Series 65 Unit 2

A mutual fund's expense ratio is found by dividing its expenses by its

A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets. For example, if the fund had net assets of $100 million and its annual expenses are $1 million, the expense ratio is $1 million divided by $100 million = 1%.

An investor goes short 5 soybean futures contracts on the Chicago Mercantile Exchange (CME). When the contract expires,

Among the ways in which futures differ from options is that both parties, long and short, are obligated to execute the contract. At expiration date, if not exercised before, the buyer must purchase at the contract price and the seller must deliver at the contract price. In the case of options, the buyer (long position) is the one who chooses to exercise or not, and it is the seller (short position) who becomes obligated to perform.

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer

Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while non-qualified options are always treated as ordinary income.

Duration is

Duration measures a bond's volatility with respect to a change in interest rates. The higher the duration, the greater the change in a bond's price with respect to interest rate changes.

Mr. Beale buys 10M RAN 6.6s of 32 at 67. What is his total purchase price?

For those of you not familiar with bond listings, this means that Beale bought $10,000 (10M) of the RAN Corporation bonds with a 6.6% coupon (interest rate stated on the face of the bond) that mature in 2032 (32). The price is 67, which represents 67% of $10,000, or $6,700.

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with A)

Other things equal, a bond with a low coupon and long maturity will have the longest duration and therefore greatest price volatility.

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year?

TIPS bonds have a fixed coupon rate with a principal that varies each 6 months based on the inflation rate. With an annual inflation rate of 9%, each 6 months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 x 104.5% = $1,045 x 3% = $31.35 plus, $1,045 x 104.5% = $1,092 x 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year. You should be able to "eyeball" this. Any bond with a 6% coupon will pay $60 in one year ($30 x 2). Because the TIPS bond increases the principal after the first 6 months, the second interest payment will be slightly higher than $30. There is only one choice slightly higher than $60.00 and it would be that way on the real exam.

Which of the following categories of assets is most likely classified as an alternative asset?

Traditional investments include cash, bonds, and stocks, regardless of the adjective used. Alternative investments include 4 major categories: real assets, hedge funds, private equity, and structured products.

Which of the following is TRUE of GNMA securities?

Income received by investors in Government National Mortgage Association (GNMA) securities is subject to both state and federal income tax, and the asset backing them is residential mortgages.

An investor in a high tax bracket who invested in a DPP should have which of the following characteristics?

DPPs are appropriate for investors who can benefit from substantial tax deductions or credits, are not bothered by illiquidity, understand the business risks and benefits involved, and can stay in the program until completion.

An investor is considering purchasing an equity exchange-traded fund (ETF) to further diversify his portfolio. All of the following are reasons for him to purchase this investment EXCEPT

Equity ETFs are often organized as regulated open-end investment companies and rarely as limited partnerships. Therefore, they must distribute at least 90% of their net investment income and capital gains. However, the method by which those capital gains are realized by the ETF is different than that of a mutual fund and, in almost all cases, results in lower taxable capital gains distributions. Unlike limited partnerships, there is no flow-through of losses. Expenses are generally lower as well, and ETFs trade during the day just like any stock.

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is TRUE?

The letter of intent is not satisfied by the price appreciation of the shares. A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed.

Specified in an exchange-traded futures contract would be

Typically, there are 5 standardized parts to an exchange-traded futures contract: Quantity of the commodity (e.g., 5,000 bushels of corn or 100 oz. of gold) Quality of the commodity (specific grade or range of grades may be acceptable for delivery, including price adjustments for different deliverable grades) Delivery price (similar to exercise or strike price with options) Time for delivery (e.g., December wheat to be delivered) Location (approved for delivery)

A benefit of active investment in real estate that is not available to purchasers of REITs is

Under Internal Revenue Code Section 1031, no gain or loss is recognized on the exchange of real estate held for investment if such property is exchanged solely for real estate of like-kind which is to be held for investment. This does not apply to REITs where an exchange is considered a sale with a realized gain or loss for tax purposes. Section 1035 is similar in concept, but deals with insurance products, usually annuities. Dividends are paid by corporations, not those who flip houses and, because most REITs are publicly traded, they are the ones with greater liquidity.