Chapter 15- Ethics, Recommendations And Taxation Flashcards

Question

Non-financial considerations

Answer 1

``` Customers age Marital status Number and ages of dependents Customer employment status Employment of customer family members Customers current and future financial needs ```

Answer 2

What kind of risks can you afford How liquid must Investments be How important are tax considerations Long term or short term investments What is your investment experience What investments do you currently have

Answer 3

Short term debt, income oriented mutual funds, money market funds and annuities Investment pyramid goes safety, growth and speculation

Answer 4

Most common growth investments are common stock and common stock mutual funds

Answer 5

Allow earnings to accumulate tax deferred (pay money on withdrawls)

Answer 6

Objective to move away from having a single asset for retirement

Answer 7

Preservation of capital= Gov securities/Ginnie MAEs Growth= common stocks or common stock mutual funds Balanced or moderate growth= Blue chip stock Aggressive growth/sepculation= tech stocks or sector funds Income- bonds, but not zero coupons Tax free income- munis or muni bond funds High yield income- corp bonds or corp bond funds Income oriented stock portfolio- preferred stock and utilities Liquidity- money market funds Keep pace with inflation- stock portfolio

Answer 8

Investor wants to partake in a trade deemed by rep as unsuitable Reg rep must explain why and would mark the trade unsolicited if customer went forward

Answer 9

Purchasing power risk Rising prices past investor return such as a bonds yield going lower than inflation

Answer 10

Potential to lose some or all money Unrelated to an issuers financial strength

Answer 11

Investing at the wrong time and incurring loss or lower gains

Answer 12

Sensitivity of investment value to fluctuations in interest

Answer 13

Difficulty to reinvest proceeds when interest rates decline during time period Mortgage backed securities are susceptible due to refinancing of loans Best answer for not susceptible to reinvestment risk is a zero coupon bond

Answer 14

Risk a bond might be called before maturity and the investor will not be able to reinvest at a similar rate Call protection can be bought to defend against that and most issues come with some years of it

Answer 15

Systematic risk Losing principal to price volatility in a security Cannot be diversified away, rather it can only be minimized

Answer 16

Danger of losing Principal through an issuers failure

Answer 17

May not be able to sell Municipals may be less marketable outside of local areas

Answer 18

Congress changing laws affecting securities Reps should warn about impending law changes

Answer 19

Measure of performance that adjusts risk relative to a known benchmark Basically excess return from predictions of benchmark

Answer 20

Measure of volatility in relation to entire market 1 moves inline with market 1+ are more volatile in relation to overall market Higher beta means the stock will return better than its pears by whatever it is over 1 Measures systematic risk, usually considered aggressive if over 1 High beta= Tech and automobile Low= utilities and drug

Answer 21

Risks specific to a stock instead of the market

Answer 22

Measures time in years a bond takes to mature Lower coupon generally signals higher duration Interest bearing bonds usually have a shorter duration than maturity Zero coupon are exactly maturity Knowing duration means you can predict what an interest rate decrease would do to return 9 year duration and 1% decrease in rates would be a 9% increase in bond

Answer 23

May have growth or income as objective but will be mostly invested in: Blue chip stocks and AAA bonds Examples include: food, utility and drug companies

Answer 24

Assume higher risk by investing in: Highly volatile or Beta stock Buying securities on margin Using put and call option strategies Most investors fall somewhere in between

Answer 25

Emphasizes relationship between risk and reward Derived from Capital Asset Pricing Model which states a stock price takes into account systematic and non systematic risk

Answer 26

Type of instrument Industry Companies in an industry Length of maturity Investment rating and geography

Answer 27

Periodic purchasing of a fixed dollar amount in one or more common stocks or mutual funds Fluctuating market average prices would be lower than average price bought

Answer 28

Buy and sell in a way to keep equity and debt balanced Usually start at 60 equity -40% debt

Answer 29

Buy and sell to keep a set dollar amount invested at all times Sell as prices rise and buys when markets fall

Answer 30

Balancing of different asset classes Primary factor in performance is allocation

Answer 31

Proportion of investments that should compose long term investment portfolio Subtract age by 100 to find stock bond split

Answer 32

Short term portfolio adjustment that adjusts portfolio mix between asset classes in consideration of current market conditions Try to time market instead of having set boundaries

Answer 33

Relies on managers stock picking and market timing ability Passive- belief that no particular management style will consistently outperform the market Usually will try to mirror a specific index and seek a low cost means of generating return

Answer 34

Focus on companies that outpace earnings of other companies Will often buy companies at the high end of 52 week price range as growth is usually priced into stocks

Answer 35

Undervalued and out of favor Stock whose prices are low relative to company's earnings or book value Bottom of 52 week high/low

Answer 36

Sales, excise, payroll, property, and gasoline Levied equally regardless of income Low income families pay higher percentage because a greater majority of their incomes than they do save

Answer 37

Estate and income taxes Increase with income

Answer 38

Earned income- salary, bonuses and income derived from active participation in a business (GP) Passive income- rental property, LPs, and enterprises in which someone is not actively involved. Passive loses are only allowed to be used against passive income Portfolio income- dividends, interest, and net capital gains, taxed during year of receipt

Answer 39

Can only offset earned income by 3000 in a particular year Can carry forward indefinitely

Answer 40

Interest paid on debt securities, tax differs Corporate bonds- taxable by fed, state and local gov US Gov securities- Tbill, Tnote, and bonds are not taxable at state and local levels but taxed at fed Agency issues- Similar to US gov securities except when mortgage backed securities. These are taxed at all levels. Fannie Mae and Freddie Mac- taxed at all levels because they are corporations Accrued Interest- When a bond is sold between interest payments, the trade confirmation will confirm how much accrued interest was received. Buyer deducts the interest paid to seller from total interest received

Answer 41

Interest from municipal securities is exempt from federal state and local taxes May not be exempt if not a resident of the state in which the bond or note is issued Private purpose bonds (industrial revenue bonds) issued by states or municipalities are a tax preference item in the Alternative minimum tax

Answer 42

Must be held more than 60 days during a 121 day period beginning 60 days before ex dividend day Tax rate is specified by the IRS tax code Nonqualified dividends are taxed as ordinary income

Answer 43

Corporate bonds- taxed at ordinary income rate Stock funds- in accordance with IRS not ordinary income Taxed regardless of whether funds are reinvested into additional shares or taken as cash

Answer 44

Taxed by country the investor is a citizen of Us investor would be Federal, State and local (if applicable) taxes on foreign securities Any withheld amount by foreign government can be used as a tax credit

Answer 45

Cost basis is increased by commissions paid to buy a security Proceeds are reduced by commission paid Buy at 90 but pay $1 in commission, 91 base Sell for 92 but pay $1 commission, 91 basis no gain

Answer 46

First in first out (FIFO)- assumed by IRS because it causes largest gain recognition Share identification- must do before the transaction settles (Trade date + 3 business days) Average basis- Usually used by mutual fund investors because its simplest with fractional shares

Answer 47

May not use losses if selling a security and then repurchasing securities 30 days before or after trade date Buying calls, rights, warrants and convertible bonds is considered repurchasing Writing deep in the Money puts also included Allowed to adjust the cost basis of reacquainted stock by amount of disallowed loss Applies to short selling as well

Answer 48

Change 2 of 3 factors Issuer Coupon Maturity

Answer 49

Municipal bonds would have the lowest pre tax yield compared to us gov bonds

Answer 50

Bonds purchased at premium must amortize their loss Reduces reported interest income during the year Negative benefit for municipal bonds because it's income is not taxed

Answer 51

Accretion depends on whether it was purchased as an original issue discount (new issue) or on secondary market Beneficial for municipal bonds if buying at original issue If bought on secondary, the accretion is taxable

Answer 52

Bond accretes if bought at discount Investor has option to amortize or not If the investor decides not to, his cost basis remains the same

Answer 53

1. Donation to charity- Donor receives a tax deduction equal to market value on date of donation, no tax liability if held for more than one year. Tax is due if not held for one or more years Recipient cost basis is higher market value 2. Donations to others- no deduction, cost basis to recipient is original cost basis, subject to gift tax 3. Inherited securities- Recipient cost basis is FMV as of date of death

Answer 54

Paid by estate not the heirs, likewise for gifts Both are progressive taxes Married couples are allowed to transfer entire estate to surviving spouse tax free

Answer 55

Tax deductible expense except if used to purchase Municipals Deductions can not exceed interest income, dividends and cap gains Banks can deduct 80% of costs for financing

Answer 56

Selling shares short instead of selling a long position. 5% margin requirement applies on proceeds and firm may release 95% of proceeds Cannot be used to stretch a short term gain to long term Must be closed in 30 days and long for additional 60

Answer 57

Makes certain high income tax payers pay taxes Adds back: Accelerated depreciation on investment property Certain DPP costs Local tax and interest on investments that do not generate income Incentive stock options exceeding FMV

Answer 58

Dividends received from other corporations are 70% exempt from taxation