Chp 4 Investment Companies (Self) Flashcards
The principal difference between an open-end and a closed-end management company is: A capitalization B management C investment objective D expense ratio
A.
Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund’s stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently.
Mutual funds must send their financial statements to customers: A annually B semi-annually C quarterly D monthly
B.
Mutual funds send their financial statements to customers semi-annually.
Which of the following statements are TRUE about Individual Retirement Accounts?
I Contributions are allowed based solely upon personal service income
II Contributions may be made if the individual is covered by another type of retirement plan
III All contributions reduce the individual’s taxable income
IV To remain tax deferred, distributions from other retirement plans must be rolled over within 60 days
A I and III
B II, III, IV
C I, II, IV
D I, II, III, IV
C.
Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan. However, they may not be tax deductible if the person’s income is too high (making Choice III wrong). IRA “rollover” rules allow pension plan distributions rolled over into an IRA within 60 days to remain tax deferred.
Which of the following employees MUST be included in a Keogh plan?
I A waitress who works full time 4 months a year in a summer resort
II A clerk who works full time for 9 months a year in a private school
III A secretary working part time, 8 hours per week
IV A secretary working part time, 20 hours per week
A I and II only
B II and IV only
C III and IV only
D I, II, III, IV
B.
To qualify for inclusion in a Keogh plan, an employee must be “full time” - defined as working over 1,000 hours per year. Since a year has 2,000 working hours, if a full time employee works more than 1/2 year, he or she must be included in the plan.
In 2020, self-employed person earning $300,000 wishes to open a Keogh plan. The maximum contribution is: A $6,000 B $47,000 C $57,000 D $60,000
C.
The maximum contribution to a Keogh plan is effectively 20% of income (though the “stated” rate is 25%) or $57,000 in 2020, whichever is less. 20% of $300,000 = $60,000. However, only $57,000 maximum can be contributed in a year.
A customer invests $15,000 in a non-qualified variable annuity. The separate account is currently valued at $40,000. The customer, age 62, takes a $20,000 lump sum distribution from the separate account. The tax consequence is:
A $15,000 of taxable ordinary income and $5,000 tax-free return of capital
B $15,000 of taxable long-term capital gains and $5,000 tax-free return of capital
C $20,000 of taxable ordinary income
D $20,000 tax-free return of capital
C.
Lump-sum distributions from variable annuity contracts are taxed on a LIFO basis. The investment $15,000 is the first money in and these are already taxed dollars. The tax-deferred build up of $25,000 represents the second money in, and these dollars have not been taxed. When distributions commence, the first dollars out represent the never taxed build-up, so all $20,000 withdrawn is taxable as ordinary income. Of the remaining $20,000 in the account, the next $5,000 taken out represents the balance of the never-taxed build up that will now be taxed; and the balance of $15,000 is the return of already taxed capital with no further tax due.
Which of the following employees must be fingerprinted under SEC Rule 17f-2? I Registered representative II Cage clerk III Accounting supervisor IV Human resources supervisor A I only B II and III only C I, II, III D I, II, III, IV
C.
SEC Rule 17f-2 requires that all officers, directors, sales employees, as well as all persons who handle cash, securities, and the books and records of original entry (and their supervisors) be fingerprinted. Thus, a human resources employee would not fall under this requirement.
A customer redeems 1,000 shares of ABC Fund. The computed Net Asset Value per share is $9.20. The Public Offering Price per share is $10. The fund has a 1/2% redemption fee. The customer will receive $9,154. The customer must receive the money within: A 1 calendar day B 5 calendar days C 7 calendar days D 10 calendar days
C.
Under the Investment Company Act of 1940, customers who redeem must be paid within 7 calendar days of the redemption date.
A variable annuity is a(n): A open-end management company B closed-end management company C fixed unit investment trust D participating unit investment trust
D.
A variable annuity is a participating unit investment trust. The trust is an “umbrella vehicle” used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies.
Which of the following individuals earning $150,000 of income per year can make a deductible contribution to an IRA?
I Corporate employee covered by a pension plan
II Corporate employee who is not covered by a pension plan
III Self-employed individual who has established a Keogh plan
IV Self-employed individual who has not established a Keogh plan
A I and II
B III and IV
C I and III
D II and IV
D.
An individual who is not covered by another qualified retirement plan can make a tax deductible contribution to an IRA. Individuals who are covered by another retirement plan can make a contribution, but the tax deductible amount phases out as income rises. Individuals making $150,000 that are covered by another pension plan are above the 100% phase out threshold (full phase out occurs above $75,000 of income for an individual in 2020). Their IRA contributions are not deductible.
A customer who earns $200,000 per year wishes to set aside funds for his 12-year old daughter’s future college expenses. Which statements are TRUE?
I The customer can open a UTMA account for the daughter to deposit the funds
II The customer cannot open a UTMA account for the daughter to deposit the funds
III The customer can open a Coverdell ESA account for the daughter to deposit the funds
IV The customer cannot open a Coverdell ESA account for the daughter to deposit the funds
A I and III
B I and IV
C II and III
D II and IV
B.
Custodial accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened. On the other hand, high earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account (there is a phase out that starts with individuals earning $124,000 in 2020 and is fully phased out at $139,000 of income per year).
Distributions after age 59 1/2 from non-tax qualified retirement plans are:
A 100% taxable
B partial tax free return of capital and partial taxable income
C 100% tax free
D 100% tax deferred
B.
Contributions to non-tax qualified plans such as variable annuities are not tax deductible. They are made with “after-tax” dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital is not taxed, the earnings are taxed.
Which of the following can be purchased on margin?
I Mutual Funds
II Initial public offerings of Closed-End Funds
III Closed-End Funds trading on the NYSE
A I only
B III only
C II and III
D None of the above
B.
New issues are not marginable. Every issue of a mutual fund (open-end) share is a “new issue” as is the initial public offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock.
Under FINRA rules, payments made to purchase variable annuity contracts must be forwarded to the underwriter: A promptly B within 5 business days C within 7 business days D within 10 business days
A.
FINRA requires that customer payments for variable annuity purchases be forwarded to the issuer promptly.
Which of the following customers is allowed a breakpoint on mutual fund purchases? I Corporate purchaser II Investment club III Individual purchaser IV Investment advisor omnibus account A I and III B II and IV C I, II, III D I, II, III, IV
A.
People cannot “join together” to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers’ purchases. An individual or corporation making a purchase is considered to be “one” purchaser and qualifies for the breakpoint.
