Final 8
Which statements are true when a bond sells at a discount? I The nominal yield is less than the yield to maturity II The nominal yield is more than the yield to maturity III The current yield is less than the yield to maturity IV The current yield is more than the yield to maturity A. I and III B. I and IV C. II and III D. II and IV
A. I and III
Dividend Income: $3,000 Interest Income: $1,000 Short-term Gains: $500 Long-term Gains: $500 Expenses: $1,000 Above is a summary of the ACME Fund's income, expenses, and capital gains for the past year. Which dollar amount must this fund distribute to its shareholders to be a "regulated" company? A. $2,700 B. $3,000 C. $5,400 D. $6,000
A. $2,700 An investment company must distribute at least 90% of its net investment income to shareholders to be a regulated investment company. Net investment income consists of all dividends and interest earned ($4,000 in this case) less operating expenses ($1,000). This amounts to $3,000 and 90% of that is $2,700.
For a management company to register with the SEC, it must have at least what percentage of net assets invested in securities? A. 40% B. 50% C. 75% D. 100%
A. 40% Before a management company can register with the SEC, it must have a net worth of $100,000; a minimum of 100 shareholders; and it must have at least 40% of assets invested in securities. Do not confuse this minimum investment requirement with the 75/5/10 rule for a fund to be "diversified" (which states that a "diversified" fund must have at least 75% of assets invested in securities with no more than 5% of assets invested in any one issuer with that holding representing no more than 10% of the voting control over that issuer). A fund that has less than 75% of assets invested in securities is a "non-diversified" fund by definition. In no event can a non-diversified fund have less than 40% of its assets invested in securities.
Your customer is the executor of his father's estate and wants to invest his father's remaining assets for his mother's care. His elderly mother is in very poor health and recently moved into a nursing home. She has long-term care insurance and pension income that pay most of her monthly expenses. The customer is interested in supplementing his mother's current monthly income with a low risk investment. What is the most suitable recommendation for this client? A. Acme U.S. Treasury Fund B. Acme Corporate Bond Fund C. Acme Blue Chip Fund D. Acme Value Fund
A. Acme U.S. Treasury Fund A U.S. Treasury Fund holds Treasury notes and bonds, which are AAA rated, so these are as safe as it gets, and they generate a decent level of income since the bonds and notes pay interest semi-annually. The corporate bond fund is not as safe, so it does not meet the objective of a "low risk" investment. The blue chip fund is invested in large capitalization growth stocks for capital gains potential with some dividend income. It has higher risk than the corporate bond fund, so it does not meet the customer's "low risk" objective. Finally, a "value" fund invests in stocks that are "undervalued" for capital gain potential, but it will generate little or no income, so it does not meet the income requirement (and this fund is not "low risk" either).
The portfolio of a conservative growth fund will primarily contain what investments? A. Blue chip stocks B. Small and mid cap stocks C. Technology stocks D. Foreign company stocks
A. Blue chip stocks
Which of the following statements are true regarding Individual Retirement Accounts? I The earliest a taxpayer can make an annual contribution is January 1st of that tax year II The latest a taxpayer can make an annual contribution is April 15th of the next tax year III If the taxpayer obtained a 4-month filing extension, the annual contribution can be made until the extension date IV Annual tax deductible contributions may be made regardless of income even if the person is covered by another qualified retirement plan A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
A. I and II only Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his or her tax return, he or she does not get an extension for making the IRA contribution. Note that this is different than the requirement for qualified retirement plans, where the contribution can be made anytime up to the filing date under an extension. Contributions can always be made based upon earned income, but if a person is covered by another qualified retirement plan and earns too much (over $71,000 for an individual in 2016) per year, the contribution is not deductible.
A customer that buys shares of a mutual fund on the record date is: I entitled to the dividend II not entitled to the dividend III obligated to pay tax on the dividend IV not obligated to pay tax on the dividend A. I and III B. I and IV C. II and III D. II and IV
A. I and III If a customer buys the mutual fund shares on the record date, the customer will receive the dividend and must pay income tax on the dividend received. If a customer knows that a fund is going to pay a dividend, he or she should wait until the ex-date (which is the day after the record date) or after to buy the shares to avoid this result. By purchasing the shares prior to the ex-date, the customer will get the dividend, but the customer will also have to pay tax on the dividend received. This is especially painful if the customer is automatically reinvesting dividends, since the tax bill will have to be paid with other funds. If the customer waits until the ex-date or after to buy the shares, the price per share is now reduced by the dividend that the customer will no longer receive. Thus, the customer really loses nothing except a tax bill by waiting to purchase the shares until the ex-date or after.
Which of the following statements are true about closed-end investment companies? I Series #6 representatives cannot trade the shares of these companies for customers II Shares of these companies are redeemable with the issuing companies III Customers pay a commission to buy shares of these companies IV Customers pay a sales charge to buy shares of these companies A. I and III only B. I and IV only C. II and III only D. III and IV only
A. I and III only The Series #6 license allows an individual to make a prospectus offering of closed-end fund shares (the Initial Public Offering); but once the shares are listed and start trading in the secondary market, the Series #6 license does not allow the acceptance of trades from customers for these securities. Once closed-end fund shares start trading, either a Series #7 general securities license or a Series #62 corporate securities license is needed to accept customer orders. Closed-end fund shares are not redeemable - they are negotiable, meaning that they trade like any other stock. To effect a trade in a closed-end fund share, the broker charges a commission - again like any other stock trade. Sales charges are imposed on investment company prospectus offerings only.
Which of the following is NOT true about mutual fund redemptions? A. Mutual funds must make redemption payments within 3 days of receipt of a proper request B. No load mutual funds may charge a redemption fee C. The fund redeems shares at NAV D. The total of a front-end sales charge and redemption fee may not exceed 8½ percent
A. Mutual funds must make redemption payments within 3 days of receipt of a proper request Mutual funds must make payment in 7 days of a proper redemption request - not 3 days. No load funds cannot charge a "sales charge" but they are permitted to assess a redemption fee (this goes to the fund to defray administrative costs and does not go to a salesperson). SEC rules limit the maximum redemption fee to 2%. Mutual funds redeem their shares at NAV. Under FINRA rules, the total of any sales charges and redemption fees (together) may not exceed 8½ percent.
Which of the following investments will have the HIGHEST level of liquidity risk? A. Small company stock B. Negotiable CD C. BBB-rated corporate bonds D. A-rated convertible debentures
A. Small company stock Negotiable CDs are issued by banks and are guaranteed by the issuing bank. These and other money market instruments have very little liquidity risk and generally can be sold without loss of principal. Investment grade (BBB rating or better) corporate bonds are also fairly liquid. An investor may need to sacrifice some principal to effect a "quick" sale of small company stocks, which are typically illiquid.
Which statement regarding a customer account with a "limited power" third-party trading authorization is TRUE? A. The third party can enter orders in the account B. Checks can be drawn on the account as long as they are made out to customer name C. Upon the death of the customer, the power of attorney remains in force D. The customer can only revoke the power of attorney with permission of the third party
A. The third party can enter orders in the account
Which statement is TRUE about a representative that recommends that a customer trade mutual fund shares on a short-term basis? A. These securities are not proper trading vehicles and such an activity is, on its face, a rule violation B. These securities are listed and trade like other stocks, so this is a permitted practice C. These securities can only be traded if the fund has closed itself to new investment and the shares cannot be purchased in the normal manner D. These securities must be on the "Legal List" in order for trading to be authorized
A. These securities are not proper trading vehicles and such an activity is, on its face, a rule violation
An investor who places the majority of assets in a single stock exposes the portfolio to: A. business risk B. liquidity risk C. purchasing power (inflation) risk D. market risk
A. business risk Business risk is the risk that a specific issuer performs poorly due to business conditions, causing its securities to decline in price. If a majority of a portfolio is in one stock, then the portfolio is highly exposed to this risk. As more and more stocks are added to the portfolio, this risk is diversified away. Once a portfolio is fully diversified, the only risk left is market risk - the risk that there is a general decline in the market; and all stocks fall as a result.
A customer is single, earns $175,000 per year, and has a net worth of $2 million. The customer would like to purchase an attractive restricted security that ZBOT Inc. plans to issue. There are already 35 non-accredited investors subscribed to the issue when the customer applies. The customer may: A. subscribe because he has adequate net worth B. not subscribe because he does not have adequate annual income C. subscribe because there are not yet 45 non-accredited investors D. not subscribe because he is not an institutional investor
A. subscribe because he has adequate net worth The customer has adequate net worth (it must be at least $1,000,000) to be an accredited investor, so he does not need to meet the $200,000 annual income test. There can be an unlimited number of accredited investors. The 35 person limit is only on the non-accredited investors. Accredited investors are typically wealthy sophisticated individuals and institutional investors.
If there is trading activity in a customer's account, a statement must be mailed: A. that month B. that quarter C. semi-annually D. annually
A. that month If there is no activity in a customer's account, statements are mailed quarterly. However, if activity takes place (meaning there is a purchase or sale), a statement must be sent for that month.
All of the following investments will be appropriate to recommend for an investor whose objective is aggressive growth EXCEPT: A. Emerging market stocks B. Large company stocks C. Small company stocks D. Technology stocks
B. Large company stocks
An 81-year old customer in the highest tax bracket with $1,000,000 to invest is risk averse. Which investment recommendation would be appropriate? A. Money market funds B. Municipal bonds C. A Dow Jones Industrial Average index fund D. Certificates of deposit
B. Municipal bonds
A partner in the XYZ Partnership is a 20% owner and earns $350,000 for the year. What is the maximum deductible contribution that the partnership can make to a defined contribution Keogh plan for this partner? A. $26,000 B. $53,000 C. $70,000 D. $87,500
B. $53,000
Under SEC Rule 35d-1, a fund that advertises itself as a "U.S. Treasury Money Market Fund" must be: A. 100% invested in short-term Treasury securities B. 80% invested in short-term Treasury securities C. 100% invested in money market instruments D. 80% invested in money market instruments
B. 80% invested in short-term Treasury securities
Which of the following statements concerning forward pricing of mutual fund shares are correct? I Forward pricing results in reduced sales charges because the fund adds the current value of shares held by the investor to the cost of new purchases II Forward pricing means an investor will not know his or her purchase or redemption price at the time the investor requests such transactions III Forward pricing means that orders to purchase fund shares are filled only after the NAV has been recalculated to reflect the current value of securities held in the portfolio IV Forward pricing means the fund values securities held in its portfolio at their cost or market value, whichever is higher A. I and II only B. II and III only C. III and IV only D. I, II, III, and IV
B. II and III only
Which of the following statements concerning 529 plans are correct? I Contributions are tax deductible to the donor II Distributions to pay for qualified higher education expenses are tax-free III The beneficiary can be changed to another family member without tax consequences IV Any plan balance must be distributed to the beneficiary at age 30 A. I and II only B. II and III only C. III and IV only D. I, II, III, and IV
B. II and III only Contributions to a 529 plan are not tax deductible. Distributions for qualified higher education expenses are tax-free. The beneficiary can be changed to another family member without tax consequences. There is no requirement that the plan balance be distributed to the beneficiary at any age, so this differs from the requirement for Coverdell ESAs that the funds be used by age 30.
Which of the following items of information must be included in a mutual fund prospectus? I Financial statements, including a schedule of investments, a statement of assets and liabilities, and an auditor's report II A description of sales charges and management fees III A statement that the fund satisfies the requirements of the Investment Company Act of 1940 A. I only B. II only C. II & III only D. I, II & III
B. II only The prospectus need not contain financial statements. Rather, these are found in the Statement of Additional Information. The Statement of Additional Information includes a schedule of investments, a statement of assets and liabilities, an income and expense statement, a statement of changes in net assets, and an auditor's report. The prospectus may incorporate this Statement by reference. The prospectus must contain a description of sales charges, management fees, advisory fees, and other expenses. There is no requirement for the prospectus to state that the fund has satisfied the requirements of the Investment Company Act of 1940.
If prices for goods and services are rising too fast, the Fed could take what steps to deal with this problem? A. Reduce reserve requirements and reduce the discount rate B. Increase the reserve requirements and increase the discount rate. C. Reduce the reserve requirements and increase the margin requirements D. Increase the margin requirements and reduce the discount rate
B. Increase the reserve requirements and increase the discount rate.
A customer purchases 200 shares of XYZ Company at $15 per share. Immediately after the order is filled, the price of XYZ drops and the customer does not pay on settlement. Which statement is TRUE? A. The broker must liquidate the account promptly B. The broker must sell the unpaid position and freeze the account for 90 days C. The broker must liquidate the entire account and freeze the account for 90 days D. The broker has the right to handle the situation as the firm sees fit
B. The broker must sell the unpaid position and freeze the account for 90 days Regulation T requires that the customer pay "promptly," but no later than "S + 2." Since settlement is 3 business days after trade date, payment must be obtained no later than 5 business days after trade date. If payment is not received, the broker-dealer must liquidate the unpaid position, and freeze the account for 90 days. There is no requirement to liquidate the entire account. Note that under "extraordinary circumstances," the broker could ask FINRA for an extension, but there is no mention of this in the question.
All of the following require the use of a prospectus EXCEPT: A. Purchase of a common stock mutual fund B. Trade of a closed-end country fund C. Offer of an open-end U.S. government bond fund D. Sale of a growth stock mutual fund
B. Trade of a closed-end country fund
Which of the following owners of the securities of ABC Corporation will be entitled to subscribe to stock rights for a new issue of common stock? The holders of ABC: A. unsecured bonds B. common stock C. warrants D. preferred stock
B. common stock
A mutual fund portfolio contains stocks that are selected by the investment adviser for their reliable dividends and long term potential for capital appreciation. This mutual fund is most likely a(n): A. index fund B. growth and income fund C. aggressive growth fund D. global bond fund
B. growth and income fund
Breakpoints are allowed for when buying a fund in: A. the same family of funds with similar investment objectives only B. the same family of funds regardless of the investment objective C. a different family of funds with similar investment objectives D. a different family of funds regardless of the investment objective
B. the same family of funds regardless of the investment objective
If the advertising for a mutual fund includes a graph showing "Total Return," the shortest period the fund may present is: A. 1 month B. 1 year C. 10 years D. the life of the fund
C. 10 years
Which statements are true regarding money market funds? I Money market funds typically do not have a sales charge II Money market funds typically do not impose management fees III Fund dividends are not subject to income tax if reinvested in additional shares IV Typical maturities of securities held in the portfolio are 30 days or less A. I & II only B. III & IV only C. I & IV only D. II & III only
C. I & IV only
Which of the following expenses may be charged to shareholders under a 12b-1 plan? I Advertising II Sales literature III Underwriter's fees IV Sales loads A. I only B. II and III only C. I, II, and III only D. I, II, III, and IV
C. I, II, and III only SEC Rule 12b-1 permits a mutual to charge the cost of soliciting new investment into a fund to that fund's existing shareholders. The distribution expenses that the fund can charge to shareholders under a 12b-1 plan are: advertising; compensation of underwriters, dealers, and sales personnel; printing and mailing of prospectuses to anyone other than current shareholders; and the printing and mailing of sales literature. The fund deducts these from the net asset value once per year as an ongoing expense of soliciting new shareholders to the fund. Sales loads are an up-front deduction, taken out before money is invested into the fund. These are not part of annual 12b-1 charges.
The Federal Telephone Consumer Protection Act permits: I solicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient II unsolicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient III solicited calls to be made anytime IV unsolicited calls to be made anytime A. I and III B. I and IV C. II and III D. II and IV
C. II and III
The Firm Element component of the "Continuing Education" requirement: I is administered by FINRA II is administered by the FINRA member firm III must be completed annually IV must be completed bi-annually A. I and III B. I and IV C. II and III D. II and IV
C. II and III
Which of the following statements concerning qualified and non-qualified retirement plans are correct? I An employer with a qualified plan may not add a non-qualified plan II An employer with a qualified plan may add a non-qualified plan III An employer can avoid paying income taxes on investment earnings in a qualified plan invested in equities IV An employer can avoid paying income taxes on investment earnings in a non-qualified plan invested in equities A. I and III B. I and IV C. II and III D. II and IV
C. II and III
Which of the following securities are not marginable? I Municipal securities II U.S. government securities III Initial public offerings of equity securities IV Open-end investment company securities A. I and III only B. II and IV only C. III and IV only D. I, III and IV only
C. III and IV only Regulation T defines which securities are marginable. The marginable securities are those that are exchange listed or NASDAQ listed. In addition, all new issues of debt and outstanding debt issues are marginable. Note that equity new issues sold with a prospectus are not marginable - they must be paid in full. This rule applies to mutual funds, since every share is newly issued and sold with a prospectus.
Which statement about a money purchase retirement plan is TRUE? A. The plan must be established by the employee B. The plan can be underfunded C. The maximum deductible annual contribution is 25% of income up to a maximum dollar amount D. The annual contribution can be lowered or skipped by the employer in an unprofitable year
C. The maximum deductible annual contribution is 25% of income up to a maximum dollar amount A money purchase plan is a defined contribution pension plan - not a defined benefit plan. These are employer-established plans, where the employer contributes a percentage of the employee's salary each year. The maximum permitted contribution is 25% of compensation, capped to a maximum of $53,000 in 2016. With a money purchase plan, the employer contribution must be made each year, even if the company is operating at a loss. Only defined benefit plans can be underfunded. As a defined contribution plan, money purchase plans cannot be underfunded. In contrast, a profit sharing plan is also a defined contribution plan with the same maximum permitted contributions, but it gives the employer the flexibility to increase or decrease contributions depending on business conditions. These are both qualified plans that must comply with ERISA - the plans must be non-discriminatory and must vest employee benefits over a reasonable time frame (no more than 6 years).
Which of the following statements concerning a distribution reported by a mutual fund as a "capital gain" on Form 1099-DIV is correct? A. The distributions are usually non-taxable return of principal B. The shareholder pays no capital gains tax on the distributions because the fund pays this tax C. The shareholder pays short term capital gains tax if the mutual fund shares were purchased within one year D. The shareholder generally pays long term capital gains tax regardless of when the shareholder purchased the mutual fund
C. The shareholder pays short term capital gains tax if the mutual fund shares were purchased within one year
All of the following recommendations are appropriate for a customer seeking defensive investments EXCEPT: A. money market funds B. utility stocks C. defense company stocks D. food company stocks
C. defense company stocks
All of the following statements concerning the penalties for insider trading are correct EXCEPT: A. the SEC may seek civil penalties of up to three times the profits earned or loss avoided on insider trading B. any person buying or selling the securities at the same time that insider trading occurs may sue to recover damages C. persons communicating material, non-public information cannot be held liable for insider trading violations D. broker-dealers who have failed to enforce procedures to prevent insider trading may be liable as controlling persons
C. persons communicating material, non-public information cannot be held liable for insider trading violations
Which of the following is NOT true regarding a signature guarantee required for good delivery? A. A commercial bank may issue it B. The guarantor assumes the risk for any loss from an invalid signature C. A FINRA member may issue it D. A notarized signature and photo ID meet the signature guarantee requirement
D. A notarized signature and photo ID meet the signature guarantee requirement Good delivery rules require a guaranteed signature, which must be executed by a Medallion Signature Guarantee Program member. These include commercial banks and FINRA member firms. The guarantor assumes the risk for an invalid signature. A notary does not "guarantee" a signature because the notary does not assume risk of loss if the signature is invalid.
Which statement best describes a "wrap" account? A. An account that invests in securities that charges both commissions and annual fees B. An account that wraps around a qualified retirement plan to maintain tax-deferred status C. An account invested in a mutual fund that includes 12b-1 fees in the operating expenses of the fund D. An account that invests in securities and charges a flat fee for all services rendered
D. An account that invests in securities and charges a flat fee for all services rendered Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account nor are charges imposed for safekeeping of securities or for recommendations. All services are covered in the single "wrap" fee.
Which of the following transactions must a broker-dealer report to FinCEN on Form CTR? A. Robert Hall sells all of his shares of Snow White Mutual Fund and receives a check for $25,000 B. Martha Clifford sells $15,000 worth of her shares of Goofy Global Fund and requests the check be sent to her Canadian bank C. Robert Hall invests $12,000 in IBM common stock and pledges his shares of Snow White Mutual Fund, worth over $25,000 D. Farmer Brown brought $15,000 in small bills into the office to pay for his purchase of shares in Snow White Mutual Fund
D. Farmer Brown brought $15,000 in small bills into the office to pay for his purchase of shares in Snow White Mutual Fund A "CTR" is a Currency Transaction Report - which is a report made with FinCEN for cash deposits or withdrawals exceeding $10,000. This report must be filed within 15 days. Note that this is different than a Suspicious Activities Report (SAR) - there is no "suspicion" that the customer is doing anything illegal here. If the cash deposited or withdrawn exceeds $10,000, the report must be filed. If the member is "suspicious," then a Suspicious Activities Report (SAR) must be filed as well. A CTR report is only filed if CASH is deposited or withdrawn (or an equivalent such as a money order). It is not filed for checks deposited or withdrawn
A bank that has a large position in ABCD stock wishes to dispose of it at the lowest cost. To do so, the bank would first attempt to get an execution in the: A. First Market B. Second Market C. Third Market D. Fourth Market
D. Fourth Market
State registration (Blue Sky) requirements apply to: I resident salesmen soliciting in that state II non-resident salesmen soliciting in that state III resident issuers of securities offered in that state IV non-resident issuers of securities offered in that state A. I and III B. II and IV C. I and II D. I, II, III, IV
D. I, II, III, IV Blue sky laws apply to both resident and non-resident salesmen who solicit in that state, as well as to their brokerage firms. Both the salesperson and the broker-dealer must be registered in each state in which securities business is solicited. Any securities issues that are offered in the state must also be registered (this is in addition to SEC registration), unless an exemption is available.
What actions take place in the OSJ (Office of Supervisory Jurisdiction)? I Opening of new accounts II Final approval of new accounts III Entry of customer orders IV Review and endorsement of customer orders A. I and III B. I and IV C. II and III D. II and IV
D. II and IV
Which statement concerning the AIR of a variable annuity contract is TRUE? A. It is the insurer's best estimate of the future performance for accumulated income retained in the separate account B. It applies during the accumulation period C. It must be adjusted annually for inflation D. It applies only during the annuity period
D. It applies only during the annuity period AIR refers to the assumed interest rate used to determine the initial monthly payment to the annuitant - it is set when the contract is annuitized and only applies during the annuity period. Once the first annuity payment is made based on the chosen AIR, if the earnings in the separate account are greater than the AIR, the next payment increases. If the earnings in the separate account are less than the AIR, the next payment decreases. The AIR has no meaning during the accumulation period. Also note that the prospectus has an "AIR Illustration" that is an estimate of the annuity to be paid based on a conservative growth estimate, but the actual AIR is not set until the contract is annuitized.
Which of the following is FALSE about mutual fund distributions? A. Investors may either reinvest them or take them in cash B. Investors may reinvest capital gains distributions at NAV C. Investors may reinvest dividend distributions at NAV D. Minimum subsequent investment amounts apply to reinvested distributions
D. Minimum subsequent investment amounts apply to reinvested distributions Mutual funds waive their minimum subsequent investment requirement for reinvested distributions. Investors may reinvest distributions or take them in cash. Any reinvestment of distributions, both dividend and capital gains, is done at NAV - not at POP.
A registered representative overhears a customer state that he made $4,500 by trading based on information received from the representative. This information given by the representative was a slip of the tongue and was not intended to be told to the customer by the representative because it was inside information. Which statement is true about this situation? A. The representative has violated the insider trading rules as a "tipper" and can be penalized B. The representative has not violated the insider trading rules because the customer made less than $5,000 C. The representative has not violated the insider trading rules because the information benefitted the customer D. The representative has not violated the insider trading rules and will not be penalized because the information was transmitted unintentionally
D. The representative has not violated the insider trading rules and will not be penalized because the information was transmitted unintentionally In order for the representative to be held liable as a "tipper" under the insider trading rules, he or she must have deliberately and intentionally transmitted the information to the customer, who then traded on it.
Which of the following statements concerning a distribution reported by a mutual fund as a "capital gain" on Form 1099-DIV is correct? A. The distributions are usually non-taxable return of principal B. The shareholder pays no capital gains tax on the distributions because the fund pays this tax C. The shareholder pays short term capital gains tax if the mutual fund shares were purchased within one year D. The shareholder generally pays long term capital gains tax regardless of when the shareholder purchased the mutual fund
D. The shareholder generally pays long term capital gains tax regardless of when the shareholder purchased the mutual fund Taxation of mutual fund distributions is not based on how long the shareholder held the fund shares; rather, it is based on the fund's holding period in the underlying securities. If a fund has held securities for more than 1 year and sells them at a profit, the resulting gain is reported on Form 1099-DIV in the box titled "Total Capital Gains Distribution." Long-term capital gains are taxed at a preferential maximum 15% or 20% rate. Note the 20% rate is for individuals earning $400,000; or couples earning $450,000. If the fund distributes a dividend where the source of the distribution is dividends received from a portfolio of equity securities, these are reported on Form 1099-DIV in the box titled "Qualified Dividends" and are taxed at a preferential maximum 15% or 20% rate. If the fund distributes a dividend where the source of the distribution is dividends received from a portfolio of debt instruments or short term capital gains from securities sold at a profit, these are reported on Form 1099-DIV as ordinary dividends ("non-qualified") and are taxed at ordinary income tax rates of up to 39.6%.
Your clients, Joe and Sarah Smith, wish to open accounts to pay for the college educations of their 2-year old twin daughters. The girls were in the hospital for several weeks after they were born, and Joe and Sarah are paying off some large medical bills. Money is tight right now, but the Smiths think it is very important to begin a college savings program. Joe's income is $43,000 annually, and Sarah stays home to care for the twins, although she plans to return to work as a pediatric nurse in three years. After the medical bills are paid and Sarah is back in the workforce, the Smiths plan to make regular investments. At this time, they are looking for a "big bang for the buck" to start the college savings and are willing to assume risk because the girls are so young. Which of the following types of bonds should you consider recommending to the Smiths? A. ABC Corporation short-term debentures B. XYZ Corporation income bonds C. City of Ames municipal bonds D. Zero coupon bonds
D. Zero coupon bonds Zero coupon bonds sell at a steep discount, can be either long or short term, and the interest is the difference between the purchase price and face value paid at maturity. Since the children have 16 years until they start college, buying zero coupon bonds with a 16-year maturity is the best choice. They will sell at a steep discount because the maturity is so long, so the cash outlay will not be large. And because the couple earns only $43,000 per year, the annual tax bill on the accretion of the discount (the imputed interest) will be fairly small. The ABC debentures are short term and not suitable for these children since they have about 16 years before college. The XYZ bonds are income bonds (also called adjustment bonds) that are issued to existing bondholders in exchange for their "old" bonds when a company in financial trouble is trying to reorganize. Income bonds only pay interest if a company earns enough "income," and have a very high risk of default, so these are not appropriate recommendations. Finally, municipal bonds are only suitable for high income taxpayers that are in high tax brackets.
All of the following statements about the OTC market are true EXCEPT: A. Initial Public Offerings (IPOs) occur in the OTC market B. it is a negotiated market C. mutual fund offerings occur in the OTC market D. fewer stocks trade there than on exchange floors
D. fewer stocks trade there than on exchange floors The Over-The-Counter market is a negotiated market, as compared to an exchange floor, which is an auction market. The OTC market is bigger than you might think! All new issue offerings occur OTC, and this includes mutual fund offerings, where every share is "newly issued" by the fund company when an investment is made. The equities portion of the OTC market consists of the OTCBB (the "OTC Bulletin Board") and the Pink Sheets. Finally, almost the entire bond market is OTC - U.S. Governments, Agencies and Municipals all trade OTC; and virtually all corporate bond trades occur OTC. The OTC market has a greater number of companies that trade as compared to exchange listings. For example, the NYSE trades the stocks of about 3,000 companies. There are about another 6,000 issues traded in the OTCBB (Over-The-Counter Bulletin Board). In addition, trading volume OTC is greater than that of the exchanges.
If the advertising for a mutual fund includes a graph showing "Total Return," the shortest period the fund may present is: A. 1 month B. 1 year C. 10 years D. the life of the fund
D. the life of the fund When mutual fund advertising shows "Total Return," the advertisement must depict the Total Return for 1-, 5-, and 10-years; or the life of the fund, if this is shorter. For example, if the fund existed for only 6 months, that is the longest (and shortest) period the advertisement can show.
