Unit 3- KYC, Investment Obj, Port Analysis, Money Mkt, Muni

Which of the following does NOT issue commercial paper? A)Sole proprietorship B)Service company C)Finance company D)Broker-dealer

A)Sole proprietorship Sole proprietorship's do not issue commercial paper. The commercial paper market was developed so that corporations could lend to, and borrow from, each other more economically.

The minimum face amount of a negotiable CD is: A)$50,000. B)$100,000. C)$10,000. D)$25,000.

B)$100,000. Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are typically traded in blocks of $1 million.

In a fiduciary account with stated investment objectives of preserving capital and generating income, which of the following investment trading strategies is the most suitable? A)Short-term trading in a volatile market. B)Margin buying in a rising market. C)Buying Treasury bonds. D)Short sales in a declining market.

C)Buying Treasury bonds. Although still subject to market risk, Treasury bonds would be the most suitable investment listed. Margin buying is too risky for the objective of preserving capital, and short-term trading and short sales do not provide income.

Which of the following is a customer probably referring to when he speaks of safety in investments? A)Steady current income B)Reducing inflation risk C)Long-term capital growth D)Preservation of capital

D)Preservation of capital When a customer speaks of safety, he is almost always referring to preservation of capital.

Money market instruments would include which of the following? I-Banker's acceptances. II-Commercial paper. III-Nonnegotiable certificates of deposit. IV-Treasury STRIPS. A)I and II. B)III and IV. C)I and IV. D)II and III.

A)I and II. Money market instruments are high-quality debt securities issued with a maturity of one year or less. Negotiable CDs and Treasury Bills are money market instruments, but nonnegotiable CDs and Treasury STRIPS are not.

During a fact-finding interview with a potential client, your client information sheet is used to list detailed financial information. Which of the following items would be relevant in determining a prospect's net worth? I-$225,000 annual income. II-$78,000 current IRA balance. III-recently paid off a $3,000 credit card balance. IV-just installed a $25,000 home entertainment center. A)II and IV. B)I and II. C)III and IV. D)I and III.

A)II and IV. Net worth is computed by subtracting liabilities from assets. The IRA balance and the home entertainment center are assets. The credit card debt was a liability, but since it has been paid, it no longer appears on the financial statement. Income is important, but it does not figure into net worth until it is deposited into a bank or invested in something.

All of the following are money market instruments EXCEPT: A)commercial paper. B)newly issued Treasury bonds. C)municipal notes. D)Treasury bills.

B)newly issued Treasury bonds. Money market securities are high-quality debt instruments with a maximum maturity of one year. Treasury bonds are high quality but issued with maturities of more than ten years. All of the other securities listed are both high quality and issued with maturities of one year or less.

Which of the following concerning Section 529 plans are TRUE? I-Qualified withdrawals are exempt from federal income tax. II-Contributions are tax qualified. III-Some states will tax the withdrawals as income. IV-Withdrawals may be used for any expenses incurred by a student. A)II and III. B)I and IV. C)I and III. D)II and IV.

C)I and III. The withdrawals from Section 529 plans are federally tax exempt, but they may be taxed as income in some states. The money that is invested in a Section 529 plan is always after tax. The withdrawals must be used for qualified education expenses (e.g., tuition, books, lecture fees, lab fees) and not simply for any expense of a student.

The IRS permits an employer sponsored retirement plan known as a TSA to be established by certain entities. One of those is known as a 403(b) institution and would include which of the following? A)Museum B)Research foundation C)Parochial school D)Public elementary school

D)Public elementary school Public schools, those schools supported by the state, are 403(b) organizations. Parochial schools, museums, research foundations, and private hospitals are 501(c)(3) organizations. All may participate in what are known as 403(b) plans (tax-sheltered annuities, TSAs)).

Another name for Section 529 plan is A)municipal fund security B)education development bonds C)a tax-free mutual fund D)the escrow account for a revenue bond

A)municipal fund security Section 529 plans are state sponsored education plans and defined as municipal fund securities. As such, sale of these plans must be accompanied or preceded by an official statement, not a prospectus, and the broker-dealer must have a principal registered with the MSRB in order to supervise sales of this product.

A young, recently married couple, would like to purchase a home within five years. They have $2,000 in savings and $400 a month to invest. In addition, they owe $35,000 on student loans to be repaid over the next ten years. What type of mutual fund investment would likely be the BEST recommendation? A)Dollar-cost-average $400 per month in an asset allocation fund, lowering the average cost per share of the investment. B)Build up cash reserves and then save for a down payment on the new home. Investing must wait. C)Invest $2,000 in a Real Estate Investment Trust for the home purchase and use the $400 per month to pay down the student loans. D)Pay down the student loans and invest $200 a month in a value fund for purchase of a new home.

B)Build up cash reserves and then save for a down payment on the new home. Investing must wait. Under these circumstances, the investor should be encouraged to postpone the investing until they have a sufficient emergency reserve of ready cash and money set aside for their goal of purchasing a home in five years.

A money market mutual fund portfolio might contain: I-common stock issued less than one year ago. II-negotiable, unsecured bank certificates of deposit. III-T-bills. IV-T-bonds maturing in two years. A)I and II. B)II and III. C)III and IV. D)I and IV.

B)II and III. The portfolio of a money market mutual fund would contain money market securities. Those are defined as high-quality debt issues with one year or less to maturity. T-bills and negotiable bank CDs (jumbo CDs) meet that definition. Common stock, regardless of when issued, is equity, not debt. T-bonds would be included only if they were due to mature in one year or less.

Your client calls you to inform you that he has recently sold his home and is in the process of constructing a new one. He has approximately $150,000 in proceeds from the sale on which he would like to earn a return. The funds must be available in about six months to pay the contractor. Which of the following might you suggest? I-ABC 8% preferred stock, callable at par in five months. II-U.S. 5% Treasury bond, maturing in six months. III-Banker's acceptance IV-XYZ common stock, listed on the NYSE. A)III and IV. B)I and II. C)II and III. D)I and III.

C)II and III. This client's needs are best met by placing the funds into the money market, defined as high-quality debt securities with one year or less to maturity. The banker's acceptance and the Treasury Bond meet those criteria.

A popular asset found in the portfolio of money market mutual funds is commercial paper. The most common issuer of commercial paper is: A)governments. B)money market mutual funds. C)corporations. D)banks.

C)corporations. Commercial paper, a money market instrument, is issued by corporations.

All of the following are advantages of Section 529 plans EXCEPT: A)there are few restrictions as to who may be designated first beneficiary. B)the account remains the property of the donor, even after the beneficiary reaches legal age. C)gift tax rules do not apply, as long as the account is eventually used for higher education purposes. D)the assets in the account are not regarded as part of the owner's estate for tax purposes.

C)gift tax rules do not apply, as long as the account is eventually used for higher education purposes. Gift tax rules do apply to contributions to a Section 529 plan. The limit beyond which the gift tax applies is an indexed annual limit.

Which of the following are characteristics of commercial paper? I-A type of secured debt II-Maximum maturity is 270 days III-Issued by municipalities IV-Exempt from registration A)I and II B)III and IV C)I and III D)II and IV

D)II and IV Commercial paper represents the unsecured debt obligations of corporations in need of short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of 270 days or less, it is exempt from registration under the Act of 1933.

A married couple in their early 50's saving for retirement would most likely have which of the following objectives? A)High risk, moderate safety, low liquidity. B)Moderate risk, low safety, high liquidity. C)Low risk, high safety, high liquidity. D)Moderate risk, moderate safety, low liquidity.

D)Moderate risk, moderate safety, low liquidity. Questions like this are the worst because they call for an opinion (and I really could defend each of these choices because we don't know enough about these people). However, we must pick the answer the test wants. Since they still have more than 10 years until retirement age, that long a time horizon allows them to take more risk than had they been in their early 60's. Since they won't need the money for a while, liquidity is not a concern.