Investment Quiz 3 Flashcards
Andy and Harriet, ages 50 and 48 respectively, have two adult children. One of their children, Joseph, has decided to open a bed-and-breakfast located on lakefront property in a tourist region. He has asked his parents for a $25,000 loan to help furnish the building. The couple has a large investment portfolio, but they are concerned about the stock market declining in the near future. They want to refinance an existing higher interest rate mortgage with a new lower rate mortgage before interest rates go higher, as predicted. In addition, the couple would like to retire when Andy reaches age 67. Assuming the CFP® professional already has a long-standing planning relationship with this couple, what is best course of action?
A)
Discuss the impact of the loan on their retirement planning goal.
B)
Offer to review and make appropriate changes and recommendations to their financial plan.
C)
Refer the couple to a mortgage broker to handle the refinance and lock in a low interest rate.
D)
Identify sources of capital for the loan to Joseph.
B
Mike and Marcy, ages 45 and 43 respectively, are meeting with their CFP® professional, Jackie, to discuss an investment management strategy. The couple wants to reevaluate their portfolio to reflect changes in their personal circumstances. While completing a risk-profile questionnaire, the couple agreed that the portfolio should be rebalanced on a semiannual basis without their consultation. However, any additional transactions will require a discussion. Based on the information provided, all of the following may be contained in the couple’s investment policy statement EXCEPT?
A)
The investment manager will have full discretion as to the timing and choice of assets for the portfolio to maintain the proper mix.
B)
The portfolio’s asset allocation will be consistent with the couple’s risk tolerance level.
C)
To meet the couple’s financial goals, the portfolio is expected to produce a 6% annual rate of return.
D)
The time horizon for the financial goal will be initially stated at 23 years.
A
CDE, Inc., bonds have the following characteristics:
10% coupon rate Semiannual coupon payment $1,000 par value Current market price of $1,136.92 8 years to maturity Callable in 5 years at $1,100 Which of the following statements is CORRECT?
- If the bond is sold in 2 years for $1,200, the annualized rate of return is 11.34%.
- With a current market price of $1,136.92, the bond is currently trading at a premium.
- The coupon payment is subject to ordinary income tax in the year earned.
- The bond has a current yield of 8.80%.
all are correct
During his initial meeting with a prospective high net worth individual, Brian, a CFP® professional, intentionally shares the account performance and name of one of his best clients in order to sway the prospective client to hiring him for a comprehensive wealth management plan. In addition, Brian decides to charge this client a higher than average planning fee to cover the expense of his upcoming Hawaiian vacation. Which of the following Principles has Brian violated?
- Integrity
- Confidentiality
- Fairness
- Fiduciary
1, 2, and 3
Fiduciary is not a principle
Jim, a CFP® professional, is meeting with Francis and Nicolas to communicate the financial planning recommendations. He has gathered all of the necessary information and has developed a comprehensive financial plan. All of the following should be discussed with the couple at this time EXCEPT?
A)
Set up a review meeting in six months to review the progress of their plan.
B)
Review the couple’s goals to make sure they are consistent.
C)
Communicate any observations and findings regarding their financial data.
D)
Present alternatives to the couple to meet their goals.
A
Jasmine has a large paper profit in her Amalgamated Corporation shares, which are currently trading at $42 per share. She does not mind holding on to the stock, but she understands that positive price movements may not last forever. If she is willing to sell the shares at $50, what is the best strategy for her to implement? A) Place a limit order at $50. B) Sell $50 call options. C) Buy $50 put options. D) Place a stop order at $38.
B
Selling a call option will allow her to generate income from the option premium with little risk, because she does not expect the stock to continue to increase in price. If the stock does exceed $50, she would be paid what she wants for the stock. The limit order will neither provide any income nor guarantee fulfillment if the stock price stays below $50. The stop order may help Jasmine in case of the stock falling in price. However, this order will change to a market order when the price reaches $38 and may be filled at a different price.
Harry, a dentist, owns a long-term corporate bond that is presently selling for $1,103.19 in the secondary market. This B rated bond pays an annual coupon of $100 (paid semiannually). What would happen to the price of his 30-year bond if interest rates suddenly rose by 200 basis points?
- The price of the bond would decrease by $190.44.
- The price of the bond would decrease by $328.68.
- The price of the bond would change to $1,374.17.
- The price of the bond would change to $912.75.
1 and 4
Chuck, age 54, is meeting with his CFP® professional, Rachel. During the meeting, he indicates that he is seeking an investment that provides a fixed annual income and a low risk of default. Which of the following securities could Rachel recommend to best meet his needs?
- GNMA MBSs.
- State of Texas water and sewer revenue bonds, rated AAA by S&P.
- State of New York general obligation bonds, rated AA by S&P.
- High-yield corporate bonds.
2 and 3
Rachel could recommend either the State of Texas water and sewer revenue bonds or the State of New York general obligation bonds. GNMAs do not provide fixed coupon payments. Any prepayments are passed on to the GNMA holders. AA and AAA rated municipals bonds offer fixed coupons and low default risk. High-yield corporate bonds are noninvestment-grade bonds and have a high risk of default.
Matt has a portfolio that consists of the following three equities.
FMV Beta Stock A $4,000 0.90 Stock B $9,000 1.25 Stock C $2,000 −1.20 What is the beta of Matt's portfolio? Does this portfolio exhibit a higher or lower level or risk than the overall market?
A) 1.15, higher. B) 0.93, lower. C) 1.03, higher. D) 0.83, lower.
D
Ralph bought 400 shares of LOA stock at $36 per share on margin (assume a 50% initial margin percentage). The margin interest was 7.5% annually. He sold the stock after one year for $49.50 per share. LOA did not pay any dividends during the holding period. What was Ralph's holding period rate of return using margin? A) 33.75%. B) 75.00%. C) 67.50%. D) 37.50%.
C
Proceeds from sale = 400 x 13.50 = $5,400
Initial Investment = $400 x 36 x 50% = $7,200
Interest Charged = 7.5%
Gain = ($5,200 / $7,200) - 7.5% = 67.5%
Ten years ago, Leslie purchased 1,000 shares of XYZ stock for $45,000. She is considering selling these shares to help her mother purchase a new condominium in a retirement community. Her mother needs $50,000 to purchase the unit and make upgrades and improvements. The stock is currently trading at $62.50 per share. Leslie and her CFP® professional agree to sell enough shares to fund this goal. Assuming she sells the stock at the current market price, what is the tax consequence? A) $12,500 long-term capital gain. B) $31,000 ordinary income. C) $14,000 long-term capital gain. D) $5,000 short-tem capital gain.
C
Jeff is interested in BEC stock. BEC's earnings and dividends are expected to grow at a rate of 6% per year for the foreseeable future. If Jeff's required rate of return is 11%, what is the intrinsic value of BEC stock if it is currently paying a dividend of $1.20? A) $20.00. B) $24.00. C) $25.44. D) $10.91.
C
Allison and Thomas are meeting with their CFP® professional, Phyllis, to finalize the implementation of their financial plan. They are very excited to be taking this step to ensure their financial security. Phyllis has prepared all of the necessary paperwork for the couple to sign. What should Phyllis do next?
A)
Implement products and services that provide Phyllis with the highest commission and/or fees.
B)
Review and confirm all of the planned actions contained in the financial plan with the couple.
C)
Refer the couple to an estate planning attorney that offers a high referral fee to financial planners.
D)
Set up an appointment for the first financial plan review to take place in six months.
B
Lynn's investment portfolio has a standard deviation of 5% and a correlation coefficient of 0.95 when regressed against the market. The market has a standard deviation of 4% and a return of 10%. If the 90-day U.S. Treasury bill rate is 2% and Lynn's portfolio earns a 16% rate of return, what is Jensen's alpha for her portfolio? A) 4.5% B) 6.4% C) 5.4%. D) 6.0%
A
Mike expects a certain stock to significantly rise in value in the near future. He owns a corporate bond maturing in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of the following actions should Mike take? A) Buy a call option. B) Sell a put option. C) Buy a put option. D) Sell a call option.
A
