Module 3: Equity Investments and Managed Assets

Question 1

Equity Investing Risks

Answer 1

• Market Risk
• Interest Rate Risk
• Financial Risk
• Business Risk

Question 2

Rights

Answer 2

Sometimes referred to as subscription rights, are given by the corporation who plans to raise more money via stock issues. This gives the owner the right to buy more shares of the company before someone else does, so it doesn’t dilute their equity holdings in the company. Rights are valued separately and actually trade in their own secondary market during the “subscription period”.

Question 3

Warrents

Answer 3

Long-Term, customized call options that allows the owner to buy shares of the company at a specified price.

Question 4

Differences Between Warrants and Call Options (4)

Answer 4

• Warrents are not sold in round lots like a call option. aka 1 call option equals x amnt of shares.
• Warrants are created by the corporation, call options created by an individual.
• A warrant is customized to fit the needs of the corporation, whereas the options is required to follow the OCC guidelines.
• A warrant may not expire for years, whereas the Call Option expires within 9 months on average.

Question 5

Specific Idenitification Method

Answer 5

When the shares werre bought for cost basis, which is different from the FIFO method.

Question 6

Difference between Dividend and Interest from a bond

Answer 6

Interest from a bond is a guaranteed payment from a corporation, a dividend is declared by the board of directors

Question 7

Shareholder of Record

Answer 7

The person who receives the dividend because they are the owner who is listed as such on the record date To be listed as the shareholder of record, the investor must purchase stock before the ex-dividend date

Question 8

Record Date

Answer 8

is the first dividend date after the ex-dividend date.

Question 9

Ex-Dividend Date

Answer 9

The first dat eon which a security is traded that a buyer is not entitled to receive a previously declared dividend.

Question 10

Dividend Reinvest Plans (DRIPS)

Answer 10

The opportunity for shareholders to purchase more stock using the dividends they’ve received.

Question 11

Reinvested Dividends Taxes

Answer 11

They are streated the same for income tax purposes as those that you receive in the form of cash, however, the amount reinvested in dividends dds to the investors tax basis.

Question 12

Taxation of Cash Dividends

Answer 12

Qualifying Dividends may be trated at favorable long-term cap gains rates (0%, 15%, 20%) if it meets the following criteria:

• The dividend received is from a domestic corporation or a qualified foreign corporation
• The stock must be held for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date

Non-qualified dividends are taxed at ordinary income tax rate.

Question 13

Which Dividends are Considered Qualifying?

Answer 13

Most dividends declared by the corporate board of directors of a domestic corporation are considered qualifying dividends and are permitted preferential tax treatment.

• qualified foreign companies
• Corporations, who stock of American depository receipts trades readily on an United States securities market

Question 14

Stock Dividends

Answer 14

Dividends paid to shareholders of record in the form of additional shares of company stock rather than in cash.

Question 15

Stock dividends taxation

Answer 15

• Unless they have the option to receive a cash dividend (which would create a constructive receipt), the stock dividend is usually not federally taxable, although it does decrease the basis in the overall holding to reflect the received stock.

Question 16

Forward Pricing

Answer 16

The purchase or redemption of a mutual fund share is determined at the next NAV calculation after an order is entered

Question 17

NAV Calculation

Answer 17

assets(cash+value of securities) - liabilities

Question 18

Mutual Fund Operating Expenses

Answer 18

• Management Fee
• 12b-1 Fees
• Other Expenses

Question 19

Mutual Fund Management Fees

Answer 19

The fee paid by a mutual fund to the investment advisor for its services related to managing the fund

Question 20

12b-1 Fees

Answer 20

Fees used to compensate investment advisors on an ongoing basis for selling the funds

Question 21

Mutual Fund other expenses

Answer 21

Administrative or outside services, such as shareholder recordkeeping, auditing, custodial services, legal services, proxy solicitations, annual meeting costs, directors fees, and state and local taxes

Question 22

Types of Mutual Funds

Answer 22

Bond Funds
equity funds
hybrid funds
precious metal funds
commodity funds

Question 23

Taxable Bonds Funds

Answer 23

• Primary Objective is to provide current income to shareholders.

Question 24

Bond Funds vs. Individual Bonds

Answer 24

• Interest Income Changes, it’s not fixed
• Maturity is not fixed
• Yield is calculated differently, a bond funds yield is based on current income relative to its NAV
• Monthly interest distributions

Question 25

GNMA Funds

Answer 25

These funds hold at least 80% of their portfolios in mortgage-backed securities guaranteed by Ginnie Mae.

Question 26

Multisector Bond Funds

Answer 26

"Strategic Income Bond Funds" - typically purchase 3 types of bonds: US Government Bonds, high-yield corporate bonds, and foreign bonds (up to 25% of the fund's portfolio).

Question 27

Foreign World Bond Fund Risks

Answer 27

Investors should be aware of the potential change in the value of the foreign currency relative to the U.S dollar because some funds won't gedge currency risk.

Question 28

Municipal Bond Fund Considerations

Answer 28

- Determining if the interest from them is subject to the alternative minimum tax, and if so, to what extent.

Question 29

Small Market Capitalization

Answer 29

$2b or lower

Question 30

Mid Market Capitalization

Answer 30

$2b to $10b

Question 31

Large-Cap Capitalization

Answer 31

$10b+

Question 32

Sector Funds

Answer 32

- Invest in specific sectors, must have a minimum of 25% of their assets invested in their specialties.

Question 33

Index Fund Optimization

Answer 33

If an index contains a large number of stocks or the fund has limited assets, the fund will buy a representative sample of the index's stocks OR it will use index options or futures contracts to follow an index.

Question 34

International Funds Correlations with US Funds

Answer 34

- Large Cap International: higher correlation - Emerging markets: lower correlation - Frontier markets: lowest correlation

Question 35

Frontier Markets

Answer 35

- markets less developed than those classified as emerging markets. Exmaples: Ecuador, Kenya, Romania, Panama, and Ukraine

Question 36

Developed Countries

Answer 36

France, Germany, Great Britain, and Japan

Question 37

Emerging Market Countries

Answer 37

Brazil, Mexico, Malaysia, China and India

Question 38

Flexible Portfolio Funds

Answer 38

Give money managers the greatest flexibility in anticipating or responding to economic changes.

Question 39

Types of Flexible Portfolio Funds

Answer 39

- Lifestyle Funds | - Lifecycle Funds

Question 40

Lifestyle Funds

Answer 40

Most of these are funds of funds, usually offering three portfolios with different risk levels such as conservative, moderate and growth.

Question 41

Lifecycle Fund

Answer 41

More commonly referred to as a target-retirement fund or a target date at which the investor will retire.

Question 42

Precious Metal Funds

Answer 42

- These funds seek an increase i the value of their investments by investing at least 80% of their portfolios in securities associated with gold, silver, and other precious metals.

Question 43

Gold Fund Uses

Answer 43

Tend to do well in period of political and economic uncertainty, when real interest rates are low, and when inflation rates increase. A weak dollar also encourages investors to buy gold as a way to preserve purchasing power

Question 44

Silver Fund uses

Answer 44

More closely tied to economic activity. The market for silver is also smaller which makes it more volatile.

Question 45

Commodity Funds

Answer 45

Generally regarded as inflation hedges because of the direct impact that increased commodity prices can have on measures of inflation. Very volatile funds

Question 46

Mutual Fund Tax Considerations

Answer 46

Mutual Fund Taxable Events: - Ordinary Taxable Dividends - Exempt interest dividends - Capital gain distributions You can also receive a tax-free return of capital from the sale of shares; these are considered nontaxable distributions. If an investor sells shares of a mutual fund, there is a tax owed on any gain.

Question 47

Mutual Fund Tax Laws

Answer 47

- required that cash from the year's net gains - those left after taking offsetting losses - must be distributed by December 31st.

Question 48

Investors Capital Gains Calculation after Selling Shares of a Mutual Fund

Answer 48

Net Sales Price received for the shares (after deducting any expense of sale) less the investor's basis (or adjusted basis) in the shares.

Question 49

Three Methods to Calculate Mutual Fund Basis

Answer 49

- Specific Identification Method - Average Cost Method - First in, first out (FIFO) ** The specific identification method will generally be the most favorable for the investor, but it requires the investor to keep detailed records and identify to the IRA the exact shares sold.

Question 50

Closed-End Investment Companies

Answer 50

A company whose shares trade in the same manner that publicly traded stocks trade int he secondary market on a stock exchange or over the counter.

Question 51

Unit Investment Trusts (UITs)

Answer 51

A type of investment company whose units are sold in the secondary market but not on the major exchanges. Generally known as unmanaged or passively managed, funds because professional managers initially select the securities to be included in the portfolio and then hold those unti lthey mature.

Question 52

Taxation of UIT

Answer 52

During the term of the trust, the unit holders are taxed like shareholders of a mutual fund, with capital gains, interest and dividends earned by the trust passed through and taxed to the unit holders.

Question 53

Separately Managed Accounts

Answer 53

An account comprising a diversified portfolio of individual securities managed by a professional money manager.

Question 54

Advantages of SMA's

Answer 54

The professional money manager purchases the securities in the portfolio on behalf of the investor, not on behalf of the fund. Also it gives the investor the ability to maintain an individual cost basis in the securities within the portfolio, thereby making it easier for prudent income tax management.

Question 55

ETF "In-Kind Redemption"

Answer 55

Occurs when the investor redeems some of th shres in the fund for a distribution of some of the fund's underlying stock. So they are not taxed on the distribution.

Question 56

Two types of ETF Replication

Answer 56

- Replicate Index-based ETF | - Sample index-based etf

Question 57

Indexing

Answer 57

The purpose of an indexed portfolio is not to beat the targeted index but merely to match its long-term performance, less any management fees and admin costs.

Question 58

Hedge Funds

Answer 58

Generally unregistered, privately offered, managed pool of capital for wealthy, financially sophisticated investors.

Question 59

Hedge Fund Structure

Answer 59

A partnership, with the general partner acting as the investment manager and investors consituting the limited partners.

Question 60

Hedge Fund Risks (4)

Answer 60

- leverage - short selling - higher risk investments - lack of transparency

Question 61

Fund of Funds

Answer 61

Hedge fund that consists of several, usually 10 to 30, hedge funds.

Question 62

Fund of Fund Fees/Values

Answer 62

The FOF has extra fees for the value that it adds in: - Strategic Allocations - Tactical Allocations - Manager Selection

Question 63

Guaranteed Investment Contracts

Answer 63

Similar to CD's but are issued by insurance companies , not commercial banks. They are not federally insured.

Question 64

Participating vs. Nonparticipating GIC's

Answer 64

Participating = variable return

Question 65

DCA Does Not Guarentee

Answer 65

A profit for investors. This is especially true if the asset continue to decline in price over the long term and does not rebound.

Question 66

Value Averaging

Answer 66

Periodic investments designed to ease the investor into the market on a regular basis. This is not equal dollar investments; instead it aims to have hte market value in th eaccount increase by a definite dollar amount at regular and periodic time intervals.

Question 67

Share Averaging

Answer 67

An equal number of shares of a stock or fund are purchased each period.

Question 68

DCA, Value or Share Averaging?

Answer 68

It comes down to the amount of time you have to allocate to said strategy and the investor profile

Question 69

Mutual Fund Selection Factors

Answer 69

- Investment Objective - Investment Strategy - Investment Holdings - Securities Permitted - Manager Flexibility - Risk Exposures - Fund Performance - Management Continuity - Fees and Expenses - Fund Size - Portfolio Turnover - Fund Age - Tax Efficiency

Question 70

What investment Strategies should be given attention?

Answer 70

- As a general rule, anythign that involves more than 5% of assets is considered material by the SEC. - leveraging through borrowing - short-selling - the lending of securities - Lack of diversification - Manager Flexibility - Investment Style

Question 71

Manager Flexibility

Answer 71

- Consideration should be given to the degree of flexibility that is given to the fund portfolio manager

Question 72

Fund Performance

Answer 72

- Consistency of Performance - Comparing Apples to Apples - Risk Adjusted Performance

Question 73

Fund Company Evaluation

Answer 73

- Low Expenses - Closing Funds - Bringing out "hot" Funds - Advertising Short-Term Performance - Depth and Clarity of Shareholder Communication - Investment Policies and Restrictions (Redemption Fees, which go back into the fund, not the firm) - Management ownership of their own funds - Investment personnel turnover - Large Bonuses to it's Executives

Question 74

Potential Mutual Fund Investing Pitfalls

Answer 74

- New Funds with Great Records - Top-Ranked Funds - Fund Performance, Loads and Fees - Tax Liabilities - Disappearing Underachievers - Misleading long-term performance

Question 75

Mutual Fund Tax Liability Timing

Answer 75

- A purchase of a fund with a large realized gain immediately before a distribution is essentially buying a tax liability because the tax must be paid on those distributions regardless of the amount of time the purchaser has owned the shares. - Short-Term realized gains are taxed at ordinary income rates.