Final Review

Question 1

Yield curve and duration short end, long end distinctions

Answer 1

Remember the short end of the yield curve is very sensitive to rate changes
Long and is based on market expectations

Y-axis rate/yield ,
x axis maturity

Vs duration
The long end is more sensitive to rate changes
Y-axis price x axis yield to maturity

Question 2

Stock options
Know in the money and out of the money

Answer 2

Call COME
Put POEM

Question 3

Intrinsic value of an option

Answer 3

Market compared to exercise use come and poem
But never less than zero

Question 4

Exceptions to early withdrawal penalties QP, IRA, annuity

Answer 4

Both
MEDD where E is equal payments

QP only. SOS
Separation of service after 55

IRAs only , HHH
Higher Ed
Home up to 10K
Health insurance while unemp

ANNUITY
Death, disability
>59.5
SEPP if taken greater of 5 years and over 59.5 ?? Look up

QDRO
No tax to the payOR
Taxed to the payEE if distributed but no penalty
No tax or penalty of rolled over

Question 5

Option chart

Answer 5

Remember the straddles and spreads

Question 6

Ratios

Answer 6

Debt to equity is LONG-term debt to equity

Debt ratio
total debt/total assets

ROA is EAT to total assets
ROE. EAT/equity

Question 7

Economic scenario

Answer 7

If the Fed is aggressively increasing the short end while economists are predicting prolonged contraction with five to seven years is likely inverted

An inverted generally indicates a recession coming in 6 to 12 months especially if the two year is greater than the 10 year

Question 8

Time premium and options

Answer 8

As any of these increase the time premium increases
Risk free rate
Time to expiration
Variability of the underlying stock measured by standard deviation

So the time premium goes down as the time to expiration goes down

Question 9

Option strategies
Most important

Answer 9

A covered call is to generate income on your portfolio
You own the stock, you sell a call
Long stock short to call
You’re only covered if you own enough shares to cover all your contracts

Protective put
own the stock and buy a put
It’s insurance against a price drop. I don’t want to sel the contract price is a floor for me this is the essence of portfolio insurance
Advisors may do this one investor has too concentrated a position but will not sell

If I write a call also then I’ve done a collar

Collar
Long the stock long to put short the call

Question 10

How do I protect shorts in the stock

Answer 10

Protective call
If I’m short the stock I buy a call
Short the stock ,long the call

Covered put
I’m short the stock so I sell a put

Question 11

Straddles and spreads
Which is to benefit from volatility and which is for stability

Answer 11

Straddle for volatility
Spread for stability
Picture the chart.
straddle is on the top where I buy a call in a put or I sell a call in a put

Question 12

Futures

Answer 12

If I’m long I need a short hedge
If I’m short I need a long hedge

A farmer owns corn he needs to sell it he sells a future
Construction company is short lumber they buy futures

Question 13

Charitable contributions

Answer 13

Watch for short-term capital gain which goes in the ordinary income 50% category

Question 14

Selling Section 1231 1245 1250

Answer 14

Sold below adjusted basis is an ordinary loss
Between adjusted basis and original cost it’s all section 1245 ordinary or
If real estate section 1250 25%

If above original cost then the gain is split between section 1245 1250 and the ST or LT capital gain

Question 15

Option maximum losses and gains

Answer 15

Draw the chart

Buyer’s Max gain equals sellers Max loss

The premium is the max loss to the buyer and the max gained to the seller

Calls the maximum gain to the buyer and maximum loss to the seller is UNLIMITED
Therefore seller should have a covered call

On puts the maximum gain to the buyer and the maximum loss the seller is the strike price less the premium

Question 16

Watch the basis versus the earnings

Answer 16

Remember for Roth IRAs and for annuities there is no penalty on the basis taken out before 59 and a half

Question 17

Present interest gifts

Answer 17

1. If the property is transferred into an irrevocable trust it is completed gift
2. The beneficiary receives income for life or
   Income for term certain

Result
Beneficiary has a present interest since they can receive income this year AND in subsequent years

Therefore the donor can take an annual exclusion for the present value of the beneficiaries income interest

Question 18

Estate tax formula
See picture

Answer 18

Gross
Adj gross
Taxable estate
Total taxable transfers
Tentative estate tax
Gross estate tax
Estate tax liability

Question 19

Asset transfers at death per capita

Answer 19

Question 20

When does a trust have to file a tax return

Answer 20

If any of these three

Any taxable income
Gross income over $600
Beneficiary is a non-resident alien

Question 21

How much is a beneficiary taxed on

Answer 21

The lesser of dni or the amount required to be distributed

I thought it was the amount actually distributed??

Question 22

What are the 4 requirements for qualified disclaimer

Answer 22

In writing
No benefits
No undue influence
Must be received within 9 months of the later of the date on which the transfer was made or the date the person reaches 21

Question 23

Crummey powers
Turns a future interest gift into a present interest gift because the beneficiaries have the right to withdraw what

Answer 23

I think sometimes it’s limited to the annual exclusion for the amount of the gift in there and sometimes there’s a 5x5
I’m not sure what to assume on the exam. See below for something our book had

The lesser of
1.Annual exclusion
2.Annual contribution to the trust
3. Greater 5K or 5% of amount transferred in

Question 24

When is property in grantor trust pulled back to the estate

Answer 24

If the grantor dies before the end of the term it’s pulled back into the estate. And it still does not get a step up in basis

If the grantor outlives the trust term then the property is not in the taxable estate

It IS in an irrevocable trust. The grantor has the right to a fixed payment of income (annuity) for a chosen period. He is taxed at his rate on the income

Taxable gift a time of creation is FMV - PV annuity pmts

Disadvantages are if he dies before the trust term it’s subject estate.

Either way
Beneficiaries receive carryover basis
Income is subject to creditor claims

Question 25

Qprt

Answer 25

An irrevocable grantor trust that allows couples to move their home out of the estate and keep living there during the trust term

If they don’t outlive the trust term but it’s pulled back into the estate

If they do outlive the trust term they have to start paying rent. But that this is another way to get money out of the estate and to beneficiaries

Question 26

Gifts between a US citizen and non-citizen

Answer 26

Gifts to a non-citizen spouse only get a $185,000 exclusion
This only applies to lifetime giving not at death
It does take it to 13.610 but not the unlimited marital
Unless they do the Q Dot

Question 27

Annuity distributions
Annuities versus withdrawals

Answer 27

Withdrawals have Lifo treatment AT ANY AGE but subject to 10% penalty prior to 59.5 unless exception applies. See below

Annuities with after tax basis have the exclusion allowance which ends after all basis has been recovered

Withdrawal exceptions? Look up
Death disability, nq immediate?
SEPP over greater of 5 years or 59.5

Question 28

If the Fed is aggressively increasing the discount rate but economists are anticipating a prolonged contraction in 5 to 7 years what will result

Answer 28

Inverted yield curve

Question 29

Collar

Answer 29

Buy out of the money puts and sell out of the money calls

Question 30

Tax

Answer 30

20% penalty for HSA
Age 55 for HSA
25% penalty and first two years of simple
Inherited IRAs for eligible designated beneficiaries is life. This applies to non-spouses not more than 10 years younger!

Qbid is lesser of 20% of qbi or 20% of taxable income without capital gains

Remember to be rental the personal use much not exceed the greater of 14 days or 10% of the days rented

Child dependent Care credit
Max expenses 3k/6K
minimum credit is 20%
Phase out starts at 15K

Max mortgage interest 750k debt

Remember early withdrawal penalties on CDs or for AGI deduction

Question 31

Annuity and mec dates

Answer 31

Annuity 8/13/82
Withdrawals Lifo
Annuitization has the exclusion ratio but after 82 it’s lifo after basis is recovered

MEC 6/21/88 living distributions and loans are LIFO

Question 32

Legislation

Answer 32

Investment company act of 1940 regulates mutual funds

Sipc of 1970 regulates brokerage firms

Question 33

Simplifying puts and calls

Answer 33

Expect a large price fluctuation buy a call or put
Up buy call
Down buy put
Expect small price fluctuation sell a put or a call (gen income when expect stability)

Straddle buy a put and buy a call

Collar buy a put and sell a call

Selling = writing = taking the short position

Question 34

Gstt taxation
Who pays in a direct skip, taxable termination, taxable distribution

Answer 34

Direct skip. Transferor pays

Taxable termination. Trustee pays

Taxable distribution. TransferEE pays (recipient)

Question 35

Relative investment measures

Answer 35

Remember beta is in Treynor and Jensen’s alpha

If r2 is low I don’t want to use either of those

Question 36

Rental personal use

Answer 36

Can’t exceed the GREATER of
14 days
10% of days rented

So if it is rented for 6 months or 180 days you can stay there for 18