.$12,597
• c.approximately $12,682
• d.roughly $12,400

Semiannual compounding: 4% per period for 6 periods. 1.04^6 = 1.265319, so the balance is $12,653. Recheck by steps: 1.04^2 = 1.0816, 1.0816^3 = 1.2653. The $12,597 figure compounds only annually (1.08^3). The $12,400 figure uses simple interest (10,000 + 3 x 800). The $12,682 figure compounds quarterly (1.02^12), which the question does not state.CFA Institute curriculum, Quantitative Methods (time value of money)

A retiree will receive $2,000 at the beginning of each of the next 4 years. At a 5% discount rate, the present value of these payments is closest to:

• a.roughly $7,092
• b.around $8,000
• c.approximately $6,754
• d.about $7,446✓

Present value of an ordinary annuity = 2,000 x [1 - 1.05^-4] / 0.05 = 2,000 x 3.5460 = $7,092. Payments at the beginning of each year form an annuity due, so multiply by 1.05: $7,092 x 1.05 = $7,446. Check: 2,000 + 2,000/1.05 + 2,000/1.05^2 + 2,000/1.05^3 = 2,000 + 1,904.76 + 1,814.06 + 1,727.68 = 7,446.50. The $7,092 answer treats the payments as end-of-year. The $8,000 total ignores discounting. The $6,754 answer divides by 1.05 instead of multiplying.CFA Institute curriculum, Quantitative Methods (annuity due)

A client wants $500,000 in 20 years and will invest a level amount at the end of each year in an account earning 7% annually. The required annual contribution is closest to:

• a.$25,000
• b.$12,196✓
• c.$35,000
• d.$11,399

Future value annuity factor = (1.07^20 - 1) / 0.07 = (3.8697 - 1) / 0.07 = 40.995. Payment = 500,000 / 40.995 = $12,196. Check: 12,196 x 40.995 = 499,980, about 500,000. The $11,399 figure (12,196 / 1.07) assumes deposits at the start of each year, but the question says year end. The $25,000 answer divides the goal by 20 and ignores growth. The $35,000 answer takes 7% of the goal, which is a single year of interest on the target.CFA Institute curriculum, Quantitative Methods (future value of an annuity)

Three annual returns for a fund are 4%, 8% and 12%. Treated as a sample, the standard deviation is:

• a.16.0%
• b.3.3%
• c.4.0%✓
• d.8.0%

Mean = 8%. Deviations: -4, 0, +4. Squares: 16, 0, 16 = 32. Sample variance divides by n - 1 = 2, giving 16; the square root is 4.0%. Dividing by n = 3 gives 10.67 and a population standard deviation of 3.3%, which is not the sample statistic. The 16.0% figure is the variance, not the standard deviation. The 8.0% figure is the mean.CFA Institute curriculum, Quantitative Methods (dispersion)

A stock rises 50% in year one and falls 50% in year two. Which statement describes its performance?

• a.The geometric mean is about -25% per year, and the investor ends with 50%
• b.The geometric mean is about +25% per year because the first year's gain is larger
• c.The geometric mean is about -13.4% per year, and the investor ends with 75% of the start✓
• d.The arithmetic and geometric means are both 0%, and the investor breaks even

Growth factors: 1.50 x 0.50 = 0.75, so the investor ends with 75% of the starting value, a 25% total loss. The geometric mean is sqrt(0.75) - 1 = -13.4% per year. The arithmetic mean is (50% - 50%) / 2 = 0%, which overstates results; breaking even is wrong. No positive 25% average applies. The -25% figure is the two-year cumulative loss, not an annual rate, and the investor ends with 75%, not 50%.CFA Institute curriculum, Quantitative Methods (geometric mean return)

A company has a market capitalization of $800 million, debt of $300 million, cash of $100 million, and EBITDA of $125 million. Its EV/EBITDA multiple is:

• a.about 6.4x
• b.roughly 5.6x
• c.8.0x✓
• d.around 8.8x

Enterprise value = market cap + debt - cash = 800 + 300 - 100 = $1,000 million. EV / EBITDA = 1,000 / 125 = 8.0x. Recheck: 125 x 8 = 1,000. The 6.4x answer divides market cap alone by EBITDA. The 8.8x answer adds debt but forgets to subtract cash (1,100 / 125). The 5.6x answer subtracts both debt and cash from market cap (700 / 125), which is the reverse of the correct treatment of debt.CFA Institute curriculum, Equity Valuation (enterprise value multiples)

A company reports total equity of $500 million, of which $100 million is preferred stock, and has 20 million common shares outstanding. The shares trade at $30. Its price-to-book ratio is:

• a.0.67
• b.1.5✓
• c.1.2
• d.2.0

Book value attributable to common = 500 - 100 (preferred) = $400 million. Book value per share = 400 / 20 = $20. Price-to-book = 30 / 20 = 1.5. The 1.2 answer uses total equity of $500 million (25 per share, 30 / 25). The 0.67 answer inverts the ratio (20 / 30). The 2.0 answer has no basis in the data given.CFA Institute curriculum, Equity Valuation (price-to-book)

A portfolio has a beta of 1.25 and a total standard deviation of 24%. The market's standard deviation is 16%. Treating total variance as systematic plus nonsystematic variance, the nonsystematic standard deviation is closest to:

• a.20.0%
• b.24.0%
• c.13.3%✓
• d.4.0%

Systematic risk = beta x market standard deviation = 1.25 x 16% = 20%. Variances: total 24^2 = 576, systematic 20^2 = 400, so nonsystematic variance = 176 and the standard deviation = sqrt(176) = 13.3%. The 4.0% answer simply subtracts standard deviations (24 - 20), but variances, not standard deviations, add. The 20.0% answer is the systematic component. The 24.0% answer is the total.CFA Institute curriculum, Portfolio Management (systematic and nonsystematic risk)

A client's employer stock makes up 70% of her portfolio. Her adviser says most of that exposure is company-specific. How can that risk best be reduced?

• a.Spread holdings across many issuers and industries rather than one company✓
• b.Shorten the average maturity, since the exposure is mainly rate risk
• c.Hedge the market's direction, since the exposure is mainly market risk
• d.Move to inflation-linked bonds, since the exposure is mainly inflation risk

Concentration in one issuer creates unsystematic (company-specific) risk, which diversification across issuers and industries largely eliminates. Hedging the market addresses systematic risk, which would remain even in a well-diversified portfolio. Shortening maturity reduces interest rate sensitivity of bonds and does not change employer-stock risk. Inflation-linked bonds address inflation risk, not the risk that one company's results disappoint.CFA Institute curriculum, Portfolio Management (diversification)

A firm is financed 60% by equity costing 10% and 40% by debt with a 6% pre-tax cost. The tax rate is 25%. Its weighted average cost of capital is:

• a.around 6.3%
• b.8.4%
• c.approximately 7.8%✓
• d.about 8.0%

WACC = 0.60 x 10% + 0.40 x 6% x (1 - 0.25) = 6.0% + 1.8% = 7.8%. Recheck: 0.4 x 6 = 2.4; 2.4 x 0.75 = 1.8. The 8.4% answer omits the debt tax shield (6.0 + 2.4). The 8.0% answer is the simple average of 10% and 6%, ignoring the weights. The 6.3% answer applies the tax adjustment to the entire weighted sum, including equity, whose cost is not tax-deductible.CFA Institute curriculum, Corporate Issuers (cost of capital)

A married couple has a $400,000 joint CD, and each spouse also has $200,000 in a single-name savings account, all at the same FDIC-insured bank. How much of the $800,000 is uninsured?

• a.$300,000, because each person is insured for $250,000 across all accounts at the bank
• b.None; every dollar is within the limits for single and joint ownership categories✓
• c.$150,000, because a joint account is insured for only $250,000 in total
• d.$550,000, because the bank is insured for only $250,000 of the couple's money

Coverage is $250,000 per depositor, per insured bank, for each ownership category. Each spouse's single account ($200,000) is under $250,000. The joint CD gives each spouse a $200,000 interest, also under $250,000, and joint interests are insured separately from single accounts. Total insured = 200,000 + 200,000 + 400,000 = 800,000. The $300,000 answer wrongly combines categories (each person would hold $400,000, $150,000 over). The $550,000 answer applies one $250,000 limit to everything. The $150,000 answer caps the joint account at $250,000 in total instead of per co-owner.FDIC: Understanding Deposit Insurance (12 CFR Part 330)

A customer keeps $100,000 in a bank's money market deposit account and $100,000 in a money market mutual fund purchased at the same bank's branch. Which statement is accurate?

• a.The fund is insured while the deposit account is covered only by the SIPC
• b.Neither is insured because balances above $100,000 per bank are excluded
• c.Only the deposit account is insured; the fund can lose value✓
• d.Both are insured because the same bank sold them to the same customer

A money market deposit account (MMDA) is a bank deposit and is covered by FDIC insurance up to $250,000 per depositor per ownership category. A money market mutual fund is an investment product, not a deposit; the FDIC does not cover mutual funds, even when sold in a bank branch, and a fund can in rare cases lose value. The current limit is $250,000, not $100,000. SIPC protects customers of failed brokerage firms against missing assets, not bank deposits, and it does not guarantee fund values.FDIC: Understanding Deposit Insurance (12 CFR Part 330)

Which of the following is covered by FDIC deposit insurance?

• a.Items stored in a safe deposit box rented from the bank
• b.A certificate of deposit issued directly by an insured bank✓
• c.Municipal bonds held at the bank's securities affiliate
• d.A mutual fund bought through the bank's branch investment desk

The FDIC covers deposit products at insured banks: checking, savings, NOW and money market deposit accounts, CDs, and official items such as cashier's checks. It does not cover stocks, bonds, mutual funds, annuities, life insurance, municipal securities, U.S. Treasury securities, or safe deposit boxes and their contents, even when the bank or its affiliate sold the product or rented the box.FDIC: Understanding Deposit Insurance (12 CFR Part 330)

An investor owns, in her own name at one bank, a $150,000 checking account and a $150,000 CD, plus a $200,000 IRA at the same bank invested in a CD. How much is uninsured?

• a.$200,000, because insurance covers only the first $100,000 per category
• b.$250,000, because all of her deposits at the bank count as one category
• c.$0, because each product she holds is insured on its own
• d.$50,000, because the single accounts total $300,000 against a $250,000 limit✓

Single-ownership deposits at the same bank are added together: 150,000 + 150,000 = 300,000, which exceeds the $250,000 limit by $50,000. The IRA is a separate category (certain retirement accounts) with its own $250,000 coverage, so the $200,000 is fully insured. The $250,000 answer combines all categories (500,000 - 250,000). The $0 answer treats each product as separately insured, but the checking account and CD are in the same category. The $200,000 answer uses the old $100,000 limit (300,000 - 100,000).FDIC: Understanding Deposit Insurance (12 CFR Part 330)