Series 65 unit 4

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust?

All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.

An investment adviser using an insurance approach to capital needs analysis would

An insurance approach to a customer's capital needs analysis involves purchasing life insurance sufficient to complete the customer's financial objective should he die before it is met.

A benefit of waiting until the age of 70 to claim Social Security benefits is that

If an individual delays taking Social Security until age 70, the benefit is increased by 8% for each year from the full retirement age. If full retirement age is 66, four years at 8% means the payout is 132% of the base amount. Medicare (Part A) goes into effect at 65 and income tax rates do not change at 70.

A client purchases 1,000 shares of the ABC Global Growth Fund when the NAV is $8.75 and the POP is $9.21. Three years later, the client makes a gift to her daughter when NAV is $9.50 and POP is $10.00, and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale?

In the case of a gift of securities, the donee acquires the donor's cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares).

Under the provisions of the Internal Revenue Code, which of the following business forms is not required to file a separate tax return?

In the case of a sole proprietorship, any tax consequences (income or loss) are reported on the owner's personal Form 1040, Schedule C. The other entities file either a Form 1065 (limited partnership and LLC) or a Form 1120S (S corporation). Although a one member LLC is treated like a sole proprietorship, unless that was

What is the risk measure associated with the capital market line (CML)?

In the context of the CML, the measure of risk is total risk, or standard deviation. Beta (systematic risk) is used to measure risk for the security market line (SML).

A market maker is quoting ABC common stock at $76.10 - $76.31. That means

Marker makers provide a two-sided quote. Because market makers stand ready to buy and sell the specific security, they provide a bid price, the price the firm is willing to pay for the stock, and the offer price, the price they are asking to receive when selling the stock. Market makers do not earn a commission; they charge a markup or markdown. A $.21 spread on a stock at this price is certainly not excessive.

All of the following are progressive taxes except

Progressive taxes are those where the tax rate increases as the amount being taxed increases. The opposite of that is the regressive tax where the rate remains the same regardless of the dollar amount being taxed. Excise taxes, such as those on cigarettes, are a prime example. Whether someone purchases a pack, a carton, or a case, the tax rate is constant.

Using industry jargon, the tax on the last dollar of income is at

The IRA defines marginal tax rate as "the highest rate that you will pay on your income." Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.

Which of the following is least likely to be considered an investment constraint when preparing an investment policy statement?

The commonly tested investment constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is included in the investment objectives of the policy statement, not in the constraints.

A hedge fund with a 2-plus-20% fee structure has equal probabilities of a 10% loss or a 30% gain in its first year. The probable return to an investor in the fund for the first year is closest to

To our knowledge, the exam has never asked a question this complicated. But, things can always change so we wanted you to get the "flavor" of combining probable return (which is tested) with hedge fund performance fees. With a 30% gain, the fund would earn fees of 2% + 0.20(30% - 2%) = 2% + 0.20 (28%) = 2% + 5.6% = 7.6%. With a 10% loss, the fund would only earn its management fee of 2%. To the investor, the expected return is 0.5(-10% - 2%) = 0.5 (-12%) = -6% + 0.5(30% - 7.6%) = -6% + 0.5 (22.4%) = -6% + 11.2% = 5.2%.

An analyst observes that the beta of a security is 1.3, the market return is 6%, and the risk-free rate is 1%. The analyst forecasts that the security will return 7% over the next year. Based on these assumptions, the security is

Under the CAPM, the required return is the RF rate plus the beta times (the market return - RF rate). Using the numbers in this question, it is 0.01 + 1.3 (0.06 - 0.01) = 0.01 + 1.3 (0.05) = 0.01 + 0.065 = 0.075 which is 7.5%. Because the forecasted return of 7% is less than the required return of 7.5%, this security is considered to be overvalued.

A client has made both tax-deductible and nondeductible contributions to a traditional IRA. When distributions are taken from the IRA,

they are taxed on a pro rata basis The portion of the distribution that is nontaxable must be prorated with amounts that are taxable. For instance, if the individual contributed $2,000 in after-tax amounts and $8,000 in pre-tax amounts, a distribution of $5,000 would be prorated to include $1,000 after-tax and $4,000 in pre-tax assets.