Kaplan Cheat sheet Flashcards
Concept Understanding
1
Q
What would an investor in preferred stock be most concerned about?
A
The issuer’s ability to pay dividends.
2
Q
What do ADRs (American Depository Receipts) facilitate, and what risk do they still carry?
A
ADRs (American Depository Receipts) facilitate trading in foreign securities but still have currency risk.
3
Q
Who issues ADRs (American Depository Receipts)?
A
Domestic branches of American banks.
4
Q
Why would investors allocate more of their portfolios to ADRs ( (American Depository Receipts) if they expect the U.S. dollar to weaken?
A
Because a weaker dollar increases the value of foreign investments when converted back to U.S. dollars.
5
Q
What do investors in convertible preferred stock or bonds sacrifice, and what do they gain?
A
They sacrifice some income in exchange for potential appreciation.
6
Q
What are the two types of employee stock options?
A
Nonqualified Stock Options (NSOs) and Incentive Stock Options (ISOs).
7
Q
How are all bonds priced?
A
As a percentage of par value, which is always $1,000.
8
Q
In what fractional increments are corporate and municipal bonds quoted?
A
In 1/8 of a point, which equals $1.25.
9
Q
In what fractional increments are U.S. Treasury notes and bonds quoted?
A
In 1/32 of a point, which equals $0.3125.
10
Q
What is the minimum credit rating for investment-grade debt?
A
BBB (S&P) or Baa (Moody’s).
11
Q
What is debt rated below BBB (or Baa) called?
A
High-yield or junk bonds.
12
Q
At what price do convertible bonds generally trade relative to parity price?
A
Slightly above parity price.
13
Q
How is current return (yield) calculated?
A
By dividing the annual dividend (or interest) by the current market price.
14
Q
What is the relationship between yield to maturity (YTM) and holding period return (HPR) when coupons are reinvested at a rate higher than YTM?
A
YTM will be lower than the holding period return (HPR) if coupons are reinvested at a rate higher than the YTM.
15
Q
What is the relationship between a bond’s coupon, yield to maturity (YTM), and yield to call (YTC) when selling at a discount or premium?
A
- A bond selling at a discount always has a higher yield than its coupon.
- A bond selling at a premium always has a lower yield than its coupon.
- The yield to maturity is lower than the yield to call on a bond selling at a discount.
- The yield to maturity is higher than the yield to call on a bond selling at a premium.
16
Q
How do you calculate the Tax-Equivalent Yield (TEY) for a municipal bond?
A
Tax-equivalent yield (TEY) = Municipal bond coupon ÷ (100% - investor’s tax bracket).
17
Q
What information is important when performing cash-flow analysis on a mortgage-backed pass-through security?
A
The average maturities of the underlying mortgages.
18
Q
What is a Eurodollar bond and why does it have no currency risk?
A
A Eurodollar bond is issued outside of the United States and is dollar-denominated, meaning it has no currency risk.
19
Q
What are Yankee bonds and how are they denominated?
A
Yankee bonds are issued in the United States by foreign entities and are denominated in U.S. dollars.
20
Q
How is commercial paper (CP) traded in the money market?
A
Commercial paper (CP) is traded at a discount in the money market.
21
Q
What are the key characteristics of negotiable (jumbo) certificates of deposit (CDs)?
A
Negotiable (jumbo) CDs are issued at face value and do not have a prepayment penalty.
22
Q
What is the LIBOR and what role does it serve in financial markets?
A
The LIBOR (London Interbank Offered Rate) is the world’s most widely used benchmark for short-term interest rates.
23
Q
What does DDA stand for and what type of account is it?
A
DDA stands for demand deposit account, usually a checking account at a bank.
24
Q
What are the three types of investment companies?
A
Face-amount certificates
Unit investment trusts
Management companies.
25
How do closed-end funds and open-end (mutual) funds differ in terms of trading?
Closed-end funds trade on secondary markets (NYSE, Nasdaq), while open-end (mutual) funds do not.
26
What determines the price of a closed-end company?
The price of a closed-end company is based on supply and demand, not on its net asset value (NAV).
27
What is one important factor to consider when comparing mutual funds?
The tenure of the management.
28
How can net redemptions affect a mutual fund’s performance?
Net redemptions can cause portfolio managers to alter their investment strategies, potentially leading to negative consequences for performance.
29
What is a breakpoint sale and why is it considered a violation?
A breakpoint sale occurs when an investor is sold mutual fund shares just below a breakpoint, which means they do not receive the discount they are entitled to. It is considered a violation because it’s a practice to maximize commissions at the expense of the investor.
30
What is a 12b-1 fee and how does it differ from a CDSC?
A 12b-1 fee is a percentage of the fund's net asset value (NAV) used for the distribution of its shares. It is not a contingent deferred sales charge (CDSC), which is a fee paid when shares are sold.
31
What types of securities are typically included in a money market fund’s portfolio?
A money market fund’s portfolio holdings typically include Certificates of Deposit (CDs), Treasury bills, Commercial Paper (CP), and repurchase agreements.
32
What characteristics define a venture capital fund's investment approach?
A venture capital fund manager seeks young, promising companies, which involves high risk, high return, and low liquidity.
33
How are hedge funds typically organized, and what is a key requirement for REITs?
Hedge funds are usually organized as partnerships, where management invests alongside the investors. REITs must distribute at least 90% of their taxable income.
34
What do all derivatives have in common regarding their value?
All derivatives derive their value from an underlying instrument.
35
What is a call option, and what type of strategy does it represent?
A call option is the right to buy an asset at the strike price. It represents a bullish strategy, where the investor expects the price to rise.
36
What is a put option, and what type of strategy does it represent?
A put option is the right to sell at the strike price and is a bearish strategy.
37
How does an option writer’s market outlook compare to the buyer’s?
An option writer’s market outlook is the opposite of the buyer’s.
38
What is the key difference between rights and warrants in terms of duration?
Rights are short-term, while warrants are long-term.
39
Who has an obligation in futures and forward contracts, and who is obligated in options contracts?
Holders of futures and forward contracts have an obligation. In options, only the seller (short position) is obligated to perform if exercised, while the holder (long position) has no obligation.
40
How does liability differ between limited partners and general partners in a Direct Participation Program (DPP)?
Limited partners have limited liability, meaning they can only lose their investment. General partners have unlimited liability, meaning they are personally responsible for the debts and obligations of the partnership.
41
In a limited partnership program, what limits a limited partner’s loss?
A limited partner's loss is limited to his basis, which includes his initial contribution and any funds committed but not yet contributed.
42
What is the sale of a life insurance policy in the secondary market called?
A viatical settlement or life settlement.
43
What type of financial instruments are ETNs & ELNs?
ETNs (Exchange-Traded Notes) and ELNs (Equity-Linked Notes) are actually debt instruments.
44
What is the risk level of leveraged and inverse funds?
Leveraged and inverse funds are highly speculative.
45
What are key characteristics of investment real estate?
Active rather than passive role; Generally not correlated with the stock market; Potential inflation hedge; High leverage increases risk and possible reward
46
What are key characteristics of commodities as an investment?
Generally not correlated with the stock market; Potential inflation hedge; Agricultural commodities are very popular; Precious metals have the largest spreads (Gold, Platinum, Silver)
47
What are the two main government policies used to influence the economy?
Fiscal policy & monetary policy.
48
What does fiscal policy involve, and who controls it?
Fiscal policy involves taxing and budgeting and it is controlled by Congress and the President.
49
Who controls monetary policy, and what tools do they use?
The Federal Reserve Board (FRB) controls monetary policy using the discount rate, reserve requirements, and open-market operations. The prime rate is NOT a tool of monetary policy.
50
Which of the following is NOT a tool of monetary policy: Discount rate, Reserve requirements, Open-market operations, or Prime rate?
Prime rate is NOT a tool of monetary policy.
51
What is a top-down analysis in investing?
A top-down analysis identifies the best-performing sectors of the economy and buys stocks in those sectors, expecting those companies to do well.
52
What is a bottom-up analysis in investing?
A bottom-up analysis focuses on identifying individual companies that will outperform others in their industry.
53
How does the strength of the U.S. dollar affect exports and imports?
If the dollar weakens, exports increase and imports decrease; If the dollar strengthens, exports decrease and imports increase.
54
What is a trade deficit and how does it affect the value of the dollar?
A trade deficit occurs when a country imports more than it exports, leading to a weaker dollar.
55
How does the balance of payments affect the strength of the dollar?
Net exports lead to a stronger dollar; Net imports lead to a weaker dollar.
56
What are the phases of the business cycle?
Expansion; Peak; Contraction; Trough
57
Where would a corporation disclose pending litigation or off-book debts?
They will be revealed in the footnotes to the financial statements or the annual report.
58
What is the formula for the acid test (quick asset ratio)?
Acid test = (Current assets - Inventory) ÷ Current liabilities.
59
What happens to net worth and working capital when a company redeems bonds?
When redeemed at par, there is no change to net worth. If redeemed at a premium, net worth is reduced. If redeemed at a discount, net worth increases. In all cases, working capital is reduced.
60
When common stock with a par value of $1 is issued at $5 per share, what happens to the extra $4?
The extra $4 is recorded as paid-in or capital surplus.
61
What is another term for revenue on the income statement?
Sales
62
How do you compute cash flow from operations (CFO)?
Start with net income and add back all noncash charges such as depreciation.
63
When is a corporation whose securities are registered with the SEC excused from filing a Form 8-K?
When a wholly owned subsidiary is relocated to a different state.
64
Which of the following are not considered securities?
A) Retirement plans (IRAs, 401(k)s);
B) Nonvariable insurance contracts (fixed annuity, term, whole life, modified endowment);
C) Collectibles;
D) Commodities (e.g., gold);
E) Condominiums used as a personal residence;
F) Currencies
All of the above are not considered securities.
65
What is the main purpose of the Securities Act of 1933?
The main purpose is the registration of securities, often referred to as the "Paper Act."
66
When can nonexempt new issues be sold, and what can be accepted before the effective date?
Nonexempt new issues can only be sold once the prospectus is effective. During the registration period (before the effective date), indications of interest (but no orders or money) can be accepted.
67
What is required for a security registered by qualification to become effective under the USA?
A security registered by qualification becomes effective only with an active review of the registration.
68
What are some of the most common exempt transactions under the USA?
The most common exempt transactions are:
1. Isolated nonissuer transactions;
2. Unsolicited orders;
3. Transactions with institutions;
4. Transactions between the issuer and underwriter;
5. Transactions by fiduciaries;
6. Private placements (10 or fewer offers to noninstitutional clients within 12 months).
69
Does an agent of a broker-dealer (BD) need to be registered if the security or transaction is exempt?
Yes, even if the security or transaction is exempt, the agent of a BD must be properly registered.
70
Can a registered agent accept an unsolicited order for a nonexempt unregistered security?
Yes, a registered agent can accept an unsolicited order for a nonexempt unregistered security because it is an exempt transaction. However, the Administrator may require clients to acknowledge that the order was unsolicited.
71
What characteristics exclude someone from being considered a person under legal definitions?
A person is not a minor, a dead person, or someone declared mentally incompetent.
72
What does a person need to meet in order to be classified as an investment adviser (IA)?
A person meeting the three-prong test is classified as an investment adviser (IA).
73
When is registration as an investment adviser (IA) required regarding comparing adviser performance?
If a person is in the business of comparing the performance of one adviser against others for compensation, registration as an IA is required.
74
Which professionals were added by IA-1092 to the definition of investment advisers?
Financial planners, entertainment/sports representatives, and pension consultants.
75
What are the registration requirements based on assets under management (AUM) for investment advisers?
AUM of $110 million or more—SEC registration as federal-covered adviser;
AUM less than $100 million—state registration.
76
What happens when a federal-covered investment adviser’s AUM falls below $90 million?
They must register with the state(s).
77
When must an investment adviser (IA) register with the SEC?
If any advisory clients are investment companies.
78
Who is excluded from the definition of an investment adviser (IA) under the LATE rule?
Lawyers, accountants, teachers, and engineers, as long as their advice is incidental to their professional practice.
79
If an investment adviser (IA) has no place of business in a state, what is the maximum number of institutional clients they can have without needing to register?
An unlimited number of institutional clients.
80
What does the snowbird rule provide an exemption from for securities professionals?
It provides an exemption from registration when dealing with vacationing clients, subject to the 30-day rule for change of residence.
81
Who can use the term "investment counsel"?
An investment adviser (IA) whose principal business consists of rendering investment advice and a substantial portion of their advisory business involves investment supervisory services.
82
Under the Uniform Securities Act (USA), when do professionals' registrations and withdrawals take place?
They take place at noon, 30 days after the completed application.
83
When do registrations of persons expire and how often do they need to be renewed under the Uniform Securities Act (USA)?
All registrations of persons expire on the first December 31 after registration, with annual renewal after that.
84
When does a successor firm to a broker-dealer (BD) or investment adviser (IA) under the USA pay fees for registration?
A successor firm to a broker-dealer (BD) or IA does not pay a fee until the renewal date.
85
What must all professionals file as a permanent part of their registration?
A consent to service of process.
86
What is required for an investment adviser (IA) exercising discretion over client accounts under the Uniform Securities Act (USA)?
$10,000 net worth or a surety bond.
87
What is required for an investment adviser (IA) maintaining custody of customer funds or securities under the Uniform Securities Act (USA)?
$35,000 net worth or a surety bond.
88
How do bonding, net worth, and recordkeeping requirements apply to state-covered and federal-covered IAs?
A state-covered IA that meets the bonding, net worth, or recordkeeping requirements of its home state satisfies the requirements for any other state in which it is registered; Federal-covered IAs only need to meet SEC requirements.
89
At what ownership level is a person deemed to be in control of an investment adviser (IA) under state and federal law?
A person is deemed to be in control of an IA if they have an ownership level of at least 25%.
90
Where must company records, such as corporate charters or partnership agreements, be maintained, and for how long?
Company records must be maintained in the principal office of the IA or BD and preserved for at least three years after the termination of the enterprise.
91
Who qualifies as an Investment Adviser Representative (IAR)?
An IAR is an individual associated with an investment adviser (IA), including those who supervise IARs.
92
Who qualifies as an Investment Adviser Representative (IAR)?
An IAR is an individual associated with an investment adviser (IA), including those who supervise IARs.
93
Who qualifies for the de minimis exemption under state registration rules?
An Investment Adviser Representative (IAR) with a state-registered Investment Adviser (IA) qualifies for the de minimis exemption.
94
Do IARs with a federal-covered IA qualify for the de minimis exemption?
No, IARs with a covered IA do not have a de minimis exemption, but they only register in states where they have a place of business, regardless of the number of clients.
95
Under the Uniform Securities Act (USA), when must a solicitor for an investment advisory firm register as an Investment Adviser Representative (IAR)?
A solicitor must register as an IAR if they are paid a fee for their services.
96
Under the Uniform Securities Act (USA), who must notify the Administrator when an Investment Adviser Representative (IAR) leaves an Investment Adviser (IA)?
If the IA is state-registered, the IA notifies the Administrator; If the IA is federal-covered, the IAR notifies the Administrator.
97
Under the Uniform Securities Act (USA), when must a broker-dealer (BD) register in a state?
A BD must register in a state if it has an office there.
98
Under the USA, when must a broker-dealer (BD) post a surety bond?
A BD must post a surety bond if it exercises discretion or maintains custody of customer funds/securities, unless its net capital exceeds SEC requirements.
99
When does an agent need to post a surety bond?
An agent exercising discretion (but not having custody of funds or securities) may need to post a surety bond.
100
What alternatives can the Administrator accept instead of a surety bond?
The Administrator may accept deposits of cash or securities in lieu of a surety bond.
101
What must a surety bond provide to meet the requirements of the Uniform Securities Act (USA)?
It must allow any customer who can prove a violation to collect against the bond.
102
What must a broker-dealer (BD) do when a customer deposits securities?
The BD must issue a receipt for the certificates promptly.
103
Under the Uniform Securities Act (USA), who must notify the Administrator when an agent terminates association with a broker-dealer (BD)?
Both the agent and the BD must notify the Administrator promptly.
104
Under the USA, when must an individual representing a broker-dealer (BD) register?
Any individual representing a BD in any form of securities offer or sale must be registered.
105
How must records be maintained to comply with regulations?
Records may be kept on a computer disk that cannot be altered.
106
How long must broker-dealers (BDs) and investment advisers (IAs) maintain records?
BD records must be kept for three years; IA records must be kept for five years.
107
When must a broker-dealer (BD) report material changes to its registration?
Material changes must be reported promptly.
108
What are the time limits for filing a civil suit under the Uniform Securities Act (USA) and federal law?
Under the USA: Within three years of the alleged infraction or two years from discovering the violation, whichever comes first; Under federal law: One year from discovery of the violation.
109
What is the right of rescission under the Uniform Securities Act (USA)?
It is the offer to return a customer's money, plus interest, minus any income received from the investment when a sale has violated the USA. The client has 30 days to accept or reject the offer.
110
When does a state Administrator have jurisdiction over securities offers under the Uniform Securities Act (USA)?
A state Administrator has jurisdiction if the offer originates in, is directed to, or is accepted in their state. A violation can lead to multiple Administrators bringing an action.
111
Under the USA, what is the difference between an offer and a sale?
An offer is an attempt to make a sale. A sale only occurs when the actual transaction takes place.
112
Under the USA, is a gift of assessable stock considered a sale? What about a gift of nonassessable stock?
A gift of assessable stock is considered a sale, while a gift of nonassessable stock is not.
113
If a BD (or anyone else) gives a security as a bonus with a purchase, is that considered a sale under the USA?
Yes, if a security is given as a bonus with a purchase (like stock, a car, or a house), it is considered a sale under the USA.
114
Is a stock split or stock dividend considered a sale under the USA?
No, a stock split or stock dividend (even if it's in stock other than that of the issuer) is not considered a sale if there is no cost involved.
115
What is the difference between a stop order, a cease and desist order, and summary action?
Stop Order: An order to stop the sale of a security, typically issued by the Administrator when registration is incomplete or if there is a violation of securities laws.
Cease and Desist Order: An order requiring someone to stop illegal activity, such as fraudulent practices or violations of securities regulations.
Summary Action: A temporary action taken by the Administrator to immediately stop certain actions or conduct pending a hearing, often used to prevent further harm or risk.
116
What is a stop order, and can it be appealed?
A stop order is used to halt the registration of a securities issue; It may be appealed to the appropriate court within 60 days.
117
What is a cease and desist order, and how is it enforced?
A cease and desist order is used to halt the activities of persons engaging in potential violations. The Administrator may issue this order with or without a prior hearing. Failure to comply can lead to a court-imposed injunction.
118
What is a summary action, and what rights does the affected party have?
The Administrator may summarily suspend the registration of any person or security. If a written request is received, a hearing must be granted within 15 days.
119
What are the maximum criminal penalties under the Uniform Securities Act (USA) and federal law?
Under the USA: $5,000 fine and/or three years imprisonment. Under federal law: $10,000 fine and/or five years imprisonment.
120
How are electronic communications treated under compliance rules, and what is important for firms to manage?
Electronic communications are subject to the same scrutiny as written communications.
For social media, the content—not the method of delivery—is what matters.
Firms must have strict controls over personal and office equipment use.
Training is essential for compliance.
121
What is an agency cross transaction?
An investment adviser (IA) represents both the buyer and the seller in a transaction and receives commissions from both sides.
122
When is an agency cross transaction prohibited?
An agency cross transaction is prohibited if the same investment adviser (IA) recommended the transaction to both the seller and the buyer.
123
What must an investment adviser (IA) do before executing an agency cross transaction?
The IA must disclose the nature of the relationship and receive prior consent from the client.
124
What happens if an IA's brochure (Form ADV Part 2A and supplement Part 2B) is not delivered at least 48 hours before entering into a contract?
The client has five business days to terminate the contract without penalty.
125
When must both state-registered and federal-covered investment advisers deliver their brochure (Form ADV Part 2A and Part 2B)?
No later than the commencement of the advisory agreement.
126
What does Form ADV require regarding the investment adviser's compensation?
Form ADV requires the adviser to disclose how they will be compensated, including the fact that fees may be negotiable and that different fees may be charged to different clients.
127
What does the term "guaranteed" mean under the Uniform Securities Act (USA)?
"Guaranteed" means that a third party, not the issuer, guarantees the payment of principal, interest, or dividends, but not capital gains.
128
How is a broker-dealer's website classified under the USA, and how long must records be kept?
A broker-dealer's website is considered advertising, and records must be kept for three years after the original site plan and three years after any subsequent changes to the design.
129
What must be disclosed when there is a conflict of interest, such as recommending a company owned by a family member or underwriting an IPO of an affiliated company?
All conflicts of interest, such as recommending a company owned by your sister or underwriting an IPO of an affiliated company, must be disclosed. BD fees must also be disclosed.
130
What services can a BD charge a reasonable fee for?
A BD is permitted to make a reasonable charge for services like appraisals, account transfers, collection of dividends or interest, and safekeeping of client assets.
131
Why must a financial advisor ensure that an advertised free service is "totally free of any obligations"?
A financial advisor must ensure that a free service is genuinely free, with no hidden fees, required purchases, or commitments, to comply with ethical advertising practices and maintain client trust.
132
What requirement must be met when financial literature describes past investment performance?
It must show all performance, both good and bad, for a minimum of the past 12 months.
133
What requirements must be met for investment adviser (IA) advertisements that contain testimonials or charts?
Testimonials may be included with proper disclosures, and if charts are used, a disclaimer must explain their limitations and difficulties of use.
134
Why is it unethical for an investment adviser (IA) to direct clients to trade in securities in which the adviser has an undisclosed interest?
It creates a conflict of interest by artificially increasing the value of those securities for the adviser's benefit, violating ethical and fiduciary responsibilities.
135
What does investment discretion allow an investment adviser to select for a client?
Investment discretion allows the adviser to select one or more of the following:
Asset (which security to buy or sell)
Amount (how much to buy or sell)
Action (whether to buy or sell)
136
Under what conditions may agents split commissions, and do they need to inform clients?
Agents may split commissions with other agents of the same or affiliated broker-dealers (BDs) and are not required to inform clients of the split.
137
What must be done when a written customer complaint is received?
It must be promptly brought to the attention of the appropriate supervisor.
138
Under what circumstances may an adviser disclose the name of a current client?
An adviser may disclose a client’s name only with the client’s permission, a joint owner’s permission, or under a court or IRS order.
139
What must an investment adviser do when distributing third-party research reports?
When distributing third-party research reports, the investment adviser must give proper attribution to the source.
140
Under what conditions can an investment adviser receive performance-based compensation?
Performance-based compensation is allowed if the client is an investment company or a qualified investor who meets minimum net worth requirements or has a certain amount of assets under management (AUM) with the adviser. If using joint assets, the client must be with a spouse.
141
What is the requirement for investment adviser (IA) fees under the Uniform Securities Act (USA)?
IA fees should be competitive under the USA.
142
When would investment adviser (IA) fees be considered unreasonable?
IA fees are considered unreasonable if they are projected to consistently exceed the expected returns of the client's portfolio.
143
What pricing method is used when an adviser buys the same security for multiple clients in one order but at different prices?
Each client pays an "averaged" price.
144
Can an analyst discuss a stock on TV the same day their report is released on the IA’s website?
No!
145
What should an IA do if a stock certificate or money is inadvertently mailed to them by a client or executing BD?
The IA must return it to the sender promptly, but no later than three business days unless authorized to maintain custody. Third-party checks must be forwarded within three business days.
146
What are the statement and notification requirements for an IA with custody of client funds?
Statements must be sent to clients quarterly, and any change in location must be sent promptly.
147
What are some prohibited practices for an investment adviser (IA)?
Borrowing money or securities from a client, unless the client is a BD, an affiliate of the IA, or a financial institution engaged in lending (a mortgage broker does not qualify).
Loaning money to a client, unless the IA is a financial institution engaged in lending or the client is an affiliate of the IA.
Making a blanket recommendation of the same security to all clients.
148
What is Form ADV-E, and who must file it?
Form ADV-E is for the annual financial examination of an investment adviser (IA). It is completed by the IA and submitted by an independent accountant. It is required only for IAs with custody of client assets.
149
What does Section 28(e) of the Securities Exchange Act of 1934 allow investment advisers (IAs) to accept as compensation from broker-dealers (BDs)?
Under Section 28(e), IAs may accept compensation from BDs in the form of research, customer-related software, and seminar registration fees. However, they cannot accept travel and transportation reimbursement, rent, furniture, or noncustomer-related software and computers.
150
What does the safe harbor provision do to protect customer data?
The safe harbor provision protects customer data by requiring encryption.
151
What should a business continuity plan be based on for an investment adviser (IA)?
A business continuity plan should be reasonable based on the IA's size and operation.
152
What is typically the lowest tax filing status for married individuals?
Married filing jointly is usually the lowest tax filing status.
153
What are the tax considerations for earned income, passive income, and portfolio income?
Earned Income: Subject to regular income tax rates and self-employment tax (if applicable).
Passive Income: Generally taxed at a lower rate, but may be subject to the net investment income tax (NIIT) for high earners.
Portfolio Income: Taxed based on the type of income, such as qualified dividends being taxed at long-term capital gains rates, while interest and non-qualified dividends are taxed at ordinary income tax rates.
154
How are reinvested distributions taxed and how do they affect the cost basis?
Reinvested distributions are taxed in the year of the distribution as income, but they increase the cost basis of the investment, which may reduce taxable capital gains when the investment is sold.
155
What is the difference between the effective tax rate and the marginal tax rate?
The marginal tax rate is the rate applied to the next dollar of taxable income, while the effective tax rate is the average rate you pay on your entire taxable income.
156
What qualifies an asset for long-term capital gains treatment?
An asset qualifies for long-term capital gains treatment if it is held for more than one year (one day plus 12 months).
157
What is the IRS default method for selling securities if no specific shares are identified?
The IRS default method is FIFO (First-In-First-Out).
158
Can an investor choose a method other than FIFO to sell securities?
Yes, the investor can identify specific shares to sell.
159
What method can be used when selling mutual fund shares?
What method can be used when selling mutual fund shares?
160
What is a wash sale in tax terms?
A wash sale occurs when an investor sells a security at a loss and buys a substantially identical asset within 30 days before or after the sale.
161
How long before or after a sale is an investor restricted from buying substantially identical assets?
An investor is restricted from buying substantially identical assets for 30 days before or after the sale.
162
What are AMT preference items in tax terms?
AMT preference items are specific types of income or deductions that can trigger the Alternative Minimum Tax (AMT) because they are treated differently for AMT purposes compared to regular income tax.
163
Can you give examples of AMT preference items?
Examples of AMT preference items include tax-exempt interest from private activity bonds, the exercise of incentive stock options, and depreciation on certain property.
164
What are the different types of joint accounts clients can have?
Joint accounts can be joint tenants with right of survivorship (JTWROS), tenants in common (TIC), or tenants by the entirety.
165
What is the key feature of a joint tenant with right of survivorship (JTWROS) account?
In a JTWROS account, when one account holder dies, the surviving account holder automatically inherits the deceased's share.
166
What distinguishes tenants in common (TIC) from joint tenants with right of survivorship (JTWROS)?
In a TIC account, each owner holds a specified percentage of the account, and if one owner dies, their share passes according to their will or estate plan, not automatically to the other owner.
167
What is the key feature of tenants by the entirety accounts?
Tenants by the entirety is a type of joint ownership available only to married couples, where both spouses must agree to any actions related to the account, and the right of survivorship applies.
168
What is tenancy by the entirety, and who can have this type of account?
Tenancy by the entirety is a type of joint account that is available only to married couples. It requires the consent of both parties for any transactions.
169
What is the key feature of tenancy by the entirety accounts regarding transactions?
Both spouses must consent to any transactions in a tenancy by the entirety account, and the right of survivorship applies, meaning the surviving spouse automatically inherits the deceased’s share.
170
What does TOD stand for, and what is its purpose in individual and joint accounts?
TOD stands for "Transfer on Death." It allows assets in individual and joint accounts (other than TIC) to pass directly to the named beneficiary upon the account holder’s death, avoiding probate for the first to die.
171
Which types of accounts can have a TOD designation?
Individual accounts and joint accounts (other than Tenancy in Common, or TIC) can have a TOD designation.
172
What is the difference between a limited and a full power of attorney?
A limited power of attorney grants authority for specific actions, such as trading, while a full power of attorney allows authority for both trading and managing money.
173
What is the purpose of a durable power of attorney?
A durable power of attorney remains effective even if the principal becomes incompetent, ensuring the agent can continue managing the principal's affairs.
174
When does a power of attorney terminate?
A power of attorney is terminated upon the death of the principal, or when the specific account for which it was given is closed.
175
What form does a sole proprietor file to report business income?
A sole proprietor files Schedule C to report business income.
176
What is a Schedule K-1 used for, and who receives it?
Schedule K-1 is used by limited partners, LLC members, and shareholders in S corporations to report their share of the business's income.
177
What form does a C corporation use to report income?
A C corporation reports its income on Form 1120.
178
When are the filing deadlines for partnership, LLC, and S corporation returns?
Partnership, LLC, and S corporation returns are due on March 15.
179
When are the filing deadlines for sole proprietors and C corporations?
Sole proprietor and C corporation returns are due on April 15.
180
Can the grantor of a trust also be the trustee and the beneficiary?
Yes, the grantor of a trust can also be the trustee and the beneficiary.
181
Who is the remainderman in a trust?
The remainderman is the individual who will receive the principal of a trust when the final distribution takes place.
182
What does the term "per stirpes" refer to in the context of asset distribution?
"Per stirpes" refers to the way assets are distributed to descendants, typically meaning that if a beneficiary predeceases the grantor, their share is passed down to their descendants.
183
Can an Investment Adviser Representative (IAR) be appointed as a trustee, and if so, what must they disclose?
Yes, an IAR can be appointed as a trustee and handle the account, but they must disclose the potential conflict of interest to clients.
184
What happens if someone dies without a will, and who handles the estate in such a case?
If someone dies without a will, the estate is handled by an administrator in intestacy rather than an executor.
185
What is a living will used for?
A living will is used to express the author's end-of-life wishes.
186
What is included in the distributable net income (DNI) of a trust?
DNI includes dividends, interest (including from tax-free municipal bonds), and rents, but does NOT include capital gains reinvested into the corpus of the trust.
187
The distributable net income (DNI) of a trust includes ________, ________, and ________, but does NOT include ________ reinvested into the corpus of the trust.
dividends, interest, rents, capital gains
188
True or False: Capital gains reinvested into the corpus of the trust are included in the distributable net income (DNI) of a trust.
False - Capital gains reinvested into the corpus are not included in DNI.
189
What types of income are excluded from the distributable net income (DNI) of a trust?
Capital gains reinvested into the corpus of the trust are excluded from DNI.
190
What is the income distribution requirement for a simple trust versus a complex trust?
The trustee must distribute all income every year under a simple trust; income may be retained under a complex trust and is reported on Form 1041.
191
What is a generation-skipping trust?
A generation-skipping trust is a trust that continues more than one generation, skipping the children and going to the grandchildren.
192
How is the taxation of gifted stock determined when the donee sells the stock?
The donee acquires the stock at the donor's basis. For example, if the donor purchased stock for $4,000, the donee takes that same $4,000 basis. If the stock is sold for $6,000, the donee realizes a long-term capital gain of $2,000.
193
How is the taxation of inherited stock determined when the beneficiary sells the stock?
The beneficiary receives a stepped-up cost basis, meaning the stock is valued at its fair market value at the time of the decedent's death. For example, if the stock is worth $5,000 at the time of the uncle's death, and the niece sells it for $6,000, the long-term capital gain is $1,000.
194
If a child owns a life insurance policy on their mother, are the proceeds part of the mother's estate?
No, the proceeds from a life insurance policy owned by the child on the mother's life are not part of the mother's estate.
195
What items are included in a spouse's estate?
The spouse's estate would include an IRA, securities, and a money market fund, but not life insurance with the other spouse as the owner.
196
When are estate taxes due, and which form is used to report them?
Estate taxes are due nine months after the date of death and are paid on Form 706.
197
What is the alternative valuation date for estate assets, and when can it be used?
The executor can use an alternative valuation date, which is six months after death.
198
What should clients with a negative net worth do first upon receiving a surprise inheritance?
They should first pay off high-interest (credit card) debt.
199
What does a family’s balance sheet contain?
A family’s balance sheet contains assets and liabilities, not income and expenses.
200
What happens to a liability when it is paid off?
When a liability is paid off, it disappears from the balance sheet.
201
Does term life insurance have a cash value, and is it considered an asset on the balance sheet?
No, term life insurance has no cash value and is not considered an asset on the balance sheet.
202
How can life insurance serve a valuable need in the event of someone's death?
Life insurance can prevent the need to sell income-producing assets to cover estate tax liabilities or other final expenses.
203
What type of investment should clients with a need for cash in the near term consider?
Clients with a need for cash in the near term should invest in money market instruments like T-bills.
204
What is the first choice for preservation of capital?
The first choice for preservation of capital is insured bank CDs.
205
Why are municipal bonds suitable for high tax brackets and not for low tax brackets?
Municipal bonds are tax-exempt at the federal level, making them more beneficial for high tax brackets. They are less beneficial for low tax brackets because the tax advantage is not as significant.
206
What is the time horizon for a client who is 5, 10, or 20 years from retirement?
The time horizon for these clients is their life expectancy.
207
What is the purpose of capital needs analysis?
Capital needs analysis is used to determine coverage for future needs and ignores market volatility.
208
What is the growth rate for Social Security payments when waiting until age 70 to begin receiving them?
The growth rate for Social Security payments is 8% when waiting until age 70.
209
Which individually funded retirement plan has no required minimum distributions (RMDs)?
The Roth IRA is the only individually funded plan that has no required minimum distributions (RMDs).
210
What are the tax implications of contributions and distributions for a Roth IRA?
Contributions to a Roth IRA are made with after-tax dollars, and distributions are tax-free if proper conditions are met.
211
Is life insurance allowed in an IRA?
No, life insurance (term or whole life) is not permitted in an IRA.
212
Is it generally appropriate to include municipal bonds in an IRA?
Is it generally appropriate to include municipal bonds in an IRA?
213
Can one invest in real estate within a retirement plan?
Yes, one may invest in real estate, but cannot benefit the participant or lineal family members.
214
Can a beneficiary of an IRA disclaim proceeds?
Yes, a beneficiary of an IRA may disclaim proceeds.
215
Can a CEO utilize the company’s profit-sharing plan for a short-term loan to the company?
No, a CEO cannot utilize the company's profit-sharing plan for a short-term loan to the company.
216
What type of plan is a deferred compensation plan, and what are its key features?
A deferred compensation plan is nonqualified, so it can be discriminatory and has no mandatory funding. It is frequently used to retain key people.
217
What are the critical factors in a defined benefit plan, and which factor is not included?
The critical factors in a defined benefit plan are the participant's age, annual earnings, and years to retirement, but NOT gender.
218
What provisions did the EGTRRA (Economic Growth & Tax Reconciliation Relief Act) of 2001 allow for those age 50 and older regarding retirement plans?
The EGTRRA of 2001 allowed for catch-up provisions for those age 50 and older for retirement plans and provided for rollovers to an IRA for participants in a government employee's 457 plan.
219
What does it mean when a 401(k) plan is "top-heavy"?
A 401(k) is considered "top-heavy" if a disproportionate amount of benefits or contributions go to key employees, not just highly compensated employees.
220
What is a Safe Harbor 401(k) plan, and how does it avoid top-heavy testing?
A Safe Harbor 401(k) is a plan that does not have to undergo annual top-heavy testing if all employees receive a minimum employer-sponsored contribution with immediate vesting.
221
A Safe Harbor 401(k) plan does not require annual top-heavy testing if all employees receive a minimum ________ contribution with ________ vesting.
A Safe Harbor 401(k) plan does not require annual top-heavy testing if all employees receive a minimum ________ contribution with ________ vesting.
222
What protection does Section 404(c) of ERISA provide to fiduciaries?
Fiduciaries are not liable for losses to the plan resulting from participants selecting their own investments, provided certain conditions are met.
223
What are the key requirements for a plan to qualify for Section 404(c) Safe Harbor?
The plan must offer at least three investment alternatives (a high-yield bond fund should not be one of them).
Participants must be able to change investments at least quarterly.
Participants must have access to their accounts via phone or internet.
224
Under the Uniform Prudent Investor Act (UPIA), what standard must fiduciaries follow?
Fiduciaries must exercise reasonable care, skill, and caution in managing trust assets.
225
What aspects of portfolio management can a trustee delegate under UPIA?
A trustee may delegate portfolio management but cannot delegate the amount and timing of distributions.
226
Is an Investment Policy Statement (IPS) required, and what key elements does it include?
An IPS is recommended but not required. It outlines:
Investment objectives and philosophy;
Methods of performance measurement;
Determination for meeting future cash flow needs, and
Investment parameters to be followed by portfolio managers
227
What two items are not included in an Investment Policy Statement (IPS)?
An IPS does NOT include:
A copy of the Summary Plan Description (SPD) required by the Department of Labor (DOL)
Specific security selection
228
How does the maximum contribution limit of a Section 529 plan compare to a Coverdell ESA?
The maximum contribution to a Section 529 plan is much higher than a Coverdell ESA and is set by individual states.
229
How can ESA and Section 529 funds be used for education?
ESA funds may be used at any level of education. Section 529 funds can be used in full for postsecondary education, but K-12 tuition is limited to $10,000 per year.
230
Are U.S. savings bonds available as investment options in Section 529 plans?
No, U.S. savings bonds are not available as investment options in Section 529 plans.
231
How often can you switch between Section 529 plans?
You can switch Section 529 plans once every 12 months.
232
Can 529 plan funds be used for certain foreign universities?
Yes, 529 plan funds can be used for qualified expenses at certain foreign universities.
233
What is the difference between UGMA and UTMA custodial accounts?
UGMA is limited to securities and cash with transfer at majority, while UTMA can hold almost any asset and transfers at age 21 or later.
234
What is required to open a Health Savings Account (HSA)?
A Health Savings Account (HSA) requires having a high-deductible health plan (HDHP).
235
What is market risk (systematic risk), and can it be diversified away?
**Market risk,** also known as **systematic risk**, is the risk that changes in the overall market will negatively affect individual securities regardless of the company's circumstances, and it cannot be diversified away.
236
What is interest rate risk, and how does it affect interest-sensitive securities?
Interest rate risk is the risk that changes in interest rates will affect the market value of interest-sensitive securities, such as debt and preferred stock. When interest rates rise, the prices of these securities typically fall, and when interest rates fall, their prices generally rise. The longer the duration, the greater the risk.
237
What is inflation risk, and which type of securities are most susceptible to it?
Inflation risk, also known as purchasing power risk, is the risk that the value of the currency unit will decline, causing the principal returned to the investor to have less purchasing power.
Fixed-income securities are the most susceptible to inflation risk.
238
What is currency risk, and how does it affect U.S. investors holding American Depositary Receipts (ADRs)?
Currency risk is the risk that fluctuations in foreign exchange rates will cause the value of an investment to change relative to the investor's home currency.
U.S. investors holding ADRs may still face currency risk, even though ADRs are traded in U.S. dollars.
239
What is unsystematic (or nonsystematic) risk, and how can it be managed?
Unsystematic risk is the risk specific to a particular security, such as business risk, which arises from management decisions, competition, or product deficiencies.
It is independent of the overall market and can be diversified away.
240
What is regulatory risk, and how can it affect companies?
Regulatory risk is the risk that changes in regulations (e.g., by the EPA) can negatively impact a company's earnings or operations, potentially causing financial distress.
241
What is legislative risk, and how can it affect individuals and companies?
Legislative risk is the risk that changes in laws (e.g., tax increases) can negatively impact both corporate and personal earnings, potentially causing financial distress.
242
Legislative risk refers to the risk that ________ changes (e.g., tax increases) can cause financial ________ to both corporate and personal earnings.
legal; distress
243
What is political risk, and how can it affect investments?
Political risk is the risk that political upheavals, such as a coup or the nationalization of an industry, will negatively affect an investment.
244
What is sovereign risk, and how does it affect investments?
Sovereign risk is the risk that a sovereign government will default on its obligations, which can negatively affect investments related to that government.
245
What is liquidity risk, and how does it affect investments?
Liquidity risk is the risk that an investment cannot be turned into cash quickly without significantly lowering the price.
An example is a short sale of a home that is "underwater," where the home cannot be sold quickly without incurring a loss.
246
What is opportunity cost in the context of investments?
Opportunity cost refers to the difference in return between the chosen investment and the next best alternative.
For example, if an investor chooses a stock with an expected return of 11%, but it only returns 2%, and the alternative (such as a 91-day Treasury bill) yields 6%, the opportunity cost is 4% (6% - 2%).
247
What is the liquidation priority order in the event of a company's bankruptcy?
The liquidation priority order is:
1) Secured bondholders
2) General creditors (including debentures)
3) Subordinated debentures
4) Preferred stock
5) Common stock
248
What are the three key factors needed to compute the future value of an investment?
The three key factors are:
1) Current amount invested
2) Expected earnings rate
3) Time the money will be invested
249
What are the three key factors needed to compute the present value of an investment?
The three key factors are:
1) Future amount needed
2) Expected earnings rate
3) Time the money will be invested
250
What does the Rule of 72 tell you about doubling your money?
The Rule of 72 tells you that you can double your money by earning at a rate determined by dividing 72 by the number of years you have to go.
251
What does the Internal Rate of Return (IRR) take into consideration?
The IRR takes into consideration the time value of money.
252
Which variable is NOT needed to compute net present value (NPV)?
The inflation rate is not needed to compute NPV.
253
How does the coupon rate of a bond affect its duration and volatility?
Higher-coupon bonds have a shorter duration and, therefore, less volatility.
254
What is the best way to measure a bond's sensitivity to changes in interest rates?
Convexity is the best way to measure a bond's sensitivity to changes in interest rates.
255
How is discounted cash flow (DCF) used to value a fixed-income security?
Discounted cash flow (DCF) is used to value a fixed-income security by taking the future cash flow (interest payments plus return of the principal) and discounting it to arrive at a present value (PV).
256
What does a stock with a beta of 1.0 indicate?
A stock with a beta of 1.0 mirrors the movement of the overall market.
257
What does positive alpha indicate about a stock or portfolio?
Positive alpha indicates that the stock or portfolio performs better than its beta would predict.
258
What characteristic of a portfolio indicates it is the least volatile?
The least volatile portfolio is the one with the lowest standard deviation.
259
What does correlation measure in terms of securities?
Correlation measures the movement of one security in relationship to the movement of another.
260
What type of correlation contributes to creating the most diversified portfolio?
Negative correlation.
261
What is the primary tool used in fundamental analysis to evaluate a company's financial health?
Financial statements, which are used to compute financial ratios.
262
What does the acid-test (quick) ratio exclude from its calculation?
The acid-test (quick) ratio excludes inventory.
263
What does asset allocation do in terms of risk?
Asset allocation diversifies into different asset classes and reduces unsystematic risk.
264
How does active management differ from passive management?
Active management is tactical, focusing on short-term decisions to outperform the market, while passive management is strategic, focusing on long-term market returns.
265
What is the purpose of rebalancing a portfolio?
Rebalancing is done periodically to bring a portfolio back to its target allocation percentages.
266
What is the dividend discount model (DDM)?
The dividend discount model is a method for valuing a stock by determining the present value (PV) of all future dividends to be paid on a given stock, assuming a constant dividend rate.
267
What is the dividend growth model (DGM)?
The dividend growth model is a method for valuing a stock by determining the present value (PV) of all future dividends to be paid, assuming that dividends will grow by a stated percentage
268
How does a fundamental analyst approach securities analysis?
A fundamental analyst looks at the company's "books," examining financial statements, earnings, and other fundamental data to assess the stock's intrinsic value.
269
How does a portfolio manager typically approach growth investing?
A portfolio manager looks for stocks that trade at higher price-to-earnings (P/E) and price-to-book (P/B) ratios than value stocks, with an emphasis on earnings momentum.
270
How does a portfolio manager typically approach value investing?
A portfolio manager looks for stocks that are cheaper, trading at lower P/E and price-to-book (P/B) multiples, and focuses on the company's financial statements. Higher dividend yields are often found in these stocks.
271
How does a contrarian portfolio manager approach the market?
A contrarian portfolio manager believes the majority is wrong and does the opposite of what most investors are doing.
272
Why are tangible assets placed in a portfolio?
Tangible assets are placed in a portfolio to reduce inflation risk.
273
What does the Efficient Market Hypothesis (EMH) state about security prices?
The Efficient Market Hypothesis (EMH) maintains that security prices adjust rapidly to new information, fully reflecting all available information, meaning markets are efficiently priced.
274
What does the weak form of the Efficient Market Hypothesis (EMH) suggest about technical analysis?
Under the weak form of EMH, technical analysis is ineffective because past price and volume data are already reflected in the current market price.
275
According to the semi-strong form of the Efficient Market Hypothesis (EMH), which types of analysis are ineffective?
Under the semi-strong form of EMH, both technical analysis and fundamental analysis are ineffective because all publicly available information is already reflected in the stock price.
276
What does the strong form of the Efficient Market Hypothesis (EMH) say about the efficiency of the market regarding insider information?
Under the strong form of EMH, even insider information is reflected in the market price, meaning the market is fully efficient and no information, including non-public, can lead to consistent outperformance.
277
According to Modern Portfolio Theory (MPT), what defines the optimal or efficient portfolio?
The optimal or efficient portfolio is one that provides the highest return for a given level of risk, or the lowest risk for a given level of return.
278
When computing the Capital Market Line (CML), which risk statistic is necessary?
Standard deviation is necessary when computing the Capital Market Line (CML). You do not need to know alpha or beta for this calculation.
279
What is the collection of efficient portfolios called?
The collection of efficient portfolios is called the Efficient Set or Efficient Frontier.
280
What is dollar cost averaging?
Dollar cost averaging is the strategy of investing a fixed dollar amount on a regular basis, purchasing at different prices.
281
How can a call option be used to protect (hedge) a short stock position?
Buying a call option is the best way to hedge a short stock position because it gives the right to buy the stock at a specific price, limiting potential losses if the stock price rises.
282
How can a put option be used to protect (hedge) a long stock position?
Buying a put option is the best way to hedge a long stock position because it gives the right to sell the stock at a specific price, limiting potential losses if the stock price falls.
283
How is total return calculated?
Total return is calculated as the annual dividend (or interest) plus appreciation (or minus depreciation) divided by the original investment.
284
What is annualized return?
Annualized return is the total return on an investment, expressed on a 12-month basis.
285
What is after-tax return?
After-tax return is the total return on an investment minus the taxes paid on that return.
286
What is probable return?
Probable return combines different potential outcomes of an investment, weighted by their likelihood, to determine an expected return.
287
What is the real rate of return?
The real rate of return adjusts the nominal return for inflation, based on the Consumer Price Index (CPI), to reflect the actual purchasing power.
288
What is the inflation-adjusted return of Treasury Inflation-Protected Securities (TIPS)?
The inflation-adjusted return of TIPS is always equal to the coupon rate, as the principal value of TIPS increases with inflation, but the coupon payments remain fixed based on that principal.
289
Is total return related to the variability of a portfolio's returns?
No, total return is not related to the variability of a portfolio's returns. Total return measures the overall return from dividends, interest, and capital gains or losses, while variability refers to how much the returns fluctuate.
290
What is the Sharpe ratio and how is it calculated?
The Sharpe ratio is a measure of a stock's risk-adjusted return. It is calculated by subtracting the risk-free rate (91-day Treasury bill) from the security's actual return and dividing that by the standard deviation.
291
How is the market capitalization of a stock calculated?
The market capitalization of a stock is calculated by multiplying the number of outstanding shares by the market value per share.
292
What is the market capitalization range for small-cap stocks?
Small-cap stocks have a market capitalization between $300 million and $2 billion.
293
What is the market capitalization range for mid-cap stocks?
Mid-cap stocks have a market capitalization between $2 Billion and $10 billion.
294
What is the market capitalization range for Large-cap stocks?
Large-cap stocks have a market capitalization over $10 billion.
295
Which index is commonly used to track small-cap securities?
The Russell 2000 index is commonly used to track small-cap securities.
296
Which index is commonly used to track mid-cap securities?
The S&P 400 index is commonly used to track mid-cap securities.
297
Which index is commonly used to track large-cap securities?
The S&P 500 index is commonly used to track large-cap securities.
298
What document must be signed promptly after an initial transaction in a margin account?
The margin agreement must be signed promptly after the initial transaction in a margin account.
299
What is the initial margin requirement under Regulation T?
Regulation T requires an initial margin of 50% for most securities in a margin account.
300
What happens when the equity in a margin account falls below the maintenance margin?
A maintenance call occurs when the equity in a margin account falls below the required maintenance margin, prompting the investor to deposit additional funds or securities to bring the equity back up to the required level.
301
What is a mixed margin account?
A mixed margin account includes both long and short positions, allowing the investor to trade securities that they own (long positions) and securities they have borrowed (short positions) under the same account.
302
What does a positive margin indicate in a margin account?
A positive margin indicates that profits from investments exceed the interest cost of borrowing funds in the margin account.
303
What happens when equity in a margin account drops below 25%?
A maintenance margin call is issued to the client under SRO (Self-Regulatory Organization) rules.
304
What role do Specialists or Designated Market Makers (DMMs) play on the NYSE floor?
They handle orders on the NYSE floor either as a principal or an agent.
305
What is the function of market makers (MMs) in the over-the-counter (OTC) market?
Market makers function in the OTC market by selling from their inventory at their asking price and buying for their inventory at their bid price.
306
What is the inside market?
The inside market is the highest bid and the lowest ask price among all market makers (MMs).
307
What is a market order?
A market order is an order to be executed immediately at the best available price. It is the only order that guarantees execution.
308
What is a limit order?
A limit order is an order that instructs the broker-dealer (BD) to buy a specified security at or below a certain price (buy limit) or sell a specified security at or above a certain price (sell limit).
309
What is a buy stop order and why is it used?
A buy stop order is used to "stop loss" by persons with a short position in a stock.
It is placed above the current market price and triggers a market order once the price reaches the stop level, potentially accelerating the direction of a bull market.
310
What is a sell stop order and why is it used?
A sell stop order is used to "stop loss" by persons with a long position in a stock.
It is placed below the current market price and triggers a market order once the price falls to the stop level, potentially accelerating the direction of a bear market.
311
What is a block trade?
A block trade is a large transaction involving 10,000 shares or more of a security, typically executed outside of the open market to minimize price disruption.
312
What is high-frequency trading (HFT)?
High-frequency trading (HFT) is a type of algorithmic trading where institutions use complex algorithms to execute a large number of orders at extremely high speeds.
313
Is a fixed annuity considered a security?
No, a fixed annuity is not considered a security.
314
Why are variable annuities generally not suited for short-term investing?
Because of their surrender charges, which penalize early withdrawals.
315
What is a key benefit of variable annuities in terms of taxes?
Variable annuities offer tax-deferred growth, allowing investment earnings to grow without being taxed until withdrawn.
316
Why do variable annuities typically have higher expenses than mutual funds with the same investment objective?
Variable annuities have higher expenses due to additional fees, such as mortality and expense (M&E) charges, administrative fees, and surrender charges.
317
What is the participation rate in an index annuity, and how is it typically limited?
The participation rate in an index annuity is the percentage of the index’s return that the annuity holder can earn.
It is usually limited by a cap, which sets a maximum amount of return the annuity holder can receive, regardless of how much the index increases.
318
What is a characteristic of term life insurance in terms of cash value and premiums?
Term life insurance is pure protection with no cash value, and the premium typically increases upon renewal.
319
What is a feature of whole life insurance regarding cash value and loans?
Whole life insurance builds guaranteed cash value over time, and policyholders can take loans against the cash value.
320
What is a key feature of universal life insurance related to premiums?
Universal life insurance has flexible premiums, but insufficient payments could cause the policy to lapse.
321
What is a key feature of variable life insurance regarding cash value?
Cash value in a variable life insurance policy is not guaranteed and can fluctuate based on the performance of the separate account.
322
What is the exchange privilege in a variable life insurance policy?
The exchange privilege allows the policyholder to switch to a new permanent life insurance plan within the first 24 months without medical underwriting.
