Final Exam 9 Flashcards
For a person to be eligible for a Health Savings Account (HSA), he must be:
QID: 1506481Mark For Review
A
Covered under a high deductible health plan (HDHP)
B
Covered under a qualified retirement plan
C
A joint owner with his spouse
D
Enrolled in Medicare
Covered under a high deductible health plan (HDHP)
To be eligible for a Health Savings Account (HSA), a person must be covered under a high deductible health plan (HDHP), not a qualified retirement account. Also, to be eligible for an HSA, individuals cannot be enrolled in Medicare or be claimed on another person’s income taxes. Each eligible spouse must open a separate HSA, since joint HSAs are prohibited. Withdrawals taken from an HSA are tax-free if the funds are used to pay qualified medical expenses.
Which of the following statements is NOT TRUE regarding a SEP-IRA?
QID: 1507446Mark For Review
A
An employer makes contributions to an employee’s SEP-IRA.
B
An employer is not required to make annual contributions.
C
Employees are immediately vested for any contributions that are made to the account.
D
Employees are permitted to make contributions to the account.
Employees are permitted to make contributions to the account.
A simplified employee pension plan (SEP-IRA) does not allow employees to make contributions. Instead, SEPs are funded by employer contributions only and these contributions are elective (discretionary).
Which of the following must be included in a solicitor disclosure document?
The manner in which the solicitor will be paid by the registered investment adviser
The amount of the client’s fee that is related to soliciting activities
The details of the agreement between the solicitor and the registered investment adviser
The business history of the solicitor
QID: 1506494Mark For Review
A
I and III only
B
I, II, and III only
C
I, III, and IV only
D
I, II, III, and IV
I, II, and III only
Which of the following is a valuation model used to calculate the anticipated return for a portfolio of securities? QID: 1506495Mark For Review A The internal rate of return B The holding period return C The real rate of return D The expected rate of return
The expected rate of return
If an analyst wants to measure the degree to which a company or partnership is leveraged, he would calculate the:
QID: 1507433Mark For Review
A
Return on equity, which is net income / average stockholders’ equity
B
Current ratio, which is current assets / current liabilities
C
Debt-to-total capital ratio, which is debt / total capital
D
Quick asset test, which is (current assets - inventories) / current liabilities
Debt-to-total capital ratio, which is debt / total capital
The debt-to-capital and debt-to-equity ratios both measure the amount of a company’s capital that is financed with debt (i.e., its degree of leverage). The quick asset test and current ratio both measure a company’s liquidity or short-term financial health.
Under the Uniform Securities Act, which of the following is exempt from the definition of an investment adviser?
QID: 1506450Mark For Review
A
An insurance company that provides investment advice to clients for a fee
B
A company that provides investment advice to non-profit organizations and municipalities for a fee
C
A firm that solely provides advice on municipal bonds for a fee
D
A trust company that provides investment advice to trust clients for a fee
A trust company that provides investment advice to trust clients for a fee
Under the Uniform Securities Act, a trust company is exempt from the definition of an investment adviser. The other persons that are exempt from the definition include:
- Banks and/or savings institutions
- Lawyers, accountants, teachers, and engineers (remember L,A,T,E) whose advice is incidental to their profession
- Broker-dealers whose advisory services are incidental to their business
- Bona fide publishers
- Federal covered advisers
- Any other person that is designated by the Administrator
A firm that provides advice about securities (even if they are municipal bonds) for a fee is considered an investment adviser.
Registration of a security in a state is not required for ALL of the following reasons, EXCEPT:
QID: 1507447Mark For Review
A
The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933
B
The security is offered in an exempt transaction
C
The security is exempt
D
The instrument does not meet the definition of a security
The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933
Under the Uniform Securities Act, a security is not required to be registered if:
- The security is exempt; or
- The security is non-exempt, but is being offered in an exempt transaction; or
- The security is a federal covered security; or
- The instrument does not meet the definition of a security
Whether a security has been registered with the SEC (under the Securities Act of 1933) has no bearing on the state registration requirement.
What's the best way to hedge a long stock position? QID: 1506452Mark For Review A Buy a put option B Sell a call option C Buy a call option D Take a long futures position
Buy a put option
An investor is in the 20% marginal tax bracket and has a yield of 10% on a portfolio. If the CPI is 5%, what's the investor's after-tax inflation-adjusted return? QID: 1506458Mark For Review A 4% B 9.5% C 8% D 2.86%
2.86%
The first step is to adjust the investor’s yield for taxes. The formula for finding After-Tax Yield is: Nominal Yield x (100% - Tax Rate%). In this case, the investor’s after-tax yield equals 8% [10% x (100% - 20%)]. The next step is to adjust the after-tax yield of 8% for inflation. The formula for finding Inflation-Adjusted Return is: [(1 + After-Tax Yield) ÷ (1 + Inflation Rate)] - 1. For this question, the inflation-adjusted return equals 2.86% [(1 + .08) ÷ (1 + .05)] - 1. An alternative method for calculating the inflation-adjusted return is: After-Tax Return - Inflation Rate, which equals 3% (8% - 5%). Obviously, this method is not as precise, but it’s a more simple calculation. For exam purposes, it may be helpful to be prepared to calculate it using both methods to definitively find the correct answer. Returns that are adjusted for inflation are also referred to as “real returns”.
Which of the following statements is FALSE about universal life insurance policies?
QID: 1507425Mark For Review
A
Premiums are always invested in a separate account of the insurance company
B
Cash values may vary based on interest-rate fluctuation
C
Policyholders may not choose how premiums are invested
D
Premiums may fluctuate
Premiums are always invested in a separate account of the insurance company
In universal life insurance policies, all premiums are deposited in the insurance company’s general account. Variable policies/contracts use a separate account. Universal policies also have flexible premiums that may be increased or decreased over the life of the policy. While universal policies may have a guaranteed minimum rate of return, the return may fluctuate above the minimum.
What main characteristic qualifies an American-style equity option to be described as a derivative security?
QID: 1506470Mark For Review
A
Its pricing is based solely on its time value
B
As consistent with many other derivatives, it is risky
C
Its value is based on the valuation of another asset
D
It may be exercised at the owner’s discretion
Its value is based on the valuation of another asset
Derivative contracts (e.g., options) obtain their value from the price/value of an underlying asset. Derivatives are often priced based on both intrinsic and time value. Futures and swaps are types of derivatives whose owners have no exercise rights. Simply being risky does not qualify a security as a derivative. American-style options are able to be exercised by the owner at any time prior to its expiration. However, European-style options may only be exercised by the owner on the last trading day prior to expiration.
Which of the following is the BEST hedging strategy if a client is long 1,000 shares at $42? QID: 1506499Mark For Review A Short 45 puts B Long 40 puts C Short 40 calls D Long 45 calls
Long 40 puts
Which of the following statements is TRUE about ETNs?
QID: 1506504Mark For Review
A
ETNs are unsecured bonds and investors are secured creditors if the issuer declares bankruptcy.
B
ETNs may lose value even if the underlying index remains stable.
C
ETNs are suitable for investors who want to capture long-term growth.
D
Similar to ETFs, ETNs are suitable for passive investors.
ETNs may lose value even if the underlying index remains stable.
Unlike an ETF which is backed by an independent pool of securities, an ETN is an unsecured bond that’s issued by a financial institution. That company promises to pay ETN holders the return on some index over a certain period and return the principal of the investment at maturity. However, if something happens to the issuing company (e.g., bankruptcy) and it’s unable to make good on its promise to pay, ETN holders could be left with a worthless investment.
Which of the following would NOT be an important consideration when conducting a capital needs assessment for a client?
QID: 1506448Mark For Review
A
The rate of inflation
B
The client’s future anticipated earnings
C
The client’s life expectancy and retirement needs
D
The amount of anticipated volatility in the marketplace
The amount of anticipated volatility in the marketplace
A capital needs assessment analyzes a client’s future goals and needs. Retirement planning, college funding, and the risk of death before meeting a savings goal are all considered. A client’s life expectancy, the rate of inflation, and her earnings will all affect the capital needs assessment. Market volatility may influence the securities on which recommendations are based, but not the capital needs assessment.
An agent solicits the purchase of MPH, Inc, a nonexempt, unregistered security. The agent requests the client sign a document, acknowledging the security’s status. The document also includes an exculpatory provision absolving the agent and the broker-dealer from any liability or wrongdoing. The waiver the client signed is:
QID: 1507440Mark For Review
A
Acceptable
B
Acceptable with the Administrator’s approval
C
Null and void
D
Subject to civil liability and criminal penalty
Null and void
Agents must not solicit nonexempt, unregistered securities nor should they request a client sign documents absolving the agent or broker-dealer from wrongdoing. Such statements are sometimes called exculpatory clauses and are prohibited. These documents would be null and void under the Uniform Securities Act.
