Series 65 Flashcards

Question

Custodian bank

Answer 1

Domestic branch of large US commercial banks issue ADRs. A custodian, typically in the issuer’s country, holds the shares of foreign stock that the ADRs represent. The stock must remain on deposit as long as the ADRs are outstanding because the ADRs are the depositary bank’s guarantee that it holds the stock

Answer 2

Domestic branch of large US commercial banks issue ADRs. A custodian, typically in the issuer’s country, holds the shares of foreign stock that the ADRs represent. The stock must remain on deposit as long as the ADRs are outstanding because the ADRs are the depositary bank’s guarantee that it holds the stock

Answer 3

ADRs are registered on the books of the US banks responsible for them. The individual investors in the ADRs are not the stock’s registered owners.

Answer 4

Although portions of ADRs may be withheld to pay local taxes, owners of ADRs can claim a US tax credit for these withholdings.

Answer 5

Markets in lesser developed countries associated with: · Low levels of income, as measured by the country’s GDP · Low levels of equity capitalization · Questionable market liquidity · Potential restrictions on currency conversion · High volatility · Prospects for economic growth and development · Stabilizing political and social institutions · High taxes and commission costs for foreign investor · Restrictions on foreign ownership and on foreign currency conversion · Lower regulatory standards resulting in a lack of transparency

Answer 6

Highly developed markets with stable political and social institutions that are characterized by: · Large levels of equity capitalization · Low commission rates · Few, if any, currency conversion restrictions · Highly liquid markets with many brokerage institutions and market makers · Many large capitalization securities · Well-defined regulatory schemes leading to transparency similar to that enjoyed by those investing in US securities

Answer 7

· Expanded potential investment universe · Foreign securities sometimes outperform domestic ones · Low correlation with domestic securities which results in a reduction of overall portfolio risk

Answer 8

Country risk · Exchange controls · Withholding, fees, and taxes

Answer 9

A composite of all the risks of investing in a particular country. These may include political risks, such as revolutions or military coups, and structural risks such as confiscatory policies toward profits, capital gains, and dividends. Economic policies, interest rates, and inflation are also elements of risk of investing in emerging countries.

Answer 10

Foreign investors can also be subject to restrictions on currency conversion or movement

Answer 11

Some foreign countries may withhold a portion of dividends and capital gains for taxes. Some also impose heavy fees and taxes on securities that the investor must bear in addition to generally higher brokerage commissions.

Answer 12

· Normally own commercial property (equity REITs) · Own mortgages on commercial property (mortgage REITs) · Do both (hybrid REITs) REITs are organized as trusts in which investors buy shares of certificates of beneficial interest either on stock exchanges or over the counter.

Answer 13

Under the guidelines of Subchapter M of the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its taxable income to the shareholders.

Answer 14

An owner of REITs holds an undivided interest in a pool of real estate investments · REITs trade on exchanges and over the counter · REITS are not investment companies (mutual funds) · REITs offer dividends and gains to investors but do not pass through losses like limited partnerships are therefore are not considered to be direct participation programs (DPPs)

Answer 15

· Opportunity to invest in real estate without the degree of liquidity risk found in direct ownership · A negative correlation to the general stock market · Reasonable income and/or capital appreciation

Answer 16

Because the investor has no control, much of the risk in investing in REITs has to do with the quality of the management · Problem loans in the portfolio could cause income and/or capital to decrease · Dividends are not considered qualified for purposes of 15% maximum tax rate and are taxed at full ordinary income rates

Answer 17

Rights and warrants allow investors to buy additional shares of stock under defined circumstances. Preferred stockholders do not have the right to subscribe to rights offerings.

Answer 18

Entitle existing common stockholders to maintain the proportionate ownership shares in a company by buying newly issues shares before the company offers them to the general public. Preferred stockholders do not have the right to subscribe to rights offerings.

Answer 19

Allows stockholders to purchase common stock below the current market price. The rights are valued separately from the stock and trade in the secondary market during the subscription period.

Answer 20

· Exercise the rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent · Sell the rights and profit from their market value (rights certificates are negotiable securities) · Let the rights expire and lose their value

Answer 21

Certificates granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price. Unlike a right, a warrant is usually a long-term instrument that gives the investor the option of buying shares at a later date at the exercise price.

Answer 22

Warrants are usually offered to the public as sweeteners in connection with other securities, such as debentures or preferred stock, to make those securities more attractive. Such offerings are often bundled as units. Because the value of rights and warrants is dependent upon the value of the underlying stock into which the right or warrant may be exchanged, these are considered derivatives.

Answer 23

Give an employee the right to purchase a specified number of shares of the employer’s common stock at a stated price over a stated time period. For publicly traded stock, the “strike” price is usually the market price of the stock at the time the option is granted. There is usually a vesting period. 2 types of plans: nonqualified stock options & incentive stock options

Answer 24

Most common type of employee stock options. NSOs are treated as compensation. When NSOs are exercise, the difference between the current market price at the time of the exercise and the strike price is reported as wages on the tax returns of the ER and the EE. Therefore, instead of capital gains treatment, the EE is taxed as ordinary income while the ER receives a tax deduction as a salary expense for the difference between the current market price and the strike price.. Because the spread between the market price and the strike price is considered salary, it is subject to payroll taxes as well as income tax.

Answer 25

Generally no tax consequences for ER. As long as stock purchased through exercise of an ISO is held at least 2 years after the date of grant and one year after the date of exercise, any profits are reported as long-term capital gains. If these time limits are broached, the ISO is taxed like an NSO. There is one other time stipulation- a maximum 1o-year limit for exercise. When and ISO is exercised, the difference between the market value at time of purchase and the strike price is a preference item used in calculating the Alternative Minimum Tax (AMT).

Answer 26

No income recognized when option is granted · NO tax due when option is exercised · Tax is due when stock is sold o Gain is capital if held at least one year and sold at least two years after grant o Otherwise-ordinary income · Difference between option price and the FMV on date of exercise is an add back for AMT purposes

Answer 27

Debt capital refers to long term financing. Long term debt (also called funded debt) is money borrowed for a minimum of 5 years.

Answer 28

Largest issuer of debt securities is the US government. Government bonds usually mean federal government. Municipal bonds usually means state or other municipality.

Answer 29

How much am I lending 2. How safe is my loan and how sure am I that I will get my money back? 3. How much interest will I be paid for the use of my money? 4. How and when will I get my money back?

Answer 30

For common stock, par value is of no importance to the investor. With preferred stock, par value is the number on which the dividend is based. Par value is even more important with bonds because not only does it represent what the interest payment is based on, but it also represents the amount of principal to be repaid at maturity.

Answer 31

If the corporation develops financial problems and is unable to pay the interest on the bonds, those real assets pledged as collateral are generally sold to pay off the mortgage bondholders.

Answer 32

Similar to car loan. When the corporation has finished paying off the loan it receives clear title to its equipment from the trustee. If the company does not make the payments, the lender repossesses the collateral and sells it for his benefit.

Answer 33

Is a debt obligation of the corporation backed only by its word and general creditworthiness. Debentures are not secured by any pledge of property. They are sold on the general credit of the company.

Answer 34

Is a bond that is guaranteed as to payment of interest or both principal and interest, by a corporate entity other than the issuer. The value of the guarantee is only as good as the strength of the company making that guarantee.

Answer 35

Means the relative priority of claim of a security. Every preferred stock has a senior claim to common stock. Every debt security has a senior claim to preferred stock. Secured bonds have a senior claim to unsecured bonds. The term senior securities means bonds and preferred stock, because they have a claim senior to common stock. Mortgage and equipment trust certificates have prior claim ahead of unsecured creditors.

Answer 36

A subordinated debenture has a claim that is behind (junior to) that of any other creditor. However, no matter how subordinated the debenture, it is still senior to any stockholder.

Answer 37

Wages earned up to 180 days prior to employer’s declaration of bankruptcy · Taxes · Secured creditors (e.g. mortgage bonds, equipment trust certificates, collateral trust bonds) · Unsecured creditors (e.g. general creditors including debenture holders) · Subordinated debt holders · Preferred stockholders · Common stockholders

Answer 38

· Common stock- taxable as dividend in most cases · Preferred stock- taxable as dividend in most cases · Bonds- taxable as ordinary income in most cases

Answer 39

Backed by pledge of the issuer’s full faith and credit for prompt payment of principal and interest

Answer 40

Payable from the earnings of a revenue –producing enterprise, such as a water, sewer, electric or gas system, toll bridge, airport, college dormitory, etc.

Answer 41

Are the direct debt obligations of the US Treasury with the following characteristics: · They pay semiannual interest as a percentage of the state par value · They have intermediate maturities (2,3,4,7,and 10 years) · They mature at par value

Answer 42

· Pay semiannual interest as a percentage of the state par value · Have long-term maturities, generally 10-30 years · Older 30-year bonds are usually callable at par beginning 25 years after issue. However, the last callable 30-yuear bond was issued in November 1984 · They mature at par value

Answer 43

Help protect investors against purchasing power risk. These notes are issued with a fixed interest rate, but the principal amount is adjusted semiannually by an amount equal to the Consumer Price Index (CPI). They are issued in maturities of 5, 10, and 30 years.. The investor receives interest payments every six months with the newly adjusted principal reflecting inflation and deflation. Like other Treasury notes, they are subject to federal taxes, but exempt from state and local taxes. TIPS adjust the principal every 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.

Answer 44

· Subject to federal taxes · Exempt from state and local taxes

Answer 45

Are issued by US government agencies that have been authorized by Congress to issue debt securities Do not have direct Treasury backing Considered moral obligations of the US government Most agency bonds are described by their titles 2 principal US government agencies that issue debt securities are the Federal Farm Credit Banks & the Federal Home Loan Bank (FHLB)

Answer 46

Are supervised by the Farm Credit Administration. FLBs through Federal Land Bank associations, make loans secured by mortgages to farmers and ranchers

Answer 47

The FICB consists of 12 banks authorized to make loans to farmers for expenses, machinery, and livestock. The loans are intermediate term, running no longer than 10 years

Answer 48

Are operated under the Farn Credir Administration. These banks make loans to farm cooperatives.

Answer 49

Operating under the supervision of the Federal Home Loan Bank board, FHLB is the agency that stands behind the nation's savings & loans. The FHLB lends to members S&Ls to augment the money these S&Ls receive from their regular depositors. FHLB borrows money in the open market by issuing various debt securities, then relents it to S&Ls who relend it to home buyers

Answer 50

Was a government owned corporation that was converted to a private corporation in 1968. Is commons trades on NYSE. FNMA purchases & sells mortgages- primarily those insured by Federal Housing Authority (FHA) or guaranteed by the Veterans Administration. FNMA issues mortgage-backed bonds that can be purchased by individual investors. Considered to be quite safe. Issued at par and pay semiannual interest Like other federal issues, they come out in book entry forms FNMA interest is subject to state and local taxation

Answer 51

In late 1960s when the FNMA was split into 2 corporations (FNMA- privately owned & GNMA- publicly owned) GNMAs are known as modified pass-through certificates They represent an interest in pools of FHA insured mortgages and VA or Farmer Home Administration guaranteed mortgages Carry a minimum denomination of $25,000 Unlike other agencies, they are backed by full faith and credit of US government GNMA interest is subject to state and local taxation

Answer 52

Means that as homeowners make their monthly mortgage payments , these payments are collected in the pool and the shares pass through to the investor. Payment differs from most other securities in 2 respects 1. Payments are received monthly because mortgages are paid monthly 2. Each payment the investment receives consists partly of principal and partly of interest

Answer 53

The issuer does not want to pay for the cost of receiving the rating The issuer does not have a sufficient credit history to enable the rather to make a fair judgment

Answer 54

Volatility is usually substantially higher

Answer 55

The rate charged by major banks to their most creditworthy customers In order for the bank to enjoy a real rate of return, nominal interest rates must be above the rate of inflation

Answer 56

Difference between yields on bonds with the same maturity,, but different quality (rating) to get a sense of the market sentiment. It tends to widen when economic conditions sour and narrow when conditions improve

Answer 57

Rate stated on the face of the bond | Also referred to as coupon rate

Answer 58

Return (annual interest in dollars)/investment | Also called current return

Answer 59

When a bond is selling at a price above par, it is selling at a premium When a bond is selling at a price below par, it is selling at a discount If you pay more, you get less If you pay less, you get more

Answer 60

Current market price of bond Is determined by supply and demand

Answer 61

Interest is free from federal income taxes, and if the investor resides in the issuer's state, it is free from state tax as well.

Answer 62

Yield/100-tax rate= tax equivalent yield (TEY) for municipal bonds Coupon/ 100-tax rate The tax equivalent yield for a municipal bond issued by an entity within a state with a state income tax will have a other equivalent yield to a resident of that state due to the "double" tax exemption

Answer 63

Corporate & municipal bonds are quoted as a percentage of par Each bond point represents $10, and the fractions are in eighths 90 1/4 = $902.50 101 3/4 = $1,017.50

Answer 64

Government bonds are quoted as a percentage of par Each bond point is $10, and each 0.1 represents 1/32 90. 8 = $902.50 101. 24 = $1,017.50

Answer 65

Nominal (coupon) rate is 0 Always issued at a discount No reinvestment risk because there are no interest payments to reinvest More volatile than other bonds of similar quality Even though no periodic interest payments are received, the IRS requires the issuer to send a Form 1099-OID indicating the taxable interest to be reported each year Useful in college education funds and qualified retirement plans because of tax treatment. Low tax bracket for child & tax deferral in retirement plan Zero coupon exists in both corporate and municipal

Answer 66

``` DEF is the issuer 5 is the nominal or coupon rate 35 is the maturity date of 2035 106 is the price of $1,060 "s" is nothing but the separation between the coupon and the maturity date ```

Answer 67

Callability is a feature that permits the issuer to redeem the bids (pay off the principal) before maturity if it so desired

Answer 68

Issuer takes advantage of lower cost of borrowing by issuing new bonds at lower rates prevailing in the market and using those proceeds to Csll in the only bonds with higher coupons Similar to refinancing a mortgage

Answer 69

The number of years into the issue before the issuer may exercise the call provision. The best call protection a bond may have is if a bond is noncallable

Answer 70

Issued by corporations only, it is the option to exchange the bond for shares of the company's common stock. Most convertibles are debentures The conversion is exercisable at the discretion of the investor The indenture tells you the number of shares into which the bond is convertible If a $1000 bond converts into 50 shares and the stock is selling at $40, the investor is getting them at $20 ($1000/50) Bond prices follows the stock's price Most convertible bonds are callable If the bond prices become too high, issuer can force the investors to convert by exercising the Csll provision. It's I'd called. Forced conversion

Answer 71

For convertible bonds If the bond prices become too high, issuer can force the investors to convert by exercising the Csll provision. The reason the bond price went up is because the underlying stock went up. If a bond is called at a price significantly lower than its current market, it will be to the bondholder's advantage to convert the bond into stock. Once that occurs, the issuer owes nothing

Answer 72

Wen two things are equal. If the convertible bond and the common stock we would get upon conversion are worth the same, we osay they are at parity

Answer 73

Downside protection- as long as the company's solvent, investors will be paid There is a market level to which the bond price will drop and go no further on the basis of its coupon Convertibles carry a lower interest rate because of the convertibility factor Upside potential- if the business does well, investor can convert

Answer 74

Lower interest rate than nonconvertible debt | Possibility that convertible bond may be called away before investor is ready to convert

Answer 75

One concern of any convertible security holder is protection against the potential dilution resulting from a stock split or a stock dividend

Answer 76

Market for buying and selling short-term loanable funds It is called money market because that is what is traded there, money not cash The buyer of a money market instrument is the lender of the money; the seller is the borrower Maturity dates are 1 year or less; most less than 6 months Safe Commercial paper less safe than t-bill

Answer 77

T-bills are the bellwether of the money market T-bills, t-notes, and t-bonds are the treasury securities Low risk, extremely high liquidity Exempt from state tax, but not federal Yields are the lowest in the money market

Answer 78

Created in the mid 1960s Unsecured time deposits Negotiable CDs can be sold in the open market prior to maturity date CDs are the only money market instrument that pays interest semiannually To be a negotiable CD, it must have a value of $100,000, with $1 million being the most common

Answer 79

Short-term paper issued by corporations, primarily I raise working capital. Used for current rather than long-term needs Commercial paper is exempt from registration as long as the maximum maturity is less than 270 days

Answer 80

Debt obligations backed by a pool of mortgages and usually have a pass-through feature. GNMA is an example Investors have a undivided interest, do not own a specific mortgage, and have a proportionate share in the cash flow GNMAs have denominations of $25,000 GNMA investors receive monthly payments GNMAs, FHA- insured, and VA- guaranteed mortgages back by full faith and credit of US government

Answer 81

Federal Home Loan Mortgage Corporation (FHLMC) is another type of pass-through It is sometimes called a participation agreement (PC) Freddie Mac PCs comprise qualifying FHLMC, conventional, residential mortgages on single-family homes. Fannie Maes and lFreddie Mac PCs are not backed by full faith and credit of the US government. Freddies and Fannies have higher rates than GNMAs

Answer 82

Introduced in June 1983 Bonds that are collateralized by mortgages and mortgage-backed securities Most of the mortgages are private, not qualified under VA or FHA CMOs have a stated maturity with loans of varying maturity dates Complicated and difficult to understand Prepayment risk leads to mortgages being refinanced when rates drop Default risk; particularly if the mortgages are subprime Reinvestment risk Liquidity risk

Answer 83

Difficult to predict a cash flow on a portfolio of mortgage backed securities Although they do have default risk (other than GNMA), the specific risk is due to prepayment, complicates the computation When doing cash flow analysis on a mortgage-backed pass-through security, you would want to know the average maturities

Answer 84

Eurodollars are US dollars deposited in banks outside the US; that is, the deposits remain denominated in US dollars rather than the local currency European are Japanese yen deposited in banks outside Japan. When a currency is preceded by the prefix euro, it refers to a bank deposit outside of the country's currency Time deposits tend to be short-term, ranging from overnight to 180 days European banks lend Eurodollars to other banks much in the same way US banks lend federal funds. Interest rate is usually based on LIBOR

Answer 85

Any long-term debt instrument issued and sold outside the country of the currency in which it is denominated. e.g. A US dollar-denominated Eurobond is called eurodollar bond.

Answer 86

Eurodollar bonds pay in US dollars Eurobonds pay in foreign currency These instruments must be issued outside of the US Eurodollar bonds are issued in bearer form Interest is paid once per year Holders are not subject to withholding test

Answer 87

A Yankee bond is a US dollar- denominated bond issued by a non-US entity in the US market A Eurobond is a US dollar- denominated bond issued by a non-US entity outside of the US E.g. maple bond- Canada, Matilda bond- Australia

Answer 88

Named after former US Treasury Secretary Nicholas Brady were created in 1989 to exchange defaulted bank loans issued in less developed countries with a security that can be carried on the bank's books as a performing asset Partners include the IMF and the World Bank Most are denominated in US$ Maturities range from 10 to 30 years Can be interest bearing or zero coupon Safety of Brady bond depends on the pledged collateral Liquidity of Brady bonds is far superior to that of other debt issues from emerging markets

Answer 89

T-bills are always issued at a discount, they pay no interest. The investor receives par value and makes the difference between the discounted purchase price and the par received at maturity. All government bonds are now book entry There has not been a T-note or bond issued since July 1986 with interest coupons attached.

Answer 90

Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders There is no obligation to pay the dividend The yield is invariably higher than that on debt issues Fixed return may not keep up with inflation, regardless of corporate earnings The dividend will not change so there is no hope of increased income

Answer 91

Because of the way many investors combine their investment capital, investment companies are frequently referred to as "pooled investments Investment companies = pooled investments

Answer 92

A corporation or trust path rough which individuals invest in large diversified portfolios of securities by pooling their funds with other investors' funds

Answer 93

Diversification of investments Lower transaction costs Professional management

Answer 94

Investment companies must abide by similar registration and prospectus requirements imposed by Securities Act of 1933

Answer 95

The Investment Company Act of 1940 classifies investment companies into three broad types: Face-amount certificate companies Unit investment trusts Management investment companies

Answer 96

A contract between an investor and an issuer in which the issuer guarantees payment of a stated (or fixed) sum to the investor at some set date in the future. IN return for this future payment, the investor agrees to pay the issuer a set amount of money either as a lump sum or in periodic installments.

Answer 97

If the investor pays for the face-amount certificate (FAC) in a lump sum, the investment is known as a fully paid FAC. Issuers of these investments are called FAC companies. Few FAC companies operate today because tax law changes have eliminated their tax advantages

Answer 98

· FAC companies pay a fixed rate of return · FAC companies do not trade in the secondary market; they are redeemed by the issuer · FAC companies are classified as investment companies

Answer 99

· Is an unmanaged investment company organized under a trust indenture · Do not have boards of directors · Do not employ an investment adviser; and · Do not actively manage their own portfolios (trade securities) · Trustees typically buy other investment company shares (nonfixed (UIT) or stocks or bonds (fixed UIT) to create the desired portfolio · Because UITs are not managed, when securities in the portfolio are liquidated or called, the proceeds must be distributed.

Answer 100

· Typically purchase a portfolio of bonds and terminates when the bonds in the portfolio mature · When UITs consist of bonds, the UIT terminates when the bonds in the portfolio mature · When fixed UITs consist of equities, a liquidation date is set in the offering documents

Answer 101

Purchase share of underlying mutual funds Under Investment Company Act of 1940, the trustees of both fixed and nonfixed UITs must maintain secondary markets in the units thus allowing unit holders the ability to redeem their units.

Answer 102

Most ETFs are organized as UITs and trade, as the name implies on exchanges or NASDAQ

Answer 103

· Are not actively managed; there is no board of directors (BOD) or investment adviser · UIT shares (units) must be redeemed by the trust · UITs are investment companies as defined under the Investment Company Act of 1940

Answer 104

· The most familiar type of investment company · Actively manages a securities portfolio to achieve a stated investment objective · Is either closed-end or open-end · Initially both closed- and open-end companies sell shares to the public; the difference between them lies in the type of securities they sell and how investors buy and sell their shares- in the primary of secondary market.

Answer 105

· Trade upon supply and demand for their shares · To raise capital, a closed-end investment company conducts a common stock offering. · For the initial offering, the company registered a fixed number of shares with the SEC and offers them to the public for a limited time through an underwriting group · The fund’s capitalization is fixed unless an additional public offering is made · Closed-end companies can also issue bonds and preferred stock · Closed-end companies are also called publicly traded funds

Answer 106

· After the stock is distributed, anyone can buy or sell shares in the secondary market either on an exchange or OTC · As a result, their buying and selling price does not have a direct relationship to the NAV of the shares

Answer 107

Price at which an investor can sell

Answer 108

Price at which an investor can buy

Answer 109

· Does not specify the exact number of shares it intends to issue · It registers an open offering with the SEC · Can raise an unlimited amount of investment capital by continuously issuing new shares · Any person who wants to invest in the company buys shares directly from the company or its underwriters at the public offering price (POP)

Answer 110

NAV + any applicable sales charges

Answer 111

Fund’s liabilities – total assets

Answer 112

NAV/# of outstanding shares

Answer 113

· Country funds are funds that concentrate their investments in the securities of companies domiciled in foreign countries. Well-known examples are the Korea Fund, the New Germany Fund, and the Mexico Fund. · Country funds are generally organized as closed-end (rather than open-end) companies because it is often difficult to liquidate the foreign securities to get their value into the United States

Answer 114

· open-end: unlimited; continuous offering of shares · closed-end: fixed; single offering of shares

Answer 115

· open-end: common stock only; no debt securities; permitted to borrow · closed-end: may issue common stock, preferred stock, debt securities

Answer 116

open-end: o sold and redeemed by fund only o continuous primary offering o must redeem shares · closed-end o initial public offering o secondary trading OTC or on an exchange o does not redeem shares

Answer 117

· Open-end o NAV + Sales charge o Selling price determined by formula in the prospectus · Closed-end o Current market value + commission o Price determined by supply and demand

Answer 118

· Open-end: dividends (when declared), voting · Closed-end: dividends (when declared, voting, preemptive

Answer 119

Because the trading price of closed-end investment company shares is determined by supply and demand, these funds computer their NAV only once per week, rather than daily with open-end companies

Answer 120

· Under the Investment Act of 1940 an investment company qualified as diversified if it meets the 75-5-10 test · 75% of total assets must be invested in securities issued by companies other than the investment company or its affiliates. · Cash on hand or cash equivalents count as part of the 75% required investment in outside companies · Of this 75%, no more than 5% can be invested in any one corporation’s securities · Of this 75%, this investment company can own no more than 10% of an outside corporation’s voting class securities

Answer 121

· Does not meet the 75-5-10 test · A company that specializes in one industry is not necessarily nondiversified

Answer 122

Can still be considered diversified if they meet the 75-5-10 test

Answer 123

· Investors may purchase fractional shares · Usually called mutual funds · Selling price usually includes a sales charge

Answer 124

· Must redeem shares at NAV · Offer guaranteed marketability · Investor owns an undivided interest in the entire underlying portfolio · No investor has preferred status · Fund issues only one class of common stock · Investor shares mutually in gains and distributions with other investors · Investors share in fund’s performance based on number of shares owned

Answer 125

· An excess of shareholder redemptions over new share purchases · Manager must then decide which assets to liquidate Mutual fund sales charges · When buying shares of mutual funds, FINRA sets a maximum sales charge of 8.5% of the POP · The actual schedule of sales charges is specified in the prospectus Closed-end funds Do not carry sales charges. An investor pays a brokerage commission

Answer 126

· All sales commissions are paid from the sales charges collected · Sales charges include commissions for whole food chain plus advertising, sales lit, etc. Types of Mutual Fund sales charges · Front-end loads (difference between POP and net NAV) · Back-end load (contingent sales charge) · 12b-1 fees (asset-based fees, technically not a sales charge)

Answer 127

· Are reflected in a fund’s public offering price (POP) · The charges are added to the NAV at the time the investor buys shares · Class A shares have lower operating expense ratios than the other classes

Answer 128

· Also called a contingent deferred sales charge (CDSC) is charged at the time an investor redeems mutual fund shares · The sales load is a declining percentage charge that is reduced annually · Is usually structured so that it drops to 0 after 6 or 8 years at which time they are converted to Class A shares with their lower operating expense ratios

Answer 129

· Mutual funds cannot act as distributors for their own fun shares except under Section 12b-1 of the Investment Company Act of 1940. · Investment Company Act of 1940 Section 12b-1 allows a mutual fund to collect a fee for promotion or sales-related activities in connection with distributing its shares · Fee is flat dollar amount of % of assets of average total NAV during the year · Fee is disclosed in the firm’s prospectus · Fee must reflect the anticipated level of distribution services · Annual fee cannot exceed 0.75% of net assets · If fee exceeds 0.25%, fund cannot use the term no-load · 0.25% is viewed as the fees that would have been paid to an underwriter had sales charges been negotiated

Answer 130

· Class A shares (front-end load): investors pay at the time of purchase; lowest operating costs · Class B shares (back-end load): declines over time so investors pay the charge at redemption · Class C shares (level load): no sales charge to purchase, generally a 1% CDSC for one year, with a continuous 12b-1 charge

Answer 131

· Breakpoints- a scale of declining sales charges based on the amount invested · Rights of accumulation Breakpoints · Available to any person · In this case, person means married couples, parents and their minor children, and corporations · Investment clubs or associations formed for the purpose of investing do not qualify for breakpoints Breakpoint sales · Registered reps making higher commissions by selling shares in dollar amounts just below breakpoint levels · FINRA prohibits reps from doing this

Answer 132

· Person who plans to invest more money with the same mutual fund company may decrease overall sales charges by singing a letter of intent (LOI) · LOI informs the investment company that he intends to invest the additional funds necessary to reach the breakpoint within 13 months · Each deposit is charged the reduced sales charge at the time of purchase

Answer 133

· Is a one-sided contract binding on the fund only. · The customer must complete the intended investment to qualify for the reduced sales charge. · Fund holds the extra shares purchased as a result of the reduced sales charge in escrow · When investor deposits sufficient money to complete the LOI, he receives the escrowed shares · Appreciation and reinvested dividends do not count toward the LOI · If the customer has not completed the investment within 13 months, he will be given the choice of sending a check for the difference in sales charges or cashing in escrowed shares to pay the difference

Answer 134

· Funds often permit customer to sign an LOI as late as 90 days after an initial purchase · The LOI still cannot exceed 13 months to complete the transaction

Answer 135

· Allow an investor to qualify for reduce sales charges · Unlike LOIs, they are available only for subsequent investment and do not apply to initial transactions · Allow the investor to use prior share appreciation to qualify for breakpoints o Customer may qualify for reduced charges when the total value of shares previously purchased and shares currently being purchased exceeds a breakpoint amount · Do not impose time limits

Answer 136

· For the purpose of qualifying customers for breakpoints, the mutual fund bases the quantity of securities owned on: o The current level of the securities at either NAV or POP o Total purchases of the securities at the actual offering price; or o The higher of current NAV or the total of purchases made to date

Answer 137

Mutual fund company offers more than one fun and refers to these multiple offerings as its family of funds. Investors can get a reduced sales charge by combined separate investments within the same family to reach a breakpoint

Answer 138

· Exchange privileges allow an investor to convert an investment in one fun for an equal investment in another fun in the same family at net asset value without incurring an additional sales charge. · Any exchange of funds is considered a sale for tax purposes. Any gains or losses are fully reportable at the time of the exchange

Answer 139

· A professional investment adviser manages the portfolio for investors · Mutual funds provide diversification by investing in many different companies · A custodian holds a mutual fund’s shares to ensure safekeeping · Most funds allow a low minimum investment, often 4500 or less, to open an account and allow an additional investment for as little as $25

Answer 140

· An investment company may allow investments at the reduced sales charges by offering breakpoints, for instance, through a letter of intent and/or rights of accumulation · An investor retains voting rights, such as the right to vote for changes in the board of directors of the investment company, approval of the investment adviser, changes in the fund’s investment objective, changes in sales charges, and liquidation of the fund · By FINRA rules, all funds created after 4/1/2000 offer automatic reinvestment of capital gains and dividend distributions without a sales charge. To remain competitive, almost all of the old funds do so as well. This has the effect of compounding the investment

Answer 141

· An investor can liquidate of apportion of his holding without having to select a specific security- the fund generally has enough cash on hand to process redemption requests. · Tax liabilities for an investor are simplified because each year the fund distributes a 1099 form explaining taxability of distributions · A mutual fund may offer various withdrawal plans that allow different payment methods at redemption

Answer 142

The objective must be clearly stated in the prospectus and can be changed only by a majority vote of the fund’s outstanding shares Growth funds · Companies tend to reinvest all or most of their profits for research and development rather than pay dividends · A growth fund with a high dividend has not followed its investment objective

Answer 143

Stresses current income over growth

Answer 144

· Combines objectives of growth and income · Specialized (sector) funds · Specialize in particular economic sectors or industries. Some specialize in geographic areas. These funds have 25% - 100% invested in their specialties and are more likely than other funds to stick to a relatively fixed allocation · Offer higher appreciation potential, but also pose higher risks Special Situation Funds Buy securities of companies that may benefit from a change within the corporations or in the economy. Takeover candidates and turnaround situations are common investments

Answer 145

· Invest in securities to mirror a market index. Performance tracks the underlying index’s performance · This approach reflects the pass style of portfolio management · Lower management costs · Minimal turnover (for investors seeking minimal capital gains)

Answer 146

· Invest in the securities of companies that have their principal business activities outside of the US · Long term capital appreciation is their primary objective although some funds seek current income · Involve foreign currency risks as well as usual equity risks

Answer 147

· International funds- have their entire portfolio invested in securities issued outside of the US · Global funds have portfolio invested around the globe which includes US Tax-free (Tax-exempt) Bond Funds Invest in municipal bonds or notes that produce income exempt from federal income tax. Note that any capital gains distributions from the fund are taxable just as with any other fund

Answer 148

Buys US treasuries, GNMAs, etc. Investors in these funds seek current income and maximum safety Asset Allocation Funds

Answer 149

Invest in stocks for appreciation and bonds for income, and different types of securities are purchased according to a formula e.g. – a balanced fund’s portfolio might contact 60% stocks and 40% bonds

Answer 150

· Split investments between stocks for growth, bonds for income, and money market instruments (cash) for stability. · The fund adviser switches the percentages of holdings in each asset category to the expected performance of that group.

Answer 151

· No-load, peon-end mutual fund that serves as temporary holding accounts for investors’ money · The term no-load means that investors pay no sales or liquidation fees · Most suitable for investors who financial goals require liquidity above all · Dividend rates are neither fixed nor guaranteed · Interest the fund distributes as dividends is computed daily and credited to accounts monthly · NAV is fixed at $1 · $1 Price is not guaranteed, but the fund is managed not to “break the buck” · Price does not fluctuate much in response to interest rate changes · Generally offer check-writing privileges

Answer 152

· Performance · Costs · Taxation · Portfolio turnover · Services offered · Suitability

Answer 153

· Securities law requires that each fund disclose the average annual total returns for 1,5, and 10 years or since inception · A manager’s track record in keeping with the fund’s objectives, as stated in the prospectus, is important as well · Returns must be expressed assuming maximum sales loads applied

Answer 154

· Expresses the management fees and operating expenses as a percentage of the fund’s net assets. · All mutual funds, load or no-load, have expense ratios. · Calculated by dividing a fund’s expenses by its average net assets · The sales charge is not generally considered an expense when calculating a fund’s expense ratio · Typically more aggressive funds have higher expense ratios- more trading in the fund’s portfolio · Stocks funds generally have expense ratios between 1% and !.5% of a fund’s average net assets · Bond funds typically have expense ratios between 0.5% and 1.0%

Answer 155

· Mutual fund investors pay taxes on income and capital gains distributed by the fund. · Dividends that qualify are taxed at 15%; for test purposes, all capital gains distributions are from the fund’s long term gains, so they are taxed at 15% to the investor · Dividends and capital gains distributions are currently taxable to investors whether they are taken in cash or reinvested to purchase additional shares · Dividends must be reported as dividend income and will be taxed either as ordinary income or as a qualifying dividend with a maximum rate of 15% · Capital gains distributions must be report as a long-term capital gain

Answer 156

· Reflects the fund’s holding period. If a fund has a turnover rate of 100%, it holds its securities, on average, for less than one year & therefore, all gains are likely to be short term and subject to the maximum tax rate · A fund with portfolio turnover rate of 25% has an average holding period of 4 years & most gains are taxes at the long-term rate

Answer 157

· Retirement accounts · Investment plans · Check-writing privileges · Phone transfers · Conversion privileges · Combination investment plans, · withdrawal plans, etc.

Answer 158

· The #1 advantage is the diversification offered · Professional management, convenience, liquidity, and minimum initial investment are also important

Answer 159

· Market risks · Fees and expenses

Answer 160

· This type of fund invests in a specific index · Any class of asset that has a specific index around it and is liquid can be made into an ETF · Differs from an index fund in that it is closed-in and trades like a stock · Price changes are due to the market, rather than the underlying value of the portfolio

Answer 161

· ETFs can be purchased on margin · ETFs can be sold short · Expenses are lower than mutual funds · Because there are brokerage fees, ETFs are generally not competitive with no-load index funds for the small investor · ETFs are included in the term “pooled investments”

Answer 162

· Does not currently have to register with SEC, although portfolio managers are generally required to register as investment advisers · Pending legislation that would require all hedge funds to register · Free to adopt far riskier investment strategies than those open to ordinary mutual funds o Arbitrage strategies o Massive short positions during bearish markets · Use leverage and derivatives such as options and futures · Considered to be in the asset class of alternative investments

Answer 163

· Primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions · Management fees tend to be much, much higher than with other investments · Almost all hedge funds charge performance-based fees. The typical fee structure is known by the vernacular “2&20- most funds take a 2% management fee and 20% of the profits · Because of the risk, investments are limited to institutional clients and wealthy individuals, known as accredited investors · Most hedge funds are organized as limited partnerships with the portfolio managers investing along with the investors. So they have a greater motivation to succeed. The partnership is the issuer of the ownership units · Hedge funds are indirectly available to ordinary investors through mutual funds called funds of hedge funds

Answer 164

· Designed strategy of many hedge funds is to generate positive returns in both rising and falling markets · With a large variety of available investment styles, investors have a plethora of choices to assist them in meeting their objectives · A part of an asset allocation class, hedge funds may reduce overall portfolio risk and volatility and increase returns

Answer 165

Uncorrelated returns, adding a level of diversification. In doing so, the client would be incurring the following risks: · Expenses can be quite high · The risky strategies can backfire leading to significant loss of capital · There is limited liquidity because there is no active secondary market (they’re not listed on exchanges)

Answer 166

Market maker's current bid and offer on a security

Answer 167

Highest price at which the dealer will buy

Answer 168

Lowest price at which the dealer will sell

Answer 169

Difference the bid and the as,

Answer 170

The best and the best offer selected among all the market makers of a security

Answer 171

Order executed immediately at the market price with no restrictions

Answer 172

Limits the amount paid or received for securities Not guaranteed to execute. Can only be filled if the stock's market price reaches the limit price Ensures that an investor does not pay more than a predetermined amount for a stock

Answer 173

Becomes a market order if the stock reaches or goes through the stop price

Answer 174

Entered as a stop order and changed to a limit order if the rock hits or goes through the trigger price

Answer 175

Expires if not filled by the end of the day

Answer 176

Does not expire until filled cancelled

Answer 177

Does not expire until filled or canceled

Answer 178

Must be executed immediately in full or be canceled

Answer 179

Must be executed immediately in full or in part; any part of the order that remains unfilled is canceled

Answer 180

All though the UPIA permits the delegation of portfolio management decisions, trustees cannot delegate certain fiduciary duties, such as determining the amount and timing of distributions.

Answer 181

Fiduciary must act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent professional would use.

Answer 182

Under ERISA provisions, the fiduciary must be as prudent as the average expert, not the average person. To act with care, skill, prudence, and caution, the fiduciary must: Diversify plan assets Make investment decisions under the prudent expert standard Monitor investment performance Control investment expenses; and not engage in prohibited transactions

Answer 183

Transaction cost is not a determining factor in security selection. That I, when the fiduciary is deciding what security will fit the needs of the portfolio, the amount of commission involved in the purchase is not consider when determining if that security is an appropriate selection.

Answer 184

Not specifically mandated under ERISA Each plan should have one, preferably in writing Guideline for plan's fiduciary

Answer 185

A typical IPS includes: Investment objectives for the plan Determination of cash flow needs Investment philosophy including asset allocation style Investment selection criteria Methods for monitoring procedures and performance

Answer 186

Fiduciary is strictly prohibited from any conflicts of interest Self dealing with plan assets in his own interests Acting in transactions on behalf of a party with interests averse to the plan Receiving compensation for his personal account ini connection to the plan

Answer 187

A plan may not acquire any security or real property of the ER, if immediately after such acquisition the aggregate fair market value of ER securities and ER real property held by the plan is > 10% of the fair market value of the assets of the plan

Answer 188

Anyone who has an impact on an EB plan including those who render advice to the plan. All transactions involving parties in interest to an ERISA- covered plan are prohibited, unless there is an exemption for them

Answer 189

Trustees may not use plan assets to make loan to the ER, even if failure to do so could lead to the ER suffering a financial failure.

Answer 190

Diversification provision Deals with 401(k) plans Trustee is safe from liability as long as certain conditions are met A participant must have for his own account: Investment selection Investment control Have required communication of information

Answer 191

A plan participant must be able to: materially affect portfolio return potential and risk level Choose between at least 3 investment alternatives; and Diversify his investment to minimize the risk of large losses

Answer 192

The trustee of a 401(k) would be able to reduce his ERISA fiduciary exposure and meet the safe harbor provisions of 404(c) if the plan offered a broad index fund, a medium term bond fund, and a cash equivalent fund.

Answer 193

Allowing EEs to exercise independent control over the assets by letting them make their own investment selections (at least 3 options) Informing EEs they can change allocations at least quarterly Fiduciaries must still monitor performance

Answer 194

Making info available upon request (prospectuses, financial statements, reports, annual operating expenses Statement that the plan is intended to constitute an ERISA 404(c) & that plan fiduciaries may be relieved of liability for investment losses Explanation of how to give investment instructions Real time access to accounts via telephone or Internet

Answer 195

Plan administrator provided to participants free of charge | Important description of how plan works

Answer 196

Contributions to a DB plan are not affected by the participant's gender

Answer 197

ER contributions to DB & DC pension plans are mandatory. Although profit sharing & 401(k) plans are DC plans, they are not pension plans & ER plans are not mandatory

Answer 198

Is composed of the NYSE and other exchanges on which listed securities as traded

Answer 199

Listed markets, such as NYSE and AMEX, maintain central marketplaces and trading floors

Answer 200

Listed markets operate as double-auction markets. Floor brokers compete to execute trades at favorable prices

Answer 201

When a floor broker representing a buyer executes a trade by purchasing stock at a current offer price higher than the last sale, a plus tick occurs (market up)

Answer 202

When a selling broker accepts a current bid price below the last sale price, a minus ticket occurs (market down).

Answer 203

Maintains an orderly market and provides price continuity. He fills limit and market orders for the public and trades for his own account to either stabilize or facilitate trading when imbalances in supply and demand occur

Answer 204

Chief function is to maintain a fair and orderly market in the stocks for which he is responsible.

Answer 205

Minimizes price disparities that may occur at the opening of daily trading by buying and selling, as a dealer, stock from his own inventory only when a need for such intervention exists.

Answer 206

· Interdealer market · Unlisted securities · No central marketplace

Answer 207

Interdealer network. Registered market makers compete to post the best bid and ask price. The OTC market is a negotiated market.

Answer 208

Broker/dealer who stand ready to buy and sell the minimum trading unit, usually 100 shares (or any larger amount that they have indicated), in each stock in which they have published bid and ask quotes.

Answer 209

Sell from their inventory at their asking price and buy for their inventory at the bid price Price dynamics When a market maker raises its bid price to attract sellers, the stock price rises; when a market maker lowers its ask price to attract buyers, the stock price declines

Answer 210

· Securities prices determined through negotiation · Regulated by FINRA · Broker/dealers must register with both SEC and FINRA · Trade at many locations across the country

Answer 211

· Securities prices determined through auction bidding · Regulated by the NYSE · Broker/dealers must be registered with the SEC and Exchange members · Traded only on the NYSE floor

Answer 212

Listed securities + prices determined by auction

Answer 213

Unlisted securities = prices determined by negotiation | Government and municipal and unlisted corporate stocks and bonds trade in the OTC market

Answer 214

Most securities firms act as both brokers and dealers, but NEVER in the same transaction

Answer 215

Agents that arrange trades for clients and charge commissions. Brokers do not buy share for inventory, but facilitate trades between buyers and sellers

Answer 216

Buy and sell securities for their own accounts. This practice is called position trading.

Answer 217

When selling from their inventories, dealers charge the buying customers a markup rather than a commission. A markup is the difference between the current interdealer offering and the actual price charged the client. When a price to a client includes a dealer’s markup, it is called a net price.

Answer 218

A broker/dealer acts as a principal in a dealer transaction. A firm CANNOT act as both a broker and a dealer in the same transaction

Answer 219

A principal of a firm is a person who acts in a supervisory capacity

Answer 220

Face value of a bond or asset in a trust

Answer 221

When a firm makes a market in a stock, marks up that stock, and then adds an agency commission. If the firm acts as a broker, it may charge a commission. If it acts as a dealer, it may charge a markup or markdown.

Answer 222

Acts as an agent, transacting orders on the client’s behalf

Answer 223

Charges a commission

Answer 224

Is not a market maker

Answer 225

Must disclose its role and the amount of its commission to the client

Answer 226

Acts as a principal, dealing in securities for its own account and at its own risk

Answer 227

Charges a markup or markdown Makes markets and/or takes positions (long or short) in securities Must disclose its role to the client, but not necessarily the amount or source of the markup or markdown

Answer 228

The difference between the lowest current offering price among dealers and the higher price a dealer charges a customer

Answer 229

Brokers act as agents for commissions/ dealer act as principals for profits

Answer 230

An order sent immediately to the floor for execution without restrictions or limits. It is executed immediately at the current market price and has priority over all other types of orders

Answer 231

A market order to buy is executed at the lowest offering price available A market order to sell is executed at the highest bid price available

Answer 232

A customer limits the acceptable purchase or selling price. A limit order can be executed only at the specified price or better (lower in a buy order, higher in a sell order)

Answer 233

If the limit order cannot be executed at the market, the commission house broker leaves the order with the specialist who records the trade in the order book and executes the order if and when the market price meets the limit order price

Answer 234

A customer who enters a limit order risks missing the chance to buy or sell if the market moves away from the limit price. The market may never go as low as the buy limit price or as high as the sell limit price

Answer 235

Sometimes limit orders are not executed, even if a limit price is met. The most common explanation for this is stock ahead

Answer 236

Limit orders on the specialist’s book for the same price are arranged according to when they were received. If a limit order at a specific price was not filled, chances are that another order at the same price took precedence, that is, there was stock ahead.

Answer 237

If any part of an order can be filled at the limit price, it is done. All that can be is executed before the market closes, that sale is confirmed and the order for the balance is cancelled.

Answer 238

The short seller borrows stock from a broker/dealer to sell at the market. The investor expects the stock to decline enough to allow him to buy shares at a lower price and replace the borrowed stock at a later date.

Answer 239

Unless the stock declines to zero, the short seller is obligated to buy the stock and replace the borrowed shares to close the short position

Answer 240

Is risky because if stock price rises instead of falls, an investor still must buy the shares to replace the borrowed stock- and the stock price can rise without limit- therefore, unlimited risk

Answer 241

May be entered to protect a profit or prevent a loss if the stock begins to move in the wrong direction

Answer 242

Becomes a market order once the stock trades at or moves through a certain price, known as the stop price. There is no assurance of any specific price

Answer 243

Stop orders for listed stocks are usually left with and executed by the specialist.

Answer 244

A stop order takes two trades to execute 1. Trigger- the trigger transaction at or through the stop price activates the trade 2. Execution- the stop order becomes a market order and is executed at the market price completing the trade

Answer 245

Is a top order that, once triggered, becomes a limit order instead of a market order

Answer 246

· Protect against loss in a short stock position · Protect a gain from a short stock position · Establish a long position when a breakout occurs above the line of resistance

Answer 247

· Protect against loss in a long stock position · Protect a gain from a long stock position · Establish a short position when a breakout occurs below the line of support

Answer 248

· 2 steps- trigger- when security moves through the stop price & the execution · Buy- moves through at a higher price; sell moves through at a lower price

Answer 249

Once the order has been triggered, enter a limit order do not pay any more than $X for the stock, while the stop order will buy the stock at the next lowest price . With limit you can’t pay more than $X

Answer 250

Danger in using stop orders is that once they are triggered, the marketplace receives an increase of sell orders in a falling market and buy orders in a rising market. This can have the tendency to accelerate the direction of the market; sell stops in a bearish market, buy stops in a bullish one

Answer 251

10,000 or more shares of a stock

Answer 252

1. Declaration (announcement) date- date the announcement of a forthcoming dividend is made known 2. Record date- date that a list will be made of owners and only those owners will receive the dividend 3. Payable date- date payment is made 4. Ex-dividend date- the SRO decides- the date that purchasers will not receive the dividend

Answer 253

The last day an investor can purchase a stock and still receive a previously declared cash dividend

Answer 254

$5000 for individual $10,000 for couple

Answer 255

For those covered by qualified employer plans, the tax deductibility of contributions to traditional IRAs is phased out as income increases over a specified level.

Answer 256

Not eligible after age 70 ½

Answer 257

· Wages, tips, and salaries · Commissions and bonuses · Self-employment income · Alimony · Nontaxable combat pay

Answer 258

· Capital gains · Interest and dividend income · Pension or annuity income · Child support · Passive income from DPPs

Answer 259

The contribution limits for IRAs is subject to increase based on the inflation rate. These limits will also apply to the total combined contribution that might be made to a traditional IRA and a Roth IRA

Answer 260

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was the source of the legislation permitting certain individuals to make additional contributions to their IRAs. Individuals aged 50 and older are allowed to make catch-up contributions to the IRAs above the scheduled maximum annual contribution limit. These catch-up payments can go either to a traditional IRA or a Roth IRA

Answer 261

The Taxpayer Relief Act of 1997 created the Roth IRA. Contributions to Roth IRAs are not tax deductible Regular contributions can be withdrawn tax free because they are made with nondeductible contributions

Answer 262

1. Earnings accumulated may be withdrawn tax free following the initial deposit provided the: 2. Account holder is 59 ½ or older 3. Money withdrawn is used for the first-time purchase of a principal residence (up to $10,000) 4. Account holder has died or become disabled 5. Money is used to pay for authorized higher education expenses; or 6. Money is used to pay for certain medical expenses or medical insurance premiums

Answer 263

Same as those for traditional IRAs Lesser of $5000 or 100% of earned income Contributions can be made past age 70 ½ as long as individual has earned income

Answer 264

Single person with an AGI of $110,000 or less may contribute the full amount to Roth IRA Phased out after $125,000 Married person who file jointly _ $173,000; phased out after $183,000

Answer 265

Traditional IRA payments Alimony paid Self-employment tax and Penalties paid on early withdrawal from savings account

Answer 266

Maximum (current) contribution is $5000/year/individual Contributions are not tax deductible Distributions tax free if taken > 59 ½ & if account open for at least 5 yrs. Distributions not required to begin at 70 ½ No 10% early distribution penalty for death, disability and first time home purchase Minor can be named as beneficiary

Answer 267

· Offer self-employed persons and small businesses easy-to0 administer pension plans. · A qualified plan that allows an employee to contribute money directly to an IRA set up for each EE

Answer 268

· EE must be at least 21 years of age · EE must have performed services for the ER during at least 3 of the past 5 yrs. · EE must receive at least $550 (indexed for inflation) in compensation from ER

Answer 269

ER must allow all eligible EEs to participate

Answer 270

SEP allows ER to contribute up to 24% of an EE’s salary each year up to a maximum of $50,000 per EE per year ER must contribute the same % for each EE & ER

Answer 271

Immediate full vesting

Answer 272

ER contributions deductible $ Not taxable until withdrawn $ accumulate tax deferred

Answer 273

Without penalty at age 59 ½ Must begin by 4/1 of the year following attainment of age 70 ½ (If you reach 70 ½ on 1/1/2010, you must begin receiving distributions by 4/1/2011) Subsequent payments by 12/31

Answer 274

Must begin by 4/1 of the year following attainment of age 70 ½ (If you reach 70 ½ on 1/1/2010, you must begin receiving distributions by 4/1/2011) Penalty is 50% of amount not withdrawn Roth IRAs have no RMD

Answer 275

Under IRS rule 72t, you can receive IRA payments at least annually based on your life expectancy (or joint life expectancies of you & beneficiary) with withdrawals NOT subject to 10% penalty

Answer 276

4/1 of the calendar year after you turn 70 ½ or 4/1 of the calendar following your retirement (only for qualified plans, not an IRA)

Answer 277

Early withdrawal penalties for all IRAs are waived in the event of death or disability

Answer 278

If one spouse has little or no earned income and a joint tax return is filed, a spousal IRA may be opened for that person Contributions limits are the same as for any other IRA

Answer 279

Can be securities firms, banks, S&Ls, insurance companies, credit unions, mutual funds,

Answer 280

Deductibility is reduced or eliminated if individual participates in an ER-sponsored retirement plan and earns more than a specified amount

Answer 281

4/15 of the filing year- not even if you get an extension Contributions exceeding the maximum are subject to a 6% penalty until the $ is withdrawn

Answer 282

· Collectibles · Whole life insurance · Term life insurance · Short sales of stock · Speculative option strategies · Margin account trading

Answer 283

Permissible, but problematic Needs to be a hands-off investment Prohibited person cannot use the property or benefit from it

Answer 284

People who can’t benefit from real estate held in an IRA or qualified plan Includes spouses, descendants, ancestors, but not siblings

Answer 285

Account owner can take temporary possession of funds to move to another custodian Can do this only once per 12 month period 100% of $ must be rolled over or unrolled balance subject to taxes & penalties Rollover must be completed in 60 calendar days Rollovers have 20% withholding

Answer 286

Effective 1/1/2007, Pension Protection Act of 2006 amended the IRC 1986 to allow non-spouse beneficiaries to roll over qualified retirement plan distributions to an inherited traditional IRA Transfer must be trustee to trustee Checks made out to beneficiary not eligible for rollover IRA must be set up as an inherited IRA RMD rules apply to beneficiaries

Answer 287

Effective 1/1/2008, the Pension Protection Act of 2006 amended the IRC 1986 to allow rollover from qualified plans directly to Roth IRAs, providing the clients meets the requirements for converting Main requirement is that the client must report the entire amount converted into the Roth as ordinary income in the year of the conversion (or rollover)

Answer 288

· Direct custodian to custodian, unlike IRA rollover · Owner never takes possession · Number of IRA transfers owner may make per year is unlimited · Rollovers have 20% withholding · No 60 day requirement

Answer 289

AGI limits increase every year Individuals who are ineligible to participate in qualified plans may deduct IRA contributions regardless of income level

Answer 290

Rules differ between spouses and non-spouses Beneficiaries do not have to be relatives

Answer 291

Can be rolled over into spouse’s own IRA Can continue to own IRA as beneficiary If spouses roll over to own IRA, their age and rules apply If left in inherited (or beneficiary IRA), decedent’s age applies (no 59 ½, but sooner RMD

Answer 292

· 10% penalty at age 59 ½ does not apply · RMD must begin the year after the death of the account owner, but the payment is based on the life expectancy of the beneficiary, not the decedent · Non-spouse beneficiaries can distribute the entire amount over 5 years

Answer 293

When an individual disclaims an IRA proceeds pass to the contingent beneficiary Person disclaiming cannot decide were the $ goes If no contingent beneficiary, proceeds follow the provisions of the will

Answer 294

Do NOT have RMDs

Answer 295

ERISA- qualified plans intended for self-employed individuals and owner-employees of unincorporated business concerns or professional practices.

Answer 296

Included self-employed individuals include” independent contractors, consultants, freelancers, and anyone else who files and pays self-employment Social security taxes

Answer 297

The term owner-employee means sole proprietor

Answer 298

Only earnings for from self-employment count towards determining the maximum that can be contributed.

Answer 299

A Keogh plan participant may also make non non-deductible contributions. If voluntary contribution results in a total contribution that exceeds the annual maximum, the excess may be subject to a penalty tax

Answer 300

Full time EEs who work 1000 hours Tenured EEs who have complete 1 or more years of continuous service Adult EEs who are 21 or over Cannot be over 70 ½

Answer 301

IRAs do not involve ER contributions, Keoghs do IRA not qualified by ERISA, Keoghs are

Answer 302

Taxes deferred on contributions until distributed Investment income and capital gains deferred until distribution, then ordinary income taxes Only cash may be contributed Distributions can begin without penalty at age 59 ½; same penalties & exemptions apply Same payout options Same beneficiary options

Answer 303

Contributions (which come from salary reduction) are excluded from participant’s gross income Participant’s earnings accumulate tax free until withdrawn

Answer 304

If an EE contributes to a 403(b), the contributions are excluded from RR’s gross income for that year. The contribution is not counted as income, resulting in lower current income taxes

Answer 305

Usual investments GICs (guaranteed insurance contracts) NOT life insurance

Answer 306

EEs of qualified institutions must be 21 and have completed 1 year of service

Answer 307

Plan must be in writing and made through a plan instrument, a trust agreement , or both ER must remit plan contributions to an annuity contract, mutual fund, or another approved investment

Answer 308

For 2012, limit is $17,500 with a $5,500 catch-up provision For ER contributions, maximum is the lesser of 100% of EE’s compensation or $50,000 per year Same distribution rules as other qualified plans ERISA guidelines for the regulation of all retirement plans Eligibility- if a company offers a plan, all EEs must be covered if: 1. They work 1000 hrs./yr. 2. they are 21 or older 3. have 1 yr. of service

Answer 309

· Funds contributed to the plan must be segregated from other corporate assets · Trustees have a fiduciary responsibility to invest prudently

Answer 310

EEs must be entitled to their entire retirement benefit amounts within a certain time, even if they no longer work for the ER

Answer 311

Plan must be in writing | EEs must be kept informed of plan benefits, availability, account status, & vesting annually

Answer 312

A uniformly applied formula determines EE benefits and contributions

Answer 313

Also known as Pension Reform Act

Answer 314

ERISA regulations apply to private sector plans only. Plans for federal or state government works are not subject to ERISA

Answer 315

Was an attempt to update trust investment laws Growing acceptance of modern portfolio theory Standard of prudence is applied to any investment as part of the total portfolio, rather than just to individual investments

Answer 316

Risk-return trade-off in all investments is considered All categorical restrictions on types of investments have been removed Diversification has been integrated into the definition of prudent investing Investment functions can be delegated

Answer 317

· Trustee must invest & manage trust assets as a prudent investor considering everything · Decisions must be evaluated in the context of the total portfolio & overall strategy · Examines economic conditions, inflation or deflation, tax consequences, role that each asset plays, expected total return, other resources of beneficiaries

Answer 318

Trustee who has special skills or expertise and is named trustee is held to the stringent prudent expert standard for one acting as a professional money manager Trustees may delegate investment and management functions, but must do so with care selecting adviser, establishing scope of delegation, monitoring performance, etc.

Answer 319

For each person who acts as a fiduciary has to perform duties as specified in plan document Trustees cannot delegate fiduciary duties, but can delegate investment management to a qualified manager

Answer 320

Fiduciaries must: 1. Act solely in the interest of plan participants and beneficiaries 2. Other standard items

Answer 321

Only the ER contributed

Answer 322

it is highly recommended that advisors perform annual reviews with their clients to ensure that all recommendations remain suitable

Answer 323

· minimum annual income requirements; | · accumulation amount needed to meet financial goals, and so forth

Answer 324

investors risk tolerance based on self-evaluation, objective questionnaire, and past experience

Answer 325

timeframe in which goals must be obtained

Answer 326

what is cash need? For defined benefit plans, this may be high; for individual retirement plans, this may be low

Answer 327

tax characteristics event investor and desired level of tax management

Answer 328

any legal prohibitions on types of investments or transactions

Answer 329

investor preferences or desires to avoid particular types of assets

Answer 330

a trust is a legal entity that offers flexibility to an individual who wishes to transfer property trust may be established for a variety of personal and charitable property transfers trusts are also establish as the legal entity for corporate retirement plan the prudent investor rule is an outgrowth of defining trustee responsibilities

Answer 331

for trust to be valid, three parties must be specified in the trust document these parties are a settlor, a trustee, and a beneficiary under certain circumstances the settlor, trustee, and beneficiary may be the same individual for trust to be valid and the trustee must be competent parties however, the beneficiary may be a minor or a legally incompetent adult

Answer 332

· the settlor is the person who supplies the property for the trust · trust property is also referred to as its principal or corpus · settlor is also known as the maker, grantor, trustor, or donor

Answer 333

· the trustee is an individual or other party holding legal title to property held for the benefit of another person · the trustee must administer the trust by following directions in a trust document or in a will · the trustee must perform certain duties relative to the trust property

Answer 334

· the trustee is a fiduciary and is obliged to perform in the interests of the beneficiaries · the trustee may be one or more adult individuals or entity in the business of trusteeship that is responsible for investing administering and distributing trust assets for the benefit of the beneficiary

Answer 335

· in many ways a trustee's duties are like those of an executor for an estate · however I trustee's duties generally continue for more time than a typical estate settlement, and the trustee is charged with greater duty of investing trust assets

Answer 336

a person for whose benefit property is held in trust a beneficiary is one who receives or is designated to receive benefits from property transferred by trustor there is no requirement that the beneficiary hold legal capacity

Answer 337

thus the beneficiary of a trust may be one or more minors or an adult individual declared legally incompetent although it does not happen often, the grantor of the trust can also be the trustee and/or the beneficiary

Answer 338

an individual whose benefit depends on the occurrence of an event usually someone's death

Answer 339

what a trust is run its course and all expenses and distributions have been made, the person who receives the remaining balance is call the remainderman the most common case involves real estate

Answer 340

all income earned on assets placed into a simple trust must be distributed during the year it is receive if the trust does not distribute all of its net income at least annually, the trust is a complex trust the trustee is not empowered to distribute the trust principal from a simple trust

Answer 341

a complex trust may accumulate income at complex trust is permitted deductions for distributions of net income or principal capital gains are deemed part of the distributable net income of a complex trust unless reinvested furthermore the trustee may distribute trust principal according to trust terms

Answer 342

the key difference between a simple and a complex trust is that the simple trust must distribute all of its annual income, whereas a complex trust is not obligated to do so

Answer 343

a living trust, also known as an inter-vivos trust, is established during the maker's lifetime a testamentary trust is established according to the instructions of a will – that is, not with the death of the maker

Answer 344

· the settlor retains control over the assets until he dies · the individuals will specifies that, at death, the testator's property is to be placed in trust for the benefit of one or more beneficiaries · the testamentary trust does not reduce the grantor's income or estate tax exposure · furthermore assets that passed to a testamentary trust to not avoid probate because the validity of the wills instructions to pass property to the trust must be substantiated probate court

Answer 345

· a revocable trust must be a living trust because only the living grantor has the power to change or revoke the trust · at the grantor's death, the trust becomes irrevocable because the individual with the power to change or revoke the trust no longer lives · no estate tax benefit is available for revocable living trust · the value of any trust assets in which the grantor retains power to revoke the trust and again own the trust property out right is includable in the grantor's gross estate

Answer 346

for trust to be considered irrevocable the settlor must give up all ownership and property transferred into the trust property placed in in a revocable trust is usually not includable in the trustor’s estate for federal estate tax purposes certain exceptions to the general rule can jeopardize the effectiveness of an irrevocable trust to reduce estate taxes

Answer 347

the grantor retains a life interest, or life income the grantor retained a reversionary interest in the trust that is considered more than incidental. Reversionary interest means, without getting overly complicated that the grantor may receive property back from the trust. Under tax law the grantor is treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or the income if the value of the interest exceeds 5% of the value of that portion. The grantor retained general power to direct to home trust property will pass. The grantor transfers one or more life insurance policies into an irrevocable trust while retaining certain incidents of ownership including the ability to make loans from policy cash values and or beneficiaries

Answer 348

the grantor retains a life interest, or life income the grantor retained a reversionary interest in the trust that is considered more than incidental. Reversionary interest means, without getting overly complicated that the grantor may receive property back from the trust. Under tax law the grantor is treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or the income if the value of the interest exceeds 5% of the value of that portion. The grantor retained general power to direct to home trust property will pass.

Answer 349

The grantor transfers one or more life insurance policies into an irrevocable trust while retaining certain incidents of ownership including the ability to make loans from policy cash values and or beneficiaries designed to pass assets to beneficiaries – usually children in a way to minimize gift and/or estate taxes the grantor transfers property into a trust (a GRAT) that provides that the grantor will receive each year a fixed annuity usually for term of years at the end of the term the remainder beneficiaries will get whatever's left the gift involves equals the theoretical value of the remainder determined by using the discount rate specified in IRS tables

Answer 350

if the assets of the trust earn more than the IRS rate, any earnings in excess of that rate could go to the beneficiary free of estate and gift taxes however the grantor dies during the term of the trust the remaining assets are considered part of the deceased estate even though this is technically in a revocable trust because the guarantor has a retained interest the tax liability of the trust income falls on the grantor

Answer 351

because of the onerous tax implications, most trusts and estates distribute their income taxable income is known as distributable net income DNI determines the amount of income that may be taxable to beneficiaries or the grantor in the case of a living trust, whereas the balance may be taxed to the trust as indicated above

Answer 352

Is an estate planning tool used to take advantage of the lifetime estate tax exclusion It is commonly used between two spouses

Answer 353

The first 3.5 million of estate does not incur an estate tax

Answer 354

$ goes to grandchildren or great-grandchildren without estate tax

Answer 355

When the assets, either directly, through an estate, or through a trust, are left to a beneficiary at least two generations below the transferor

Answer 356

with the direct skip, the donor or the donor's estate, the executor pays a generation skipping transfer tax (GSTT)

Answer 357

applies when a trust is terminated and pays out the remainder of its funds under a taxable termination, the trustee is responsible for paying the GSTT a termination is just reviewed the principal and, if applicable accumulate income to a trust beneficiary who is a skip person, the most common case of this is when a skip person is the contingent beneficiary of someone in the generation above who is now passed away typically that persons parent

Answer 358

means any distribution from the trust to person (other than a taxable termination or direct skip). With a taxable distribution, the recipient is required to pay the GSTT

Answer 359

One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation are included in her estate

Answer 360

a custodial account that, like a trust account, is directed by an executive or on behalf of the beneficiary or beneficiaries of an estate if intestate, these functions are performed by a court appointed administrator the executor or administrator makes the investment, management, and distribution decisions for the account the taxation on undistributed income of an estate is the same as that of trusts and the tax is computed on form 1041

Answer 361

Latin for per branch

Answer 362

the trust document will usually spell out the trust objectives, and these must be followed in the case of an estate, the will must be followed tax considerations conflicts between the grantor and the beneficiary may exist

Answer 363

is a business formed under a partnership agreement that identifies the goals and purpose of the partnership partnerships are easy to form an easy to dissolve, but are generally not suited for raising large sums of capital partnerships allow the business's profits and losses to flow directly through to the investors for tax purposes, thus avoiding double taxation of profits at the business and individual levels

Answer 364

the management (a liability) is assigned to the general partner while the limited partners are passive and have liability limited to their investment

Answer 365

is a business structure that combines the benefits of incorporation (limited liability) with the tax advantages of a partnership (flow-through of taxable earnings) the LLC owners are members (not shareholders) and are not personally liable for the debts of the LLC the objectives and financial constraints of the individual members must be considered from a suitability standpoint

Answer 366

although taxed like a partnership, S corporations offer investors the limited liabilities associated with corporations in general profits and losses are passed through directly to shareholders in proportion to their ownership in the S Corporation unlike in LLC which can have unlimited number of members, an S corporation may not have more than 100 shareholders, none of whom may be a nonresident alien, or more than one class of stock (presumably common) losses on S corporation stock may be claimed only to the extent of investor’s basis shares

Answer 367

loss is limited to the amount of the investor’s basis

Answer 368

a business structure that distinguishes the company as a separate entity from its owners officers and directors are shielded from personal liability for the corporation's debts and losses in most circumstances creditors cannot reach the shareholders assets to satisfy the corporation's debts income tax applies to the corporation as an entity rather than being passed through to the shareholder

Answer 369

earnings are subject to double taxation before distribution, earnings are taxable to the corporation and then are taxed again to the shareholder when they are paid out as dividends distributions from LLCs and S corporations are taxed only once because there is no taxation at the business entity level

Answer 370

the easiest business to set up, especially if you don't expect much liability because the business and the owner are inseparable, there is unlimited liability no limits to the amount of loss that may be claimed on the proprietor’s tax return

Answer 371

Partnerships and LLC's are generally easier to form and dissolve than a C Corporation

Answer 372

Benefits of structuring a business as a general partnership, and LLC, or an S corporation would include no double taxation as is the case with the C Corporation

Answer 373

A company that expects to be very profitable should be a C corporation instead of a partnership, and LLC, or an S corporation because in those three all earnings passed through to owners – nothing can be retained

Answer 374

the only logical choice were a large amount of capital is to be raised is a C corporation

Answer 375

only the sulfur partnership in the C Corporation are taxed on their income the sole proprietorship on his personal income tax and the Corporation on a Form 1120

Answer 376

it is a limited liability owners as well as low income or loss are the limited partnership, LLC, an S corporation. The C Corporation has limited liability but no flow-through the sole proprietorship and general partnership have flow-through but unlimited liability Corporations (including LLCs) survive the death of their owners (even if there's only one shareholder in an S Corporation or C Corporation, or one member of the LLC) when it comes to transferability of ownership, the corporate form, especially the C Corporation, is the preferred choice (selling shares is usually pretty straightforward).

Answer 377

file their tax returns and business information on a Schedule C

Answer 378

receive a Form K – 1 to report their income

Answer 379

report their income on a Form 1120

Answer 380

trade in the money market

Answer 381

Large cap stocks

Answer 382

Balance/moderate growth- large cap stocks, defensive stocks

Answer 383

Technology stocks, sector funds, or cyclical stocks

Answer 384

Eliminate interest rate risk (their value remains constant, even when interest rates change) They are not savings accounts with a maturity date They would be included as an asset on a family balance sheet The preferred answer when a client wants capital preservation with no risk of loss FDIC- insured

Answer 385

Bank insured CDs They are not marketable and therefore have no interest rate risk Their value is fixed and you can always redeem them at face value, regardless of direction of interest rates

Answer 386

Government bonds- greatest safety Corporate bonds and notes and funds- high yield income Municipal bonds and funds- tax free income Preferred stock and utility stocks- from a stock portfolio

Answer 387

Highly volatile stocks; High-yield (junk bonds); Stock or index options; Commodity futures

Answer 388

Zero coupon bonds in 529s or Coverdell ESAs

Answer 389

Younger people are better off purchasing term insurance because the lower premiums offer them significantly more protection For those 60 and older, the rates are generally prohibitive

Answer 390

Premiums are non-deductible

Answer 391

Income is tax-free Capital gains are fully taxable

Answer 392

Money market funds

Answer 393

Spreading of portfolio funds among different asset classes Proponents feel that the mix of assets within a portfolio is the primary factor underlying the variability of returns in portfolio performance

Answer 394

Three major asset classes: Stocks (with subclasses based on market capitalization, value vs. growth, and foreign equity) Bonds (with subclasses based on maturity (intermediate vs. long term) and issuer Cash (focusing mainly on the standard risk-free investment- the 90-day T-bill, & other short term investments)

Answer 395

proportion of various types of investments composing a long-term portfolio

Answer 396

standard asset allocation model suggests subtracting a person's age from 100 to determine the percentage of the portfolio to be invested in stacks. According to this map, a 30 year-old would be 70% invested in stocks and 30% in bonds and cash; a 70 year old would be invested 30% in stock's with the remainder in bonds and cash.

Answer 397

investment plan that attempts to maintain the type of relationship between debt and equity (or other asset classes) periodically, the account is rebalanced to bring it back to the desired ratio

Answer 398

under this investment plan, the goal is to maintain a constant dollar amount in stacks moving money in and out of the money market fund when necessary

Answer 399

tactical asset allocation refers to short-term portfolio adjustments that adjust the portfolio mix between asset classes in consideration of current market conditions

Answer 400

tactical asset allocation refers to short term portfolio adjustments that adjust the portfolio mix between asset classes in consideration of current market conditions

Answer 401

active management relies on the manager’s stock picking and market timing ability to outperform market indexes

Answer 402

a passive portfolio manager believes that no particular management style consistently outperform market averages and therefore constructs a portfolio that mirrors a market index passive portfolio management seeks low-cost means of generating consistent, long-term returns with minimal turnover

Answer 403

passive portfolio management is very similar to strategic asset allocation the same could be said about the relationship between active management and tactical asset allocation

Answer 404

Growth portfolio manager is using the gross style of management focus on stocks of companies whose earnings are growing faster than most other stocks and are expected to continue to do so because rapid growth in earnings is often priced into the stock's, growth investment managers are likely to buy stocks that are at the high end of their 52-week price range

Answer 405

· portfolio managers using the value style of management concentrate on undervalued or out-of-favor securities whose price is low relative to the company's earnings or book value · and whose earnings prospects are believed to be unattractive by investors in securities analysts

Answer 406

growth managers expect to see high P/E ratios with little or no dividends value managers expect to see low P/E ratios and dividends offering a reasonable yield another sign of a value stock is a large cash surplus sometimes referred to as a rainy day fund

Answer 407

large cap – more than $10 billion mid-cap – $2 billion-$10 billion small-cap - $300 million – $2 billion microcap – less than $300 million

Answer 408

in a strong economy, small, fast-moving companies with concentrated product line in a fast-growing sector can dramatically outperform larger, more bureaucratic companies

Answer 409

can be used with any investment style rarely trades in the portfolio, which results in lower transaction costs and lower long-term capital gains low expense ratios in the mutual fund classic passive strategy easiest to implement and follow

Answer 410

constructed to mirror the components of a particular stock index costs of managing the portfolio a relatively low tend to be more tax efficient with the advent of index funds and ETF's this is become very popular strategy

Answer 411

reduces unsystematic risk, such as business risk, and enhances returns

Answer 412

a contrarian is an investment manager who takes positions opposite that of other managers or in opposition to general market beliefs

Answer 413

the goal is to mitigate the effects of interest rate fluctuations on the value of the principal, the income received, or both three strategies are: the barbell strategy, the bullet strategy, and the laddering strategy All three are considered active rather than passive

Answer 414

reduces timing risk in a fluctuating market the average cost per share is lower than the average price per share

Answer 415

the risk that all of your money will be invested at a market top

Answer 416

is designed to reduce the investors average cost to choir a security over the buying. Relative to its average price

Answer 417

mutual funds normally allowed dividends, interest, and capital gains to be automatically reinvested in fund shares at the net asset value per share

Answer 418

some corporations offer the shareholders the opportunity to purchase additional stop using their cash dividend under most dividend reinvestment plans (DRIPs), the shareholder is entitled to purchase the additional shares directly from the issuer and little or no commission and often at a discount to the market price

Answer 419

distributions are taxable to shareholders whether the distributions are taken cash or reinvested the issuer must disclose whether each distribution comes from income or realized capital gains form 1099s which is sent to shareholders after the close of the year details tax information related to distributions for the

Answer 420

the taxes have already been paid on any income reinvested, when the investor sells the asset cost basis is increased so that the income is not taxed again

Answer 421

the simplest business for, but offer no liability protection for the owner the only form of business where the potential losses on limited because the personal assets of the owner are at risk in addition to any assets owned by the business the owner computes the earnings of the business on schedule C of her form 1047 anything made or lost by the business is reflected directly on her tax return

Answer 422

relatively easy to form and dissolve two types: both offer low through her income in taxes, the difference being in the degree of liability Gen. partnerships provide no liability protection to the partners limited partner’s maximum loss is what has already been invested plus any funds committed for but not yet contributed

Answer 423

provide no liability protection to the partners if the business fails, they, collectively and separate are liable for any losses

Answer 424

the liability is limited maximum loss is what has already been invested plus any funds committed for not yet contributed

Answer 425

partnerships do not pay taxes they file an information return, a form 1065, and attach to that (and send a copy to each partner) a Form K-1 indicating the amount of income (or loss to be inserted on the investor’s personal Form 1040

Answer 426

somewhat of a hybrid between the partnership and the Corporation federal government does not recognize an LLC as a classification for tax purposes most file as a Corporation, a partnership, or so partnership one member LLC will use the schedule C, just as if they were so partnership those with two or more members invariably filed partnerships using the form 1065 to provide the IRS with the information in the form K – one for each member's share of income or loss the following is a Corporation, they will generally five as an S Corporation

Answer 427

C Corporation S Corporation

Answer 428

the only entity that actually files a tax return on which it must pay income tax the files on form 1120 and pays taxes at a rate that generally does not exceed 35% its dividends are paid out after paying income taxes and then that dividend is taxable to the shareholder hence the term "double- taxation"

Answer 429

is treated for tax purposes the same as a partnership except that the returned file is the form 1120S shareholders receive a form K – one indicating their share of income or loss just as with the LLC in partnership, the business entities not tax; everything flows through to the is treated for tax purposes the same as a partnership except that the returned file is the form 1120S

Answer 430

dividends paid from one corporation to another are 70% exempt from taxation a corporation that receives dividends on stocks of other domestic and certain qualified foreign corporations, therefore pay taxes only on 30% of the dividends received this avoids triple taxation to invest

Answer 431

like individual taxpayers, corporations do not pay federal taxes on interest received from this

Answer 432

function as either regressive progressive

Answer 433

sales, excise, payroll, property, and gasoline taxes are levied at the same rate regardless of income represent a small percentage of income for wealthy taxpayers than poor ones consume a larger fraction of the income of the poor

Answer 434

estate and income taxes increase the tax rate as income increases costly to people with high incomes and people with low incomes

Answer 435

salary, bonuses, and income derived from active participation in a trade or business

Answer 436

payment made under a divorce court order or under a legal separation agreement to an ex-spouse maybe paid directly to the ex-spouse or to a third party on the ex-spouses behalf (spouse’s IRA or life insurance policy, etc.) alimony payments, within limits, generally deductible to the spouse making the payments and includable in income for tax purposes by the spouse receiving

Answer 437

a legal obligation of the parent to provide financial support for child not deductible by the parent who pays in not includable as income by the recipient

Answer 438

for purposes of an IRA contribution, alimony is considered eligible income while child support is not

Answer 439

passive income and losses come from rental property, limited partnerships, and enterprises in which an individual does not actively participate for the general partner, income from a limited partnership is earned income; for the limited partner, the income is passive passive income is netted against passive losses to determine net taxable income passive losses may be used to offset only passive income

Answer 440

you're considered to use a dwelling unit is a home and not as a business if you use it for personal purposes during the tax year for more than the greater of 14 days or 10% of the total days is rented to others at a fair rental price

Answer 441

includes dividends, interest, and net capital gains derived from the sale of securities no matter what the source of the income, is taxable year in which it is received

Answer 442

if the dividend qualifies, the tax rate is a maximum of 15% otherwise the dividend is taxed at ordinary income tax rates

Answer 443

is always taxed at ordinary income tax rates

Answer 444

insurers that high income taxpayers did not escape federal income taxes certain items that receive favorable tax treatment must be added back into taxable income for the AMT and include the following: accelerated depreciation on property placed in service before 1986 certain costs associated with limited partnership programs, such as research and development costs in excess intangible drilling costs local tax and interest on investments that do not generate income tax exempt interest on private purpose municipal bonds issued after August 7, 1986 incentive stock options to the extent that fair market value of employer stock is in excess of the strike price of the

Answer 445

margin interest is a tax-deductible expense the one exception is interest expenses incurred in the purchase of municipal securities because musical interest income is federally tax-exempt, the IRS does not allow taxpayers to deduct the margin interest expenses for municipal securities investors can deduct interest expenses for other securities, including margin account interest, to the extent they do not exceed their net investment income, which includes interest income, dividends, and all capital gain

Answer 446

items that must be added back in for the purpose of the AMT computation are sometimes called tax preference items if the tax liability computed under the AMT computation is greater than the taxpayer’s regular tax application, the taxpayer must pay the AMT amount

Answer 447

the marginal tax rate is the rate you pay on each additional dollar you receive in income the effective tax rate, however is the overall rate of tax you pay on your total taxable income

Answer 448

the choice of filing status one makes as a major impact on the amount of taxes levied there are five different filing statuses: single married filing jointly married filing separately head of household qualifying widow(er) with dependent child

Answer 449

filing status is determined by your marital status as of the last day of the year if more than one filing status applies the tax payer, the IRS suggests using the one resulting in the lowest tax obligation generally that will be for married filing jointly for those who are not married, if qualifying, the lowest rate is usually obtained by filing his pedophiles (?). This must be wrong!

Answer 450

in the case of a single parent with dependent children, it would generally be most advantageous to use the filing status and of household

Answer 451

IRS requires the cost basis to be adjusted for stock splits and stock dividends Stock dividends reduce the cost basis

Answer 452

Capital losses that exceed capital gains are deductible against earned income up to a maximum of $3,000 per year Any capital losses not deducted in a taxable year may be carried forward indefinitely as a deduction to offset capital gains in future years

Answer 453

If the investor fails to choose, the IRS chooses FIFO

Answer 454

Investor keeps track of each share purchased & uses the info to liquidate shares that would provide the lowest capital gain

Answer 455

Investor calculates the average basis by dividing the total cost of all shares owned by the total number of shares The investor may not change the decision to use the average basis method without IRS permission

Answer 456

Share identification may result in a more advantageous tax treatment, but most accountants prefer the convenience of the average method for mutual fund shares Share identification is most commonly used with stock shares

Answer 457

An investor may not use capital losses to offset gains or income if the taxpayer sells a security at a loss and purchases the same or a substantially identical security within 30 days before or after the trade date establishing the loss. The sale at a loss and the repurchase within this period is called a wash sale

Answer 458

Include stock rights, call options, warrants, and convertible securities of the same issue

Answer 459

Maturity, coupon, and issuer After selling a bond, an investor can buy another bond with a different maturity, coupon, or issuer without violating the wash sale rule

Answer 460

Applies only to realized losses- not realized gains

Answer 461

An investor could sell an ABC 8% bonds that matures in 2030 at a loss and buy back and ABC 8% bond that matures in 2031 and claim the loss This is called tax-swapping

Answer 462

When a donor makes a gift of securities or virtually any asset, the cost basis to the recipient (donee) is the donor’s cost basis. This describes carryover basis

Answer 463

When a person dies and leaves securities to heirs, the cost basis to the recipients is usually the fair market value on the date of the owner’s death In other words, the cost basis steps up to the date of death value

Answer 464

Step up provision does not apply when inheriting an annuity

Answer 465

If you have lived in home for at least 2 of the past 5 years, 1st $500,000 of gain is excluded For singles, 1st $250,000 is excluded

Answer 466

An individual may transfer an unlimited amount to a spouse who is a US citizen without the imposition of federal estate tax

Answer 467

An individual may transfer unlimited amounts of $ and other property to eligible charity with no federal income tax

Answer 468

For heirs other than spouses, an estate tax credit will offset estate tax on transfers up to $5 million

Answer 469

All interests in property held by an individual at the time of death Amounts transferred to a spouse or charity not subject to federal tax, but still included in calculating the gross estate

Answer 470

Certain expenses are deducted from the gross estate to arrive at the adjusted gross estate Includes funeral expenses, charitable contributions, and debts of the decedent

Answer 471

Adjusted gross income (AGE) – unlimited marital and charitable deductions = taxable estate

Answer 472

IRC provides that the executor of the estate may decide to value the assets in the estate as of the date or death or, alternatively, six months later

Answer 473

The price at which property will change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts

Answer 474

Regardless of whether the date of death or alternative valuation method is used, estate taxes are due no later than 9 months after the date of death You can file an extension, but interest will be charged

Answer 475

Estate tax form From gross assets, certain expenses are deducted and taxes are levied on the remaining taxable estate

Answer 476

A federal tax imposed on the transfer of property during the lifetime of the donor $5 million can be transferred without incurring gift tax Individuals can give up to $13,000 per year to any number of individuals without generating gift tax $26,000 per year per couple This is not the same as the cost basis of a gift

Answer 477

Maximum gift for tax exclusion is $139,000

Answer 478

Responsibility of the owner, not the receiver

Answer 479

Filed on Form 709

Answer 480

Return must be filed whenever a gift in excess of $13,000 (or whatever the annual exclusion is at the time of the gift) is made to any individual (other than a spouse) Filed on Form 709

Answer 481

Dividend and interest income received from foreign securities are normally subject to 15% withholding by issuer’s country of domicile Can generally take the tax withheld and use as a credit on US income tax due

Answer 482

Only accelerated depreciation is a tax preference item for calculating AMT Straight line deprecation is not a tax preference item for not calculating AMT Accelerated depreciation on items placed in service after 1986

Answer 483

Considered portfolio income, not passive income by the IRS

Answer 484

Balance sheet contains assets and liabilities at a specific point in time Not expense items

Answer 485

Dividends + interest + capital gains that have not been reinvested back into the trust

Answer 486

A partner or principal of the firm must approve every new account in writing on the account form before or promptly after the completion of the first transaction in the account

Answer 487

Required by the USA Patriot Act of 2001 · Full name · DOB · Address and telephone numbers · SSN

Answer 488

· A broker/dealer’s only response to incomplete information is to open the account, but only accept unsolicited orders. It does not have enough information to make recommendations. Function of a B/D is to execute transactions · An investment adviser must refuse the account because it is its function to provide advice which it cannot do without the requisite suitability information

Answer 489

Not legally required to complete one, but the card provides protection & convenience allowing the customer to send written orders to the rep who can verify the order’s accuracy.

Answer 490

Allows a party other than the owner to make investment decisions for the account without consulting the account owner. A signed copy of the document must be kept on file

Answer 491

Customers must give specific mailing instructions when opening an account

Answer 492

IARs must maintain records for each customer's account in each securities holding. All customer transactions are posted daily and kept in the branch.

Answer 493

Required information includes the following: · the customer’s name, address, and telephone number · the type of account and account number · the customer's investment objective · a list of all securities deposited with the firm · a list of all transactions

Answer 494

Customers pay the full purchase price of securities by the transaction settlement date

Answer 495

Customers may borrow part of the securities purchase price from the broker-dealer.

Answer 496

A cash account is the basic investment account, and anyone eligible to open an investment account can open one. In a cash account a customer must pay in full for any securities purchased

Answer 497

· personal retirement accounts, such as IRAs, Keoghs, and TSAs; · corporate retirement accounts; and · custodial accounts, such as UGMAs

Answer 498

The term margin refers to the minimum amount of cash or margin of all securities a customer must deposit to buy securities

Answer 499

If a customer has fully paid securities in an account and needs cash, a broker-dealer is permitted to lend money against those securities up to the margin limit that the Federal Reserve Board (FRB) has set.

Answer 500

Customers who open margin accounts must meet certain minimal suitability requirements. The customer may then buy securities on margin and pay interest on the borrowed funds. The securities purchased are held in street name as collateral for the margin loan.

Answer 501

Margin accounts when buying on margin, investors are using financial leverage, increasing the potential for gain or loss by using borrowed funds.

Answer 502

The customer signs a margin agreement, which includes: · the required credit agreement · hypothecation agreement · and an optional loan consent

Answer 503

Under NASAA policies it is unethical to execute any margin transaction without securing from the customer a properly executed written margin agreement promptly after the initial transaction in the account

Answer 504

Discloses the terms under which credit is extended. SEC rule 10 B – 16 requires firms to disclose the method of computing interest and the conditions under which interest rates and charges will be changed Firms must send customers and insurance that statements accounting for interest charges will be sent at least quarterly

Answer 505

Gives the firm permission to pledge (hypothecate) securities held on margin A mandatory part of a margin agreement

Answer 506

Gives the firm permission to lend securities held in the margin account to other brokers, usually for short sales It is not mandatory for customers to sign the loan consent agreement

Answer 507

The initial call for funds when making a margin transaction The margin requirements of Regulation T have been 50% since 1974

Answer 508

SROs have established minimum levels of equity in a margin account below which a call will go out for additional funds This is referred to as margin maintenance or a maintenance call Current SRO levels are 25% for long margin accounts

Answer 509

If the maintenance call is not met, the broker-dealer will liquidate enough securities in the account to bring the equity back to the maintenance level If there is more than one security in the account the firm can select which to sell It does not have to be one whose decline triggered the call

Answer 510

The term used to describe stricter limits imposed by the broker-dealers themselves Instead of relying on the SRO maintenance level of 25%, the individual firm may require a minimum of 35% or even higher

Answer 511

Short sales must take place in a margin account

Answer 512

When the margin account contains both long and short positions, it is said to be a mixed margin account

Answer 513

computing the equity, sometimes called net equity, in mixed margin accounts is done by calculating the equity for both the Longs and the shorts and combining them

Answer 514

In the long account, the equity is what you own minus which show CMV long- debit balance = Long equity

Answer 515

In the case of the short position, it is basically the same except the terms are different What you owe in a short position is the cost to buy back the stock you borrowed Which you own is the credit balance representing what you received when you sold the stock in the first place So the equity in a short account is the credit balance minus the current market value of the short stack Credit balance – CMV = Short equity

Answer 516

A signed loan consent agreement permits the firm to lend the customer’s margin securities. Firms must keep customer margin securities segregated from firm securities- commingling is prohibited

Answer 517

Has one beneficial owner who can: Control the investments within the account; or request distribution of cash or securities from the account

Answer 518

Owned by two or more adults Each is allowed some form of control over the account Generally, suitability information is required on all of the tenants in the account

Answer 519

In addition to the new account form, a joint account agreement must be signed, and the account must be designated as either tenants in common (TIC) or joint tenants with right of survivorship (JTWROS)

Answer 520

Account forms for joint accounts require the signatures of all owners Joint account agreements provide that any and all tenants may transact business in the accounts

Answer 521

Checks must be made payable to the names in which the account is registered Checks must be endorsed for deposit by all tenants Male need only be sent to a single address

Answer 522

To be in good delivery form, security soul from a joint account must be signed by all tenants

Answer 523

Ownership of a TIC account may be divided equally At the death of an account owner that persons proportionate share is distributed according to the instructions in the decedents will The TIC agreement may be used by more than two individuals

Answer 524

Stipulates that a deceased tenants interest in the account passes to the surviving tenant Regardless of contributions, each JTWROS account owner has an equal and undivided interest in the account

Answer 525

Using a transfer on death account is the simplest way to keep assets held in brokerage accounts from becoming subject to probate upon the client's death However the TOD account does not avoid estate taxes if applicable

Answer 526

TOD accounts are available for most types of paper assets such as savings and checking accounts in banks and credit unions certificates of deposit stocks bonds and other securities The owner, while alive, is the only person with any rights to the property Upon the owner's death, the property is immediately transferred for the named beneficiaries, usually without any added cost

Answer 527

The owner has the right to change beneficiaries at any time Caution: the clients will does not control who inherits the assets in a TOD account so without proper coordination, it could be very difficult to predict who would receive what share of the estate

Answer 528

The only types of accounts that may be opened with a TOD designation are individual accounts and JTWROS accounts

Answer 529

Are sometimes called pay on death (PODs)

Answer 530

Is an unincorporated association of two or more individuals. Partnerships frequently open cash, margin, retirement, and other accounts necessary to conduct business Partnership must fill out the new account form and provide a partnership agreement stating which of the parties can trade in the account

Answer 531

If the partnership opens a margin account, the partnership must disclose any investment limitations Margin account trading is only permissible in partnership and corporate accounts if such trading is expressly stated in the partnership agreement or corporate charter

Answer 532

· a corporate resolution is needed to open a corporate account · if a company wants to trade on margin the corporate charter must state that margin account trading is permissible

Answer 533

· a member must obtain a copy of the corporate charter and a corporate resolution(with the corporate seal) signed by the Sec. of the Corporation, identifying which officers may trade in the account · the charter is proof that the corporation exists, and the resolution authorizes both the opening of the account and the officers designated to enter orders

Answer 534

· in a wrap account, a firm charges a fixed fee expressed as an annual percentage for portfolio management and related services · because a portion of the fee is specifically for investment advice, firms offering wrap accounts must register as investment advisers · registered Representatives handling these accounts must have either a series 65 or 66 registration/license as an investment advisor representative

Answer 535

Accounts cannot be opened for third parties However a person can open an account for himself and grant power of attorney to someone else

Answer 536

An adult can open an account for minor with the minor as beneficial owner An adult cannot open an account for another adult or trade for the account of another adult even a spouse without power of attorney

Answer 537

In a fiduciary account, individual grand fiduciary responsibility interest rates for the account, makes all of the investment, management, and distribution decisions, and must manage the account in owner's best interests

Answer 538

· trustee designated to administer a trust · executor designated in a decedents will to manage the estate's affairs · administrator appointed by the courts to liquidate the estate of a person who died intestate, known as an administrator and intestacy · Guardian (conservator) designated by the courts to handle a minor's affairs · custodian of an UGMA account · receiver in a bankruptcy · conservator for an incompetent person

Answer 539

Any trades the fiduciary enters must be consistent with the trust’s investment objectives

Answer 540

State law often places limits on the actions of the fiduciary Most states are prudent investor states, which means the fiduciary must act prudently Other states are legal list dates, which means that the only securities of fiduciary can purchase are those on the state’s legal list

Answer 541

Generally, legal list securities must be of investment grade

Answer 542

May require a court certification of the individual's appointment and authority And account for a trustee must include a trust agreement detailing the limitations placed on the fiduciary No documentation of custodial rights or court certification is required for an individual to open a UGMA or UTMA account

Answer 543

Trust accounts Guardian/conservator accounts

Answer 544

A copy of the trust agreement is required Such agreements are usually precise about how the account must be operated Unless specifically authorized in the agreement margin accounts may not be open for trust accounts Only cash accounts are permitted

Answer 545

A copy of the court appointing the Guardian must be obtained The Guardian is often appointed to oversee and protect the assets of an orphaned child or an incompetent person

Answer 546

Proper authorization must be given (1.e., the necessary court documents must be filed with and verified by the broker/dealer). Speculative transactions are generally not prohibited Margin accounts are permitted only if the legal documents establishing the fiduciary accounts authorized them The prudent investor rule requires fiduciaries to make wise and safe investments A fiduciary may not share any counts profits but may charge a reasonable fee for services

Answer 547

If a person was not named on an account is to have trading authority, the customer must have written authorization with the broker/dealer giving that person access to the account Without this power in writing, no matter how tempting the answer on the exam, activity in the account cannot be created by anyone other than the account owner. Trading authorization usually takes place in the form of the power of attorney

Answer 548

Allows an individual who is not the owner of the account to: Deposit or withdraw cash or securities; and/or Make investment decisions for the account owner

Answer 549

Limited power of attorney allows an individual to have some, but not total, control over an account The document specifies the level of access the person may exercise

Answer 550

Also call limited trading authorization Allows entering of buy and sell orders but not the withdrawal of funds entry of orders and withdrawal of funds is allowed to full power of attorney is granted new paragraph durable power of attorney A Fuller limited power may be made “durable” by the grantor of the power It is designed to provide that a specifically designated person maintains power over the account even upon the grantors incapacitation, whether due to physical or mental causes Its most common use is when providing for aging parents However upon the death of either principal to the durable power of attorney, the power is terminated

Answer 551

Survives the physical or mental incompetence of the grantor but not the death of either party This means that orders received after the time of death of the grantor, even if the purchase or sale was decided upon prior to death, are not accept

Answer 552

In a custodial account, the custodian for the beneficial owner enters all trades UGMA and UTMA accounts require an adult or trustee to act as custodian for a minor (the beneficial owner) Any kind of security or cash may be gifted to the account without limitation

Answer 553

Adopted in 1956 as a convenient way to make gifts of money and securities to minors

Answer 554

Uniform transfer to minors act was adopted in 1986 because a more flexible law than UGMA was desirable Expands the types of property you can transfer to a minor and provides you can make other types of transfers beside gifts Nearly all states have adopted UTMA, but people still tend to refer to UGMA out of habit

Answer 555

Have full control over the minors account and can: Buy or sell securities; Exercise rights or warrants: and Liquidate, trade, or hold securities The account is not normally used to pay expenses associated with raising a child

Answer 556

Accounts may be opened in manage as cash accounts only A custodian may never purchase securities on margin or pledge them as collateral for a loan The custodian must reinvest the cash proceeds, dividends, and interest within a reasonable period of time Cash proceeds may be held in interest-bearing custodial account for reasonable time Investment decisions must consider minors age custodial relationship examples of inappropriate investments are commodities futures, naked options, and high risk securities Options may not be bought in a custodial account because no evidence of ownership is issued to an options buyer Covered call writing is normally allowed Stock subscription rights or warrants must be either exercise or sell Custodians may be reimbursed for reasonable expenses incurred in managing the account compensation may be pay to the custodian unless the custodian is also the owner

Answer 557

When a person makes a gift to securities to a minor under the UGMA/UTMA laws, that person is the securities donor

Answer 558

A gift under the UGMA/UTMA conveys in indefeasible title/that is, the donor may not take the gift back Nor may the minor return the gift until the minor has reached the age of majority Once a gift is donated the donor gives up all rights to the property When the minor reaches the specified age, the property and the count is transferred into the minor’s name

Answer 559

All rules are irrevocable. Gifts may be in the form of cash or fully paid securities And account may only have one custodian and one minor or beneficial owner A donor of securities can act as custodian or a point someone to do so Unless they are acting as custodians, parents have no legal control over an UGMA/UTMA account or the securities in its A minor can be the beneficiary of more than one account and a person may serve as custodian for more than one UGMA/UTMA, provided each account benefits only one minor The minor has the right to sue the custodian for improper actions

Answer 560

Although an investment advisor representative is not responsible for determining whether an appointment is valid or custodian's activities are appropriate, he should always be sensitive to the appearance of unethical behavior

Answer 561

Any securities in an UGMA/UTMA account are registered in the custodians name for the benefit of the minor and cannot be in bearer form or registered in street name. Securities bought in a custodial manner much for you register so that the custodial relationship is evident

Answer 562

When the minor reaches the age of maturity, all of securities in the account are registered in her name

Answer 563

The minor Social Security number appears on the account the minor must file an annual income tax return and pay taxes on any income exceeding $1900 produced by the account at the parents’ top marginal tax rate, regardless of the source of the gift, until the minor reaches age 19, unless the individual is a full-time student, in which case under 24 (referred to as the Kiddie Tax)

Answer 564

If the beneficiary dies, the securities in the account past the minor's estate, not the parents of the custodian If the custodian dies or resigns, either a court of law or the donor must appoint a new custodian

Answer 565

UGMA accounts may not hold real estate and UTMA accounts can UTMA may accounts offer greater investment choice In many states, UTMA account assets are not required to be transferred upon age of majority They allow you to transfer assets at age 21 or 25 depending on the state

Answer 566

Set up with preapproved authority foreign agent or investment advisor to make transactions without having to ask for specific approval Direction is defined as the authority to decide: Which security; The number of shares or units; or Whether to buy or sell

Answer 567

Discretion does not apply to decisions regarding the timing of an investment or the price at which it is acquired

Answer 568

In order from a customer worded “by 100 shares of ABC for my account whenever you think the price is right” is not considered a discretionary order (it is a market not held order).

Answer 569

customers can get discretionary power over their accounts only by filing a written trading authorization or a limited power of attorney with the broker/dealer or investment advisor no discretionary actions can take place without this document on file

Answer 570

once authorization is given the customer is legally bound to accept the representative’s decisions, although the customer may continue to enter orders

Answer 571

the customer may only give discretion to a specific individual. If that person leaves the firm or stops working with the account, discretionary authority ends immediately

Answer 572

discretionary accounts are subject to the following rules: · each discretionary order must be identified as such when it is entered for execution · an officer partner of the firm must approve each order promptly and in writing, not necessarily before order entry · a record must be kept of all transactions · no excessive trading may occur in the account, relative to the size of the account and the customer's objectives · to safeguard against the possibility of turning a designated supervisor or manager must review all trading activity frequently and systematically

Answer 573

to identify discretionary order, try this method: an order is discretionary if any of the three A's is missing. The three A's are: activity; amount; and asset

Answer 574

if a customer asks an agent to sell 1000 shares of XYZ stock, the order is not discretionary even though the customer did not specifically say when or at what price Activity = sell; Amount = 1,000; Asset = XYZ

Answer 575

if a customer asks an agent to buy 1000 shares of the best computer company stock available, the order is discretionary Activity = buy’ Amount = 1,000 shares; Asset + ? That makes it discretionary

Answer 576

Omitting time or price does not make an order discretionary remember that time and/or price are not discretion although there are special requirements for advisors to exercise discretion, do not confuse those rules is applicable when the advisor is given the power to decide time and price

Answer 577

An unincorporated interest of two or more individuals An annual agreement specifies which individuals can trade the account individual who is been declared legally incompetent wants to open an account. Which of the following actions must the firm take? Court documents appointing a guardian must be on file before and account can be opened for person declared legally incompetent. The Guardian will be the nominal owner of the account.

Answer 578

Fundamental analysis | Technical analysis

Answer 579

Takes into consideration the financial statements and historical performance of the investment, as well as economic conditions (such as the business cycle)

Answer 580

Focuses on pricing patterns revealed in the market rather than on fundamental economic and financial data

Answer 581

focuses on behavior of narrowly defined units such as households or business firms

Answer 582

analyzes aggregates, such as rate of growth in national economic output (GDP), rate of inflation, and unemployment

Answer 583

Strategy to recover from a recession is for government to run deficits to stimulate demand and employment Higher levels of taxation More government spending

Answer 584

Adam Smith- hands off approach to government | Market wages and prices will decline quickly enough during a recession to bring about an economic recovery

Answer 585

Lower taxes and less government regulation benefit consumers through a greater supply of goods and services at lower costs Creates demand by providing jobs and wages the prices of goods of which there is excess supply will fall the prices of goods in demand will rise deficient demand can never be a problem because the production of good will always generate through employment sufficient demand to purchase the goods produced markets will always adjust quickly to direct the economy to full employment if unemployment is temporarily high, wages will fall, which will reduce costs and prices reduce prices will increase product demand, which will increase the demand for labor until the excess supply of labor is eliminated

Answer 586

Milton Friedman the quantity of money, or money supply, determines overall price levels and economic activity too many dollars chasing too few goods leads to inflation too few dollars chasing too many goods leads to deflation

Answer 587

monitors the money supply and makes adjustments when necessary

Answer 588

a well-controlled moderately increasing money supply leads to price stability price stability allows business managers were more efficient allocators of resources than the government, to plan and invest this keeps the economy from experiencing extremes in the business cycle

Answer 589

determines how much money is available for businesses and consumers to spend its decisions are critical to the US economy three primary tools to affect the money supply: changing reserve requirements changes in the discount rate open market operations

Answer 590

by raising the amount of funds commercial banks must leave on deposit with the Fed, the amount of money available for these banks to lend out is decreased the shrinkage of the money supply generally translates into higher interest rates the reverse is true when reserve requirements are eased

Answer 591

the rate the Fed charges member banks when lending the money higher rates discourage borrowing, reducing the money supply lower rates have an opposite effect

Answer 592

the Fed buys and sells U.S. Treasury securities in the open market under the direction of the Federal open market committee (FOMC) when treasuries are purchased, it adds to the money supply this is because the FOMC is purchasing these securities from commercial banks causing the banks to have greater reserves when the FOMC sells treasuries the money supply is reduced because the funds are pulled out of the bank's reserves to pay for the securities

Answer 593

expansion peak contraction trough

Answer 594

Expansion increasing business activity – in sales, manufacturing, and wages- throughout the economy

Answer 595

when GDP reaches its productive capacity in the nation's economy cannot expand further

Answer 596

when business activity declined from its peak

Answer 597

mild short-term contractions

Answer 598

longer, more severe can contractions are depressions

Answer 599

when business activity steps declining and levels off

Answer 600

when a decline in real output of goods and services – the GDP – continues for two or more consecutive quarters

Answer 601

a decrease in GDP for six consecutive quarters

Answer 602

``` increasing consumer demand for goods and services; increasing industrial production; falling inventories; rising stock market; rising property values; increasing GDP ```

Answer 603

rising numbers of bankruptcies and bond defaults; falling stock markets; rising inventories (a sign of slackening consumer demand); and decreasing GDP

Answer 604

the general increase in prices as measured by an index such as the consumer price index

Answer 605

Average cost of goods and services (market basket) | CPI statistics are published monthly

Answer 606

Decrease in the value of the monetary unit mild inflation can encourage economic growth high inflation can reduce demand for goods and services

Answer 607

the rate of inflation does not immediately react to unexpected changes in economic conditions it takes a pronounced change in the reality before there is an effect

Answer 608

excessive demand – occurs when aggregate demand exceeds the aggregate supply and prices rise monetary expansion – is a rapid increase in the nation's money stock in excess of the nation's growth rate increased inflation drives interest rates higher and drives bond prices lower decreases in the inflation rate have the opposite effect: bond yields decline and bond prices rise

Answer 609

occurs when aggregate demand exceeds the aggregate supply and prices rise

Answer 610

is a rapid increase in the nation's money stock in excess of the nation's growth rate

Answer 611

the rare, deflation is a general decline in prices | deflation usually occurs during severe recessions when unemployment is on the rise

Answer 612

deflation is caused by conditions opposite those that cause inflation when demand for goods and services is substantially below the supply of those goods or services, the prices must spiral downward to encourage an increased demand

Answer 613

Interest rates go up , bond prices go down, and bond yields go up

Answer 614

Interest rates go down, bond prices go up, bond yields down

Answer 615

High consumer debt is a characteristic of a downturn in the business cycle

Answer 616

inverted isosceles triangle: brought on top and narrow on the bottom start with the broadest measure of the overall economy and then successively narrow it down to finally select the company or companies that best fit the objectives

Answer 617

opposite of top-down analysis start with a specific company work her way up through the industry and then the economy

Answer 618

interest rates in general reflect investor expectations about inflation

Answer 619

reflect the policy decisions of the Fed as it implements the nation's monetary policy

Answer 620

the cost of borrowing money determined by: the supply and demand for loanable funds the credit quality of the borrower the length of time for which the monies borrowed current and expected inflation overall supply and demand for funds in the economy

Answer 621

the money rate of interest or the actual amount of borrower pays for loanable funds if inflation is expected, the nominal rate of interest will exceed the real rate of interest on the loan to compensate the lender for the decline in purchasing power

Answer 622

the nominal rate of interest plus the expected rate of inflation

Answer 623

the rate banks that are members of the Fed charge each other for overnight loans of $1 million or more considered a barometer of the direction of short-term interest rates listed in daily newspapers is the most volatile rate; it can fluctuate drastically under certain market conditions

Answer 624

the rates that large US money center commercial banks charge their most credit worthy corporate borrowers for unsecured loans each bank sets its own prime rate, with larger banks generally setting the rate that other banks follow banks lower their prime rates when the Fed eases the money supply and raises rates when the Fed contracts the money supply

Answer 625

the rate the New York Federal Reserve Bank charges for short-term loans to member banks

Answer 626

the Federal Reserve Board establishes the discount rate unlike the federal funds rate the discount rate is a managed rate it is one of the tools of monetary policy in contrast, the federal funds rate is a market rate determined by the demand for bank reserves on the part of deposit based financial institutions

Answer 627

a market rate determined by the demand for bank reserves on the part of deposit based financial institutions

Answer 628

the interest rates bank charge broker dealers on money they borrow to lend to margin account customers also known as the call loan rate or call money rate slightly higher than other short-term rates broker call loans are callable on 24-hour notice

Answer 629

an upward sloping curve, also called appositive curve when the yield curve is normal, long-term interest rates are higher than short-term interest rates on a graph, the normal yield curve is upward sloping

Answer 630

Long-term interest rates are normally higher than short-term rates time value of money reduce buying power of money resulting from inflation increase risk of default over long periods loss of liquidity associated with long-term investments

Answer 631

a reflection of investor expectations about inflation investors expect high inflation rates, they'll require higher rates of interest to compensate for the reduction in purchasing power over time

Answer 632

yield curve is downward sloping can be the result of high current demand for money relative to the available supply short-term interest rates tend to be more sensitive to Fed policy that longer-term rates an inverted yield curve may occur because of a sharp increase in short-term rates when you notice a negative yield curve, you expect that interest rates have rapidly risen and, they will soon retreat

Answer 633

when short-term and long-term rates are the same

Answer 634

X axis = yield Y axis = years to maturity The shape of the yield curve varies with changes in the economic cycle

Answer 635

a normal, or sending yield curve occurs during periods of economic expansion it generally predicts that interest rates will rise in the future flat yield curve a flat yield curve occurs when the economy is peaking and no change in interest rates is expected

Answer 636

an inverted, or descending, yield curve occurs when the Federal Reserve Board has tightened credit in an overheated economy; it predicts that rates will fall in the future

Answer 637

· if the yield curve spread between corporate bonds and government bonds is widening a recession is expected · investors have chosen the safety of government bonds over higher corporate yields, which occurs when the economy slows down · in the yield curve between corporate bonds and government bonds is narrowing, and economic expansion is expected in investors are willing to take risks · they will sell bonds to buy higher-yielding corporates

Answer 638

US treasuries- starting with the 90 day T-bill and ending with the 30 year bond

Answer 639

``` Includes personal consumption Government spending Gross private product Foreign investment Total value of exports Measures a country’s output within its borders regardless of who generated it ```

Answer 640

GNP = GDP + income a country’s citizens earned abroad – income foreigners earned domestically GNP measures the output generated by the country’s citizens regardless of where they did so Today virtually all measurements are in GDP, rather than GNP

Answer 641

4% unemployment rate- the point at which wage pressures do not create undue inflation

Answer 642

Measure of the general retail price level Compares the cost of buying a basket of goods with the cost of buying the same basket a year ago Food, housing, transportation, medical care, clothing, electricity, entertainment, services Published monthly by the Bureau of Labor Statistics The most commonly used measurement of the rate of inflation

Answer 643

CPI – food and energy | Term created by the media, not the Bureau of Labor Statistics (BLS)

Answer 644

Measures all the nation’s import an export transactions with those of other countries for the year

Answer 645

1 way an investor can protect against a weakening US dollar is to invest in foreign securities the simplest way to do that is through ADRs of course of the dollar strengthens, the value of a year probably

Answer 646

an excess of one country’s imports over its exports as reported as part of the balance of payment figures over time an excessive trade deficit only to the devaluation of the country's currency because the country will be converting, reselling, it's currency to obtain foreign currency to pay for its increasing

Answer 647

also called indicators of business cycle phases Three broad categories of economic indicators leading indicators coincident indicators lagging indicators these indicators are published on a monthly basis by the Conference Board, nongovernmental not-for-profit research organization

Answer 648

· economic activities that won't fall down before the beginning of a recession or turn up for the beginning of the business expansion · used by economists to predict the future direction of economic activity for six months hence

Answer 649

· Money supply · building permits (housing starts) · average weekly initial claims for unemployment insurance · average weekly hours, manufacturing · Manufacturers’ new orders for consumer goods · Manufacturers’ new orders for nondefense capital goods · index of supplier deliveries – vendor performance · interest rate spread between 10 year treasury and the federal funds rate · set prices for example S&P 500 · index of consumer expectations

Answer 650

not all leading indicators move in tandem positive changes in the majority of leading indicators point to increase spending, production, and employment negative changes in the majority indicators can forecast a recession

Answer 651

Coincident indicators and measurement change directly and simultaneously with the business cycle

Answer 652

· nonagricultural employment · personal income, minus Social Security, veterans benefits, welfare and · industrial production · manufacturing and trade sales in constant dollars

Answer 653

measurements the chance for six months after the economy has become long-term answer to confirm lagging indicators help analysts differentiate long-term trends from short-term reversals that occur in any trend

Answer 654

· average duration of unemployment · ratio of consumer installment credit personal income · ratio of manufacturing and trade inventories to sales · average prime rate · change in the CPI for services · total amount of Marshall and industrial loans outstanding · change in the index of labor cost per unit of output (manufacturing)

Answer 655

Example of a coincident indicator

Answer 656

Example of a leading indicator

Answer 657

Example of a lagging indicator

Answer 658

broad-based economic trends current business conditions within an industry quality of a particular corporation’s business, finances, and management

Answer 659

Attempt to predict the direction of prices on the basis of historic price and trading volume patterns

Answer 660

The extent to which an asset’s or portfolio’s actual return exceeds or falls short of its expected returns A positive alpha rather than a negative one is desirable

Answer 661

a strategy that generates a guaranteed profit from a transaction the simultaneous purchase and sale of the same security in different markets different prices to lock in a profit

Answer 662

a model portfolio of a large number of assets, such as the S&P 500, against which the performance of the fund or portfolio was measured

Answer 663

a measure of volatility in relation to the overall market a security or portfolio with the beta greater than one is generally going to be more volatile than the overall market the reverse is true when the beta is less than one

Answer 664

a securities market investment theory that attempts to derive the expected return on an asset on the basis of the asset systematic risk

Answer 665

a portfolio in which the specific risk of each asset in the portfolio has been diversified away

Answer 666

another term for the price to earnings (PE) ratio | the earnings multiplier is the price of the stock divided by its earnings per share

Answer 667

prices of securities rapidly reflects simultaneous access to all information

Answer 668

a bond denominated in a currency other than the currency of the country in which it is issued the most tested form of Eurobond is the euro dollar bond these bonds are most commonly issued by an overseas company outside of the US, as well as the issuer's home country these bonds are not limited to European issuers (that's just where they originated)

Answer 669

the primary reason for issuing these bonds is if they are free from the requirement to register with the SEC resulting in lower issuance costs because liquidity is not as great as with domestic issues and because the political and social risks tend to be higher, yields are generally higher a bond issued in France denominated in British pounds is a Eurobond

Answer 670

1. because they are US dollar denominated, they bear no currency risk to US investors; 2. they are rated by US rating agencies so the risk is clear; and 3. they may offer higher yields than domestic bonds from the same issuer

Answer 671

1. since they are not register with the SEC, there may be a lack of transparency; 2. they have political and social risks (take into consideration by the rating agencies); and 3. they have less liquidity and domestic issues

Answer 672

a statistical method to determine the return profile of the security or portfolio that re-creates potential outcomes by generating random values on the basis of the risk and return characteristics of the securities themselves

Answer 673

a portfolio that provides the highest expected returns for a given level of risk

Answer 674

generally refers to the interest rate of 90 day U.S. Treasury bills

Answer 675

another of the statistical measures in the beta family used to reference what percentage of a portfolio's performance can be tied to a standard benchmark the range of our squared values is from a low of zero to a high of 100 if the our squared is 100, you can expect that the security (or portfolio) moves right in line with the index

Answer 676

R2 < 50% does not have much in common with the index Higher R2 value will indicate a more useful beta figure Low R2 means that you should ignore the beta

Answer 677

· a measure of the portfolios (or individual securities) risk in comparison to its expected return · the Sharpe ratio of a portfolio is calculated as the portfolio's average return that is in excess of the risk free rate divided by the standard deviation of the portfolio · the higher the Sharpe ratio, the more attractive investment becomes

Answer 678

· the risk in the return of an investment that is associated with the macroeconomic factors that affect all risky assets · systematic plus unsystematic risk equals the total risk of an investment

Answer 679

the specific risk associated with an investment | it is not related to macroeconomic factors

Answer 680

the study of the business prospects of an individual company within the context of its industry and the overall economy analysts look for companies in industries that offer better-than-average opportunities within the current business cycle

Answer 681

Industries least affected by normal business cycles

Answer 682

food, pharmaceuticals, tobacco, and energy | public consumption of such goods remains fairly steady throughout the business cycle

Answer 683

highly sensitive to business cycles and inflation trends most cyclical industries produce durable goods such as heavy machinery and automobiles as well as raw materials such as steel during recessions the demand for durable goods declines as manufacturers postpone investments in new capital goods and consumers postpone purchases

Answer 684

tend to turn down as the economy heats up and rise when the economy turns down gold-mining has historically been a countercyclical industry

Answer 685

1. introduction 2. growth 3. maturity 4. decline

Answer 686

computers in bioengineering our current growth industries because many growth companies retain nearly all of their earnings to finance their business expansion, growth stocks usually pay little or no dividends

Answer 687

stocks of the company with unusual profit potential resulting from nonrecurring circumstances, such as new management, the discovery of a valuable natural resource on corporate property, or introduction of a new product

Answer 688

provides a snapshot of a company's financial position at a specific point in time it identifies the value of a company's assets and liabilities

Answer 689

assets = liabilities + owner’s equity | assets – liabilities = owner’s equity

Answer 690

assets appear on the balance sheet in order of liquidity | balance sheets commonly identified three types of assets: current assets, fixed assets, and other assets

Answer 691

include all cash and short-term safe investments, such as money market instruments they can readily be sold, as well as other marketable securities

Answer 692

include amounts due from customers for goods delivered or services rendered, reduced by the allowance for bad debts

Answer 693

cost of raw materials, work in progress, and finished goods ready for sale

Answer 694

items company is already paid for but is not yet benefited from, such as prepaid advertising, rents, taxes, and operating supplies

Answer 695

fixed assets or property, plant, and equipment unlike current assets, they are not easily converted into cash their costs can often be depreciated over time or deductible from taxable income in annual installments to compensate for loss in value

Answer 696

nonphysical properties, such as formulas, brand names, contract rights, and trademarks goodwill, also in intangible assets, reflects the corporation's reputation and relationship with its clients although intangible assets may have great value to the corporation owning them, they generally carry little value to other entities

Answer 697

total liabilities on a balance sheet represent all financial claims by creditors against the corporation's assets balance sheets usually include two main types of liabilities: current liabilities and long-term liabilities

Answer 698

corporate debt obligations due for payment within the next 12 months these include the following: 1. Accounts Payable – amounts owed to suppliers of materials and other business costs 2. accrued wages payable – unpaid wages, salaries, commissions, and interest 3. current long-term debt – any portion of long-term debt due within 12 months 4. Notes payable – the balance due on equipment purchased on credit or cash borrowed 5. accrued taxes – unpaid federal, state, and local taxes

Answer 699

· long-term debts or financial obligations due for payment after 12 months · long-term debts includes mortgages on real property, long-term promissory notes, and outstanding corporate bonds

Answer 700

the stockholder claims on a company's assets after all of its creditors have been paid on a balance sheet three types of shareholder equity are identified: 1. capital stock at par 2. capital in excess of par 3. retained earnings

Answer 701

includes preferred and common stock listed at par value par value is the total dollar value assigned to stock certificates when a corporation's owners first contributed capital par value of common stock is an arbitrary value with no relationship to market price

Answer 702

often called additional paid in capital or paid-in surplus | this is the amount of money over par value that a company received for selling stock

Answer 703

profits that have not been paid out as dividends retained earnings represent the total of all earnings held since the corporation was formed less dividends paid to stockholders operating losses in any year reduce the retained earnings from prior years

Answer 704

the combined sum of its long-term debt and equity accounts

Answer 705

the relative amounts of debt and equity that compose the companies capitalize a ship some companies finance their business with a large proportion of borrowed funds others finance growth with retained earnings from normal operations and little or no debt

Answer 706

the amount of capital or cash the company has available working capital is a measure of a firm's liquidity which is its ability to quickly turn assets into cash to meet its short-term obligations

Answer 707

the formula for working capital is: | current assets - current liabilities = working capital

Answer 708

increases in working capital, such as profits, sale of securities (long-term debt or equity), and the sale of noncurrent assets; and decreases in working capital, such as dividends declared, paying off long-term debt, and net loss

Answer 709

current asset/ current liabilities

Answer 710

``` quick ratio (acid ratio) = quick assets/current liabilities quick assets = current assets – liabilities ```

Answer 711

measures a company's ability to pay the expenses associated with running the business

Answer 712

every financial charge in a business requires to offsetting changes on the company books

Answer 713

compare with straight line, ask accelerated depreciation generates larger deductions (lower taxable income) during their early years in smaller deductions (higher taxable income) during the later years

Answer 714

a corporation builds its capital structure with the following four elements 1. long-term debt 2. capital stock (common and preferred) 3. capital in excess of par 4. retained earnings (earned surplus)

Answer 715

Capital stock + capital in excess of par + retained earnings = shareholder’s equity (net worth) if a company changes its capitalization by issuing stock or bonds, the effects will show up on the balance sheet

Answer 716

shareholder's equity will increase by the additional capital raised, and the amount of cash on the asset side of the balance sheet will increase

Answer 717

when investor converts a convertible bond into shares of common stock, the amount of liabilities decreases, and the owners’ equity increases the changes on the same side of the balance sheet so there is no change to the assets

Answer 718

· when bonds are redeemed, liabilities on the balance sheet are reduced · offsetting change would be a decrease in cash on the asset side of the balance sheet · the company would have less debt outstanding, but would also have less cash · since there would not be semiannual interest payments any more, this would improve future cash flow

Answer 719

when a dividend is declared, retained earnings are lowered and current liabilities are increased the declaration of the cash dividend establishes a current liability until it is paid once paid it reduces the cash and current assets and also reduces current liabilities

Answer 720

has no effect on corporate assets or liabilities | does not change the stockholders’ proportionate equity in the corporation

Answer 721

Does not affect shareholders’ equity, | only the par value per share and the number of outstanding shares change

Answer 722

the company's ability to use long-term debt to increase its return on equity a company with a high ratio of long-term debt to equity is said to be highly leveraged stockholders benefit from leverage if the return on borrowed money exceeds the debt service costs

Answer 723

leverage is risky because excessive increases in debt raise the possibility of default and a business turned out in general, industrial companies with debt to equity ratios of 50% or higher are considered highly leveraged

Answer 724

utilities, with a relatively stable earnings and cash flows, can be more highly leverage without subjecting stockholders to undue risk if a company is highly leveraged, it is also more effective by changes in interest rates

Answer 725

should be called debt-to-total capitalization ratio | debt/total capitalization

Answer 726

the liquidation value of the enterprise if we sold off all assets, paid off all liabilities, gave preferred shareholders back their par value and the rest belongs to the common stockholders analysts use only the tangible assets when calculating book value tangible assets – liabilities – par value of preferred / shares of common stock outstanding = book value per share

Answer 727

reports what resources (assets) a company owns and how it has funded them how the firm has financed the assets is revealed by the capital structure (e.g. long-term debt, owner’s equity (preferred stock, common stock, and retained earnings)

Answer 728

summarizes a company’s revenues and expenses for a period, usually quarterly fundamental analysts use the income statement to judge the efficiency and profitability of a company’s operation

Answer 729

revenues – total sales costs of goods (COGS) sold- cost of labor, material, and production used to create finished goods LIFO normally results in higher COGS than FIFO

Answer 730

Revenues (sales) – COGS and other operating costs (such as depreciation) = gross operating profit

Answer 731

Gross operating profit + income from non-operating activities

Answer 732

1. revenues (sales) 2. cost of goods sold (COGS) 3. pre-tax income

Answer 733

1. what came in 2. what went out 3. how much is left (before taxes)

Answer 734

Interest payments on debt is not considered an operating expense However, interest payments reduce the company’s taxable income Pre-tax income, the amount of the taxable income, is operating income minus interest payment expenses

Answer 735

If dividends are paid to stockholders, they are paid out of net income after taxes After dividends are paid, the remaining income (earnings) is available to invest in the business

Answer 736

Interest payments reduce a corporation’s taxable income Dividend payments to stockholders are paid from after-tax dollars Because they are taxable as income to stockholders, dividends are taxed twice Interest payments are taxed once as income to the recipient

Answer 737

Indicate what remains after payment of interest, taxes, and preferred dividends

Answer 738

Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding

Answer 739

Writes off the value of an asset evenly over its useful life the accumulated depreciation is charged against the asset value on the balance sheet to reflect the net depreciated value

Answer 740

allows for depreciating the value of an asset at a higher rate in earlier years of the asset’s life and at a lower rate in later years

Answer 741

Measures the value of a company’s earnings for each common share EPS = earnings available to common/ number of shares outstanding

Answer 742

The remaining earnings after the preferred dividend has been paid. Earnings per share relates to common stock only Preferred stockholders have no claims to earnings beyond the stipulated preferred stock dividends

Answer 743

Sometimes called primary earnings per share | Sometimes called basic earnings per share

Answer 744

Assumes that all convertible securities have been converted into the common Because of tax adjustments, the calculations for figuring EPS after dilatation can be complicated

Answer 745

The dollar amount of cash dividends paid on each common share during the year Dividends per share = annual cash dividends/ number of common shares outstanding

Answer 746

Current yield = annual dividends per common share/ Market value per common share

Answer 747

Measures the proportion of earnings paid to stockholders as dividends Dividend payout ratio = annual dividends per common share/ earnings per share In general, older companies pay out larger percentages of earnings as dividends Utilities have especially high payout rates

Answer 748

Provides investors with a rough idea of the relationship between the prices of different common stocks compared with the earnings that accrue to one share of stock PE ration = current market price of common share/earnings per share

Answer 749

Growth companies usually have higher PE ratios than do cyclical companies Cyclical companies sell at lower PEs Declining industries sell at still lower PEs Speculative companies sell at extremely high or low PEs

Answer 750

EPS = current market price of common stock/ PE ratio

Answer 751

Some fundamental analysts feel that the company’s sales to earnings ratio is more valuable that the PE ratio

Answer 752

Reflects the market price of the stock relative to its book value per share Book value is the theoretical value of a company (stated in $ per share) in the event of liquidation

Answer 753

Speculative companies typically have very high or very PE ratios Growth companies have higher PE ratios than do cyclical companies Earnings per share relates only to common stock ; it assumes preferred dividends were paid

Answer 754

Reports a business’s sources and uses of cash and the beginning and ending values for cash and cash equivalents each year

Answer 755

3 components generating cash flow: 1. operating activities; 2. investing activities; and 3. financing activities

Answer 756

does not reflect accounting changes

Answer 757

includes cash receipts, (money coming in), from selling goods or providing services, as well as income from items such as interest and dividends operating activities also include cash payments, 9money going out), such as cost of inventory, payroll, taxes, interest, utilities, and rent the net amount of cash provided (or use) by operating activities is the key figures on the statement of cash flows

Answer 758

include transactions and events involving the purchase and sale of securities, land, buildings, equipment, and other assets not generally held for resale as a product of the business it covers the making and collecting loans investing activities in a classified as operating activities that they have an indirect relationship is central, ongoing operation of the business

Answer 759

all financing activities deal with the flow of cash to or from the business owners (equity financing) and creditors (debt financing)

Answer 760

Great source of financial information is found in the reports required to be filed with the SEC by publicly traded companies information is available at the SEC's website location is at the EDGAR(Electronic Data Gathering Analysis and Retrieval of SEC filings)

Answer 761

Form 8-K Form 10-K Form 10-Q

Answer 762

use report newsworthy events to the SEC, thereby making them available to the public event driven included are items such as change management, change the company's name, mergers or acquisitions, bankruptcy filings, and major new product introductions or sale of a product line of form 8K even has to be filed when a member of the Board of Directors resigns over disagreement

Answer 763

the 8-K is filed within four days of the occurrence this form is used only by domestic issuers foreign issuers are exempt although ADRs are registered with the SEC, the two are exempt because the underlying securities is a foreign issue

Answer 764

most domestic issuers must file an annual work on form 10-K for the report is a comprehensive overview of the company's business and financial condition and includes financial statements that have been audited by independent this is not the annual report which also contains an audited statement and Accenture 10K will generally contain more detailed financial information in the annual report the annual port will have much more detail about the company itself and its future plans

Answer 765

is filed quarterly contained on audited financial statements for all of the companies with the public float of the of less than $75 million must be filed within 40 days of the end of each of the first three fiscal quarters of the year no 10-Q is filed at the end of the fourth quarter – that information is taken care of by the filing of the 10--K though smaller firms file views within 45 days of the end of the quarter

Answer 766

Other than EDGAR, it has the most detailed information on the company’s financial position unlike the form 10-K is usually a professionally prepared marketing piece SEC rules provide the company may provide shareholders with a copy of the form 10-K stack of sending manual for

Answer 767

Fundamental analysis looks at the company | Technical analysis looks at the market

Answer 768

a method of attempting to predict stock price trends over the near-term, generally 4 to 6 weeks the prediction is based on current stock price trends and the relationship of the present trend prior trends these trends are measured through charts of price movements; therefore be correct to say that a technician uses charts to attempt to predict future price movements in an effort to reduce timing risk

Answer 769

there's been an extended period of vigorous vine in the market with no more buyers to provide demand for the security, it is likely that future prices will head downward remain on a horizontal level to more buyers into the market

Answer 770

there's been some selling that the sellers have run out of securities to sell and hands the prices would stabilize or perhaps begin to increase

Answer 771

during the period of rapidly rising stock prices, the market pauses to consolidate the gains if not it may be, overbought

Answer 772

an attempt to determine from this chart with the trend has been by drawing a trend line

Answer 773

head and shoulders bottom is when the price breaks through the trendline and you have two support levels but one in between that's lower than the other two the two that are so low are called the shoulders and the longest one is the head

Answer 774

A head and shoulders top indicates the likelihood that the market has topped in the future trend of the price will be downward

Answer 775

A head and shoulders bottom indicates that the market is likely bottom trend is up

Answer 776

standard saucer pattern indicates that the bottom has been reached and is therefore bullish inverted saucer pattern is sometimes referred to as an umbrella pattern is considered bearish

Answer 777

the more times the trendline has been touched, the greater the validity the longer the trend exists, the more significant is the penetration of the line

Answer 778

the level at which the price does not seem to want to go

Answer 779

when the price movement penetrates the support or resistance level

Answer 780

1. confirmed as valid when the movement is at least 3% penetration 2. the volume during a breakout is higher than normal during the charted period 3. there will be rapid price movement in the direction of the break until a new support or resistance has been established

Answer 781

· technicians believe that stock should be bought as the trendline is moving up from support to resistance · technicians believe that stock should be sold as the trendline begins moving down resistance toward support

Answer 782

attempts to modify the fluctuation of stock prices into a smooth trend the distortions are reduced to a minimum

Answer 783

fundamental – concerned more with what stocks to buy or sell | technical – when to buy or sell

Answer 784

if one can identify future price movement of an index, one will be able to make profits trading those securities performance tends to mirror that the index

Answer 785

assets with the negative beta can be an important component when diversified portfolio because of proper mix would create a portfolio was zero beta (without systematic risk)

Answer 786

includes four main groups of securities: 1. 400 industrials 2. 20 transportation companies 3. 40 public utilities 4. 40 financial institutions

Answer 787

· is a cap-weighted index using a base period of 1941-1943 equal to 10 · although most of the stocks listed in the S&P 500 are listed on the NYSE, some are found on the AMEX and NASDAQ

Answer 788

· A composite index that covers all of the common stocks listed on the NYSE · More than 3000 different companies · The index provides the most comprehensive measure of market activity on the NYSE · NYSE index is cap weighted, similar to the S&P 500, but the base is 12/31/1965 and the index for the base is 50

Answer 789

30 stocks Price weighted 3 Dow indices- industrials (30), transportations (20), utilities (15) and the composite (65)

Answer 790

Covers more than 3,000 over the counter companies Calculated like S&P and NYSE Base period of 2/5/1971 Index number of 100

Answer 791

Morgan Stanley Capital International (MSCI) Europe Australasia Far East Stocks from 21 developed countries outside of the US and Canada Calculated since 1969

Answer 792

Cap-weighted Created in 1974 Used to be 5000, but now > 6,000 companies Broadest range of the US stock markets

Answer 793

· refers to the number of shares sold short · because short positions must be repurchased eventually, some analysts believe that short interest reflects mandatory that creates a support level stock prices · high short interest is a bullish indicator · low short interest is a bearish indicator

Answer 794

small investors trade in odd- lot (< 100 shares) trading small investors invariably buy and sell at the wrong times when odd-lot traders buy, odd-lot analysts are bearish when odd-lot traders sell, odd-lot analysts are bullish

Answer 795

the number of issues closing up or down on a specific day reflects market breadth number of advances/declines can indicate the market’s relative strength when declines outnumber advances, it is bearish when advances outnumber declines, it is bullish analysts plot advance/decline lines on graphs

Answer 796

security prices adjust rapidly to new information with security prices fully reflecting all available information markets are efficiently priced as a result believes technical analysis is useless

Answer 797

throwing darts at the stock exchange listings is as good a method as any for selecting stocks for investment a passive strategy is probably the most suitable for investment success

Answer 798

assumes that current asset prices already reflect all past information relating to price and volume- you can use some tools it is possible to use fundamental analysis, but not technical

Answer 799

Stronger than weak because the date reported here includes not only price and volume, but also the information reported in a company’s financial statements, company’s announcement, economic factors, and others- you can use fewer tools Technical and fundamental analysis don’t work, but inside info works

Answer 800

Nothing works- all knowledge is priced into the stock

Answer 801

Attempts to quantify and control portfolio risk Emphasizes determining relationship between risk and reward in the total portfolio rather than analyzing specific securities Derived from CAPM which states that the pricing of a stock must take into account two types of risk: systematic and unsystematic

Answer 802

Is used to provide an expected return on a security or portfolio based on level of risk

Answer 803

Goal of MPT is to construct the most efficient portfolio One selects the efficient set from the feasible set The feasible set of portfolios represents all portfolios that can be constructed from a given set of equities

Answer 804

The most return for a given amount of risk; or | The least risk for a given amount of return

Answer 805

The collection of efficient portfolios is called the efficient set or efficient frontier The efficient frontier is plotted as a curve The objective for the portfolio is to lie on the curve A portfolio that is not on the curve is taking too much risk for too little return

Answer 806

The efficient frontier is plotted as a curve The objective for the portfolio is to lie on the curve A portfolio that is not on the curve is taking too much risk for too little return

Answer 807

Provides an expected return based on the level of risk

Answer 808

- Expected return of the portfolio - Risk-free rate - Return on the market - Standard deviation of the market, and - Standard deviation of the portfolio

Answer 809

Alpha and beta are not used in the CML equation while standard deviation is

Answer 810

Derived from CML, allows us to evaluable individual securities for us in a diversified portfolio In focusing on a specific asset, the SML uses the following: - Expected return of the portfolio - Risk-free rate - Return on the market - The beta of the asset

Answer 811

Determines the expected return for a security on the basis of its basis And the expectations about the market and the risk free rate We want to determine how much over the risk-free rate we should earn for taking the investment risk

Answer 812

If ABC’s beta is 1.2; market return is expected to be 13% with a risk-free rate of 3% 3% + 1.2(13% - 3%) = 3% + 1.2(10%) = 3% + 12% = 15%

Answer 813

Important to generate positive alpha which means that their investment performance is better than was has been anticipated, given the risk in terms of volatility that was taken

Answer 814

statistical concepts used to analyze investments

Answer 815

the difference between the value of money today (its present value) and its value sometime in the future (its future value)

Answer 816

the formal term that indicates what an amount invested today at a given rate will be worth at some point in the future the future value of a dollar invested today depends on the: rate of return it earns (r) time period over which it has invested (t) FV = PV * (1 + r)

Answer 817

the formal term for a value today of the future cash flows of an investment discounted at a specified interest rate to determine the present worth of those future cash flows PV = FV ÷ (1 + r)t

Answer 818

(1 + r)t To the t power

Answer 819

Fixed percentage of the bond’s par value

Answer 820

Determined by dividing the coupon yield by the current price of the investment Measures current income as a measure of price much like dividend yield of a common stock CY excludes capital gains and losses and is not a measure of total return Coupon payment ÷ market price = current yield

Answer 821

Annual interest – (premium years to maturity | Average price of the bond

Answer 822

Also called the market-driven yield because it reflects the internal rate of return (IRR) from the bond investment

Answer 823

- Nominal - CY - YTM YTC

Answer 824

- YTC - YTN - CY - Nominal

Answer 825

Includes the income from dividends or interest plus any capital appreciation (or less any capital depreciation) over a given time period, usually 1 year

Answer 826

Length of time an investor owns an investment

Answer 827

Is the total return over the holding period Holding period return is not an annualized return It is the percentage return over a defined period

Answer 828

The return an investor would have received had he held an investment for 1 year

Answer 829

Determined by reducing the investment’s return by the client’s tax rate

Answer 830

Reduce the nominal return by the CPI

Answer 831

Estimates of the probable returns an investment may yield To determine the expected return of an investment, the adviser assigns a probability to each return that investment is likely to earn and then multiplies that return by the probability of it occurring

Answer 832

Difference between an investment’s present value and its cost NPV is expressed in dollars and is not a rate of return An analytical concept used by corporations to evaluate a client’s investment in any investment vehicle with a projected income stream

Answer 833

Is the discount rate ® that makes the future value of an investment equal to its present value IRR is the r in the PV and FV calculations Difficult to calculate directly- done by a trial and error process called iteration

Answer 834

The YTM of a bond is its IRR

Answer 835

IRR is the method of computing long-term returns that takes into consideration time value of money YTM of a bond reflects its IRR Investment is good if it has a positive NPV; bad if NPV is negative NPV is generally considered more important than IRR

Answer 836

Method of determining IRR by evaluating the performance of portfolio managers without the influence of additional investor deposit or withdrawals to or from the portfolio Used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals

Answer 837

Method of determining IRR that an individual investor earned on the basis of the investor’s particular cash flow into and out of the portfolio Used to determine IRR an individual investor earned on the basis of the investor’s particular cash flows into and out of the portfolio

Answer 838

Value of a stock should be equal to the PV of all future dividends Dividend ÷ required rate of return in marketplace = stock price

Answer 839

Assumes that the amount of annual dividend will grow at a constant rate Dividend + growth factor Much higher stock price than a stock with constant dividend payments

Answer 840

Mean (arithmetic mean) – average Median – midpoint Mode – most common value in the distribution of numbers Geometric mean - multiplies all the numbers together and take the nth root of them Range – difference between the highest and the lowest numbers

Answer 841

When recipient is paid annual income forever Exhausting the principal Beginning of year (BOY) calculations End of the year (EOY) calculations

Answer 842

Uncertainty that an investment will earn its expected rate of return Systematic risk- associated with the market in general Unsystematic risk- risk specific to a stock

Answer 843

High beta stocks – aggressive | Low beta stocks – conservative

Answer 844

Means that securities move in the same direction | Strong or perfect correlation means two securities prices move in a perfect positive linear relationship with each other

Answer 845

A number that ranges from -1 to 1 Perfect correlation is 1 Unrelated correlation is 0 Negatively correlated is -1

Answer 846

Measure of the volatility of an investment’s projected returns, computed by using historical performance data a statistical term that measures the amount of variability or dispersion around an average the larger this dispersion or variability is, the higher the standard deviation the higher the standard deviation, the larger the securities returns are expected to deviate from its average return, enhance, the greater the risk

Answer 847

is expressed in terms of percentage a security will vary within one standard deviation about two thirds of the time within two standard deviations, about 95% of the time a standard deviation of 7.5 means that the return of the stock for a given. May vary by 7.5% above or below its predicted return about two thirds of the time and within 15% about 95% of the time

Answer 848

an investor can you standard deviation to compare the risk/reward between investments

Answer 849

beta is a volatility measure of the security compared with the overall market measuring only systematic (market) risk standard deviation is a volatility measure of the security compared with its expected performance and includes both systematic and unsystematic risk

Answer 850

Measures risk-adjusted return calculated by using the risk-free rate (the 90 day treasury bill rate) from the overall return of the portfolio the ratio measures the amount of return per unit of risk taken the higher the ratio, the better or more return per unit of risk taken

Answer 851

``` consists of three components: 1. the actual return minus 2. the risk-free rate (the 90 day T-bill rate) divided by 3. standard deviation beta is not part of this ratio ```

Answer 852

in order to have a positive Sharpe ratio, our actual return on an investment must exceed the risk-free return

Answer 853

our diversified will and include business risk, credit risk, liquidity risk, currency risk, and country risk

Answer 854

include market risk and interest rate risk our macroeconomic by nature and are non-diversifiable the required rate of return on any investment is a combination of the risk-free rate plus a risk premium for equity investments, the risk premium can be determined by reference to a risk premium curve or by using the capital asset pricing model (CAPM)

Answer 855

the term duration is used to measure the potential volatility of the debt security when faced with changes in interest rates the longer the duration, the greater the volatility, and vice versa there are two components to the computation: the interest rate in the maturity date

Answer 856

- the lower the coupon rate, the longer a bond’s duration; the higher the coupon rate, the shorter the duration - the longer a bond’s maturity, the longer the bonds duration - for coupon bonds, duration is always less than the bonds maturity - duration 40 coupon bond is always equal to its maturity - the longer a bonds duration, the more its value will change for 1% change in interest rates; the shorter the duration, the less it will change

Answer 857

- the duration of a bond with coupon payments is always shorter than the maturity of the bond by the same token, the duration of the zero coupon bond is equal to its maturity - a five-year zero-coupon bond has a duration of five because it takes five years to make the money back the buyer gets a single payment (par) at maturity five years after the purchase

Answer 858

the measurement of the curve that results when plotting a bonds prices movement in response to changes in interest rates it is a more accurate representation then duration of what will happen to a bond's price as interest rates change, especially when the changes are great

Answer 859

duration is a linear (straight line) measurement, while convexity follows a curve comparing to bonds, the one with the higher convexity will show greater price increase when yields fall and a smaller decrease when yields rise (that is a good thing) if we find to bond with the same duration, the one with the higher convexity offers greater interest rate risk protection

Answer 860

is more useful than duration in determining the price volatility of a bond to a significant change in interest rates

Answer 861

``` Calculated by using: - Principal amount; - Coupon rate; and - Number of interest payments The higher the discounted cash flow (DCF), the more valuable the investment ```

Answer 862

Is a risk analysis technique in which probable future events are simulated on a computer, generating estimated rates of return MCSs are well suited to addressing: - Situations where no real-world data exist - Problems with unknown variables; and - Problems for which no analytical solution exists MCSs are commonly used in personal financial planning for wealth forecasting with estimated cash flows

Answer 863

Used to calculate the estimated return of an investment

Answer 864

Calculated from cash flows of a specific investment

Answer 865

The longer the duration, the greater the interest rate risk

Answer 866

Among the more popular strategies employed to reduce interest rate risk inherent in purchasing bonds are: - Barbells; - Bullets; and - Ladders

Answer 867

An investor purchase bonds with short maturities and an equal amount with long maturities with no bonds in between

Answer 868

Buying bonds at different times, but that all mature at the same time Each year buying bond with the same maturity date (although the duration gets progressively sooner)

Answer 869

Bonds are all bought at the same time, but mature at different times As the shorter maturities come due, they are reinvested and now become the long-term ones

Answer 870

Is a systematic risk, meaning that diversifying your portfolio is of little or no help.

Answer 871

Foreign governments, coups, etc.

Answer 872

Things like changes to the tax code are the most obvious examples of legislative risk

Answer 873

- Market - Interest rate - Inflation or purchasing power

Answer 874

- Business - Financial - Liquidity - Political - Regulatory

Answer 875

- Large Cap – S&P 500 - Mid Cap – S&P 400 - Small Cap – Russell 2000 - International Stocks – EAFE

Answer 876

One that returns the highest rate of return consisten with the amount of risk and investor is willing to take The portfolio that makes the best trade-off between risk and reward for a given investor’s investment profile

Answer 877

The most return for a given amount of risk; or | The least risk for a given amount of return

Answer 878

Risk free rate + stock’s beta *(expected return – risk-free rate)

Answer 879

Is a conincident indicator

Answer 880

Stock indexes and manufacturing orders

Answer 881

Economists do not use agricultural employment as an indicato | They do use nonagricultural employment

Answer 882

The rate that member banks charge each other for overnight loans or $1 million or more It is not the rate that the Federal Reserve charges member banks for overnight loans

Answer 883

The practice of moving out of those industries that are heading for a decline andinto those who fortunes are likely to rise as the economy follows the business cycle

Answer 884

PLEASE READ THE QUESTIONS CAREFULLY!

Answer 885

Semiannually

Answer 886

Is more volatile than short-term

Answer 887

Interest is tax-exempt at the state and local levels

Answer 888

Semiannual adjustment to principal based on CPI

Answer 889

Only agency backed by full faith & credit of US government Pass-through , monthly income Interest taxes at all levels

Answer 890

Pass-through , monthly income | Interest taxes at all levels

Answer 891

Maximum 12b-1 fee is 0.75% | Maximum for no load is 0.25%

Answer 892

Flow through Usually limited partnerships Need to show economic value Tax implications usually involved

Answer 893

1. Action 2. Contract (100 shares) 3. Name of underlying stock 4. Expiration month 5. Strike price 6. Type of option (call or put) 7. Premium (price of option)

Answer 894

Also called the Paper Act Also called the Truth in Securities Act Also called the Prospectus Act

Answer 895

Regulates the issuing of corporate securities sold to the public (initial public offerings or IPOs) and through subsequent public offerings (SPOs)

Answer 896

Must be disclosed to the SEC in a registration statement and published in a prospectus

Answer 897

A security meets four conditions 1. The investment of money; 2. In a common enterprise (pooling); 3. With an expectation of profits; and 4. That results solely from the efforts of others

Answer 898

· Stock · Bond · Debenture · Right or warrant · Note · Put, call, or other option · Limited partnership interests · Certificate or interest in a profit-sharing arrangement

Answer 899

any person who issues or proposes to issue any security is an issuer most issuers are businesses, and the term issuer would also apply to a government entity

Answer 900

any person who was purchased from an issuer with a view to selling is an underwriter this term does not include a brokerage firm earning a commission on the retail sale to the public

Answer 901

Person includes an individual, corporation, partnership, an association, a joint stock company, but trust, any unincorporated organization, or a governmental or political subdivision thereof

Answer 902

any notice, circular, letter, or communication, written or broadcast by radio or television, that offers any security for sale or confirms the sale of a security

Answer 903

Prospectus the term prospectus does not include oral communications

Answer 904

a tombstone advertisement (one that simply identifies the security, the price, and the underwriters) is not considered a prospectus or an offering of the subject security

Answer 905

the term sale or cell includes a contract for sale or the disposition of the security for sale

Answer 906

an offer to sell refers to any attempt to offer to dispose of the security or an interest in the security for value or solicitation of an offer to buy a security for value The sale of a security does not include preliminary negotiations or agreements between issuer and underwriter a gift of securities

Answer 907

· any security issue to guaranteed by the United States, any state, or any political subdivision of the state (all federal government issues and municipal securities are exempted securities) · Any commercial paper that has a maturity at the time of issuance of no more than nine months (270 days) · Any security issued by a religious, educational, charitable, or not-for-profit institution · Any interest in a railroad equipment trust, lease, or other similar arrangement · Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution · the exemption next described for banks does not apply to bank holding companies. Most of the large US banks today are owned by holding companies

Answer 908

(exempt under Federal law but is not exempt under the uniform securities act) rule 147 issue: any security offered and sold only to persons resident within a single state or territory where the issuer said security is a person resident in doing business with in such state or territory

Answer 909

securities must be offered and sold exclusively to persons resident in one state Persons purchasing the securities must have their principal residence within the state For nine months from the date of the last sale by the issuer or any part of the issue, resales of any part of the issue by any person will be made only to persons resident within the same state at least 80% of the issuer's gross revenue must be derived from operations within the state At least 80% of the proceeds of the offering must be used for purposes within the state At least 80% of the issuer's assets must be located within the state

Answer 910

3 exemptions under the USA that are not available under the Securities Act of 1933 Foreign government securities are not exempt under the SA 1933 but are exempt under the USA Federal covered securities listed on the national exchange or NASDAQ are not exempt under SA 1933 but are exempt under the USA (known as the blue-chip exemption) securities issued by insurance companies are not exempt under SA1933 but are exempt under the USA (this refers to the securities issued by insurance companies, not their policies)

Answer 911

Transactions by any person other than an issuer, underwriter, or dealer; transactions by an issuer that do not involve a public offering (private placement under regulation D)

Answer 912

Purpose of issue Public offering price (anticipated range) Underwriters commissions or discounts Promotion expenses Expected use of net proceeds of the issue to the company Balance sheet Earning statements for the last three years Names, addresses, and bios of officers, directors, underwriters, and stockholders owning more than 10% of the outstanding stock (i.e. control persons) Copy of underwriting agreements Copies of articles of incorporation

Answer 913

at least 20 days after the issuer files with the SEC for registration of securities the cooling-off period can last several months because of the time it takes to make additions and corrections

Answer 914

Issuer files registration statement with the SEC Cooling-off period Effective date – offering. May begin

Answer 915

prior to the filing of the registration statement, no sales can be solicited in no prospectus can circulate No one can solicit sales during the cooling-off period, but indications of interest can be solicit with a red herring sales may not be solicited, but the firm must use a final prospectus

Answer 916

the SEC sometimes issues a stop order which demands that all underwriting activity cease This may be done if the requirements of the 1933 act have not been met or fraud is suspected

Answer 917

must be made available to any prospective purchaser who expresses interest in the security from the time the issue is filed with the SEC until it becomes publicly available for sale used to solicit indications of buyer interest

Answer 918

cannot be used as a confirmation of sale cannot be used in place of or registration statement cannot be used to declare final public offering price front page contains an SEC statement printed in red ink Two items missing for the preliminary prospectus are the public offering price and the effective date

Answer 919

make offers to sell the securities take orders distribute sales literature or advertising material

Answer 920

take indications of interest distribute preliminary prospectuses published tombstone advertisements to provide information about the potential availability of the securities

Answer 921

SA 1933 requires the preparation of document shorter than a registration statement called the prospectus must contain all the material facts in the registration statement but in shorter form must be given every person who purchases no later than with the confirmation of the sale

Answer 922

allows investment companies to use what is known as an omitting prospectus which must meet the following conditions any information in the advertisement must be taken substantially from the regular prospectus the advertisement must state conspicuously from whom a prospectus may be obtained the advertisement must urge investors to read the prospectus carefully before investing any past performance data, such as yields or return, that are quoted in the advertisement must be accompanied by appropriate disclaimers and disclosures of load, if any the advertisement cannot be used to purchase the shares; purchase may only be made via an application found in the prospectus

Answer 923

every prospectus always has the following statement in bold print on the front page: THESE securities have not been approved or disapproved...

Answer 924

every person who signed a registration form all directors of the issuer attorneys accountants appraisers or other experts underwriters and parent companies

Answer 925

statute of limitations for bringing action is the earlier of: one year after discovery of the violation three years after the date of the action

Answer 926

make, amend, and rescind rules administer oaths seek injunctions or restraining orders in the appropriate court turn over evidence to the Atty. Gen. of the United States for possible criminal prosecution

Answer 927

contains SEC Rule 506 SEC Rule 506 provides an exemption for offers and sales to no more than 35 purchasers accredited investors, however, do not count toward that limit Unsophisticated investors (no more than 35 of them) may participate in the offering if a purchaser representative (accountant, lawyer, or financial advisor) is representing the unsophisticated investor to remain exempt, the law prohibits any general solicitation or general advertisement

Answer 928

a bank, insurance company, or registered investment company employee benefit plan if the bank, insurance company, or registered investment advisor makes the investment decisions, or if the plan has total assets in excess of $5 million a charitable organization, corporation, or partnership with assets exceeding $5 million directors, executive officers, and general partners of the issuer any natural person whose individual net worth, or joint net worth with that person's spouse, excluding the net equity in his primary residence, exceeds $1 million at the time of his purchase any natural person who had an individual income in excess of $200,000 or joint income of $300,000 in each of the past two years and has a reasonable expectation of reaching the same income level in the current year entities made up of accredited investors

Answer 929

the term accredited investor applies only to private placements

Answer 930

must be filed no later than 15 days after the first sale form D requires basic information about the issuer and the offering, including total size of the offering, amount sold to date, the use of the proceeds, and the names of any persons paid commissions

Answer 931

Created so that certain resales of already existing securities could be made without having to file a complete registration statement with the SEC

Answer 932

unregistered securities purchased by an investor in a private placement there also called letter securities or legend securities which refers to the fact that the purchasers must sign an investment letter attesting to their understanding of the restriction upon resale into the legend placed on the certificates indicating restriction upon resale

Answer 933

a corporate director, officer, greater than 10% voting stockholder, or the spouse of any of the preceding is a control person there loosely referred to as insiders or affiliates because of their unique status within the issuer

Answer 934

control stock is stock held by a control person what makes it control stock is who owns it, not how he acquired it

Answer 935

an investor who is not a control person and who has no other affiliation with the issuer other than as an owner of securities is a non-affiliate

Answer 936

· This act created the SEC · grants the SEC authority over all aspects of the securities industry · identifies and prohibits certain types of conduct in the markets · confers to the SEC disciplinary powers over regulated entities and persons associated with them · empowers the SEC to require periodic reporting of information by companies with publicly traded securities

Answer 937

Defines broker, dealer, and exchange

Answer 938

· any person engaged in the business of effecting transactions in securities for the account of others · Banks are not included in this definition

Answer 939

any person regularly engage in the business of buying and selling securities for his own account banks, insurance companies, investment companies, and any persons engage in investing, reinvesting, or trading in securities for their own account, either individually or in some fiduciary capacity, but not as a part of a regular business, are not included in this definition

Answer 940

a person associated with the broker/dealer is any partner, officer, or director of the broker/dealer (or any person performing similar function) or any person directly or indirectly controlling or controlled by the broker/dealer, including any employees of the broker/dealer except that any person associated with the broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of this term

Answer 941

Even “outside “directors or partners whose only connection to the firm is the contribution of capital are considered associated persons of the broker/dealer

Answer 942

any person engaged in the process of: collecting processing, or preparing for distribution or publication information with respect to transactions in, or quotations for, any nonexempt security or distributing or publishing on a current and continuing basis information with respect to such transactions or quotations this includes consolidated ticker tape Bloomberg and Reuters NASDAQ the pink sheets but doesn't include newspapers newsmagazines SROs

Answer 943

any person who engages on behalf of an issuer of securities in: counter signing the certificates registering the transfer of the issuer securities exchange your converting the issuer securities transferring record ownership of securities by bookkeeping entry without his occult issuance of security certificates

Answer 944

any insurance company or separate account that performs these functions solely with respect to variable annuity contracts or variable life insurance policies that it issues; or any registered clearing agency (e.g., Options Clearing Corporation) that performs these functions solely with respect to options contracts that it uses

Answer 945

an organization, association, or group of persons providing a marketplace or facilities for bringing together purchasers and sellers of securities exchanges must be registered registration is accomplished by filing an application with the SEC which will be accepted or denied within 90 days of application the exchange must be prepared to demonstrate the following: formation exchanges in the public interest the exchange will have compliance enforcement ability – that is, the ability to enforce both the SEC's and its own rules the Board of Directors will be represented by at least one member representing the investing public and at least one member representing listed companies the balance of the board is usually made up of directors representing the membership of the exchange member should the exchange may only be offered to registered broker/dealers or associated persons

Answer 946

a national securities exchange or a registered securities Association, such as FINRA

Answer 947

defined as a stock or similar security stock means, in a preferred stock similar security would include: a security convertible into stock (e.g., convertible bond any security with a warrant or right attached to subscribe to or by stock (e.g., bond with warrants attached) any warrant or right to purchase stock

Answer 948

a person is subject to a statutory disqualification with respect to membership or dissipation in, or association with a member of, and SRO if that person: · has been or is expelled or suspended from membership or being associated with a member of any SRO, commodities market, futures trading Association; · is subject to an order of the SEC or other appropriate regulatory agency denying, suspending four. Not exceeding 12 months, or revoking his registration as a broker/dealer, or barring or suspending four. Not exceeding 12 months his association with the broker or dealer; · by his conduct while associated with the broker or dealer, has been found to be a cause of any effective suspension, expulsion, or order of the type described in the two points above; · as associated with any person who is known, or with the exercise of reasonable care should be known, to him to be a person described by one of the three points above; · have been convicted within the past 10 years of securities violation or a misdemeanor involving finance or dishonesty, bribery, embezzlement, forgery, theft, and so forth, or any felony; · is subject to a temporary or permanent injunction from a competent court of jurisdiction prohibiting him from engaging in any phase of the securities business; has willfully violated any federal securities law; or has made a false or misleading statement in any filing with information requested by an SRO (omitting important facts is cause as well)

Answer 949

· loss of a civil lawsuit, even involving securities, is not a cause for statutory disqualification · the effective statutory disqualification is a prohibition against Association of any kind with the member firm or any investment advisor

Answer 950

· national securities exchanges · registered securities associations · members of an exchange or Association · persons associated with a member · applicants to become a member or person associated with a member · the Municipal Securities Rulemaking Board (MSRB) the SEC has no jurisdiction over banks and other similar financial institutions that are regulated by their functional regulators Federal Reserve Board Office of the Controller of the Currency FDIC

Answer 951

the Board of Directors of the Federal Reserve was authorized by the Act of 1934 to establish regulations governing the use of credit for the purchase or carrying of securities the Federal Reserve has issued Regulations T and U covering such credit

Answer 952

a person exercises investment discretion with respect to an account if, directly or indirectly that person is authorized, in writing, to determine: · which securities will be purchased or sold by or for the account; · the amount of the securities to be bought or sold for the account: or · whether the transaction will be a purchase or sale the requirement for investment discretion does not normally include the decision as to the time or price of a particular transaction

Answer 953

An oral grant of time and price discretion is limited to the end of the business day on which the customer grants it any extension of such time and price discretion requires explicit signed and dated customer instructions

Answer 954

· brokers and dealers operating in interstate commerce, including those operating on exchanges and in the over-the-counter markets · Broker/dealers file application for membership on Form BD and the SEC has 45 days to accept or deny the registration · securities exchanges (the SEC has 90 days to accept or deny registration of an exchange) · national securities associations, such as FINRA and the MSRB · corporations of listed securities

Answer 955

· the organization, the financial structure, and nature of the business, · the terms, position, rights, and privileges of the different classes of outstanding securities · the terms on which their securities are to be, and during the preceding three years have been, offered to the public, · the directors, officers, and underwriters, in each security holder of record holding more than 10% of any class of equity of the issuer, including their remuneration in their interests in the securities in their material contracts with the issuer any person directly or indirectly controlling or controlled by the issuer · certified balance sheets for the previous three fiscal years prepared by independent public accountants, and · certified profit and loss statements for the preceding three fiscal years prepared by independent accountants

Answer 956

Regulates insider trading. Certain persons must file a statement with the SEC concerning the amount of equity securities owned. These persons are: · every person who is directly or indirectly the beneficial owner of more than 10% of any class of equity security (other than exempt securities) registered on a national securities exchange; and · officers or directors of the issuers of such securities the SEC must be notified of any changes in ownership of such securities such individuals are prohibited from selling short and from engaging in short-term transactions, usually called short swing profits

Answer 957

gains made when both the purchase and sale take place within a six-month period stockholders are permitted to sue to recover any short-term profits improperly realized by insiders exercise of stock options is not prohibited

Answer 958

Regulated by Act of 1934

Answer 959

Generally requires a beneficial owner of > 5% of a class of equity securities registered under the Act of 1934 (equity securities of public companies) to file a report with the: Issuer, SEC, Securities markets where those securities trade within 10 days of any transaction that results in beneficial ownership of > 5%

Answer 960

Name and background of person or entity (including partners, executive officers, directors, and controlling persons) Origin of the money for the acquisition of the securities The purpose of acquiring the securities and plans the investor may have with the company

Answer 961

purpose is to ensure that institutional investment managers who exercise investment discretion over large securities accounts make periodic public disclosures of significant portfolio holdings Requires that any institution investment manager that uses the mail or any means of interstate commerce file a Form 13F within 45 days of the end of each quarter

Answer 962

there is a list called the official list of section 13 F securities which includes exchange traded or NASDAQ quoted stocks, equity options and warns, shares of closed-end investment companies, and certain convertible debt securities shares of open end investment companies are not included shares of ETF's however are on the official list and would be reported on Form 13 F

Answer 963

regulation 13 G was adopted to ease the beneficial ownership requirements for passive investors adopted to EEs the beneficial ownership requirements for passive investors rather than filing a schedule 13 D a passive investor whose beneficial ownership exceeds 5% must file a schedule 13 G within 10 calendar days after crossing the 5% threshold just as with schedule 13 D passive investors must amend their schedule 13 G within 45 days after the end of the calendar year to report any changes in the information previously reported

Answer 964

a person who can certify that he did not purchase or does not hold the securities for the purpose of changing or influencing control over the issuer and holds no more than 20% of the issuer securities

Answer 965

Act of 1934 Schedule 16(a) requires executive officers, directors and greater than 10% stockholders (insiders) to file transaction

Answer 966

Maloney Act of 1938 amended the Act of 1934 and created NASD which became FINRA- created out of Act of 1934 as amended

Answer 967

Created out of the Securities Amendments Act of 1975- created out of Act of 1934 as amended

Answer 968

Is part of the Act of 1934 Delegates the board of governors of the Federal Reserve System to set margin requirements Purpose of Regulation T is to prevent excessive use of credit

Answer 969

new issues (once shares have been in account for 30 days, they can be used as collateral for a margin loan) mutual funds (continuous new issues) Options

Answer 970

Churning Wash trades Matched orders (broker entering buy and sell orders for the same security at the same time) Pegging, fixing, and stabilizing (attempting to create a price level different from that which would result from the forces of supply and demand)

Answer 971

· The account number · Whether the order was solicited, unsolicited, or discretionary (including time and price) · If a sale, whether long or short · The terms and conditions of the order (market or limit) · The number of shares if a stock and if a bond, aggregate par value (but not rating or current yield) · The time of order entry and execution, and the execution price; · The identity of the agent who accepted the order or is responsible for the account · The current market price of the security and the client’s name or address WOULD NOT be on the order

Answer 972

Insider, control person, or affiliate = officer, director, or owner of more than 10% of the voting stock of the company, or the immediate family of any of these persons Cannot trade securities on basis of material, nonpublic info

Answer 973

· Civil damages up to $1 million or treble (3X) damages · Maximum criminal charges of 20 years in prison

Answer 974

· Guilty party could be fined up to 3X the amount of any gains or losses avoided by using insider info

Answer 975

People can sue inside trading violators but: · Can’t bring action under this section > 5 years after the violation · Can’t get back > they loss

Answer 976

For broker/dealers- research departments and retail sales staff cannot exchange information

Answer 977

SEC has authority to investigate violations of securities laws, specifically those of national securities exchanges, FINRA, and MSRB even though the SROs have their own procedures

Answer 978

Administer oaths Subpoena witnesses Compel attendance Require books and records to be produced Summarily suspend trading in any nonexempt security for up to 10 days without prior notice Suspend trading on an entire exchange for up to 90 days (to do this, the SEC must give prior notice to the President of the US)

Answer 979

Minimum net capital requirement for broker/dealers Net capital means liquid assets of a firm SEC requires all b/ds to maintain a fidelity bond to protect against misappropriation, forgery, etc. of the firm and its associates. The amount of the fidelity bond depends on the size of the firm with a minimum of $100,000

Answer 980

Amended parts of Act of 1934 Aim was to remove barriers to competition within the securities industry Fixed commission rates abolished in favor of negotiated commissions National market system- increased efficiency Gave SEC power to approve proposed rule changes by exchanges and SROs Required registration of municipal securities dealers- which spawned the MSRB Gave SEC power to regulated activities of clearing corporations, securities depositories, and transfer agents

Answer 981

Defines an investment company as: Any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities >40% of issuer’s total assets are invested in investment securities

Answer 982

Broker/dealer and underwriters Banks and S&Ls Insurance companies Holding companies Issuers whose securities are beneficially owned by < 100 persons Issuers who trade in investments other than securities

Answer 983

Face-amount certificate company Unit investment trust Management company

Answer 984

· Issues face-amount certificates on the installment plan · Represents an obligation on the part of the issuer to pay a stated sum at a fixed date > 24 months after the date of issuance, in consideration of the payment of periodic installments of a state amount · If the investor discontinues the plan and cashes in the certificate before maturity, he will probably lose money

Answer 985

· 75% of the value of its total assets invested so that securities of any one issuer are o < 10% of the outstanding voting securities · No requirements for the remaining 25%

Answer 986

can be diversified or non-diversified

Answer 987

Use Form N-1A

Answer 988

from serving as directors, employees, investment advisers, members of advisory boards, officers, or principal underwriters if: convicted, within the previous 10 years, of any felony or misdemeanor involving securities if they have been enjoined by order, judgment from acting in the securities business

Answer 989

40% must be non-interested, having no connecting to the fund other than a position on the board

Answer 990

Max fee is 0.75% FINRA allows another 0.25% to be added on as a servicing fee

Answer 991

· Must have been approved initially by a vote of a majority of shareholders · The plan together with any related agreements, has been approved initially and reapproved at least annually by a vote of the board of directors of the company, and of the directors who are not interested person of the company and have no direct or indirect financial interest in the operation of the 12b-1 plan or in any related agreements

Answer 992

Cannot purchase any security on margin Cannot have a joint account with someone else Cannot sell any security short Cannot acquire >3% of the shares of another investment company

Answer 993

get a majority of the outstanding voting stock to make the change

Answer 994

No registered investment company is permitted to make a public offering of securities unless it has a net worth of ≥ $100,000

Answer 995

· Any person directly or indirectly owning, controlling, or holding with power to vote, 5% of more of the outstanding shares of the investment company · Any person controlled by the investment company · A control person owns >25% of outstanding shares

Answer 996

SEC requires all investment companies to keep assets with a custodian Usually the custodian is a bank Bank does not have to have FDIC coverage

Answer 997

No investment advisory contract may be entered into that does not provide for termination with no more than 60 days’ notice in writing

Answer 998

· Commissions earned on any product, such as mutual funds, insurance, etc. may be used either in full or in part as a credit against advisory fees · What an IA cannot do is rebate or reduce commissions on products offered with a stated offering price, such as mutual funds or insurance company products

Answer 999

Employees of funds rarely have sales charges at all

Answer 1000

All investment companies must file annual reports with the SEC. These reports contain an audited balance sheet and income statement

Answer 1001

At least semiannually, shareholders must be mailed reports, including: · A balance sheet · An income statement · A listing of the amounts and values of securities owned · A statement of purchases and sales; and · A state of the remuneration paid by the investment company during the period covered by the report to tis officers and directors and all affiliated persons

Answer 1002

Options cannot be purchased on margin

Answer 1003

Under federal law, issues from Canadian provinces are not considered municipal securities

Answer 1004

When can an agent make an offering of a security? Act of 1933 also permits an offering to be made by use of a red herring preliminary prospectus, which is published when the issue is filed with the SEC and is used until the effective date. Only an OFFER can be made with a red herring, not a SALE

Answer 1005

Don’t forget that new issues at 1933, but regulation of credit (Regulation T) is Act of 1934

Answer 1006

1. Maturity may not be > 270 days; and 2. Proceeds MUST be used for operational needs (not capital equipment, etc.) Investment company filing Investment companies file reports with the SEC, not their shareholders

Answer 1007

A straddle consists of a put and call on the same stock with the same strike price and the same expiration date. If the investor has purchased both options, it is known as a long straddle; if they've both been sold (written), it is known as a short straddle. Therefore, with two option positions, it is a multi-option strategy. 2.4.3.5 in the License Exam Manual.

Answer 1008

The correct answer was: I, II and III. Administrators have the power to issue cease and desist orders, apply to a court for a temporary or permanent injunction, or apply to a court for restitution to investors or to have the court appoint a receiver for a violator's assets. In issuing the cease and desist order, the Administrator may do so with prior notice and hearing or may issue the order summarily (without such notice and hearing). Reference: 9.14.3 in the License Exam Manual.

Answer 1009

The correct answer was: A stock with a relatively low PE ratio. Value investors look for stocks in companies that have been overlooked or undervalued by other investors. They often focus on stocks with relatively low PE ratios or price-to-book value ratios or on stocks with relatively high dividend yields compared to other stocks in the same industry.

Answer 1010

The correct answer was: 12/31/2015 Investment adviser records, including copies of advertisements, must be kept for at least five years from the end of the fiscal year in which the record originated; in this case, five years from the end of 2010. Reference: 10.9.1 in the License Exam Manual.

Answer 1011

The correct answer was: With certain limited exceptions, Administrator has authority over any transaction made in the state where officiating. With certain limited exceptions, a state Administrator has jurisdiction over securities transactions conducted in the officiating state. The Administrator may issue subpoenas or otherwise conduct inspections of records in states other than where officiating if circumstances warrant. Such inspections may be made if the Administrator deems doing so to be in the public's interest. A person's license can only be suspended when it is in the public interest AND a specific provision of the act or rules has been violated. Only in the case of a transaction involving a federal covered security does the Administrator not have the power to void the exemption. Reference: 9.13 in the License Exam Manual.

Answer 1012

The correct answer was: I, II and III. The federal government's fiscal policy establishes the government's taxation, spending, and debt practices. Fiscal policy can affect the securities markets because it can be used to regulate prices, employment, and economic growth. If fiscal policy includes deficit spending, the government sells bonds to make up the deficit. Reference: 7.1 in the License Exam Manual.

Answer 1013

The correct answer was: I, II, III and IV. Federal covered securities refer to securities exempt from registration because they are regulated, or covered by federal legislation. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminated dual regulation of securities by both federal and state securities legislation. The term "federal covered security" also refers to any security listed on a national securities exchange, any security equal to or senior in standing to one listed on a national securities exchange, or a right or warrant to purchase a security listed on a national securities exchange. Reference: 9.6.2 in the License Exam Manual.

Answer 1014

The correct answer was: 5 years. Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years. Reference: 9.15.2 in the License Exam Manual.

Answer 1015

The correct answer was: the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before one year from the date of grant or two years from the date of exercise. The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before one year from the date of exercise or two years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT. Reference: 1.1.9.2 in the License Exam Manual.

Answer 1016

The correct answer was: the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before one year from the date of grant or two years from the date of exercise. The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before one year from the date of exercise or two years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT. Reference: 1.1.9.2 in the License Exam Manual.

Answer 1017

The correct answer was: Style. ``` Following a value or a growth style, or using a buy-and-hold strategy, is independent of the continent of domicile of the issuer. Investing in different countries diversifies investments among various currencies, other than the client's domestic currency. Different geographic areas have different types of industries whose performance may vary on the basis of regional resources. International equities are considered another asset class for purposes of asset allocation in one's portfolio. Reference: 6.4 in the License Exam Manual. ```

Answer 1018

The correct answer was: 2 years. Under the civil provisions, the statute of limitations extends for two years from the discovery of the offense or three years after the act occurred, whichever comes first. Reference: 9.15.1.1 in the License Exam Manual.

Answer 1019

The correct answer was: III and IV. The Administrator maintains jurisdiction over a license that has been withdrawn for a period of 1 year after the effective date of the withdrawal. An action against an agent of the broker/dealer does not allow the regulatory authority to also go after the broker/dealer unless that agent is a principal of the broker/dealer or part of the ruling indicated that there was a failure to supervise. The broker/dealer must disclose all suspensions by other regulatory agencies, including other states, to the state Administrator of its own state. A broker/dealer must also provide full disclosure of all relevant facts to the state Administrator concerning its registration. Reference: 9.14.4.1 in the License Exam Manual.

Answer 1020

The correct answer was: Interest payments of $40. The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price and the call price. A bond with an 8% coupon will make $40 semi-annual interest payments. With a 10-year call, there are only 20 payment periods, not 60. The present value is $1,150 and the future value is $1,100, the reverse of the numbers indicated in the answer choices. Reference: 7.5.2.1.4 in the License Exam Manual.

Answer 1021

The correct answer was: As she desires. In a custodial account for a minor, any adult, whether related or unrelated, can make gifts to an open UTMA account. However, all gifts are irrevocable. Reference: 5.2.7.1 in the License Exam Manual.

Answer 1022

The correct answer was: focus on generating income for the spouse. The trust was set up first and foremost to provide income for the surviving spouse. That is the investment objective until she dies. At that time, the children's objective, whatever that may be, is the one to be followed. Reference: 6.1.4 in the License Exam Manual.

Answer 1023

The correct answer was: a corporation selling certificates of interest in a mining lease. Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note. Reference: 9.5.3 in the License Exam Manual.

Answer 1024

The correct answer was: Failing to follow a customer's instructions. Deliberate disregard for a customer's instructions is a violation under the USA. Not charging commissions or markups is not a violation of the USA. Failing to state a material fact is a violation of the USA, but failure to state every fact is not required. Reference: 9.11.4 in the License Exam Manual.

Answer 1025

The correct answer was: I and II. The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens. Reference: 5.2.7.2.5 in the License Exam Manual.

Answer 1026

The correct answer was: Duration measures the holding period return on a bond. Duration does not measure the holding period return on a bond, it measures the effect of an interest rate change on the price of a bond or bond portfolio. Duration measures a bond's price volatility by weighting the length of time it takes for a bond to pay for itself. Duration is also a weighted-average term-to-maturity of a bond's cash flows. Reference: 7.6.2 in the License Exam Manual.

Answer 1027

The correct answer was: The sale of Treasury Bills to an individual client. Even though the Treasury Bill is an exempt security, the sale to an individual is NOT an exempt transaction. Isolated nonissuer transactions, unsolicited transactions effected through a broker/dealer, and transactions between issuers and underwriters are exempt transactions under the provisions of the USA. Reference: 9.8.2 in the License Exam Manual.

Answer 1028

The correct answer was: TJK must notify its clients of Tim's departure within a reasonable period following his severance from the firm. An investment adviser firm organized as a general partnership must notify its clients as to the departure of a general partner within a reasonable time period. Reference: 10.14 in the License Exam Manual.

Answer 1029

The correct answer was: the loan could only be made after the advisory contract was terminated. Under NASAA's Model Rule, an adviser may only loan money to clients who are affiliated persons. Although unusual, the adviser may loan money to a bank or broker/dealer affiliated with the adviser. As for unaffiliated persons, the adviser may not lend them money. Reference: 10.17 in the License Exam Manual.

Answer 1030

The correct answer was: II and III. No broker/dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them. Reference: 9.10.1.3 in the License Exam Manual.

Answer 1031

The correct answer was: I, II and III. The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by non-profit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security. Reference: 9.8.2.1 in the License Exam Manual.

Answer 1032

The correct answer was: II and IV. Because Eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the U.S., the issue is not registered with the SEC. Reference: 7.4.1 in the License Exam Manual.

Answer 1033

The correct answer was: $1,100,000.00 The question asks for the gross estate, not the adjusted gross estate or taxable estate. The market value of all assets in which Mr. Wright possessed an incident of ownership at the time of death are included in the gross estate. The amount is therefore $1,100,000. The adjusted gross estate would be less the $75,000 of debt and expenses. Reference: 6.5.4.1.1 in the License Exam Manual.

Answer 1034

The correct answer was: Notice filing. Notice filing is the procedure by which federal covered securities, most commonly registered investment company securities, receive clearance for their securities to be sold in a specific state. No formal registration is required, but payment of fees and filing of certain documents may be. Reference: 9.7.1 in the License Exam Manual.

Answer 1035

The correct answer was: II and III. The SEC may investigate any situation it believes may have violated federal securities laws, its own rules, and rules of the SROs (i.e., exchanges, FINRA, MSRB). The SEC does not enforce state securities statutes or state or federal banking laws. Reference: 8.8 in the License Exam Manual.

Answer 1036

The correct answer was: Bank insured CDs. Preservation of capital is almost always a sign that the client needs CDs. Sure, the U.S. Government bonds will pay back the principal when due, but, with long-term maturities, there will be plenty of interest rate risk that could affect the client if he needs the capital prior to maturity. Reference: 6.3.1 in the License Exam Manual.

Answer 1037

The correct answer was: $1,219. In addition to paying interest, a TIPS bond increases its principal value semiannually by the amount of inflation. If the inflation rate is 4% for 5 years, the principal value of the bond increases semiannually by that inflation rate. Allowing for compounding, the best choice would be the $1,219. This is computed by multiplying $1,000 by 102% 10 times. Reference: 1.2.4.4 in the License Exam Manual.

Answer 1038

The correct answer was: A trustee who invests with reasonable care, skill, and caution. Although all of these may have a fiduciary responsibility, the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution. Reference: 4.4.1.1 in the License Exam Manual.

Answer 1039

The correct answer was: a transaction pursuant to an offer directed by the issuer to no more than 10 individual investors in the state within a 12-month period, as long as no payment is made. A transaction pursuant to an offer by an issuer to 10 persons in the state would qualify as a private placement and would be exempt. However, unlike a preorganization certificate, the subscribers do pay for their purchases. All of the other transactions are exempt. Reference: 9.8.2 in the License Exam Manual.

Answer 1040

The correct answer was: XYZ is a federal covered security. If XYZ is a federal covered security it is not required to register with the state. Nonexempt securities and nonexempt persons must be registered to be sold (securities) or to do business (persons). Reference: 9.6 in the License Exam Manual.

Answer 1041

The correct answer was: Selling a put. When you sell, (write, go short) an option, you create an obligation. In the case of a put, you are obligated to purchase stock that is "put" to you. In the case of a call, you are obligated to sell stock that is "called" away from you. Option buyers have rights, they can choose what they wish to do – there are no obligations. Reference: 2.4.1 in the License Exam Manual.

Answer 1042

The correct answer was: the SEC With $175 million in AUM, MidWest is a federal covered adviser. As such, all financial requirements, bonding, recordkeeping, and so forth requirements are those of the SEC, not any of the states. Reference: 10.6 in the License Exam Manual.

Answer 1043

The correct answer was: The nature of the client's financial objectives. An agent is engaging in unethical conduct if she induced a client to trade securities too frequently in view of the financial resources, investment objectives, and character of the client's account. Frequent trading and trading in large amounts is not necessarily wrong. It is only wrong if the trades are not suitable for a particular client. Thus, the only factor listed that must be considered in determining whether trading is excessive is the nature of the client's financial objectives. Reference: 8.6.6 in the License Exam Manual.

Answer 1044

The correct answer was: house call. When the account value drops to a certain level, SRO rules require a maintenance call. When the broker/dealer sets that level more stringently (above that of the SRO), it is known as a house call. A margin call and Regulation T call are the same thing – the initial call for funds when purchasing on margin. A sell-out occurs when the maintenance (or house) call is not met.

Answer 1045

The correct answer was: I ,II and III. All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter, not for public disclosure. Reference: 10.12.1 in the License Exam Manual.

Answer 1046

The correct answer was: market risk. Market risk is the uncertainty that the market price of a stock will drop even when earnings are strong. Most stocks follow the "market" and this would appear to be no exception. Financial risk concerns itself with financing, particularly debt, so it is related to credit risk. Nothing in this question infers anything about financing difficulties. Reference: 7.7.1 in the License Exam Manual.

Answer 1047

not tending to create a favorable impression not prepossessing. an unprepossessing figure. an unprepossessing restaurant.

Answer 1048

attractive or appealing in appearance. "he was not a prepossessing sight"