Suitability Related Questions Flashcards
A sophisticated investor wants to purchase stock of a foreign company or an American depositary receipt representing the shares of that company. The purchase would align with the investor’s goal of growth and income, but he makes several statements about the potential purchase and only one of them is accurate. You feel it is important to point out and discuss from a suitability perspective which statements were not, and which one was accurate. The accurate statement was
A) I can trade the foreign shares right here on U.S. exchanges
B) with the ADRs, I’ll have voting rights just like I would if I purchased the shares directly
C) the direct purchase of the foreign stock shares eliminates currency risk
D) the purchase of American depositary receipts representing the shares exposes me to currency risk
The correct statement was D) the purchase of American depositary receipts representing the shares exposes me to currency risk
A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation?
A) Raw land real estate limited partnership.
B) New construction real estate limited partnership.
C) Oil and gas income program.
D) Exploratory oil and gas drilling program.
C) Oil and gas income program.
The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas program or by new construction real estate limited partnerships. A raw land real estate partnership is usually speculative. Of the answers listed, the income and moderate risk from an oil and gas income program would be of greatest benefit to this investor.
Reference: 13.2.2.6 in the License Exam Manual
An investor with a large salary as well as unearned investment income is two years from retirement. If he wants to shelter a portion of his income, which of the following programs would provide him with substantial initial write-offs?
A) Existing housing.
B) An oil and gas drilling program.
C) Raw land.
D) An oil and gas income program.
B) An oil and gas drilling program.
Oil and gas drilling programs pass through IDCs (intangible drillings costs), which the partners may use to reduce passive income.
Reference: 13.2.2.1 in the License Exam Manual
One should always remember that the tax-free interest paid by municipal bonds makes them better suited to those in______ tax brackets.
higher
An investor, age 40, earns $65,000 annually and contributes 3.5% to his employer’s 401(k) plan. With the 401(k), his only retirement savings, he wants to do more for retirement and hopes to invest in such a way as to have some tax-free income when he takes distributions later in life. Which of the following is the most suitable given the investor’s goals and objectives?
A) Municipal bonds
B) Traditional IRA
C) Roth IRA
D) A nonqualified variable annuity
C) Roth IRA
Given the investor’s current age (40), a safe assumption is that the Roth IRA will have been owned for at least 5 years before any distributions would be taken. Roth IRAs allow for tax-free distributions when owned for 5 years and the recipient is age 59 1/2 or older, traditional IRAs do not. Municipal bonds offer tax-free interest but do not grow tax-deferred and VAs should be used only after contributions to employer-sponsored plans and IRAs are maxed out.
Two customers in their twenties, married only a few years, should select which investment for their IRAs?
A) Growth-oriented mutual funds.
B) Oil and gas exploration limited partnerships.
C) High yield bond funds.
D) High-tech funds.
A) Growth-oriented mutual funds.
A growth mutual fund may be appropriate for a young couple’s IRA account; all other selections incur high risk that is not appropriate for a retirement account.
__________accounts are appropriate only for investors who engage in at least a moderate level of trading activity. Accounts with a low level of trading activity may be better off with commission-based charges.
Fee-based
An investor interested in acquiring a convertible bond as part of his investment portfolio would:
A) want the assurance of a guaranteed dividend on the underlying common stock.
B) seek to minimize changes in the bond price during periods of steady interest rates.
C) want the safety of a fixed-income investment along with potential capital appreciation.
D) be interested in tax advantages available to convertible debt securities.
C) want the safety of a fixed-income investment along with potential capital appreciation.
An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities.
