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Final Review Flashcards

1
Q

What must a 303 stock redemption be used for, and how much of the estate must be comprised of the closely held stock?

A

It must be used to pay for estate taxes, administration, and funeral costs . The stock must compromise 35% of the AGE.

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2
Q

Do IRD assets step up their basis?

A

No

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3
Q

What is the difference between abatement and ademption?

A

Abatement means a reduction in a bequest, and ademption is the elimination of the asset in a bequest

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4
Q

What is the amount of tax due above $1m for an estate?

A

$345,800 plus 40% over $1m

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5
Q

Between 706 and 709, which is death and which is gift?

A

Death is 706, gift is 709

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6
Q

What are the exceptions to AVD?

A

Wasting assets (annuities, patents, notes)
Assets disposed of between death and AVD (use disposal value)

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7
Q

Is unpaid debt on an installment note treated as a capital asset or IRD? In the estate

A

IRD

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8
Q

Is a SCIN or private annuity interest deductible?

A

SCIN

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9
Q

Are split gifts required to file a gift tax return?

A

Yes, that year

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10
Q

Where do gifts get included in the estate formula?

A

Taken from taxable estate to equal tentative tax base

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11
Q

Besides the estate tax credits what other credits are there?

A

Estate taxes paid within the last 10 years, and tax paid on property outside the US

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12
Q

What will cause an ILIT to be included in the gross estate?

A

If it is required to pay proceeds for estate taxes or administrative expenses

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13
Q

What part of a net gift is taxable to the donor?

A

Any gift tax paid that exceeds the donor’s basis

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14
Q

What are the broad named perils?

A

Falling objects
Accidental overflow of water
Sudden bursting of appliances
Freezing of appliances or system
Weight of ice, snow, sleet
Damage from electrical current

FASFWD

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15
Q

What are typically excluded in an open peril policy?

A

Flood, earthquake, neglect (termite damage), ordinance, intentional act, war or nuclear hazard, power failure

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16
Q

What is the waiting period for flood insurance?

A

30 days

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17
Q

What are the exclusions from part B (medical payments) on auto policy?

What about part C (uninsured motorists)?

A

Public livery, auto used without permission, racing

Public livery, auto used without permission, regular use of a non-owned auto, auto used in business

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18
Q

What’s covered under pard D collision?

A

Accident involving another car, running off the road, into creek, lake, tree, or wall

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19
Q

What’s covered under pard D comprehensive?

A

Falling objects, fire, theft, explosion, earthquake, windstorm, water, flood, mischief, vandalism, riot, contact with bird or animal, breakage of glass

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20
Q

What is the Ss definition of disability?

A

Expected to last 12 months or result in death AND cannot perform duties of ANY occupation

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21
Q

Who auto qualifies for Medicare besides people 65 and older?

A

Receiving SS disability for 2 years
End stage renal failure
Spouses based on other spouses work tecord

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22
Q

How many quarters of coverage must a worker have to be fully insured?

A

40, $1640 per quarter

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23
Q

What are the disability coverage requirements for SS/medicare?

A

Age 31, fully insured, and earned 20 quarters in the last 40

Age 24-31: half of calendar quarters since age 21

Age 21-24: 6 quarters earned

Currently insured has no spousal benefit

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24
Q

What is the beneficiary coverage for a fully insured retired individual?

A

50% for all except dependent parent at 0%

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25
Q

What is the beneficiary coverage for a fully insured deceased individual?

A

75% for child under 18, spouse with child under 16, and dependent parent

100% for spouse at FRA

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26
Q

What are the SS temporary reduction in benefits?

A

Early: Reduced $1 for every $2 earned above $21,240

FRA: $1 for every $3 above $56,520

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27
Q

How are SS benefits taxed?

A

Thresholds are based on combined income: AGI, municipal interest, half of SS benefit

32/44, 0%, 50%, 85%

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28
Q

What doesn’t Medicare part a cover?

A

Custodial services

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29
Q

How do benefit periods work for Medicare part A?

A

Deductible of $1600
$0 per day 1-60
$400 day 61-90
$800 day 91-150
(Amounts just double)

Unless skilled nursing care
$0 per day 1-20
$200 day 21-100

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30
Q

What doesn’t Medicare part B cover?

A

Dental, hearing, vision, cosmetic, routine exams

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31
Q

What are the Medicare part B costs?

A

Premiums are $164.9 (deducted from SS)
Deductible is $226 per year
After deductible Part B covers 80%

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32
Q

How does applying for Medicare work?

A

Auto enrollment if receiving Ss at 65, otherwise must enroll

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33
Q

What are the parts of a PAP?

A

A: liability
B: medical payments to others
C: uninsured motorists
D: damage to your auto
E: duties after an accident
F: general provisions

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34
Q

What are the parts of HOI?

A

Section 1
A. Dwelling
B. Other structures
C. Personal property
D. Loss of use

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35
Q

Are Ss survivor benefits available to divorced spouse?

A

Yes, If marriage lasted 10 years, and surviving spouse has not remarried

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36
Q

How does MOODYS and how does AMBEST rate insurance?

A

MOODYS Aaa Aa1
AMBEST A++ to A/A- (whole letters)

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37
Q

What is the difference between VUL and VL?

A

VUL is flexible premium subject to a minimum, VL is a fixed premim

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38
Q

Does the insurer or the insured direct the investments on a universal life?

A

Insurer

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39
Q

How many employees are required for ACA and how many for COBRA?

A

50, 20

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40
Q

What is the primary difference between PPO and HMO?

A

PPO uses a network (allows for out of network for increased cost)

HMO has a program (in-network only but cheaper than PPO)

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41
Q

What is the penalty for ACA non-compliance?

A

0$ since TCJA

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42
Q

What is the maximum benefit period for short term disability?

A

2 years

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43
Q

For loss of use on HOI, is rental income replaced?

A

Yes

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44
Q

How are qualified LTC premiums and benefits taxed?

A

Premiums are tax deductible (counts towards medical deduction under itemization, with a max deduction of $5960 for age >70)

Benefits are tax free

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45
Q

What makes LTC qualified?

A

No surrender value
Limited to LTC services
Uses dividends to reduce future premiums or increase benefits
Meets consumer protection laws
Does not pay for expenses covered under Medicare

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46
Q

Are key person and split dollar insurance premiums deductible?

A

No, but their proceeds are tax free

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47
Q

If an employee pays disability premiums with pre-tax dollars (cafeteria plan), are benefits taxed?

A

Yes

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48
Q

What is the coverage for personal property?
Is it covered if the property isn’t located on premises?
Is it typically ACV or RV?

A

50%
Yes
ACV

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49
Q

How does an independent agent differ from general agents?

A

Indie agent represents multiple, unrelated insurers rather than one insurer

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50
Q

What is modified any occ and split definition?

A

Modified any occ considers the insured disabled if unable to perform duties of gainful occupation they’re reasonably fitted by education, experience, training, etc.

Split definition begins with own occ and moves into modified any

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51
Q

What is the difference between the human life value approach, the capital needs approach, and the capital retention?

A

Capital retention uses capital as income generator, not to be invaded

Human life value takes amount of income earned, less amount consumed by the insured

Capital needs approach takes income needs, education, and retirement funding

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52
Q

What is the exclusion ratio?

A

Basis / total payments

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53
Q

What is the formula for IRA phaseout?

A

[AGI - lower range] / total range of phaseout

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54
Q

What is the coinsurance formula?

A

[ (amount of coverage purchased / coninsurance) x loss ] - deductible

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55
Q

What are the rules for in-service withdrawals for DB and DC plans?

A

DB plans: not available until 59.5
DC plans: available after 2 years of participation

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56
Q

How much employer securities can be in a DB plan?

A

10%

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57
Q

How do forfeitures work for DB and DC plans?

A

DC plans can reduce future costs or allocate them to other participants

DB plans can ONLY reduce future costs

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58
Q

When is a DB plan not subject to PBGC?

A

If the firm has less than 25 employees

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59
Q

Can credit be given for prior service for DC plans?

A

No

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60
Q

How are payroll taxes handled for contributions to plans?

A

Exempt for ER, not EE

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61
Q

What are the lump sum distribution options?

A

NUA
Pre-74
10 year averaging

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62
Q

What are the general eligibility rules for qualified plans?

A

21 and 1
OR 2 years of service and 100% immediate vesting (this special rule does not apply to 401k)

Beginning in 2024, employees with 3 years of 500 hours each are eligible to participate in 401k

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63
Q

What are the rules for coverage testing?
Who can they exclude?
What tests are there and which must be passed?

A

Can exclude ineligible employees, nonresident aliens that don’t perform services in the US, union employees

Both DB and DC must pass one of:
Safe harbor (NHC > 70%)
Ratio/AB test (% NHC covered / % HC covered > 70%)
DB must also pass 50/40 test
(People come first)

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64
Q

What are the vesting schedules?

A

DC plans use 2-6 year graduated, 3 year Cliff
DB plans use 3-7 year graduated, 5 year Cliff
Cash balance plans use 3 year Cliff

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65
Q

How is a plan determined to be too heavy and what is done to correct it?

A

If >60% of the benefits are going to KE it is top heavy

If DC must contribute 3% to NKE
If DB must contribute 2% and upgrade vesting schedule

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66
Q

What’s the difference between a KE and an HCE?

A

Key employee
5% owner
1% owner greater than $150k salary
Officer greater than $215k salary

Highly compensated employee
5% owner
$150k in salary

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67
Q

What are the plan contribution limits for both DB and DC, and what do they consist of?

A

DC: $330k; lesser of $66k or 100% of employee’s compensation

Contribution consists of EE, ER, and forfeitures (excludes catch up contributions)

DB: lesser of $265k or average 3 highest salary years

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68
Q

Which plans require an actuary?

A

Defined benefit pension plan and cash balance plans require an annual actuary

Target benefit requires an actuary at inception

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69
Q

How does integration work?
Which methods can DC and DB use?
Which plans cannot use integration?
What is the excess formula and what is the max?

A

Both DC and DB can use excess method: excess benefit to those earning more than the SS threshold

ONLY DB can use offset method: reduces benefit to those earning less than the SS threshold

ESOP and CODA cannot use integration

Formula is lesser of 2x contribution or 5.7% plus contribution, to a max of 26.25%

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70
Q

What are the features of the pension plan contributions?

A

Defined benefit pension plan: uses flat amount, flat percent, or unit credit

Cash balance: uses annual guaranteed contribution rate and guaranteed earnings, quasi-separate accounts with hypothetical benefits, 3 year Cliff vesting

Money purchase: mandatory annual funding of a fixed percentage up to 25%

Target benefit: special type of money purchase, contributions based on age

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71
Q

What does noncontributory mean in context of profit sharing plans?

A

It means the only contributions are from ER not EE

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72
Q

What are some characteristics of profit sharing plans?

A

Contributions must be non discriminatory, discretionary, do not require a profit, and must be made by ER tax filing due date, and are limited to 25% of ER covered compensation

Any profit sharing can have a CODA attached

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73
Q

Which plans require ADP/ACP testing?
what are the required limits?
What happens if out of line?
What can a plan do to avoid testing?

A

CODA/401k

HCE limited to 0-2% then 2x, 2-8% then 2% + ACP, 8%+ then 1.25x

If out of line: corrective distribution, Recharacterization, qualified non elective contributions, qualified matching contributions

To avoid testing, become safe harbor: 100% vesting at all times, and non-elective contributions of 3% OR matching (100% of 3% and 50% of 3-5%)

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74
Q

What is the advantage of a stock bonus plan to the ER and to the EE?

A

There’s a tax deduction to the ER of the FMV

EE can take NUA distribution: OI for contribution, LTCG for difference (LT regardless of holding period), 10% penalty if applicable

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75
Q

What are the ESOP characteristics?
Are there tax advantages to ER or EE?
How do voting rights and dividends work?
What distribution options are there?

A

ER gets a tax deduction for contributions of cash or stock, subject to 25% rule

EE can defer gains if proceeds from sale are reinvested within 12 months

Participants have voting rights and can receive dividends

Dividends paid are also deductible to ER

Distribution options: NUA, SEPP of 5 years, EE can demand a distribution but ER can limit the amount, EE can demand a put option from ER at distribution

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76
Q

What are the diversification requirements for qualified plans?
What is a qualified participant?
What is the qualified period?
What are the amounts of diversification required?
What is it satisfied by?

A

Qualified participant can force diversification during the qualified period

Qualified participant: 10 years of plan participation, 55 or older

Qualified period: 6 year period after becoming a qualified participant

May diversify 25% during first 5 years, 50% during sixth and final year

Satisfied by: distribution, transfer, or offering 3 or more investment choices

Satisfied by:

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77
Q

What are the limits for plan loans?
How do repayments work?

A

Allowed with any qualified plan but usually found in CODA plans

Limited to the lesser of $50k ($100k if disaster) or half balance, reduced by the highest outstanding loan within the last 12 months

If balance is <$20k, limited to the lesser of $10k or total balance

Repayments must be paid quarterly and paid back within 5 years (30 if used to purchase primary residence)

Failure to pay causes income recognition, possibly 10% penalty

Terminated employees forced to repay balance or rollover by tax filing date plus extensions

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78
Q

How do SEPP distributions work?

A

They must be made annually for the remainder of life (or lives)

Use RMD, fixed annuity, or fixed amortization schedule

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79
Q

Can a QDRO override plan rules?

A

No (ex. Demanding NUA when it isn’t an option)

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80
Q

Can RMDs be postponed if continuing to work past RMD age?

A

Yes, but not on IRA or IRA-based plans

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81
Q

What are the types of IRA beneficiaries and what are their rules?

A

Eligible designated: spouse (can roll into their IRA), minor child (becomes designated at age of majority), disabled/terminally ill person, someone not younger than 10 years can all distribute over their lifetime beginning in the year of death

Designated: must be paid out within 10 years

Non-designated: after RMD take owner RMD, before RMD must be paid out within 5 years

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82
Q

What is earned income for IRA purposes?
What is the excess contribution penalty?
Who is considered an active participant for deductibility purposes?
What is the withdrawal ratio?
What investments aren’t permitted?

A

W2, schedule c, general partnership, alimony

6%, but 10% penalty waived if corrected

DC receiving ANY contributions or DB participating or meeting eligibility

Basis before withdrawal / FMV at withdrawal

Life insurance, collectibles, non-bullion’s coins

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83
Q

What are the distribution allowances for BOTH IRA and qualified plan?

A

Death, disability, terminal illness
SEPP (72t)
Medical expenses (7.5% floor)
Federally declared disaster
Adoption of child ($5k)

84
Q

What is the withdrawal allowance for ONLY qualified plans?

A

QDRO
Age 55 and separation of service
Age 50 and separation of public service (25 years, fire fighter or corrections or safety)

85
Q

What are the withdrawal allowances for ONLY IRAs?

A

Higher education expenses
First time home purchase ($10k)
Health insurance premiums for unemployed

86
Q

What are the requirements and characteristics of a SEP?

A

21, 3 of 5 years, $750 in comp

Employer funded only, uses DC contribution limits, employees are 100% vested, withdrawals are treated with IRA rules, Roth can be elected

Must notify employees with form 5305, set up an account for each eligible employee, and give notice

87
Q

What are the requirements and characteristics of a SIMPLE?

A

100 or less employees earning $5k or more

Can elect Roth, employees are 100% vested, must provide participants either 60 day notice to elect deferral, must be calendar year plans must provide participants with form 5304 or 5305, uses IRA rules but penalty is 25% instead of 10% in the first 2 years

Employee deferrals: $15500, $3500 catch up
Employer contribution: 3% matching OR 2% non-elective contribution

88
Q

What are the characteristics of a TSA?

A

Tax exempt organization (503c), public school, or educational organization

Contribution limit same as and combined with other CODA plans

Catch up contribution of $15k ($3k per year) permitted if 15 years of employment in a HER: means that 22.5, 7.5, and 3 can all go in in one year

Funds must either be invested in mutual funds or annuity

Distributions follow penalty rules of qualified plans

89
Q

What are the characteristics of a 457b public vs. private?

A

Public: government employer, protected by trust, additional 3 years prior to retirement allowed an additional 22.5k contribution for a total of $43k

Private: 501c employer, not protected by trust, catch up not available

90
Q

What are the rules and taxation of an ISO?

A

Less than $100k, must be held 2 years from date of grant, 1 year from date of exercise

No tax at date of grant, no tax at date of exercise (positive AMT adjustment), LTCG at date of sale (negative AMT adjustment)

91
Q

How is an NQSO taxed?

A

None at date of grant, W2 income for appreciation above exercise at date of exercise, CG/CL at date of sale with holding period based on exercise date

92
Q

What are the two questions you should ask when considering property?

A
  1. Is the property for personal use, business, or held for investment/production of income?
  2. Is the property a capital asset, an ordinary income asset, or a section 1231 asset?
93
Q

What are the rules for section 1244?

A

Can deduct $50k/$100k of small business stock if
Less than $1m capitalization
The stock represents ownership in a domestic corporation and
The loss was sustained by the original owner

94
Q

Describe section 1033

A

Deferral of gain due to involuntary conversion

Time period starts at date of realization, 2 years from end of that year (3 if condemned realty)

Whatever isn’t reinvested must be recognized

95
Q

What’s the difference between cash basis and accrual basis?

A

Cash basis taxpayers recognize tax when payment is received (readily available with no limitation or restriction)

Accrual basis recognize tax when it is earned

96
Q

What are the SS hurdles, and what income are they based on?

A

32 and 44 (0 if MFS), 50% taxed and 85% taxed

Income is based on MAGI + half of SS benefit

97
Q

What are the rules for below market rate loans?

A

0-10 no Imputed interest
10-100 if NII <$1k no Imputed interest
10-100 if NII >$1k imputed interest is greater of NII or AFR interest less market rate interest
100+ imputed interest is greater of NII or AFR interest less market rate interest

98
Q

What is excluded from gross income?

A

Life insurance
Gifts and inheritance
Scholarships (tuitions, fees, books)
Gain on sale of personal residence
Qualifying Roth distributions
Compensation for sickness/injury
Certain employees benefits
Muni interest
Discharge of indebtedness in bankruptcy

99
Q

What are the exempt employee benefits?

A

Meal and lodging furnished for the benefit of the employer (must be condition of employment)
Medical insurance
Life insurance (up to $50k)
Athletic facilities
Educational assistance ($5250)
FSA ($3050)
Dependent care ($5k)
No additional cost services
Employee discounts (20% for services, profit % for products)
De minimus fringe benefits

100
Q

What are the rules for personal residency gain exclusion?

A

Must not have used the exclusion in the prior 2 years
Must own and use home as primary for 2 of last 5 years (if MFJ, only one must own)

If partial and meets exception:
Number of months met / 24 x sale = exclusion

101
Q

What are the deductions FOR AGI?

A

Deductions from Rental and royalty properties
Deductions from loss of sale or exchange of property
Self employment deductions: half SE tax, health insurance premiums
Contributions to HSA, qualified plans, IRAs, etc.
Penalty on premature distribution of time deposit
Student loan interest ($2500 and phased out)
Trade or business expenses
Pre-2019 alimony

102
Q

What are the rules for trade/business deductions?

A

Must be ordinary, reasonable, necessary
Business gifts are limited to $25
Entertainment expenses are not deductible except for 50% of meals

103
Q

What are the rules for alimony payment exclusion?

A

Must be for a divorce prior to 2019
Must not extend beyond the death of the payee
Does not include property settlement of the divorce

104
Q

What are the deductions FROM AGI?

A

Itemized or standard deduction
QBI

If itemized:
Charitable contributions
Medical deductions (7.5% floor)
Casualty losses
Misc.
Interest expenses (mortgage and investment)
SALT ($10k)

105
Q

What are the personal casualty deduction rules?

A

Only available in relation to a federally declared disaster

Must be sudden and unexpected

Loss must be greater than 10% AGI floor, lesser of decline in FMV or basis, less $100 per incident

106
Q

What are the miscellaneous deductions?

A

Gambling losses to the extent of winnings
IRD
Annuity losses for decedent annuitant
Impairment related work expenses for handicapped

Those subject to the 2% floor no longer deductible

107
Q

What are the interest deduction rules?

A

Investments: deductible to the extent of NII, not including qualified dividends and LTCG

Mortgage: up to $1m in indebtedness (on up to two residences) prior to 2017, up to $750k after 2017
No home equity deductible unless used to improve home

108
Q

What are the charitable deduction rules?

A

% = income cap, NOT cap on property deduction

LT property (excluding unrelated use): either 30% FMV or 50% basis
Cash: 60%
Everything else: lesser of FMV or basis 50%

For private: ALL LT is 20%, everything else is 30%

109
Q

What are the qualifying child and qualifying relative credit amounts?

A

Child: $2k, $1600 is refundable

Relative: $500 nonrefundable

110
Q

What is a qualifying child?

A

Relationship (not cousin), abode, support, age (<19 or <24 and student)

111
Q

What is a qualifying relative?

A

Relationship/HH member (not cousin unless living with you)
Support
Income (<$4700)
Not a qualifying child

112
Q

What are the rules for the adoption credit?

A

$15950, phased out between $239230-279230
Non refundable but can carry forward 5 years
Child below 18, or handicapped

113
Q

What are the child dependent care credit rules?

A

20% of expenses up to 3/6k OR income of lower earning spouse (remember: 3k OF EXPENSES NOT CREDIT)

Child under 13, or spouse or dependent with handicap

Utilizing dependent care FSA is usually more efficient than this credit

114
Q

What are the kiddie tax rules?

A

Dependent children < 19, or < 24 and student
Unearned income >2500 taxed at parent rate
Unearned income 1250-2500 taxed at child rate
Earned income above standard deduction taxed at child rate

Standard deduction = greater of 1250 or earned income + 400 up to ordinary standard deduction

115
Q

What are the AMT adjustments?

A

ISO exercise/sale
SALT
Standard deduction if itemization not used
Accelerated depreciation

116
Q

What are the AMT preference items?

A

PAB
intangible drilling costs
Percentage depletion

117
Q

What are the hobby rules?

A

Must have no profit 3/5 years
If deemed hobby, can’t deduct losses

118
Q

What are the QBI rules?

A

20% deduction of pass through income entities
Limited to service-based businesses

119
Q

What are the section 179 rules?

A

Used for first year property is placed in service for immediate expensing up to the lesser of PPS value, taxable income, or 1.16m

Applies before MACRS

120
Q

What are the deductible medical expenses?

A

Nursing home or special school
Travel and lodging
Capital improvements for impairment
Prescription drugs (NOT OTC)
After tax health insurance premiums

121
Q

What are the rules if you own property and rent it out?

A

Do you have less than 15 rental days? If yes, considered personal use. If no, do you stay in it more or less than you rent it? Depending, can be either rental use or mixed used.

PEROSNAL USE: if you rent it for less than 15 days, income is not taxable, expenses are not deductible, and mortgage interest and taxes are deductible as though it’s personal residence

RENTAL USE: if you rent it for more than 14 days, use it personally for less than the greater of 14 days or 10% of rental days, you have to include income, can deduct expenses ($25k rule) but not mortgage interest or taxes

MIXED USE: if you rent it for more than 14 days, use it personally for more than the greater of 14 days or 10% of rental days, you have to include income, can’t deduct expenses, but can deduct mortgage interest and taxes

122
Q

How does netting work?

A

If multiple positive net gains, each gets taxed at their corresponding rate.

If ST losses are greater, net against LT from highest to lowest (collectibles, depreciation, LT), then take $3k against income and carry over the rest

If LT losses are greater, net against LT from highest to lowest (collectibles, depreciation), then net against ST, then take $3k against income and carry over the rest

Remaining loss (carry over) retains LT or ST characteristic

123
Q

How do passive losses and at risk losses work?

A

Passive losses can only offset passive gains (can’t be deducted against portfolio or active income)

Public LPs like MLPs can’t mix, they can only offset themselves

Material participation: greater than 500 hours or 100 hours and the most of all participants

Suspended losses from at risk activity is not deductible until at risk amount is positive from additions or income, or until property is disposed of

If real estate is actively managed, can deduct $25k from income subject to a phaseout of $1 for every $2 AGI that exceeds $100k

Rental activities are deemed passive even if materially participating

124
Q

Are losses allowed on personal use property?

A

No, only capital gains

125
Q

How long is a long term holding period?

A

One year and one day

126
Q

Who is not related in a related party transaction?

A

Cousin, aunt/uncle, in-laws

127
Q

What is the formula for appreciated property with gift tax paid?

A

[Appreciation / taxable gift ] x gift tax paid

128
Q

What is the length of time for a wash sale?

A

Day of, 30 before and after for a total of 61

129
Q

What happens to dividends that are paid to a short seller?

A

They must be paid out to whoever holds the security

130
Q

Explain value line vs Morningstar

A

VL ranks individual stocks on a scale of 1-5, 1 being the highest rating, whereas MS ranks mutual funds on a 1-5 scale with 5 being the highest

131
Q

How are qualified dividends taxed, how long must they be held, and by what point do you have to own the stock to receive a dividend?

A

Qualified dividends are taxed at capital gains rates (stock dividends are not taxable to the shareholder)

They must be held for greater than 60 days during the 121 day period before the ex-dividend date

Must own the stock 2 business days before the date of record

132
Q

What are the basic features of SA33, SA34, IA40, and SIPC?

A

SA33: governs issuance of securities
SA34: governs secondary market and trading of securities and created the SEC
IA40: gave the SEC the power to govern investment companies
SIPC: insures losses against broker failures, $500k including $250k in cash

133
Q

What are the money market securities?

A

T bills: denominated in $100, maturity of <1 year
CDs
Commercial paper: denominated in $100k, maturity of <270 days
Bankers acceptance: facilitates imports/exports
Eurodollars

134
Q

What does the investment policy statement cover?

A

Establishes client objectives, limitations on investment manager, and is used to measure performance. Does NOT include investment selection.

Return requirements
Risk tolerance
Time horizon
Taxes
Liquidity
Laws and regulations
Unique circumstances

RRTTLLU

135
Q

Between the Dow and SP500, which is price weighted, which is value weighted, and what does that mean?

A

Dow is price weighted, meaning the trading price is based on the trading prices of all the individual securities that make up the index

SP500 is value weighted, meaning the number of shares outstanding is multiplied by the per share price

136
Q

What is the standard deviation bell curve?

A

+/-1 SD = 68%
+/-2 SD = 95%
+/-3 SD = 99%

137
Q

Describe coefficient of variation

A

CV = SD / average return

Useful when comparing two assets with different returns

The higher it is, the more risk was taken per unit of return

138
Q

Describe correlation

A

p = COV / (SD1)(SD2)

p is also r, which can be squared to create r squared, the coefficient of determination

Correlation and covariance are both measures of interactive risk

Ranges from +1 to -1. Anything less than +1 begins receiving the benefits of diversification. 0 = completely uncorrelated

139
Q

What are the systematic and unsystematic risks?

A

PRIME and ABCDEFG

Purchasing power
Reinvestment
Interest rate
Market
Exchange rate

Accounting
Business*
Country*
Default*
Executive
Financial*
Government/regulation*

140
Q

What is the efficient frontier?
Can an investor achieve returns above it?
What is the indifference curve?

A

The efficient frontier is the curve that represents the best possible returns that could be expected from all possible portfolios, meaning that returns cannot be achieved above it

The indifference curve is constructed using selections made based on the highest level of return given an acceptable risk

141
Q

What is the relationship between CAPM and SML? How is anything above the SML valued? What is CAPM used for?

A

CAPM is depicted graphically by the SML. Anything above the SML is considered undervalued and should be bought. CAPM is used to determine expected return.

142
Q

How can you calculate portfolio devotion without using the full formula?

A

Average the deviation between securities, then eliminate any answers equal to or greater than the result

143
Q

What should you use the sharpe ratio for?

A

If the exam doesn’t give you r squared

144
Q

Describe the arbitrage pricing theory

A

APT attempts to take advantage of pricing imbalances using a multi factor model

It uses returns and inflation as inputs, but not beta or standard deviation

145
Q

What is the HPR formula?

A

[Selling price - purchase price +/- cash flows] / purchase price

146
Q

Do mutual funds report on a time weighted basis or a dollar weighted basis?

A

Time weighted

147
Q

Describe the relationship between dividend discount model, required rate of return, and stock price

A

If RROR increases, the stock price will decrease
If RROR decreases, the stock price will increase
If the dividend is expected to increase, the stock price will increase
If the dividend is expected to decrease, the stock price will decrease

148
Q

What are the features of series EE, H, I bonds, and TIPS?

A

Series EE: non marketable, do not pay periodic interest
Series H: does pay periodic interest
Series I: does pay periodic interest
TIPS: principal adjusts for inflation

149
Q

Which mortgage agency is backed by the full faith and credit of the US government?

A

GNMA

150
Q

What are the CMO tranches?

A

They go from A-Z, with investors in tranch A receiving principal before those in tranch Z

151
Q

What is the current yield formula?

A

Payment / current price

152
Q

Describe duration and identify the variables Y, C, T in the formula

A

The weighted average time until an investor receives all coupon payments and principal

The higher the duration, the more price sensitive the bond is to interest rate changes

The longer the maturity, the higher the duration
The higher the coupon, the shorter the duration

Zero coupon bond always has duration equal to its maturity

Y = YTM of the bond
c = coupon of the bond
T = number of periods to maturity

153
Q

What are the features of closed end funds?

A

They have a fixed market cap, meaning they can trade at a discount or premium to NAV

Shares trade on an organized exchange

154
Q

What are features of a REIT?

A

Trade similarly to closed end funds

Must pay out 90% of income for tax exempt status

155
Q

What are the features of ADRs?

A

Represent foreign stock held in a domestic bank’s foreign branch

Trade in USD, on domestic exchanges, and pay dividends in USD

DO NOT diversify against exchange risk

156
Q

What are some option features?
Call and put IV
Straddles
Time value

A

Call IV ; stock price - strike price
Put iv: strike price - stock price
Time value: premium - IV
Long straddle: buy a call and a put if expecting volatility
Short straddle: sell a call and a put for premium income

157
Q

What are the options pricing models?

A

Black/Scholes, binomial pricing, call/put parity

158
Q

What are the variables in the Black/Scholes pricing model?

A

Current price
Time until expiration
Risk free rate
Volatility
Strike price

Call price increases when all of these do except strike price

159
Q

What are warrants?

A

Call options issued by the corporation
Not standardized like options
Can last 5-10 years instead of 9 months

160
Q

What is an example of an OID?

A

Zero coupon bond

Original issue discount: no tax at maturity will be owed because they’ve been paying phantom tax along the way

161
Q

What is the conversion value formula?

A

[Par / conversion price] x Stock price

162
Q

What is the dividend payout ratio?

A

Dividend / EPS

163
Q

What is the formula for ROE?

A

EPS / Stockholders Equity

164
Q

What is the dividend yield formula?

A

Dividend per share / stock price

165
Q

What is the expected price per share formula?

A

EPS x P/E multiplier

166
Q

When someone sells a bond with accrued interest, what happens?

A

Buyer pays seller for accrued interest since last coupon payment, receives 1099 but is entitled to a deduction for the accrued interest paid

167
Q

What are the 6 rules in the code of ethics?

A
  1. Act with honesty, integrity, competence, and diligence
  2. Act in the client’s best interest
  3. Exercise due care
  4. Avoid or disclose and manage conflicts of interest
  5. Maintain confidentiality and protect the privacy of client information
  6. Act in a manner that reflects positively on the financial planning profession and CFP certification
168
Q

What are the 6 standards of conduct?

A

A. Duties owed to the client
B. Financial planning and application of the practice standards for the financial planning process
C. Practice standards for the financial planning process
D. Duties owed to the firms and subordinates
E. Duties owed to CFP board
F. Prohibition on circumvention

169
Q

What are the CE requirements for the CFP?

A

30 hours every 2 years, including 2 in ethics

170
Q

What are the 6 nouns that can follow the CFP letters?

A

Certification, certificate, practitioner, professional, mark, exam

171
Q

What are included in the fiduciary duty?

A

Care, loyalty, following instructions

172
Q

What must be given to the client in either advice or planning arrangement?

A

Privacy policy

173
Q

What documents must be provided to a client annually?

A

Form ADV and privacy policy

174
Q

How often must investment reports be communicated?

A

Quarterly in times of extreme volatility, and annually compared to benchmarks

175
Q

What conduct is deemed always bar?

A

Revocation of a financial license
Felony conviction of murder or rape
Felony conviction of a financial crime
Any felony conviction of violence in the last 5 years

176
Q

What conduct is deemed presumed bar?

A

Revocation of a non-financial license
Suspension of a financial license
2 or more personal bankruptcies
Nonviolent felony within the last 5 years, violent crime older than 5 years

177
Q

If presumed bar, who does the petition for fitness determination goto?

A

Reviewed by hearing panel and submitted to the DEC (ethics commission) who have final authority

178
Q

When and where are bankruptcies disclosed?

A

On the CFP board for 10 years, and name is included once with the CFP periodic press release

179
Q

What part of a client’s finances ISNT the CFP responsible for?

A

Selling real estate, writing a will or trust, filing taxes (anything that requires a license)

180
Q

How often must materially changes be disclosed?

A

30 calendar days to CFP board, 90 to clients

181
Q

Who have exceptions from registering with the SEC?

A

-any broker/dealer whose advisory services are solely incidental to the conduct of business

-lawyers, accountants, teachers, engineers whose advice is solely incidental to the conduct of business

TABLE: Teachers, Accountants, Brokers, Lawyers, Engineers

182
Q

Who is exempt from filing with the SEC?

A

-advisors solely to venture capital funds (Venture)
-advisors whose only clients are insurance companies (Insurance)
-advisors solely to private funds less than $150m (Private funds)
-advisors whose clients reside in their state of business and who do not provide advice, services, analysis, or reports regarding nationally listed securities (home State)
-foreign advisors without a place of business in the US (Foreign)
-advisors not providing advice about securities traded on a national exchange (Exchange)

VIPs are SaFE from exemptions

183
Q

What are the RIA registration requirements?

A

If <$100m, file with state
If >$110m, file with SEC
If in between, choose either
Considered mid-sized advisor if $25m-100

Must file ADV1 and Schedule 1 annually, cannot use RIA after their name, and must use form ADV-W to withdraw from registration

184
Q

What do forms ADV 1-3 contain?

A

1: firm name, executive background, U4 records
2: firm and advisor info, comp and fees, education, investment objectives, conflicts of interest
3: form crs, explains the difference between advisors and brokers

185
Q

What is the brochure rule?

A

Requires written disclosure to every client before entering into the engagement about:
Advisory fees and services
Types of securities
Education and business standards
Participation in transactions
Conditions for managing accounts

Can be satisfied by delivery of form ADV2

186
Q

What is equilibrium on the supply/demand curve?

A

The price at which quantity demanded equals the quantity supplied

187
Q

Does the fed control the discount rate or the fed funds rate?

A

Discount rate

188
Q

What are the account types covered by FDIC?

A

Individual, joint, trust, retirement

Deposits outside of the US not covered

189
Q

What is not discharged through bankruptcy?

A

-Student and government loans
-3 years of back taxes
-alimony and child support
-monies owed due to malicious acts, drunk driving, criminal fines, etc.

190
Q

What property is immune from bankruptcy?

A

-qualified plans
-homestead
-life insurance, annuities
-IRAs up to $1.3m and rollover IRAs (but not inherited IRAs)

191
Q

What are the different bankruptcies?

A

Chapter 7: liquidation
Chapter 11: business
Chapter 13: adjusting debts

192
Q

What is the current ratio?

A

Current assets / current liabilities

Current means <12 months

193
Q

What is the emergency fund ratio?

A

Current assets / monthly non-discretionary expenses

194
Q

When is renting, leasing, and ARMs appropriate?

A

<3 years

195
Q

What is the savings ratio?

A

Savings + employer contributions / annual income

196
Q

In regards to FAFSA, when is a student considered independent?

A

Over age 23
Are married
Have legal dependents other than a spouse

197
Q

Which federal aid is needed based?

A

FAFSA, Pell grant, subsidized Stafford

198
Q

What’s the difference between LLC and AOTC?

A

LLC: 20% of up to $10k in expenses, max $2k per family
Can be claimed for an unlimited numbers of years “LIFETIME learning credit”

AOTC: 100% of first $2k, the. 25% of next $2k, max $2500 per student

199
Q

What are the 3 primary repayment programs?

A

PAYE: pay as you earn, 10% and 20 years (only Stafford and graduate plus)
ICR: income contingent repayment, 20% and 25 years (only Stafford and graduate plus)
IBR: income based repayment, 15% and 25 years (everything but parent plus)

200
Q

What duties are specific to providing financial advice?

A

Fiduciary duty
Disclose and manage conflicts of interest
Provide information to a client
Duties with additional persons

201
Q

What duties are specific to financial planning?

A

Those from advice as well as
Practice standards for financial planning
Information to client in writing

202
Q

What are the differences between private letter rulings and determination letters?

A

PLRs seek guidance for a proposed transaction and determination letters seek guidance on completed transactions

203
Q

What are the statute of limitations for the IRS?

A

3 years if return was filed, 6 if more than 25% of gross income was omitted

10 years for collecting tax

Indefinite for fraud

204
Q

Which court offers a trial by jury?

A

District court

205
Q

Which court doesn’t require prepayment of tax?

A

Tax court (and small claims division)

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