Exam 1 Series 65 - 16 Cards Flashcards

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1
Q

If a IAR of a SEC registered IA wishes to withdraw state registration, the IAR must notify the Adminstrator promptly.

A

It is the IAR that must notify the Administrator, not the IA. If the IA is not registered with the state, it is not the IA’s responsibility to notify the Administrator of the IAR’s desire to withdraw state registration.

However, IARs of SEC registered IAs must be registered in states where they are located when providing advice.

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2
Q

If a broker-dealer (BD) wishes to transfer its registration to a successor firm, the broker-dealer must: File applications with each state where the firm is registered.

A

If a broker-dealer wishes to transfer its registration to a successor firm where it changes its business structure or changs its name, the BD must file a registration application with each state, but is not required to pay registration fees.

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3
Q

**“TIPS” **stand for Treasury Inflation-Protected Securities. The are a type of U.S Treasury security specifically designed to protect investors from inflation. Do the coupon rates remain fixed while the par values fluctuate?

A

Yes. TIPS are Treasury Inflation Protected Securities. The coupon rates do remain fixed. However, par values do fluctuate, based on inflation adjustments that are determined by the US Government.

TIPS = fixed coupon rates + fluctuating Par Values

TIPS stands for Treasury Inflation-Protected Securities. They are a special kind of investment you can buy from the U.S. government that helps protect your money from losing value because of inflation.

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4
Q

Regarding TIPS, what is a coupon rate?

A

Think of the coupon like the interest rate on a savings account. It’s the percentage of money you get paid each year for lending you money.

For TIPS, this rate is fixed, meaning it doesn’t change over time. If the coupon rate is 1%, you get 1% of the par value (the starting amount you invested) as interest every year.

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5
Q

Regarding TIPS, what are “Par Values”?

A

“Par Value” is like the starting amount of money you invest in TIPS. if you buy $1,000 worth of TIPS, that’s your par value.

Unllike regular saving accounts, the par value of TIPS can change. It goes up when there’s inflation and can go down when there’s deflation.

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6
Q

Regarding TIPS, how does inflation adjustments work?

A

Inflaton means that prices for things you buy (like food, clothes, and gadgets) are going up. When inflation happens, the money you have can buy less stuff.

The U.S. government measures inflation using something called the Consumer Price Index (CPI) The CPI looks at the prices of a bunch of common items people buy and sees how much those prices change over time.

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7
Q

Regarding TIPS, how does adjusting Par Value work?

A

With TIPS, if the CPI shows that prices have gone up (inflation), the government increases the par value of your TIPS. So, if you started with $1000 and there was 2% inflation, your new par value would be $1,020.

If the CPI shows that prices have gone down (deflation), the government decreases the par value of your TIPS. So, if there was 1% deflation, you new par value would be $990.

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8
Q

Regarding TIPS, adjusting the par value based on inflation, TIPS help make sure that the money you get back in the future can still buy as much stuff as i could when you first invested it. This way, TIPS protect your money from losing value over time due to rising prices.

Explain how this is done:

A

Let’s say you have $1,000 in TIPS with a 1% coupon rate.

Year 1: If there’s a 2% inflation, your par value goes up to $1,020. Your intersest for the year would be 1% of $1,020, which is $10.20.

Year 2: If there’s another 3% inflation your new par value becomes $1,50.60 ($1020 plus 3% of $1020). You interest for the year would be 1% of $10,50.60, which is $10.51.

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9
Q

Income received by investors from limited partnerships is classified as Passive Income. Why?

A

Income earned from limited partnerships is typically classified as passive income.

Details: Limited partners in a partnership generally receive income that is categorized as passive income. This means they are** not actively involved** in the day-to-day operations of the business.

Passive income is a subset of unearned income that comes from activities in which the taxpayer does not materially participate.

Examples: income from rental properties, limited partnerships, and other enterpriss in which the individual s not actively involved.

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10
Q

Income received from cash dividends of stocks and interest on bonds are considered unearned income. Why?

A

Details: Cash dividends from stocks and interest income from bonds are considered unearned income. This is because they are derived from investments rather than active work.

Unearned income refers to any income that is not earned through active work or direct participation in a business. Examples: Dividends, interst, rental income, and capital gains.

Unearned Income: Broad category inbcluding all income not earned through direct work.

Passive Income: Specific type of unearned income from activies with no material participation.

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11
Q

What type of income are Interest and Dividend income?

A

Interest and Dividends are unearned income but are classified under portfolio income rather than passive income.

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12
Q

What is IRS Publication 925 (Passive Income)?

A

IRS Publication 925: Provides details on passive activity and at-risk rules, clarifying the nature of passive income

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13
Q

What is IRS Publication 550 (unearned income)?

A

IRS Publication 550: Cover investment income and expenses, detailing different types of unearned income.

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14
Q

What is “ordinary income”?

A

Ordinary income encompasses a wide range of income types that are primarily derived from active participation in employment or business activities. It is subject to standard income tax rates and includes wages, salaries, business profits, interest, and non-qualified dividends.

“Ordinary Income” is generally subject to higher tax rates compared to other types of income, such as long-term capital gains or qualified dividends (which are lower in tax rates). Ordinary income often results in having higher “penalty” in terms of tax burden.

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15
Q

What is IRS Publication 17 (ordinary income)?

A

IRS Publication 17: a comprehensive guide on the types of income considered ordinary and how they are taxed.

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16
Q

What is Tax Topic 400 (taxable and nontaxable income)?

A

IRS Tax Topic 400: This provides detailed information about taxable and nontaxable income, helping taxpayer understand what constitutes ordinary income.