GP, Insurance, Investments Flashcards
1
Q
punitive damages and compensatory
A
punitive damages are taxable but compensatory are not
2
Q
A CFP certificant shall notify the CFP Board of a responsible matter within how many days
A
30
3
Q
talking with a CPA without getting clients permission to share data
A
violating the duty of confidentiality and privacy
4
Q
When to decline and not to decline the client
A
Decline:
-refusing to giving information
-does not want 1099 reportable income
Not decline:
- just because they’re being rude
5
Q
suspension when not an official CFP yet
A
suspensions automatically posted
6
Q
when an order of the commission is not appealed within 30 days after the notice was sent to the certificate
A
IT”S FINAL
7
Q
you have a new client…what is really step you really should take?
A
provide the client with written disclosures of all material information
8
Q
who controls the monetary policy?
A
FOMC
9
Q
Will Mary’s 75k income qualify her for pell grants, stafford student loans, and PLUS loan?
A
MAYNOT qualify for Pell Grants and Stafford
She
10
Q
fed reserve controls money supply WHAT DO THEY NOT DO
A
discount rate- offered by commercial banks to their most credit worthy borrowers
fed funds rate- overnight lending
11
Q
checking account for emergency fund
A
usually just savings, treasury, money market
12
Q
capital withdrawals
A
additions :)
13
Q
what 4 education savings strategies can’t be used together
A
AOC, LLC, 539, coverdell
14
Q
when to decline the client
A
- squirming and not providing information
- wants to do investments and not have 1099
15
Q
new client walks into your office. they have a baby. they have done no planning. they own limited assets, carry a reasonable amount of credit card debt, and a fair amount of college debt. they are confused and seeking your help. what should they do first?
A
medical insurance. this is the most serious and immediate concern.
16
Q
tom and helen are married. this is a second marriage for both of them. they are both taking social security retirement benefits. other than a house (paid for) and person property (cars paid for) they each have IRAs totaling around $2 mil. Helen’s mother (84) needs financial help. Both tom and helen feel medicaid is charity. If helen’s mother needs assistance to live, what do you recommend Tom and Helen do?
A
They should invite her to move in with them. Who is the client?? Tom and Helen are the clients, not Helen’s sister. At 84, LTC is probably not available or too expensive. They rejected Medicaid.
17
Q
replacement cost
A
the answer shouldn’t be ‘not enough info’ and just assume 80%
18
Q
HRA
A
solely employer funded and reimburses employees for substatianited medical expenses up to a maximum dollar amount
19
Q
what recommendation should come first: executing a will or talking to an attorney
A
talking to an attorney!
20
Q
other than LTC insurance, what other means provides nursing home care coverage for longer than 100 days?
A
Medicaid!
Medicare LTC is limited to 100 days. A Medicare supplement policy or a Medigap policy may provide for a rehabilitation stay but not for extended nursing home coverage
21
Q
a company owns whole life policies on key employees. the company is considering borrowing the cash value of the policies for business reasons. the company must pay the interest on the loans. Is the interest an eligible business deduction?
A
Yes, but it is limited to a $50,000 loan on each policy.
A business may deduct a limited amount of interest paid on contracts covering a ‘kay person’ to the extent that each loan doesn’t exceed $50,000
22
Q
Rita elects a salary reduction of $2,850 to her medical expenses FSA account. Which of the following statements is true if the plan has a grace period?
A
The medical expense portion is limited to $2,850
There is an extra 2.5 months to spend the money for medical expenses. the plan has a grace period provision. The medical expense is limited to $2,850 in 2022.
23
Q
taxable fringe benefits for an employer
A
-personal use of the company apartments on the weekend (OCCASIONAL would be tax free)
-thresholds:
24
Q
Employer Group Coverage: TAX DEDUCTIBLE to employer
A
group life, group legal, group disability
NOT: code section 125. flexible spending accounts (125) are funded solely by the employee. the other plans are normally paid for by the employer (tax deductible). Code section 125 is not group coverage, it is a cafeteria plan
25
Tom and Sue had W-2 earnings of $100,000 last year. They deposited $5,000 into each of their IRAs from money that was in their checking account. They also sold their five-year-old car for$1,000 less than it was worth. Due to a slow-down in the housing market, the value of their home decreased by $25,000. What is their change in net worth?
Minus $26,000
26
Kate and Ashley, twin sisters, are 19 years old. Kate is a full-time student at a local college. Ashley "hates" school and just got full-time job starting next year as an assistant manager at a retail store in the local mall. Both of the sisters live at home with their parents. Their grandparents set up UTMA accounts for each of them that earned $3,000 in interest last year. Their parents are in the 35% tax bracket. How much income tax does each of the two sisters have to pay if they had no other income?
Both owe $360.
27
The DJIA just fell another 350 points; housing starts are on a downward trend; consumer confidence is down; new claims for unemployment are continually rising. What action is the Federal Reserve likely to consider taking?
Buy government securities using a repurchase agreement
The Fed should buy securities to loosen the money supply. The Fed cannot lower the prime rate, the banks do that.
28
GDP would not include which of the following?
A. Orange juice made in Florida from oranges grown in Brazil
B. Toyotas manufactured in Tennessee
C. Chevrolet produced in Canada but sold in New York
D. Drugs made in California and sold in Mexico
Answer: C Chevrolet produced in Canada but sold in New York
GDP includes goods and services ultimately produced within a country's borders. The orange juice is actually made in the Unites States.
29
Under the Fair Credit Reporting Act which of the following is not correct?
A. A consumer has a right to see why he/she was denied credit.
B. The maximum liability a consumer has for a lost credit card is $50 if he/she reports it timely.
C. Only interested parties can access a consumer’s credit files.
D. Consumer has a right to one free copy of his/her credit report per year.
Answer: B
Credit card liability is covered under the Consumer Credit Protection Act.
30
Joe is an aggressive stock market investor who wants to establish a college savings program for his granddaughter McKenzie. He wants to deposit as much as he can without incurring gift taxes yet still control the individual investments. What type of plan would be best for him?
Answer: UGMA/UTMA
Joe cannot control the investments in the 529 plan. He is the trustee of the trust (beneficial enjoyment) which makes the trust income taxable to him plus includes it in his estate. The Coverdell has a limit of $2,000 per year.
31
Securities Investor Protection Act (SIPC) insures against which of the following?
Broker-Dealer Failure
A person can lose principal by poor investing but SIPC insures against broker-dealer failure.
32
Kevin owns a mid-sized printing business with approximately 200 employees. Rather than pay
high premium costs for commercial insurance, he decides to provide insurance benefits directly to his employees. You advise him that a major disadvantage to this type of plan is exposure to catastrophic loss and recommend that he acquires insurance to pay claims in excess of $5 million. What is this method of protection called?
A Partially Self-Funded Plan
33
Joe owns a small chemical manufacturing plant with 6 employees. He has been offered a
contract to produce a new construction compound that will dramatically decrease the time it takes to cure concrete. However, the long-term financial impact of the contract on the
company is unknown, and it may lead to a substantial financial liability in the future. In advising him on how to respond to the potential risk, you tell him which of the following?
He should reject the contract to avoid the potential of a future loss.
He cannot buy enough liability insurance to cover the potential losses. Either answer A or C may
be true, but they do not tell him what he should do. You are supposed to advise him.
34
The highest Standard and Poor’s rating for insurance companies is which of the following?
AAA
35
Lloyd purchased a small house for $200,000 that he uses as an office building. Its replacement cost is $150,000. Because of the location, the carrier required 90% coinsurance. Lloyd insured the building for $120,000. Recently, he had a small electrical fire that caused $5,000 of smoke and other damage. Using the formula method, how much of the claim did the carrier pay if his
deductible was $500?
$3,944
36
Leroy lives in South Georgia. Due to a major drought, a large number of sinkholes have begun to appear in his neighborhood. He is especially concerned about one that developed in his front yard extending from the street to within 5 feet of his basement wall but fortunately doing no structural damage to his house. The hole was several feet deep and cost $6,250 to repair. If he has an HO-5 policy with $150,000 dwelling coverage and a replacement cost of $100,000 on his
home, how much will the insurance company reimburse him if his deductible is $250?
0
The sinkhole did no damage to his house. If the sinkhole damaged his home, then he would
have coverage.
37
Ulmer is an underwriter for a major insurance company. He is reviewing the life insurance
application submitted by Allison, a 25-year-old professional singer who has been divorced twice and has two children. Which of the following information will he not consider?
A. Information from the insurance broker
B. Medical information bureaus
C. Newspaper articles on her professional career
D. Physical examinations
Answer: C
Although C is interesting to the underwriter, the other answers are underwriting considerations.
38
Louis has a 300/500/50 PAP auto policy on his brand-new BMW and an HO-3 policy with
$500,000 dwelling coverage on a home which he purchased for $400,000 but has a replacement cost of $600,000. He also has a $1,000,000 umbrella policy that requires a base policy of $250,000 on his PAP and 80% replacement cost on his home. If a flood destroys his car and it costs $75,000 to replace it, how much will be covered by his auto policy (ignoring any
deductible)?
$75,000
39
Sherry wants to purchase a life insurance policy that has value she may be able to borrow
against in the future. She is very nervous about the stability of the state of the insurance
industry due to some recent financial news she has read. She has always thought that she has a moderate risk tolerance. What type of policy would you recommend she purchase?
Variable Universal Life
40
Lucy just graduated from college and is considering purchasing a $250,000 20-year term life insurance policy. She does not have a lot of discretionary cash flow, so she wants to keep the premium low yet provide as much protection as possible. To keep the policy low, the policy cannot include which of the following?
A. A Reinstatement Clause
B. A Waiver of Premium Clause
C. A Convertibility Clause
D. A Reentry Clause
Answer: B
The waiver of premium clause will cost an extra premium. The other clauses are part of the
policy.
41
Last year, during a physical exam to increase the death benefit of his universal life policy from
$500,000 to $1,000,000, Mel was diagnosed with HIV. His doctor told him he had a year to a
year-and-a-half to live. The death benefit increase was not approved. Mel decided to make the best of the little time he had left and exercised the 50% accelerated benefit rider, the only one that was included in his policy. Mel survived beyond his doctor’s expectations and died last month. How much will the insurance company pay his beneficiaries?
Answer: B
He received 50% of $500,000 as an accelerated benefit. The remainder will be paid to his
beneficiaries
42
Dr. Smith buys a disability policy with a base benefit of $5,000 and a SIS (Social Insurance
Substitute benefit) of $1,200. Dr. Smith is disabled and ultimately receives $600 in Social
Security disability benefits. How much in benefit will he receive from his policy when Social
Security pays $600?
A. $600/mo
B. $5,000/mo
C. $5,600/mo
D. $6,200/mo
Answer: C
The $1,200 policy SIS benefit will be reduced by $600. The policy will pay the base of $5,000
plus the $600 SIS benefit
43
. ABC has a group legal services plan. ABC pays the premium. The employee benefits will be which of the following?
A. Taxable
B. Tax-free
C. Tax-free up to $1,000 per year
D. Non-includible income
Answer: A
Group legal premiums are deductible by ABC, but benefits are taxable to the employee.
44
Is Insurace FDIC per titling or per account?
titling
45
GNMA interest and yield
can be variable because of principle prepayments
46
UITs
self liquidate and trade on secondary market
47
matching duration offsets what?
interest rate and reinvestment rate risk
48
what CC reduce SD
anything less than +1.0
49
______ is the most important consideration to the efficient frontier
RISK
50
are retirement accounts current assets?
are mortgages liability for current ratio?
hell naw to both
liability= credit card and accounts payable and taxes due
current assets= Checking/Money Mkt/GNMA
51
an upward movement in the yield curve shows
interest rates have increased
duration has decreased
52
THE LOWER THE COUPON
the greater the relative price fluctutations
53
when warrants are exercised, the corporation does what?
issues new outstanding stock
54
where should you place REITS
in an IRA- ordinary income dividends (not taxed at corporate level)
55
current yield
annual interest in dollars/bond's market price
can be used in holding period return question
56
once the NOI has been computed, what do you have to do to calculate the intinstic value?
divide by capitlization rate
57
Linda owns the following CDs at different branches of the Second National Bank. What amount is insured?
* Her name $300,000
* JTWROS with her son $300,000
* JTWROS with her daughter $300,000
D. $800,000
58
Eurodollar
Yankee Bond
Banker's Acceptance
ADR
Eurodollar- deposit in any foreign bank that is denominated in dollars
Yankee Bond- dollar denominated bond issued in the US by foreign banks and corporations
Banker's Acceptance- US
ADR- dividends paid in US dollars
59
GICs are not subject to which type of risk?
A. Purchasing Power Risk
B. Reinvestment Rate Risk
C. Inflation Risk
D. Interest Rate Risk
Answer: D Interest Rate Risk
Purchasing power risk is inflation risk. GICs are not subject to interest rate risk. The Insurance
Company takes all the interest rate risk.
60
Gloria lives in New York City. Her federal tax rate is 25%; the New York state rate is 6%, and herNew York City tax rate is 3%. If she buys a T-Bond with a 5% coupon, what will be her after-tax yield?
Tax exempt yield = 5% x (1-.25) = 3.75%
T-bonds are not subject to state or local taxes
61
You hold two bonds in equal amounts in your portfolio. Bond A has duration of 10 years, and
bond B has duration of 15 years. You will need the money in 13 years. You want to change the proportion you hold of these two bonds to immunize your portfolio. Approximately what
should you end up with?
A. 55% A; 45% B
B. 60% A; 40% B
C. 45% A; 55% B
D. 40% A; 60% B
Answer: D
The current duration is 12.5 [(10 + 15) ÷ 2]. You need more of Bond B.
45% of A 4.5
55% of B 8.25
12.75
Using 40% of A and 60% of B, you get exactly 13, the correct answer
62
If AD, Inc. generally trades between a low of $30 and a high of $60 a share, then the $60 a share is called __________, and the $30 a share is called the ____________.
The $60 is the resistance level, and the $30 is the support level.
63
An investor purchases 1,000 shares of Q2, Inc. at $75 per share on margin. The initial margin requirement is $37,500 (borrows $37,500). If the maintenance margin is 30%, what is the amount of the maintenance call if the stock drops to $45?
A. $5,000
B. $5,750
C. $6,000
D. $6,250
Answer: C
He has a margin loan of $37,500 and the 1,000 shares of stock are currently worth $45,000.
30% of $45,000 $13,500 equity required
$45,000 - $37,500 $ 7,500 actual equity
Maintenance call $ 6,000
64
Which of their assets is (are) Marketable?
I. Money Market Mutual Fund
II. Tech Fund (Closed-End)
III. ETF (Foreign Large Value)
IV. Software Stock
V. SEP Account
A. I, II, III
B. II, III, IV
C. IV, V
D. I, V
B. II, III, IV
Tech Fund (Closed-End)
ETF (Foreign Large Value)
Software Stock
The money market is liquid but not marketable (It is redeemable). The SEP is an IRA for early distributions (ordinary income plus 10% early withdrawal penalty). The tax outcome makes it unattractive to distribute (sell/market) at this time.
NOTE: Brokered CDs are marketable. Open-end mutual funds are not marketable (per Mayo) because they are redeemed. ETFs and closed-end funds are marketable.
65
When Linda purchased the state municipal bonds at 1050, she noted that they were fairly volatile. Based on the original data, if interest rates decreased by 1/2%, what would be the change in bond value?
If the price of the bond was $1,050, then the bond value would change as follows: $1,050 times 5.13% equals $53.83.
66
When a client tells you start splitting up stock in their joint account, what should you do?
Tell him you need to meet with both him and joint account holder before you can respond
67
Harry purchased ten listed bonds (XYZs 8.00s 10/1/35) on July 1 2015 at market price of 105 (10,500). Harry's transaction cost from the trade was $100. He paid his broker $10,800 for the bonds. His broker reported $400 on a Form 1099-INT (2015) as taxable interest on the bonds. How much is Harry's taxable interest?
A. 0
B. 200
C. 400
D. 800
B. 200
On October 2015, he will be paid $400 (the only semi annual payment for the year to him) .
Of the $10,800 he paid for the bonds, $10,500 was the cost of the bonds and $100 was the commission, therefore $200 was accrued interest. He has to report $400 on Schedule B (Form 1099-INT) and then subtract $200 as accrued interest. His taxable interest is $200.
68
Which of the following investments will not be subject to phantom income taxation?
A. Treasury Income STRIPS
B. CATS
C. OIDs
D. TIPs
C. OID
OID on tax exempt obligations are not taxable. On a sale or redemption, any gain attributed to the OID is tax exempt. OID refers only to the original bond issue. Tax exempt zeros are not subject to phantom income.
69
The deed of trust between the issuer of bonds and the trustee covers such considerations as:
property pledged
working capital and current ratio
any provisions for a sinking fund
call provisions
70
Which of the following statements about investment companies is true?
A. closed end funds can trade at a premium or discount to their NAVs
B. UITs can be purchased on one of the national exchanges
C. Open end funds are negotiable securities
D. UITs offer a limited number of shares when issued
A. Closed end funds can trade at a premium or discount to their NAVs
*UITs issue units, not shares
71
Which of the following statements about REITs is NOT true?
A. REITs normally distribute 90% of all net investment income
B. REITs are listed and trade on stock exchanges
C. REITs issue redeemable shares. Issuers make a market
D. REITs must invest at least 75% of their assets in real estate related activities to qualify for conduit treatment
C. REITs issue redeemable shares. Issuers make a market.
**REITs are not redeemable. They are negotiated and trade on exchanges.
72
Your client is bearish on Canine, Inc. The client sells Canine short at $50. If Canine drops to $20, what must the client do to offset the position?
He must purchase Canine to close the short sale.
The act of delivering a stock closes (offsets) the sale.
73
You have 2 funds in your portfolio (45% Fund A 55% Fund B). The Covariance is 0. Fund A has a return of 5.5% and a risk of 9.5%. Fund B has a return of 6% and a risk of 12.5%. What is the standard deviation of your portfolio?
A. .5%
B. 7.85%
C. 8.09%
D. 11.29%
C. 8.09%
Select the first answer below 11%. It is the square root of 65.54^2.
74
A stock with a beta of .6 is only ___% as volatile as an average stock?
60% or 40%?
60%.
A stock with a beta of .6 is 40% less volatile than the market as a whole
75
Mr. Merilee lives in New York City. His federal tax rate is 35%. The New York state tax rate is 7%, and his new york city tax rate is 2%. if he bought US treasury bonds with a 6% coupon, what is his after tax yield?
after tax yield= tax exempt yield in this case
= 6% * (1-.35)= 3.9%
Interest on federal bonds (EE, T bills, and other treasures) is not subject to state and local taxes but is subject to federal tax
76
What is the callable duration of a BB rated bond with a 10-year call provision and a 20 year maturity. The bond has a 5% coupon and is selling for $900 when comparable bonds are paying 6%?
A. 7.82
B. 8.02
C. 9.90
D. 10
E. 12.62
B. 8.02
Answer C is too close to 10 years. Answer E is the maturity.
77
When is the duration of a BB rated bond with an 8 year and a 6% coupon selling for $110 when comparable bonds are paying 5%
A. 6.41
B. 6.54
C. 6.63
D. 8
C. 6.63
When a bond pays a coupon, pick the next lowest reasonable number under the year to maturity. It has to be less than 8 because the bond pays interest.
78
Which of the following occurs when a stock is split two-for-one?
A. The price of the stock doubles
B. The firm's liabilities decreases
C. The firm raises additional equity financing
D. The par value of the stock is reduced
D. The par value of the stock is reduced
With a stock split, the par value of the stock is lowered to reflect the lower per share value
79
If Tuesday December 14th is the date of record of XYA, when must an investor purchase XYZ to get the cash dividend?
December 10th
The ex dividend date is December 13th. The investor must have purchased the stock before the ex dividend date or 2 business days before the record date (T+2). There is a weekend in this question. Regular way settlement is 2 business days.
