Final Review Flashcards
Yield curve and duration short end, long end distinctions
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
Stock options
Know in the money and out of the money
Call COME
Put POEM
Intrinsic value of an option
Market compared to exercise use come and poem
But never less than zero
Exceptions to early withdrawal penalties QP, IRA, annuity
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
Option chart
Remember the straddles and spreads
Ratios
Debt to equity is LONG-term debt to equity
Debt ratio
total debt/total assets
ROA is EAT to total assets
ROE. EAT/equity
Economic scenario
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
Time premium and options
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
Option strategies
Most important
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
How do I protect shorts in the stock
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
Straddles and spreads
Which is to benefit from volatility and which is for stability
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
Futures
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
Charitable contributions
Watch for short-term capital gain which goes in the ordinary income 50% category
Selling Section 1231 1245 1250
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
Option maximum losses and gains
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
Watch the basis versus the earnings
Remember for Roth IRAs and for annuities there is no penalty on the basis taken out before 59 and a half
Present interest gifts
- If the property is transferred into an irrevocable trust it is completed gift
- 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
Estate tax formula
See picture
Gross
Adj gross
Taxable estate
Total taxable transfers
Tentative estate tax
Gross estate tax
Estate tax liability
Asset transfers at death per capita
When does a trust have to file a tax return
If any of these three
Any taxable income
Gross income over $600
Beneficiary is a non-resident alien
How much is a beneficiary taxed on
The lesser of dni or the amount required to be distributed
I thought it was the amount actually distributed??
What are the 4 requirements for qualified disclaimer
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
Crummey powers
Turns a future interest gift into a present interest gift because the beneficiaries have the right to withdraw what
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
When is property in grantor trust pulled back to the estate
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
Qprt
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 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
Gifts between a US citizen and non-citizen
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
Annuity distributions
Annuities versus withdrawals
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
If the Fed is aggressively increasing the discount rate but economists are anticipating a prolonged contraction in 5 to 7 years what will result
Inverted yield curve
Collar
Buy out of the money puts and sell out of the money calls
Tax
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
Annuity and mec dates
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
Legislation
Investment company act of 1940 regulates mutual funds
Sipc of 1970 regulates brokerage firms
Simplifying puts and calls
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
Gstt taxation
Who pays in a direct skip, taxable termination, taxable distribution
Direct skip. Transferor pays
Taxable termination. Trustee pays
Taxable distribution. TransferEE pays (recipient)
Relative investment measures
Remember beta is in Treynor and Jensen’s alpha
If r2 is low I don’t want to use either of those
Rental personal use
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
