Chapter 3 Flashcards
Coverdell (CESA)
$2K per child under 18
Contributions may be made persons other than parents
Must cease contribution after 18 bday
Not tax deductible
Distributions tax free if taken before age 30 and used for education expenses
If not used for education after age 30, subject to OI plus a 10% penalty, taxes charged to beneficiary
Contributions to a Coverdell Education Saving Account (ESA) are made with after- tax dollars. Distributions used for qualified educational expenses are tax free.
If a distribution exceeds education expenses, a portion representing earnings will be taxable to the beneficiary and may be subject to an additional 10% penalty tax.
An indexed maximum contribution may be invested in each child’s Coverdell Education Savings Account every year. For instance, if a couple has 3 children, they may invest the current maximum into each of 3 accounts.
The maximum contribution permitted for any beneficiary is $2,000 per year. The beneficiary need not be related to the contributor(s). ESA accounts may be rolled over to change investment vehicles or to change beneficiaries. Account balances may be used for education only.
Under most circumstances, if the money is not used for education or the money is distributed after age 30, earnings are subject to ordinary income tax plus a 10% penalty. The taxes are charged to the beneficiary.
Diversified Rule
At least 75% of asses must be invested in securities issued by company other than investment company isuelf
of 75%:
No more than 5% of funds total assets invested in securities of any one issue
No more than 10% of outstanding voting securities of any one security owned
No conditions attached to other 25%
T Bills
Issued at discount mature less than a year, book entry
Bid > Ask (unique)
Quoted discount yield basis
Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. They mature in 4, 8, 13, or 26, 52(every 4 weeks) weeks from issuance and are sold at a discount. Interest on Treasury bills is taxable at the federal level only.
Auctioned weekly
Zero coupon securities
Appreciated of bill treated as interest
Treasury bills are issued in denominations of $100 to $5 million. The U.S. Treasury holds weekly auctions for the bills with original maturities of 4, 8, 13, and 26 weeks and the 52 week bills are auctioned every 4 weeks.
T Notes
2-10 years, priced at percentage of par, book entry $100 to $5M Priced as a % of par Interest paid semi-annually Sold every 4 weeks quoted in 1/32 Taxed at federal level only T+2 Interest on actual day basis
Can be refunded
T Bonds
> 10 years
Priced % of par
Book entry
Interest every 6 month
CMO/PAC
CMOs are created by broker/dealers, who buy pass-through securities from government agencies and government-sponsored corporations, place the certificates in trust, and issue participation interests in the trusts that are tied to specific maturity periods (tranches).
Generally rated AAA
Mortagues securitization
Issued private sector companies but can be backed by Fannie and Freddie
Yield and maturities from PSA
CMO not backed by US gov
PO discount to par, impacted by interest rate fluctuations
IO’s increase when interest rate increases- hedge against interest rate risk
Interest paid taxable
backed by mortgage pools
Yield more than US treasuries
Issues in $1,000 dominations and trade OTC
PACS have reduced prepayment and extension risks, fixed maturity, retired first
TACS are protected against prepayment but not extension risk
PACS lower yield than comparable TACS
Z Tranche- paid last, most volatile, not suitable investor who needs proceeds in fixed time
Pay monthly interest and principal
Active secondary market
Customer required to sign suitability agreement before purchase
May not be compared to other investments
Yield more than treasuries
Value right before X date (trading with the right)
(MP-SP)/(N+1)
Value Right After X Date
(MP-SP)/N
Conduit theory
taxes retained income if distributes 90%
Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.
Sector/segment rotation
Swithcing sectors based on thoughts of which will outperform
Scheduled premium variable contract
minimum life guarantee
SPAC
A company without business operations that raises money through an IPO in order to have its shares publicly traded for the sole purpose of seeking out a business or combination of businesses
tax nonqualified annuity
Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings
The investor has already paid tax on the contributions but the earnings have grown tax-deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.
When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59-½, there will be a tax penalty of an additional 10%.
Head and shoulders trend
Bearish trend
529 Plan
The withdrawals from Section 529 plans are federally tax exempt, but they may be taxed as income in some states. The money that is invested in a Section 529 plan is always after tax. The withdrawals must be used for qualified education expenses (e.g., tuition, books, lecture fees, lab fees), including up to $10,000 per year for K-12 education. The plan does not cover any expense of a student.
Use after tax dollars, earnings grow tax deferred
Treasury Stock
A company may, from time to time, go into the market and buy some of its own outstanding stock, which is then placed in the treasury and called treasury stock. Treasury stock has no voting rights and does not receive dividends. Treasury stock is not included when calculating shareholders’ equity, or net worth.
NAV
Shares are redeemed at NAV
Increase NAV: +MV, receive dividend, receive interest, liability decline
No impact NAV: Mgr buy or sell securiites, fund issues or redeems shares
Treasury receipts
Treasury receipts are zero-coupon bonds issued by broker/dealers. Zero coupon bonds pay all of their interest at maturity. They are issued at a discount and redeemed at par, and the difference represents the interest earned. For zeroes with a maturity of more than one year, the interest (or discount) must be accreted each year-and is taxable that year as income. This is termed imputed interest.
Not backed by US Gov
Quoted on yield
Stripped bonds
Although interest is not paid annually on receipts, investors receive a 1099 Original Issue Discount (OID) that reports the amount of interest imputed for that year. This interest must be reported to the IRS as taxable income.
Head and shoulders bottom formation
A head and shoulders bottom formation is also known as an inverted head and shoulders formation. It is that part of a graph in which a downtrend has reversed to become an uptrend. It is not, however, an indicator of the bullishness or bearishness of the market as a whole. It is an indication only of the direction of a trend, which may be either short or long in duration.
CMO
CMO holders are paid interest monthly. As payments are received from the underlying mortgages, interest is paid pro rata to all tranches, but principal repayments are paid to the first tranche until it is retired. Subsequent principal repayments are then applied to the second tranche until it is retired, and so on. CMOs are a derivative security because the value of each tranche is derived from the timing of principal repayments to that tranche.
Fannie, Freddie, and ginnie all back CMO
Variable annuity
During the accumulation phase, the number of accumulation units will increase as additional money is invested. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Once annuitized, the number of annuity units does not vary. The value of accumulation and annuity units varies with the investment performance of the separate account.
Insurance contract require State Insurance Commission and separate account portion with the SEC
The assumed interest rate (AIR) of a variable annuity is the percentage needed on the investments in the separate account of a variable annuity in order to receive the expected payouts upon retirement. The value of an accumulation unit rises during the pay-in phase because the value of the securities in the separate account rises by 4 percent per year. The value of the annuity unit during the pay-out phase falls because it doesn’t reach the expected 4½ percent per year on the investments in the separate account
Sallie Mae
Sallie Mae is the Student Loan Marketing Association, which purchases student loans and packages them for the secondary market.
Interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. As a general rule, debentures pay interest every six months. Sallie Mae is not backed by the taxing power of the U.S. Government and money is used for student loans for higher education.
Ginnie Mae (Gov national mortgague associaiton)
Pay interest monthly Guaranteed by federal government Taxable all levels $1,000 minimums monthly interest and principal payment Significant reinvestment risk
LOI
A letter of intent must be met with dollars invested within 13 months. The customer needs to invest an additional $7,000 to fulfill his letter of intent. The representative should remind the customer of his intention to qualify for the reduced sales charge.
Under a letter of intent, the full contribution is required for the letter to be completed. Appreciation is not considered.
Can be backdated 90 days to include previous deposit
Not binding
The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load.
