Cleint Investment Recommendations and Strategies (Units 18-24) Flashcards
What is bid price? What is offer/ask price?
The current bid is the highest price at which the dealer will buy and the current offer is the lowest price at which the dealer will sell. The difference between the bid and ask is call the spread.
The more active the stock, the narrower the spread.
What is Reg T call?
In margin accounts, customers may borrow part of a securities purchase price from BD under terms set by Fed Rsv Board Regulation T. Says which securities are eligible and stipulates 50% of security value may be borrowed from BD.
What is the risk measure associated with the capital market line (CML)? A) Alpha B) Beta C) Systematic risk D) Standard deviation
D
In the context of the CML, the measure of risk is total risk, or standard deviation. Beta (systematic risk) is used to measure risk for the security market line (SML).
U20LO8
What are 3 techniques for minimizing interest risk for bond holders?
- Barbell: s.t. bonds (1-2yrs) on one end with equal amount of l.t. bonds (10+yrs) on the other ened.
- Bullet: bonds purchased at different times all with same maturity or target date. Like for college education.
- Laddering: Bonds all purchased at same time but maturing at different times.
What is market capitalization and the various levels?
The number of outstanding shares times the current market price.
Small cap is $300M to $2Billion
Mid cap is $2-10Billion
Large cap is greater than $10Billion
what is a limit order?
Limits the amount paid or received for securities. A customer limits the acceptable purchase or selling price. A limit order can only be executed at the specified price or better (lower for a buy and higher for a sell)
Which of the following characteristics best exemplifies a value stock?
A) High earnings-per-share growth, high profitability
B) Low earnings-per-share growth, high profitability
C) Low price-to-book, high price-to-earnings ratio
D) Low price-to-book, low price-to-earnings ratio
D
A value investor focuses on share price in anticipation of a market correction and improving company fundamentals. Therefore, such an investor tends to select a stock featuring lower price-to-earnings and price-to-book value ratios. A growth investor focuses on high earnings-per-share, growth, and high profitability.
U20LO5
What is hypothecation?
Permission by client to use margin securities as collateral for loan and permission to re-hypothecate / pledge securities held in margin account to lending institution. A mandatory part of the margin agreement.
Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Deferred annuities B) Stock dividends C) Cash dividends D) Section 529 plans
Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner’s cost basis and, when sold at a price above that cost basis, are treated as capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.
Which of the following has the power to close a stock exchange for up to 90 days?
A) The SEC
B) The Administrator in the state where that stock exchange is located
C) The president of the United States
D) The president of that stock exchange
A
The Securities Exchange Act of 1934 granted the SEC the power to close any registered stock exchange for up to 90 days. All that is required is notice to the president of the United States.
Two years after their wedding, Pam and Jim became the proud parents of child. Both grandparents want to help ensure educational funds for their new grandchild by using the Coverdell ESA. Assuming they are within the earnings limitations, which of the following would be permitted?
A) $1,000 from Pam’s parents and $1,000 from Jim’s parents into separate ESAs
B) $2,000 from Pam’s mother, $2,000 from Pam’s father, $2,000 from Jim’s mother, and $2,000 from Jim’s father
C) $2,000 from Pam’s parents and $2,000 from Jim’s parents into separate ESAs
D) $2,000 from Pam’s parents and $2,000 from Jim’s parents into a single ESA
A
Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. There’s no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000.
What is a stop order?
Becomes a market order if the stock reaches or goes through the trigger price.
Which of the following phrases best describes a prudent investor?
A) A person in a fiduciary capacity who invests in a prudent manner
B) An investment adviser representative handling a discretionary account
C) A trustee who invests with reasonable care, skill, and caution
D) The custodian for a minor under the Uniform Transfers to Minors Act
C
Although all of these may have a fiduciary responsibility; the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution.
U24LO5
What is LIBOR
It is the world’s most widely used benchmark for short term interest rates.
Eurodollars are US dollars placed in banks outside the US. The deposits remain denominated in US dollars. (EuroYen are Yen placed in banks outside Japan). European banks lend Eurodollars to other banks outside US much like US banks lend federal funds to one another. Interest rate is usually based on London Interbank Offered Rate (LIBOR).
What is systematic risk
Undiversifiable. Market risk. Risk for the stock market as a whole.
What is Capital Market Line CML?
An offshoot of CAPM (Capital Asset Pricing Model).
The CML is generally used to evaluate diversified portfolios.
The CML provides an expected return based on level of risk. It uses:
–expected return of portfolios
–risk free rate
–return on the market
–standard deviation of the market
–standard deviation of the portfolio
What kind of accounts can be TOD?
Individual, JTWROS, tenants in entirety
Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her? A) S Corporation B) Limited Partnership C) C Corporation D) General Partnership
Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.
U18LO3
An agent making a sales presentation to a client about a mutual fund’s historical returns is required to explain to the client the difference between the fund’s
A) total return and risk-adjusted return.
B) current yield and real return.
C) current yield and holding period return.
D) current yield and total return.
D
When comparing to a benchmark, it is common to show various return computations. In connection with the solicitation of investment company shares, it is considered an unfair business practice to discuss returns without fully explaining the difference between current yield and total return.
U23LO1
Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty?
A) When the account is fully funded with nondeductible contributions
B) A distribution taken to satisfy the terms of a court-ordered property settlement
C) When the distribution is paid in equal annual amounts over the owner’s life
D) A distribution taken at age 55 if the owner is retired
C
A distribution from an IRA taken in equal annual amounts over the owner’s life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.
U24LO4
What does a market maker’s quote like this mean (45 - 45.2)(8 x 10)?
Means dealer is offering 1000 shares for sale at 45.2 and is ready to buy 800 shares for sale at 45. If not stated the quote is good for a single round lot (100 shares)
A grandparent wishes to contribute funds to an account for the benefit of the college education of a grandchild. In which of the following does the donor have the greatest amount of control over the assets in the account?
A) An UGMA account
B) A Coverdell ESA
C) An UTMA account
D) A Section 529 plan
D
It is the Section 529 plan that offers the greatest amount of control to the donor. In the case of the ESA, on the IRS form used to open the account, it states: “The ‘responsible individual”’ named by the depositor shall be a parent or guardian of the designated beneficiary.” Unless we are told that the grandparent has been appointed as legal guardian, there is a lack of control. And, even then, one thing the “responsible individual” cannot do that the donor to a 529 plan can is take the money back. Although the grandparent could be named the custodian of the UGMA or UTMA account, the only authority there is to make the investment decisions and disbursements until the termination age of the account.
U24LO6
What are some common uses for derivatives?
Derivatives are generally not appropriate for highly risk-adverse investors due to the risk and sophistication involved. Some of the common uses of derivatives are for:
Hedging to reduce the impact of adverse price movements (e.g., by buying put options or selling futures contracts).
Anticipating future cash flows.
Asset allocation changes.
Income (selling options).
U20LO12
What are Eurodollars?
Eurodollars are US dollars placed in banks outside the US. The deposits remain denominated in US dollars. (EuroYen are Yen placed in banks outside Japan). European banks lend Eurodollars to other banks outside US much like US banks lend federal funds to one another. Interest rate is usually based on London Interbank Offered Rate (LIBOR).
