Unit 19 Series 65
possible at the current price. With that in mind, which of the following would likely have the lowest degree of exposure to liquidity risk? A) Investment-grade municipal bonds B) Money market mutual funds C) REITs D) RELPs
B RELPs (real estate limited partnerships) would have high liquidity risk because there is generally no secondary market for them. Municipal bonds, even highly rated ones, can have liquidity issues. Even though many REITs are listed on exchanges, there are a growing number of non-traded ones where liquidity can be an issue. However, money market funds with their check-writing privilege, are about as liquid as you can get.
If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A) Investment-grade corporate bond. B) City of Milwaukee GO bond. C) Zero-coupon bond. D) U.S. government bond.
A The investor is in a low tax bracket, so the tax-exempt municipal bond is not a suitable investment. To maximize income, the best recommendation is the corporate bond which offers a higher yield than a government bond with a similar maturity.
An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? A) Mid-cap common stock mutual fund B) Municipal unit investment trust C) Ginnie Mae fund D) Money market mutual fund
A
If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend? A) Money market B) Foreign stock C) Biotechnology D) Aggressive growth
A
Otto and Lucy set up a 529 plan to save funds for the college education of their daughter, Marangue, who is 14. What is the most suitable investment for the largest portion of their contribution? A) An intermediate term bond fund B) A large-cap stock fund C) A long-term bond fund D) A growth stock fund
A
What is the net worth of a customer with the following personal balance sheet? Cash $20,000 Municipal bonds $75,000 401(k) account value $150,000 Salary $80,000 per year Cars $30,000 Home $250,000 Miscellaneous (jewelry, etc.) $50,000 Personal loan $10,000 Car loan $20,000 Mortgage $150,000 Monthly mortgage payment $1,500 A) $245,000 B) $395,000 C) $473,500 D) $95,000
B A customer's net worth equals assets minus all liabilities ($575,000 − $180,000 = $395,000). Salary and mortgage payments are income and expense items and are not part of net worth.
A 74-year-old widower has been your client since his early 50s. He is a well-informed investor and has always seemed capable of understanding most investment concepts you have presented. At least twice a year, the 2 of you meet to evaluate his current financial situation and objectives. In your last meeting, it seemed to you that he was distracted and somewhat forgetful. It would be appropriate for you to do all of the following EXCEPT A) ask him to invite a friend or family member to accompany him to appointments with you B) inform your supervisor of your concerns about his memory loss C) wait to see if there are further causes for concern about his capabilities D) take detailed notes on future conversations and meetings with him
C
Your 47-year-old client plans to retire at age 65. When constructing a recommendation for the client's $850,000 IRA rollover account, your first consideration should be the client's A) tax status B) planned retirement age C) risk tolerance D) liquidity needs
C
A 45-year-old investor wants the greatest possible monthly income with the preservation and stability of capital as secondary objectives. Which of the following investments would you recommend? A) Growth mutual fund B) Growth and income fund C) Money market mutual fund D) Long-term bond fund
D
Your retired 72-year-old client still lives in the home he purchased 35 years ago for $40,000. It is currently valued at $700,000 and there is no mortgage. The client has almost $500,000 in his self-directed IRA rollover account. When determining suitable investments for this client, you would base your recommendations on the fact that the client is an accredited investor having a net worth in excess of $1 million a home equity loan could more than double the amount of funds available to invest as a retiree, any losses suffered cannot be made up from current income the client's time horizon could be as long as 20 years A) I and IV B) II and III C) I and II D) III and IV
D
An individual has just received a bonus of $12,473 and wishes to generate some income without risking loss of capital. Assuming the client is in a low tax bracket, which of the following would be the most suitable choice? A) Bank-insured CDs B) Growth stocks C) Public utility stocks D) Insured municipal bonds
A
Many financial planners recommend that clients wait until age 70 to begin their Social Security retirement benefits. The primary reason for this recommendation is that A) by waiting past full retirement age (currently 66), your payments will grow at an annual rate of 8% B) taking payments prior to age 70 increases the likelihood that you will run out of money sooner than if you wait C) by waiting, you increase the amount that Social Security will pay for burial expenses D) once you've reached age 70, there is no limit to the amount that may be earned without affecting monthly payments
A
Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A) 70% large-cap stock fund, 20% balanced fund, 10% money market fund B) 50% government bond fund, 50% large-cap fund C) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund D) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund
A
As part of your annual review for clients, you perform a net worth computation. You have computed a specific client's net worth at $500,000. This client calls you and asks what his net worth will be after withdrawing $4,000 from his savings account to pay off credit cards, taking another $5,500 to deposit to his IRA and buying a $25,000 home theater system using store credit. You would respond that the client's net worth is now A) $475,000 B) $500,000 C) $491,000 D) $466,000
B In each case, we have an asset offsetting a liability so there is no change to the net worth.
For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? A) Sole proprietorship B) Pension plan C) General partnership D) C corporation
C Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners. Although the suitability is based on the owner of a sole proprietorship, there is only one owner, so a question asking about collective suitability doesn't ring true for that.
