Incorrect questions

Question 1

What is considered an institutional account?

Answer 1

account of a bank, savings/loan association, insurance company, investment company, investment advisor, person with total assets exceeding $50m

Question 2

What is not allowed according to ERISA?

Answer 2

aggressive derivative strategies (some conservative option strategies are okay, like writing a covered call)

Question 3

what is writing a covered call?

Answer 3

conservative options strategy where a person who owns stock sells the right to purchase it from them

Question 4

What are the gift rules of a custodial account?

Answer 4

Gifts can be of an unlimited amount, but will be subject to gift tax if exceeding $18k per year

Question 5

Tax rules of qualified retirement plans

Answer 5

-such as 401k
funded pre-tax (tax deductible for the year)
distributions are fully taxable as ordinary income at time of retirement

Question 6

What must a new firm do for retail communications in the first year as a FINRA member?

Answer 6

file broadly disseminated retail communications 10 business days prior to first use

Question 7

What kind of retail communication must be approved by principal?

Answer 7

retail communication that makes a financial recommendation or promotes a product/service

Question 8

What are the time periods that must be presented in fund ads that show avg annual total returns?

Answer 8

Fund existing for one year (one year)
existing 5 years (one and 5 years)
existing for 10+ years (one, 5, and 10 years)

Question 9

What securities are most likely to be subject to withholding tax?

Answer 9

ADR
stock issued by a foreign company that earns income in the US, subject to withholding tax by country which it was paid

Question 10

What is participating preferred stock?

Answer 10

additional dividend payment beyond stated amount, non-cumulative

Question 11

How are gains/losses on short sales treated?

Answer 11

as a short-term capital gain, since short position is closed out the same day the stock is purchased

Question 12

What is an established customer?

Answer 12

Penny Stock Rules:
BD already carries an account for the person, who has executed transactions or deposited into it more than one year before penny stock transactions
or made three purchases of penny stocks, occurring on three separate days with three separate issues

Question 13

What is a Series K preferred stock?

Answer 13

no maturity, pay dividends at fixed rate initially, then switch to floating rate (usually callable at this point)
non-cumulative but qualified for tax purposed (max rate of 20%

Question 14

How much capital loss can offset ordinary income?

Answer 14

$3,000. The rest is carried over to the next year to offset capital gains

Question 15

In a short sale, who is responsible for paying stock dividends?

Answer 15

all stock dividends are the responsibility of the investor who sold the stock short.

Question 16

Qualified vs non-Qualified dividend taxation for corporations

Answer 16

Qualified: taxed at max 20% after holding period of 60 days for common stock and 90 for preferred
Non-qualified: ordinary income taxes

Question 17

How are capital gains taxed?

Answer 17

short term: held for one year or less (trade date to trade date)
ordinary tax rate

Long term: held for greater than one year
max 20%

Question 17

Based on ownership, what portion of a dividend may a corporation exclude from taxes?

Answer 17

Own <20%: 50% dividends excluded from taxes
Own 20% or greater: 65% excluded from taxes (35% taxable)

Question 18

What is a Wash Sale?

Answer 18

IRS disallows capital loss if substantially the same security is purchased (or if a short position of substantially the same security) within 30 days either way (61 day wash sale period)

Question 19

When interest rates are fluctuating, how do short-term rates compare to long-term rates?

Answer 19

short-term interest rates fluctuate more sharply than long-term rates
long-term prices are more affected than short-term prices

Question 20

How do you calculate capital gain or loss on a bond when purchased at a premium?

Answer 20

Must be amortized down to par value (purchase price-par=premium/number of years=annual amortization)
purchase price - (amortization x #years) = adjusted basis
sell price - adjusted basis=gain or loss

Question 21

How is bond price affected as a bond gets closer to maturity?

Answer 21

If yields are constant and it is selling at a discount, selling price will increase closer to par value

Question 22

What bonds have the lowest interest rates?

Answer 22

short-term bonds with a high credit rating

Question 23

Which securities have the least amount of capital risk?

Answer 23

Bonds, since they are promised the principal amount back. If bankruptcy occurs, bondholders receive payment before stockholders

Question 24

How is accrued interest calculated?

Answer 24

Corporate, Muni, US gov agency is on a 30/360 day basis
Treasury bonds are on an actual/365 day basis

Question 25

How are zero-coupon bonds taxed?

Answer 25

Each year an investor owns a zero-coupon bond, accretion is taxed as interest income
Zero-Coupon bonds are always issued at a discount.

Interest income=par-purchase price

interest income/# of years held= annual accretion

Question 26

What are negotiable CDs?

Answer 26

issued by commercial banks in the secondary market, can be resold by owners
fixed interest rate
minimum denominations of $100k, but usually trade in $1m denominations
secured only by bank’s credit
usually mature in <1yr, but there is no limit

Question 27

What is a guaranteed bond?

Answer 27

secured by collateral of the issuing corporation, as well as a guarantee of another corporation (usually parent company
-asset -backed securities

Question 28

What are long-term CDs?

Answer 28

issued by banks, cold by BDs, maturity>1Yr
-traded in the secondary market-> changes in interest rates cause price fluctuations
-investor may experience gain or loss if sold before maturity
-FDIC protection up to $250k

Question 29

What is an income bond?

Answer 29

(adjustment bond)
only required to be paid if corporation has sufficient income
**all other debt securities MUST be paid or else the corporation defaults.

Question 30

What is parity price?

Answer 30

the price at which it becomes profitable for investors to convert their convertible bonds into shares of common stock
(Par/Conversion Price)=conversion ratio x share price= parity price

Question 31

What is a non-dilutive feature on convertible bonds

Answer 31

conversion features are adjusted if there’s a stock split or stock dividend
ex: stock split

Question 32

What is a bank-qualified bond?

Answer 32

investments that banks can deduct 80% of interest costs, with interest income being tax-free. a municipality can issue if it anticipates that it will not exceed $10m in one calendar year

Question 33

What is useful in analyzing credit risk of the issuer of a GO bond?

Answer 33

ratio of net overall debt to assessed value

Question 34

What is a hold at rate order?

Answer 34

when a current holder of an auction rate security wants to hold the security but only if the rate is at or above a specified rate. If the rate is set below specified, the holder will sell securities

Question 35

What is the difference between special assessment bonds and IDBs?

Answer 35

special assessment:
used for new projects/improvements that are paid by assessments on properties and residents that benefit

IDB:
benefits a specific company

Question 36

What is a parity bond?

Answer 36

two or more issues of revenue bonds have the same claim against revenue or are backed by the same pledged revenues

Question 37

What is a CDO?

Answer 37

collateralized debt obligation:
privately issued asset-backed security sold as a bond, backed by pool of bonds, loans, other assets
similar to mortgage obligations
in the form of tranches, each having different maturity and risk level
not suitable for retail investors

Question 38

Who can issue mortgage-backed securities?

Answer 38

US gov agency (GNMA or GSE like FNMA or FHLMC
financial institutions like banks
home builders

Question 39

What is the PSA Model?

Answer 39

estimates prepayment rate for MBS against a benchmark
PSA=100, assume prepayment speed remains stable
PSA>100, speed is faster than normal
PSA<100, speed is slower than normal
If interest rates decline, homeowners refinance and prepayments increase

Question 40

What are characteristics of Mortgage-Backed Securities?

Answer 40

pooling of mortgages, traded OTC, collateralized by mortgage loans on properties, taxed at state and federal level

Question 41

What impacts the NAV or an equity fund?

Answer 41

NAV=total assets/shares outstanding
anything impacting assets or number of shares will impact the ratio

Question 42

What has the least stable NAV?

Answer 42

sector funds, since they are focused in specific industries or regions, they are less diversified and have less

Question 43

When a mutual fund is tendered for redemption, how many days must the issuer make payment?

Answer 43

within seven calendar days of tender

Question 44

What are tax implications of withdrawals from variable annuities?

Answer 44

withdrawal is first considered earnings and is taxed as ordinary income. If the distribution includes contributed funds, that portion is a return of capital and is not taxed.

Question 45

How do annuity payments change when the separate account annualized basis changes?

Answer 45

If performance is greater than AIR, payments increase. if equal to AIR, payments remain the same. if the performance is less than AIR, annuity payments decline.

Question 46

q18 ch 10