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Unit 5 Flashcards

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SIE Exam flashcards
1
Q

What is a section 529 plan?

A

is a specific type of education savings account available to investors. The plans allow money saved to be used for qualified expenses for K-12 and post-secondary education.

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2
Q

What are some QUALIFIED EXPENSES under section 529 plan?

A

include TUITION at an elementary or secondary public, private, or religious school for up to $10,000 per year.

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3
Q

What are the two basic types of 529 plans?

A

PREPAID TUITION PLANS for STATE RESIDENTS and

SAVINGS PLANS for RESIDENTS AND NONRESIDENTS.

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4
Q

What is a PREPAID TUITION PLAN?

A

allows RESIDENT DONORS to LOCK IN CURRENT TUITION RATES by PAYING NOW for FUTURE EDUCATION COSTS.

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5
Q

What are SAVINGS PLANS?

A

allows donors to save money to be used later for education expenses.

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6
Q

True or False

An adult has to be related to an individual in order to open a 529 plan for a future college student?

A

False

The donor does not have to be related to the student.

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7
Q

Explain the process of the 529 plan

A

With a 529 plan, the donor can invest a lump sum or make periodic payments.

When the student is ready for college, the donor withdraws the amount needed to pay for qualified education expenses (e.g., tuition, room and board, and books).

Withdrawals for nonqualified expenses will be subject to taxes on any gains and a 10% penalty on the gains.

Contributions, which are considered gifts under federal tax law, are made with after-tax dollars, and earnings accumulate on a tax-deferred basis.

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8
Q

When are WITHDRAWALS considered TAX-FREE?

A

at the FEDERAL LEVEL if they are used for QUALIFIED EDUCATION EXPENSES.

MOST STATES permit TAX-FREE WITHDRAWALS as long as the DONOR has opened an IN-STATE PLAN.

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9
Q

Mr. Hermosillo would like to save money for his 10-year-old daughter’s college tuition costs.

She has her heart set on a small liberal arts school with a growing reputation in the arts.

His biggest concern is the POTENTIAL INCREASE IN COST over the next several years.

The program best suited to hedge against the increasing cost of college tuition at the school is

A. a 529 prepaid tuition program.
B. a 529 college savings program.
C. a Coverdell ESA account.
D. a custodial account in the child’s name.

A

A. a 529 prepaid tuition program.

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10
Q

Your customer, Mr. Hernandez, has been saving money in 529 college savings plans for his three nephews.

The oldest nephew is awarded an athletic scholarship valued at $15,000 at a major university.

Mr. Hernandez may do any of the following EXCEPT

A. withdraw the value of the scholarship tax free.
B. transfer the account to one of the brothers.
C. withdraw the value of the scholarship penalty free.
D. leave the money in the account for that nephew’s future use.

A

A. withdraw the value of the scholarship tax free.

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11
Q

Which of the following DOES NOT have REGULATORY JURISDICTION over the STRUCTURE OR SALE of 529 plans?

A. SEC
B. IRS
C. MSRB
D. Department of Education

A

D. Department of Education

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12
Q

What will occur if a beneficiary DOES NOT need the funds for school?

A

there are NO TAX CONSEQUENCES if the donor CHANGES THE DESIGNATED BENEFICIARY to a FAMILY MEMBER OF THE ORIGINAL BENEFICIARY

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13
Q

What will occur if the beneficiary receives a scholarship?

A

the donor may withdraw the equivalent value from the plan without penalty.

INCOME TAXES on the gains would still apply.

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14
Q

Other relevant points regarding Section 529 plans are as follows

A

■ Overall CONTRIBUTION LEVELS can VARY from STATE TO STATE.

■ ASSETS IN THE ACCOUNT remain under the DONOR’S CONTROL, even after the student becomes of LEGAL AGE.

■ There are NO INCOME LIMITATIONS on MAKING CONTRIBUTIONS to a 529 plan.

❑ Plans allow for MONTHLY PAYMENTS if desired by the account owner.

❑ Account balances left UNUSED may be TRANSFERRED to a RELATED BENEFICIARY.

❑ Rollovers are permitted from one state’s plan to another state’s plan, but NO MORE THAN ONCE EVERY 12 MONTHS.

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15
Q

What is a PARTNERSHIP?

A

A partnership is an UNINCORPORATED ASSOCIATION of TWO OR MORE INDIVIDUALS.

Partnerships frequently OPEN ACCOUNTS necessary for business purposes.

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16
Q

What does a partnership agreement document include?

A

stating WHICH OF THE PARTNERS can MAKE TRANSACTIONS for the account.

If the partnership opens a margin account, the partnership MUST DISCLOSE any INVESTMENT LIMITATIONS.

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17
Q 
An investment established by states to provide other government entities such as cities or counties a place to invest funds short term is 
A. an FDIC. 
B. an ABLE. 
C. an LGIP. 
D. a REPO.
A

C

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18
Q

All of the following are true for an Achieving a Better Life Experience account except
A. the account must be opened before the beneficiary turns 26.
B. the account owner and the beneficiary must be disabled. C. the income is tax free.
D. the onset of the disability must have occurred before the owner turned

A

A

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19
Q

What are the two types of partnerships?

A

general partnerships and limited partnerships

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20
Q

General partnership is a __________1____________ but not a ____________2______________.

A

1 . tax-reporting entity (they report their business results)

2 . tax-paying entity (the owners would pay any taxes)

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21
Q

What is a Direct participation programs (DPPs)?

A

are unique forms of business that raise money to invest in real estate, oil and gas, equipment leasing, and other similar business ventures. DPPs are not taxed directly as a corporation would be; instead, the income or losses are passed directly through to the owners of the partnership—the investors.

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22
Q

Describe a general partnership

A

all partners in the business have responsibility to manage the business. Ownership of a general partnership may be unequal, and specific responsibilities may be assigned to specific partners. The partnership agreement would detail the specifics of the partnership. All owners may be held liable for actions of the partnership; there is no liability protection.

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23
Q

True or False

DPPs are considered highly illiquid.

A

True

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24
Q

An _____________ (similar to a corporate resolution) must be obtained each year if any changes have been made

A

amended partnership agreement

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25
Q

Describe a limited partnership

A

LPs are investment opportunities that permit the economic consequences of a business to flow or pass through to investors. The businesses themselves are not tax-paying entities.

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26
Q

What is a disadvantage of a limited partnership?

A

is the lack of liquidity in the partnership interest. The secondary market for LP interests is extremely limited; investors who wish to sell their interests frequently cannot locate buyers (i.e., interest in the business is not freely transferable).

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27
Q

Who is a general partner?

A

General partners (GPs) have unlimited liability, meaning that they can be held personally liable for business losses and debts.

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28
Q

What is the most common type of DPP in the securities industry ?

A

is a limited partnership (LP)

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29
Q

What are the two types of partners involved in a limited partnership?

A

general partner and the limited partner. An LP must have at least one of each.

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30
Q

Describe limited partnerships in terms of investors?

A

These programs pass through to investors a share in the income, gains, losses, deductions, and tax credits of the business entity. The investors (partners) would then have the responsibility to report individually to the IRS.

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31
Q

Property in limited partnerships is usually held in the form of and why?

A

a tenants in common (TIC), which provides limited liability and no management responsibilities to the limited partners.

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32
Q

What is the role of a general partner?

A

to manage all aspects of the partnership and have a fiduciary responsibility to use the invested capital in the best interest of the investors.

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33
Q

Describe the managerial role general partners play

A

In managing the partnership, they make decisions that legally bind the partnership, and they buy and sell property for the partnership; they are compensated for fulfilling these duties.

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34
Q

What is the purpose of local government investment pools (LGIPs)?

A

to provide other government entities, such as cities, counties, school districts, or other state agencies, with a short-term investment vehicle to invest funds. The LGIPs are generally formed as a trust in which municipalities can purchase shares or units in the LGIP’s investment portfolio.

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35
Q

most LGIPs operate similar to

A

a money market fund

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36
Q

True or False

LGIPs are required to register with the SEC and are subject to the SEC’s regulatory requirements

A

LGIPs are not required to register with the SEC and are not subject to the SEC’s regulatory requirements, given that LGIPs fall within the governmental exemption, just as municipal securities do. Therefore, investment guidelines and oversight for LGIPs can vary from state to state.

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37
Q

LGIP programs do have ____________ documents

A

disclosure documents

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38
Q

What are LGIP disclosure documents?

A

which generally include information statements, investment policy, and operating procedures. The information statement typically details the management fees associated with participation in the LGIP.

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39
Q

What are Achieving a Better Life Experience (ABLE) accounts?

A

tax-advantaged savings accounts for individuals with disabilities and their families. They were created as a result of the passage of the ABLE Act of 2014.

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40
Q

Describe the Achieving a Better Life Experience (ABLE) accounts

A

The beneficiary of the account is the account owner, and income earned by the accounts is not taxed. The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age 26.

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41
Q

At what age is one eligible for Achieving a Better Life Experience (ABLE) accounts?

A

one need not be under the age of 26 to be eligible to establish an ABLE account. One could be over the age of 26, but as long as the onset of the disability occurred before age 26, one is eligible to establish an ABLE account.

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42
Q

How is one eligible to create a ABLE account?

A

an individual meets the age/onset criteria and is also receiving benefits either through Social Security insurance (SSI) and/or Social Security disability insurance (SSDI), he is automatically eligible to establish an ABLE account. Only one ABLE account per person is allowed.

43
Q

The most common type of direct participation program (DPP) in the securities industry is
A. a limited partnership (LP).
B. a real estate investment trust (REIT).
C. a collateralized mortgage obligation (CMO).
D. an investment company.

A

A

44
Q

How can contributions be made to ABLE accounts?

A

which can be made by any person, including the account beneficiary, as well as family and friends, must be made using after-tax dollars and is not tax deductible for purposes of federal income taxes. Some states, however, do allow income tax deductions for contributions made to an ABLE account.

45
Q

For ABLE accounts contributions by all participating individuals are limited to a specified dollar amount per year, which may be adjusted periodically to account for ______

A

for inflation

46
Q

All of the following are benefits for the limited partners in a direct participation program (DPP) except
A. passive losses.
B. flow-through of income.
C. unlimited liability.
D. an investment managed by the general partner (GP).

A

C

47
Q

Which of the following statements regarding a general partnership is correct?
A. Partners participate in the gains and losses of the business and are fully liable for the businesses actions.
B. Partners participate in the gains and losses of the business and are partially shielded from the businesses liabilities.
C. Partners participate in the gains and losses of the business and are fully shielded from the businesses liabilities.
D. Partners participate in the gains but not the losses of the business and are fully shielded from the businesses liabilities.

A

A

48
Q

What are some advantages of limited partners?

A

■ An investment managed by others (the GP)
■ Limited liability (can only lose the amount invested)
■ Flow-through of income and certain expenses

49
Q

Who are limited partners?

A

limited partners have limited liability, meaning that they can’t lose more than they invested.

50
Q

Describe the role of limited partners?

A

They have no business management responsibilities, and in fact, should they participate in any day-to-day management of the business, they can lose their limited liability status and be considered a GP Limited partners have the right to vote on overall business objectives and the right to receive cash distributions, capital gains, and tax deductions generated by the business. They have the right to inspect all books and records, and if the GP does not act in the best interest of the business, limited partners have the right to sue the GP.

51
Q

What occurs if LP’s are sold privately?

A

investors receive a private placement memorandum for disclosure. Generally, such private placements involve a small group of limited partners, each contributing a large sum of money.

52
Q

When dissolution occurs, the GP must settle accounts in what order?

A
  1. Secured lenders
  2. Other creditors
  3. Limited partners—first, for their claims to shares of profits and then for their claims to a return of contributed capital
  4. GPs
53
Q

How are LP’s liquidated?

A

LPs are liquidated on a predetermined date specified in the partnership agreement

54
Q

LPs may be sold through ______________ or ______________

A

private placements or public offerings.

55
Q

What will cause the early shutdown of a partnership?

A

Early shutdown may occur if the partnership sells or disposes of its assets or if a decision is made to dissolve the partnership by the limited partners holding a majority interest

56
Q 
Revenue $300,000 
Costs: Maintenance $ 50,000 
           Loan Interest $ 70,000
           Operations $160,000 
Depreciation $50 000 
Profit/Loss $-30,000 
Note that depreciation is not an actual cost.

What is the cashflow?

A

To find the cash flow, add the depreciation back into the business results.
Profit/loss $-30,000
Depreciation $50.000

Cash Flow $ 20,000

57
Q

Income from an LP is called

A

passive income and is added to ordinary income for tax purposes

58
Q

Losses from an LP are called

A

passive losses. Passive losses offset passive income only.

59
Q

If an LP generates tax credits, those may be used to offset

A

income taxes directly; tax credits are not a type of income.

60
Q

What occurs in a In a public offering of LPs?

A

LPs are sold by prospectus for disclosure. In a public offering distribution, a larger number of limited partners each making a relatively small capital contribution ($1,000- $5,000) is more likely because they do not need to be accredited investors.

61
Q

some limited partnerships were called

A

tax shelters. The structure of the limited partnership allows for the investor to receive income that is sheltered from taxes.

62
Q

DPPs use ____ and _____ to reduce taxable income.

A

depreciation and depletion. These deductions are not actual cash costs. They reduce taxable income without affecting cash flow.

63
Q

What are the types of limited partnerships?

A

Real estate programs
Oil and gas programs
Leasing programs

64
Q

What benefit opportunities can Real estate programs provide?

A

■ Capital growth potential—achieved through appreciation of property

■ Cash flow (income)—collected from rents

■ Tax deductions—from mortgage interest expense and depreciation allowances for “wearing out the building” and capital improvements

■ Tax credits—for government-assisted housing and historic rehabilitation (tax credits are very strong incentives because they reduce tax liability dollar for dollar)

65
Q

Which real estate program would be best for a client?

A

That depends on the client’s objective. Conversely, an existing property would be better suited for an investor who desires current cash flow, but it likely offers less capital appreciation potential.

66
Q

Describe Real estate programs

A

can invest in raw land, new construction, or existing properties

67
Q

What are the tax advantages associated with Oil and gas programs ?

A

■ Intangible drilling costs (IDCs)—These are costs associated with drilling, such as wages, supplies, fuel, and insurance that have no salvage value when the program ends. These IDCs can be written off (deducted) in full in the first year of operation.

■ Depletion allowances—These are tax deductions that compensate the program for the decreasing supply of oil or gas (or any other resource or mineral) after it is taken out of the ground and sold.

68
Q

In contrast, tangible drilling costs are associated with items that have some salvage value at the end of the program, such as drilling equipment. These types of tangible costs, instead of being immediately deductible, are

A

deductible over several years. The deduction is taken as depreciation. In other words, each year, the asset is worth a little less, and that depreciated amount can now be deducted.

69
Q

Describe Leasing programs

A

Equipment leasing programs are created when DPPs purchase equipment leased to other businesses.

70
Q

A drilling program offers the greatest chance for ______________1____________ Conversely, an income program would be better suited for an investor who ______________2___________________

A
  1. capital appreciation but would not provide current income.
  2. desires current cash flow, but it likely offers less capital appreciation potential.
71
Q 
All of the following would be considered tax advantages relating to a DPP investment except 
A. depreciation recapture. 
B. depletion. 
C. intangible drilling costs. 
D. accelerated depreciation.
A

A

72
Q

Describe Oil and gas programs

A

include speculative or exploratory (wildcatting) programs to locate new oil deposits (generally considered the riskiest developmental programs that drill near existing producing wells in hopes of locating new deposits) and income programs that invest in producing wells (generally considered the least risky)

73
Q

Each limited partner’s share of partnership losses
A. may be used to reduce ordinary income.
B. may be used to offset passive income.
C. is deductible up to $3,000 per year.
D. cause a dollar-for-dollar decrease in the market value of the limited partnership units.

A

B

74
Q

Explain the risk of liquidity to a LP

A

There is effectively no secondary market for limited partnership interests. Any transfer of interest in an LP requires permission of the general partner. An investor in a limited partnership should assume she will own the program until it ends.

75
Q

What is a real estate investment trust (REIT)?

A

is a company that manages a portfolio of real estate, mortgages, or both to earn profits for shareholders

76
Q

REITs normally

A

■ own commercial property (equity REITs),

■ own mortgages on commercial property (mortgage REITs), or

■ do both (hybrid REITs).

77
Q

How do REIT’s pool capital?

A

REITs pool capital in a manner similar to that of an investment company but are not investment companies, neither open nor closed end. Shareholders receive dividends from investment income or capital gains distributions.

78
Q

What will occur in underreporting of income for LP?

A

The IRS will likely impose taxes and penalties for the underreporting of income plus interest on the unpaid taxes. The limited partners would have to pay for the problem.

79
Q

What is a public REIT?

A

Many REITs are registered with the SEC and, therefore, are subject to all disclosure requirements

80
Q

What is exchange-traded or listed REITs?

A

Many REITs are traded on a stock exchange

81
Q

All of the following are types of real estate investment trusts except
A. mortgage. B. oil and gas. C. equity. D. hybrid.

A

B

82
Q

Explain the risk of audit/recapture of tax benefit

A

If the IRS disallows a prior tax benefit, the consequences flow through to the limited partners

83
Q

What is a private REIT?

A

there are REITs that are not registered with the SEC. known as private REITs. Nonregistered REITs are not subject to the same disclosure requirements as public REITs and, therefore, are subject to greater risk

84
Q

How are REITs organized?

A

organized as trusts in which investors buy shares or certificates of beneficial interest, either on stock exchanges or in the OTC market.

85
Q

A REITs is taxed as

A. a corporation. B. a partnership. C. a municipal bond. D. as a conduit.

A

D

86
Q

Your client is considering the Newport Land and Farming REIT and notes in the description that it is listed. What does ‘listed° mean in this context?
A. The REIT is registered and likely trades OTC.
B. The REIT is unregistered and trades only in the primary market.
C. The REIT is registered and likely trades on an exchange.
D. The REIT is unregistered and is likely trading OTC bulletin board.

A

C

87
Q

What is the difference between hedge and mutual fund?

A

they differ in that the hedge fund has more flexibility in the investment strategies employed. While hedging is the practice of attempting to limit risk, most hedge funds specify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to shoulder a substantial amount of risk.

88
Q

What is a hedge fund?

A

are often organized as limited partnerships and are sold as private placements. Hedge funds are similar to mutual funds in that investments are pooled and professionally managed

89
Q

common strategies employed by hedge funds are

A

■ highly leveraged portfolios (borrowing to purchase securities);

■ the use of short positions (selling securities the portfolio does not own);

■ the utilization of derivative products such as options and futures;

■ currency speculation;

■ commodity speculation; and

■ the investment in politically unstable international markets.

90
Q

Most hedge funds are organized as private investment partnerships, allowing them to

A

limit the number of investors or require large initial or minimum investments if they so desire. Some also require that investors maintain the investment for a minimum length of time

91
Q

Exchange-traded notes (ETNs) are

A

senior, unsecured debt securities issued by a bank or financial institution. Therefore, they are backed only by the good faith and credit of the issuer.

92
Q

What is an exchange-traded fund (ETF)?

A

, considered an equity security, invests in a specific group of stocks and generally does so to mimic a particular index, such as the S&P 500.

93
Q

What is the difference between an ETF and a mutual fund?

A

is that the ETF trades like a stock on the floor of an exchange and, in regard to how it trades, is similar to a closed-end investment company rather than an open-end mutual fund. They are registered, however, as either an open-end fund or as a UIT.

And, unlike mutual funds, ETFs can be purchased on margin and sold short. Expenses tend to be lower than those of mutual funds, and the management fee is also low.

94
Q

All of the following are true for exchange-traded funds (ETFs) except
A. ETFs can be bought or sold throughout the trading day.
B. ETFs are not marginable securities.
C. ETF share prices are subject to market forces like supply and demand.
D. ETF transactions are commissionable trades.

A

B

95
Q 
An investor has placed money in a debt-like instrument issued by a financial institution and linked to the performance of the S&P 500 Index. From the investment, which has a stated maturity date but makes no interest payments, the investor anticipates receiving a cash payment minus any applicable management fees when the instrument matures. This describes which of the following investments? 
A. Municipal bond 
B. Direct participation program (DPP)
C. Exchange-traded note (ETN) 
D. Variable annuity
A

C

96
Q

A private, unregulated investment company organized in such a way so as to invest and achieve high returns utilizing debt leverage and derivative products such as options and margin is best described as
A. a mutual fund.
B. a direct participation program (DPP).
C. a real estate investment trust (REIT).
D. a hedge fund.

A

D

97
Q

What is the role of the notes in ETN?

A

The notes track the performance of a particular market index, but do not represent ownership in a pool of securities the way share ownership of a fund does.

98
Q

advantages of ETFs when compared with open-end mutual funds

A

■ Pricing and ease of trading—Because individual ETF shares are traded on exchanges, they can be bought or sold anytime during the trading day at the price they are currently trading at as opposed to mutual funds, which use forward pricing and are generally priced once at the end of the trading day.

■ Margin—ETFs can be bought and sold short on margin like other ETPs. Mutual funds cannot be bought on margin, nor can they be sold short.

■ Operating costs—ETFs traditionally have operating costs and expenses that are lower than most mutual funds.

■ Tax efficiency- ETFs can and sometimes do distribute capital gains to shareholders like mutual funds do, but this is rare. Understanding that these capital gains distributions are not likely, there are no further tax consequences with ETF shares until investors sell their shares. This may be the single greatest advantage associated with ETFs.

99
Q

disadvantages of ETFs when compared to open-end mutual funds

A

■ Commissions—The purchase or sale of ETF shares is a commissionable transaction. The commissions paid can erode the low-expense advantage of ETFs. This would have the greatest impact when trading in and out of ETF shares frequently or when investing smaller sums of money.

■ Overtrading—Given the ability to trade in and out of ETFs easily, the temptation to do so is possible. Excessive trading can eliminate the advantages associated with investing in a diversified portfolio and add to overall commissions being paid by the investor, further eroding any of the other expense and operating-cost advantages associated with ETFs.

■ Market influences on price—Because ETFs trade on exchanges, share prices can be influenced by market forces such as supply and demand, like any other ETP. In this light, investors need to recognize that just as they might receive less than book value per share when selling corporate shares of stock, they might also receive less than NAV per share when selling ETF shares.

100
Q

What is the primary risk of an ETN?

A

is default risk. Liquidity risk is also a common concern. Even though they are called ‘exchange traded; very few of them have ever actually been listed on an exchange.

101
Q

The market price of an ETN, in theory, depends on

A

the performance of the underlying index or benchmark

102
Q

What are ETN’s?

A

are bond-like instruments with a stated maturity date, but they do not pay interest and offer no principal protection. Instead, ETN investors receive a cash payment linked to the performance of the underlying index minus management fees when the note matures.

103
Q

What are the additional risk of ETN compared with an ETF?

A

if the credit of the underwriting bank should falter, the note might lose value in the same way any other senior debt of the issuer would. Additionally, there are limits to the size of ETN issues.

investments (securities) (15 decks)

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