Client Profile Unit 19
In projecting future cash requirements, one of the tools is a capital needs analysis. When doing one, all of the following would be considered capital needs EXCEPT A) a $20,000 loan for undergraduate school with a due date in 6 years B) rolling over a 401(k) into an IRA C) a home equity loan with a $15,000 balance D) a $100,000 loan for law school with a due date in 10 years
B) rolling over a 401(k) into an IRA A capital needs analysis attempts to determine money that would be needed in the event of an individual's sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset such as the 401(k) is not a need; it is something that will help meet the need.
You are doing an investment plan for a new client, age 55, who plans to retire at age 70. The client is somewhat risk averse and wants to preserve capital while at the same time not falling prey to possible inflation. Which of the following portfolios would probably be most suitable? A) 40% high-yield bonds; 60% large-cap stocks B) 90% high-quality bonds; 10% large-cap stocks C) 60% high-quality bonds; 30% large-cap stocks; 10% cash equivalents D) 90% large-cap stocks; 10% high-quality bonds
C) 60% high-quality bonds; 30% large-cap stocks; 10% cash equivalents Although it is possible to debate this choice (but don't), NASAA would suggest that the bonds and cash offer sufficient capital preservation while this proportion of equities will combat the risk of inflation. High-yield (junk) bonds have no place in the portfolio of a risk-averse investor.
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? The investor is 65 years old and needs the reliability of current income. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible. A) III and IV B) I and II C) II and III D) I and IV
C) II and III 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.
A client with 25 years until retirement should invest primarily in A) bonds B) private placements C) common stocks D) preferred stocks
C) common stocks This client's time horizon is quite long. With 25 years until retirement, the customer should invest primarily in stocks. Historically, over long time periods, equity securities have provided the greatest returns.
An investment advisory firm requires all new clients to complete a 4-page questionnaire before conducting the first meeting. This would be known as A) the client disclosure document. B) fulfilling the requirements of the CIP. C) the information-gathering stage. D) the investment adviser's brochure.
C) the information-gathering stage. The first step in any adviser's relationship with a client is information gathering. A popular way of doing this is by using a questionnaire.
Construction of an investment policy statement (IPS) requires identifying the client's objectives and constraints. Which of the following would not be in the list of constraints? A) Liquidity B) Time horizon C) Taxes D) Risk tolerance
D) Risk tolerance When constructing an investment policy statement (IPS) risk tolerance is an objective, not a constraint. Time horizon, taxes, and liquidity are all constraints. An easy way to remember the five constraints is TTLLU (time horizon, taxes, liquidity, laws, unique).
John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $130,000 B) $150,000 C) $138,000 D) $122,000
A) $130,000 The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.
An elderly widow with no independent income wishes to invest the proceeds from her recently deceased husband's life insurance. Which of the following would be the most suitable recommendation? A) High-grade corporate bond mutual fund B) Oil and gas exploration program that you know is going to strike C) Municipal bonds D) Call options
A) High-grade corporate bond mutual fund This customer needs income. Of the answers provided, the bond fund would be the most suitable because it would provide income while maintaining relative safety. While the municipal bonds are probably safer, the benefits of their tax-free income would probably be lost on a client with no independent income.
An investment adviser representative is meeting with a potential advisory client. Among the items of information the IAR needs to obtain in order to develop the proper plan are the prospect's anticipated number of years until retirement location of current bank and brokerage accounts current savings and investments college alma mater A) II and IV B) III and IV C) I and II D) I and III
A) II and IV Proper investment planning involves saving for retirement and what steps are taken to reach that goal are influenced by the time remaining. Future plans are developed using current assets as the starting point. We don't care where the assets are, just what they are.
Which of the following statements about investment constraints is least accurate? A) Investors with short time horizons are not likely to worry about liquidity. B) Diversification efforts can increase tax liability. C) Unwillingness to invest in tobacco stocks is a constraint. D) Being an accredited investor increases investment opportunities.
A) Investors with short time horizons are not likely to worry about liquidity. Investors with a time horizon constraint may have little time for capital appreciation before they need the money. The need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand-in-hand. Diversification often requires the sale of an investment and the purchase of another. Those transactions may trigger tax liability. Attitudes are unique to the client and one of those could be an aversion to certain "sin" products. As an accredited investor, the law permits one to participate in many offerings not available to others.
If a client wanted an investment that would eliminate interest risk as to principal, you would recommend A) a bank-insured certificate of deposit B) a 91-day Treasury bill C) TIPS D) preferred stock
A) a bank-insured certificate of deposit Because bank-insured CDs are nonnegotiable (we're not discussing the $100k minimum jumbos), there is no market fluctuation caused by changes in interest rates as with marketable securities. If you invest $10,000, you will always get back that $10,000 whenever you cash in the CD, regardless of current interest rates. This is true even when cashing in early. There may be a prepayment penalty, but that is considered separate from interest rate risk. TIPS offer inflation protection and preferred stock is interest rate sensitive in the same manner as a bond. The 91-day T-bill doesn't have much interest rate risk, but if an investor was to attempt to liquidate the holding prior to maturity and interest rates increased, there could be a lossBecause bank-insured CDs are nonnegotiable (we're not discussing the $100k minimum jumbos), there is no market fluctuation caused by changes in interest rates as with marketable securities. If you invest $10,000, you will always get back that $10,000 whenever you cash in the CD, regardless of current interest rates. This is true even when cashing in early. There may be a prepayment penalty, but that is considered separate from interest rate risk. TIPS offer inflation protection and preferred stock is interest rate sensitive in the same manner as a bond. The 91-day T-bill doesn't have much interest rate risk, but if an investor was to attempt to liquidate the holding prior to maturity and interest rates increased, there could be a loss
A newlywed couple with a combined income of $46,000 recently opened 2 IRA accounts with you. You receive a call from them asking for advice on the best investment for a sizable and unexpected inheritance they have just received. The most suitable recommendation for the couple is to A) invest $6,000 into a stock index fund in both IRA accounts and place the remaining funds in a money market account until their new financial situation can be evaluated B) invest the funds in an aggressive stock fund C) pay off all outstanding debts and invest the rest in municipal bonds D) immediately purchase 2 lump-sum variable annuities to secure their retirement future
A) invest $6,000 into a stock index fund in both IRA accounts and place the remaining funds in a money market account The couple's new IRA accounts are an indicator that retirement savings is a primary goal, therefore making maximum contributions as soon as possible is suitable. Because the funds were unexpected, it would be prudent for the couple to place any additional funds in a liquid money market account until they have time to reevaluate how this windfall may change their financial objectives and time horizon. There is no indication that the couple has a high risk tolerance, so an aggressive stock fund would be unsuitable, as would tax-free municipal bonds based on the couple's income level. Variable annuities may be suitable, but it is not the most suitable answer choice in this case.
A 78-year-old retiree has a $100,000 CD maturing and is dissatisfied with current yields on CDs. Aside from Social Security and a monthly pension, the $100,000 is his total liquid net worth. The agent recommends investing the funds in a single premium immediate variable annuity and allocating funds to the separate account as follows: Medical Technology − $10,000 High Yield Corporate − $40,000 Growth & Income − $50,000 The agent's recommendation is A) unsuitable primarily because of the customer's age, objectives, and risk tolerance B) suitable because it appears probable to increase the value of his holdings, as well as to generate increased income C) suitable, provided the customer agrees with the recommendation D) unsuitable primarily because of the customer's probable liquidity needs
A) unsuitable primarily because of the customer's age, objectives, and risk tolerance With half of the investment allocated to medical technology and high-yield separate accounts, which carry a higher risk, the allocation seems unsuitable for a 78-year-old needing this monthly income.