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CFP Exam Missed Questions > Investments > Flashcards

Investments Flashcards

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1
Q

Trust indenture covers the following.

A

Amount of Issue, Property Pledge, and Call Provisions

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2
Q

Bond Rating agencies

A

S&P, & Moodys

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3
Q

Series EE Bonds

A

Purchased at their face value; Investors can declare the interest annually or at redemption; and Interest is subject to federal income tax.

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4
Q

A grandmother wants to fund an EE Bond for grandkids school.

A

In order to qualify for the education interest exclusion, the taxpayer generally must be the parent. Only if the grandparent has custody of the child can they take advantage of the exclusion.

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5
Q

I Bonds

A

Earn interest for up to 30 years; accrue earnings based on both a fixed rate and a semiannual inflation rate; Special Tax benefits available for EE bonds are available for I bonds; Difference between the purchase price and the redemption value is taxable interest (redeemed or matures).

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6
Q

What bonds are guarnteed by the US govt

A

STRIPS; GNMA & EE Bond

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7
Q

When is an issuing corporation more than likely to call a bond?

A

When the bonds are selling at a significant premium.

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8
Q

10Q is quarterly reports, and 10k is annual reports both sent to SEC. What does a shareholder automatically receive?

A

Corporate Annual Report

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9
Q

Preferred Stocks can be callable like bonds, what do they not share?

A

Preferred do not have a fixed maturity date.

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10
Q

Facts about ADRs

A

Buy foreign shares of companies with ADRs; they entitle the shareholder to all dividends; prices quoted in US Dollars; dividends paid in US dollars but declared in the currency of the country of origin. Also ADR holders may receive foreign tax credits for income tax paid to a foreign country.

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11
Q

Do ADRs satisfy “qualified foreign corps” to get 0%-20% qualified dividend rate?

A

Most but not all. will satisfy the IRS definition of “qualified foreign corp.”

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12
Q

Net Operating Income

A 
Gross Rental Receipts
\+ Non-Rental Income
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
= Potential Gross Income (PGI)
- Vacancy & Collection Losses
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
= Effective Gross Income
- Operating Expenses
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
NOI

(Depreciation and Debt service are not factored into the equation DO NOT SUBTRACT EITHER)

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13
Q

Finding maximum price of which you would buy off of Intrinsic value and NOI.

A

NOI / Cap Rate = Max Price at what you would advise to buy.

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14
Q

Equity and Mortgage REITS

A

75% of income must be from Real Estate Investments. Distribute 90% of net investment income (if they fail 90% then all the NII is taxable to the REIT.

Equity REIT income is derived from the difference between net rental income and interest paid on the loans to acquire the properties.

Mortgage REIT income comes from the spread between the lending rate and borrowing rate.

REITs cannot invest in Limited Parterships

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15
Q

REMIC

A

(Real Estate Mortgage Investment Conduit) self-liquidating. If a REMIC is established as a corporation income is taxed as pass-through income.

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16
Q

Current Yield how to calculate

A

How much the fund generates / market price per share

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17
Q

Entities that will purchase a preferred stock

A

Pension plan, Individual at 12% tax bracket; Regular C Corp with excess funds to invest.

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18
Q

Mortgage REITS have substantial taxable income. What type of entity would purchase it?

A

An entity that can defer the taxes. SEP plans, IRAs…

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19
Q

UITs

A

The unit trust will self liquidate; Trade the UIT on the secondary market.

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20
Q

This fund can be an open end and could be a closed end investment.

A

ETF

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21
Q

Closed End Fund has a limited supply of what?

A

Supply of Shares

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22
Q

These can always be purchased at NAV

A

No-Load Balanced Mutual Fund

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23
Q

Shares are directly purchased and redeemed directly with the issuer

A

Open end and No-Load Balanced Fund

They are purchased and redeemed through their issuers.

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24
Q

What type of fund would give an investor the highest degree of diversification possible?

A

Global Funds

S&P is the just US. International is just non-US, Growth Fund is just growth

25
Q

Client is interested in purchasing an APT.

Potential Gross Income (PGI) = $2,500,000
Vacancy Rate = 8% of PGI
Operating Expenses = 28% of PGI
Capitalizatin Rate = 12%

What is the maximum price that you would advise this person to pay?

A 
PGI 
- Vacancy
- Operating Expenses
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
NOI
$2,500,000
-200,000
-700,000
\_\_\_\_\_\_\_\_\_
$1,600,000

1,600,000 / .12 = $13,333,333.33

26
Q

What most affects a stock trading close to expiration and its value declining?

A

Time

27
Q

What affects a call option where the market price is below the strike price?

A

Volatility. The strike price is above the market price (out of the money)

28
Q

For a person to buy a partnership or limited partnership, what must they be?

A

Accredited Investor 1, 2, 3

29
Q

Why are future contracts not a security?

A

They are regulated by the FTC and not the SEC.

30
Q

What type of option offers the highest potential for profit?

A

Buying a call

31
Q

When the market price of a stock is lower than the exercise price

A

The put is in the money

32
Q

Can you have a negative intrinsic value?

A

No. Never

33
Q

Intrinsic Value for a put =

A

IV = (Exercise Price) - (Market Price)

34
Q

Intrinsic Value for a call=

A

IV = MP - EP

35
Q

What term is used to describe the risk where all securities tend to move in the same fashion?

A

Systematic Risk

Market Risk and Systematic Risk are synonymous

36
Q

What are examples of Liquid Investments?

A

CD Maturing Shortly, Life Insurance CV, Money Market Fund

37
Q

Standard Deviation Qs:

5.75% Mean; Standard Deviation of 7.59%. Within what range could an investor expect its return to fall 68% of the time?

A
  1. 75 -7.59 = -1.84

5. 75+7.59 = 13.34

38
Q

Standard Deviation Qs:

5.75% Mean; Standard Deviation of 7.59%. Within what range could an investor expect its return to fall 95% of the time?

A

2X Std. Dev.

  1. 75 - (7.59 + 7.59) = -9.43
  2. 75 + (7.59 + 7.59) =20.93
39
Q

If the Question say 98%…

A

You multiply 3 x

40
Q

If a stock has a beta of .6 how much will it move up or down?

A

60%

41
Q

If a stock has a beta of 1.5 how much will it move if the market rises or falls by 10%?

A

50% more volatile. 1.5 X 10% = 15%

42
Q

The beta of a portfolio is which of the following?

A

Equal to the weighted beta. A portfolio’s beta is the weighted average of each security in the portfolio’s multiplied by its beta.

43
Q

Reinvestment risk affects what type of investments?

A

Anything that has interest and return of principal. GNMA’s have both.

44
Q

What type of portfolio would be good to own?

A

A portfolio with a correlation coefficient of zero.

45
Q

Beta risk level expresses what?

A

Volatility, and Systematic risk

46
Q

When two investments are perfectly positively correlated?

A

The correlation coefficient is +1.0

47
Q

Correlation Coefficient is?

A

A negative correlation coefficient will reduce the portfolio risk.

A negative correlation coefficient will make beta negative.

48
Q

How do you calculate Geometric Mean?

Example: The annual returns for XYZ common stock for the last 3 years have been 18%, 10%, -30%. What is the geometric mean over the three years?

A

1.18x1.10x.7= .9086

FV =.9086
PV = -1
N = 3

IY = -3.14%

Geometric Return is TWR

49
Q

What is the main use of TWR?

A

To evaluate the performance of a portfolio manager. It is not affected by cash flows.

50
Q

Biggest mistake made in calculating a dollar weighted return?

A

Reinvestment Rates. It is an IRR calculation. It is assuming that reinvestment rates is constant.

51
Q

Holding Period Return is what type of return?

A

It is the total return over the period from purchase to the end of period or sale.

52
Q

What is the future value if not stated?

A

FV is $1,000 if not stated something else than par.

53
Q

How do you calculate Current Yield?

A

CY = Annual Interest in Dollars / Bonds Current Price

54
Q

What dictates a discount bond?

A

If the bonds current yield is higher than nominal yield.

55
Q

How can you use Taxable Equivalent Yield?

A

Figuring out the interst rate on taxable bonds that are necessary to provide the same after-tax return as a municipal security

TEY = Tax Exempt Yield / 1 - Tax Rate

56
Q

What if a clients tax bracket changes from 32% to 50%, what happens?

A

Existing bond portfolio’s will increase in value, and Current yield in bonds will decrease. Demand for muni’s will drive the prices up and in opposite %’s down.

57
Q

Muni’s are exempt from?

A

Federal income tax, but they are subject to state and local taxes (unless purchased by a resident of the issuing state).

58
Q

What are treasury bonds exempt from?

A

Exempt from State and Local taxes. Fully taxable from Fed though.

CFP Exam Missed Questions (3 decks)

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