Section 3&4 Practice quizes
Dan is the owner of a mutual fund that returned him a before-tax return of 15% last year. Inflation is running at an annual rate of 3%, and Dan is in a 27% marginal income tax bracket. What has been Dan's approximate inflation-adjusted after-tax return on the fund over the course of the last year (rounded to the nearest 2 decimal points)?
7.95% First, compute Dan's after-tax rate of return of 10.95% as follows: .15 × (1 − .27), or .73 = .1095. Then, compute Dan's inflation-adjusted, or real, rate of return by subtracting the 3% inflation rate from his 10.95% after-tax return.
When performing a capital needs analysis for a client, factors to be considered would include
A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market.
The Investment Company Act of 1940 states that:
Open-end companies may issue only common stock. The prospectus must state the management fee, and an investment company needs only $100,000 to offer itself to the public. In addition, no more than 60% of the board of directors can be made up of officers or employees of the company.
Which of the following statements about bid and asked prices are TRUE?
The bid price is the price at which a dealer will buy a security, and the asked price is the price at which a dealer will sell. A dealer will always bid a lower price to buy a stock than to sell it.
An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle?
Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation and, upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old.
Gross Profit
net sales - cost of goods sold
If an investment adviser's client wishes to save current income taxes by placing certain investments in a charitable trust, ethically, the investment adviser should
recommend the client consult with a qualified attorney Presuming the adviser is not a licensed attorney, he should recommend the client see a qualified attorney. However, it is ethical to discuss the nature of a charitable trust with the client.
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 analyze corporate financial statements and trends in sales and income?
Fundamental analysts obtain information from corporate financial statements, as well as other relevant sources. Technical analysts review market charts, while fundamental analysts are concerned with the earnings ability of corporations derived from corporate financial statements.
An investor reading the open-end investment company section of today's The Wall Street Journal sees that Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close?
$10.65, less redemption fee, if any An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission.
A technical analyst is least likely to consider which of the following when selecting securities?
Corporate earnings would be of least interest to a technical analyst, who is interested in market statistics indicative of future buying, market statistics that could reflect price or market trends, and trading volume.
An investment adviser representative meets with a couple who explains that they wish to be able to pay for their daughter's college education. The IAR is told that the child will be starting school in 5 years. This 5-year time period would be considered
Investment constraints are limitations on the ability to make use of particular investments. They can be liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances (ethical objectives or social responsibility considerations). The easiest way to determine if it is a constraint or a capital need is if a dollar amount is stated. When a specific sum is mentioned, it is a capital need. The IAR might use a present value computation to determine the amount to be deposited,, and this may be part of the client's IPS, but neither of those answers the question posed.
A client has just finalized her divorce and intends to sell her gold wedding band. Because the price of gold has risen significantly since she married 20 years ago, she will be able to realize a profit on the sale, but she does not know what to use as the cost basis. You suggest she speak to a tax specialist who will tell her to
Original Cost of Ring Regardless of the nature of the asset, the cost basis of any asset acquired as a gift is that of the donor. Although not tested, the maximum rate on capital gains from collectibles, such as a gold ring, is 28% (higher than the rate for securities).
Which of the following statements regarding an investment company's board of directors is NOT true?
The board of directors sets policy and manages the administrative affairs of the investment company, but it does not manage the portfolio. The board contracts with an outside investment manager to invest the funds. It is unlawful for any person to serve or act in the capacity of employee, officer, director, or investment adviser of any registered investment company, or principal underwriter for any registered open-end company, registered unit investment trust, or registered face-amount certificate company if that person, within the past 10 years, has been convicted of any felony or a misdemeanor involving the purchase or sale of any security.
Three years ago, a customer bought 200 shares of ABC for $60.50 per share. Upon her death, she left the shares to her husband when ABC was trading at $98.25. If her husband sells the shares for $99.25, what is his cost basis for tax purposes?
The cost basis to the recipient of inherited securities is the fair market value on the date of the owner's death. In this case the fair value is the market value of $98.25. Step up cost basis
When an income-oriented investor wishes to compute the current yield of a specific investment, which one of these items would NOT be considered?
The current yield of any investment is the income return (dividends on equity; interest on debt) divided by the current market price. The NPV is a tool that evaluates the reasonableness of the price of an investment.
What would be the time horizon for a 65-year-old client who has just retired?
The time horizon for an individual who has just retired is the balance of expected life.
Which of the following best describes thinly traded stocks?
Thinly traded stocks are stocks that are not actively traded on an exchange or that are not held by a large number of investors. Because thinly traded stocks are usually less marketable and less liquid than actively traded stocks, the spread between their bid and ask prices tends to be considerably higher. They also tend to have more volatile price swings.
One of the features of broker-dealers is that they sometimes maintain an inventory of securities, even when not in the role of market maker. If a broker-dealer has shares of a somewhat speculative, thinly traded stock in its inventory whose last reported trade was several days ago at $4 per share and the firm were to offer its shares at $10 per share, the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents might consider this
Yes, it is always possible that in just a couple of days, this company's stock may have increased by 250%, but there is nothing in the question to indicate that. Yes, thinly traded stocks tend to have wider spreads, but not like this.
A loss derived from a limited partnership may be offset against income from
other limited partnerships A limited partner may use only passive income to offset the loss derived from a limited partnership. A passive loss cannot be used to offset dividends received from common stocks. Passive loss from partnerships may be used to offset passive gains from partnerships, not gains from municipal bonds.
