EXAM 1 SERIES 65 10 CARD - 3 Flashcards
A client of an investment adviser needs to have $50,000 available in 10 years to meet future expenses. If the adviser recommends a 6% bond, what would the adviser calculate the **PRESENT VALUE **to determin how much needs to be invested to meet the goal. Why?
When an investor needs to determine how much needs to be invested today in a fixed income investment to meet goals, the investor needs to calculate present value.
which of the following bonds would fluctuate the most in price when interest rates fluctuate?
1. 2 year treasury note
2. 15 year Treasury bond
3. 20 year GNMA
4. 25 YEAR FNMA
ANSWER: 25 YEAR FNMA
Bonds with the longest maturities fluctuate most in price when interest rates change. Long term bonds are riskier than short term bonds since investors have to wait longer to receiv par value
What is a 2 year Treasury note?
A 2-year Treasury note is a type of U.S. government debt security that matures in two years from its issue date. Here’s a simple explanation:
Key Features of a 2-Year Treasury Note:
Issuer:
The U.S. Department of the Treasury issues these notes.
Maturity: They have a fixed term of 2 years, meaning they will be repaid in full by the government two years after issuance.
Interest Payments:
The note pays interest to the holder every six months (semiannually) until maturity.
The interest rate is fixed at the time of issuance and does not change.
Face Value: The face value (or par value) is typically $1,000, but they can be bought in increments as small as $100.
At maturity, the face value is repaid to the investor.
Risk:
These notes are considered very low-risk investments because they are backed by the full faith and credit of the U.S. government.
Purchase:
They can be purchased directly from the U.S. Treasury through TreasuryDirect, or through banks and brokers.
Example:
If you buy a 2-year Treasury note with a face value of $1,000 and an interest rate of 2%:
You will receive $10 in interest every six months (2% annual rate divided by 2).
At the end of 2 years, you will get back the $1,000 face value.
Uses:
Investors: Typically used by investors seeking a safe and predictable return, such as for retirement savings or risk-averse portfolios.
**Diversification: **They provide a way to diversify a portfolio with a secure investment.
Benchmark: The yield on the 2-year Treasury note is often used as a benchmark for other interest rates in the economy.
What are the differences in maturity with
1. Treasury Bills (T-Bills)
2. Treasury Notes (T-Notes)
3. Treasury Bonds (T-Bonds)
The Treasury’s debt securities are generally classified into three main categories based on their maturity:
- Treasur Bills (T-Bills): Short-term securities with maturities on one year or less.
- Treasury Notes (T-Notes): Medium-term securities with maturities ranging from 1 to 10 years.
3. Treasury Bonds (T-Bonds): Long-Term securities with maturities ranging from 20 to 30 years.
Are there Penalties for redeeming Treasury securities before their maturity
Treasury Securities Types and Early Redemption
**Treasury Bills (T-Bills):
**
Maturity: Short-term securities (1 year or less).
Early Redemption: Generally, there is no provision for early redemption. They are held to maturity or sold in the secondary market if liquidity is needed.
Treasury Notes (T-Notes) and Treasury Bonds (T-Bonds):
Maturity: Medium to long-term securities (1-10 years for notes, 20-30 years for bonds).
Early Redemption: These securities can be sold in the secondary market before maturity. There is no direct penalty for selling them, but the sale price could be lower than the purchase price, especially if interest rates have risen since the bond was purchased. This could result in a capital loss.
Treasury Inflation-Protected Securities (TIPS):
Maturity: Available in 5, 10, and 30-year maturities.
**Early Redemption: **Similar to T-Notes and T-Bonds, TIPS can be sold in the secondary market. The same potential for capital loss applies if sold before maturity.
Savings Bonds (Series EE and Series I Bonds):
Minimum Holding Period: Must be held for at least 1 year.
Early Redemption Penalty: If redeemed before 5 years, there is a penalty of the last three months’ interest. After 5 years, there is no penalty.
Source: TreasuryDirect - Early Redemption
Secondary Market Considerations
Market Value: When selling Treasury securities in the secondary market, the price can fluctuate based on current interest rates and market demand. If interest rates have increased since the bond was purchased, the bond’s market value may decrease, resulting in a loss.
**Liquidity: **Treasuries are highly liquid, so they can usually be sold quickly, but the price might be lower than the face value if sold before maturity.
Summary
No Direct Penalty: For T-Bills, T-Notes, T-Bonds, and TIPS, there is no direct penalty for selling before maturity, but there is a risk of selling at a loss due to market conditions.
Savings Bonds: Early redemption of savings bonds before 5 years incurs a penalty of the last three months’ interest.
Further Reading
U.S. Department of the Treasury - Treasury Securities
Investopedia - How to Sell Your Treasury Bonds
Investopedia - Treasury Securities
By understanding these aspects, investors can make more informed decisions about whether to hold their Treasury securities to maturity or sell them in the secondary market.
A customer invests $15,000 into an equity indexed annuity with a 2% spread and a capped return of 10%. the annuity is based on the S & P 500 index. The S&P 500 has a rate of return of 15% in the first year, 7% in the second year, -4% in the third year and 10% in the fourth year. What is the valueof the annuity after the fourth year?
Answer: $18,711
An equity indexed annuity has a maximum annual return and a minimum annual return. In this example, the maximum annual return is the capped return of 10%. Further more, since there is no minimum return give, assume the minimum return is )%.
The spread is the amount of annual return below the index return that the annuity may earn. In year 1, the index return is 15%. Therefore, the spread return is 15% - 2% = 13%. however, the annual return cannot exceed the cap of 10%. Therefore, after year 1, the alue of the annuity is $15,00 x 110% (100% + 10%) = $16,500. In year 2, the index return is 7% and the sprad return is 5% (7% - 2%). Therefore, after year 2, the value of the annuity is $16,500 x 105% (100% + 5%) = $17,325. In year 3, the index return is -4%. Since the invstor cannot lose money, the value of the annuity after year 3 is still $17,325. In year 4, the index return is 10% and the spread return is 8% (10 - 2%). Therefore, after year 4, the value of the annuity is $17,325 x 108% (100 + 8%) = $18,711.
There are no income restrictions on Roth 401k plans. Why?
Since 401K plans must be available for all full time employees who have worked for the company for at least a year, Roth 401k plans do not have the income restrictions of Roth IRAs.
In participating preferred stocks, the minimum dividend is pre-determined, but the maximum dividend is not pre-determined. Why?
A participating preferred stock pays common dividends in addition to the usual preferred dividends. Therefore, the minimum dividend is determined by the issuing company, but not the maximum dividend.
If an investment adviser has discretionary accounts, the net capital requirement of the IA is $10,000. Why?
If an IA has discretinary accounts, the IA has a minimum net capital requirement of $10,000.
After an investor complets a trustee to trustee transfer from one retirement plan to another, how long must the investor wait to execute another transfer of the same funds?
Answer: There is no waiting period. Why?
Since a trustee to trustee transfer is a direct transfer of funds from one retirement plan to another, there i no waiting period to execute another transfer of the same funds.
