Investment Planning - Module 1

Brett bought 500 shares of WCA stock at $27 per share on margin (50% initial margin percentage) with an annual margin interest rate of 5.25%. After one year, he sold the shares for $44 per share. The stock did not pay dividends during his holding period. Calculate Brett's holding period rate of return using margin.

120.68%

Which of these is NOT correct when defining an accredited investor under Rule 501 of Regulation D?

A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence.

Which of the following statements regarding certificates of deposit (CDs) is CORRECT? I. CDs are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. II. Negotiable CDs are deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year.

Both I and II

Which of the following statements regarding wash sales is CORRECT? I. A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. II. The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company.

Both I and II

All of the following statements correctly describe a type of money market instrument except

Eurodollars are Eurodollar-denominated deposits maintained at banks within the United States.

Limited partnerships are distinguished by which of the following? I. The general partner controls the business activities of the partnership. II. The limited partners participate in the business venture with limited liability. III. The general partner determines when distributions are made to the limited partners. IV. The limited partners may have difficulty selling their interests.

I, II, III, and IV

Identify which of the following statements regarding money market deposit accounts (MMDAs) are NOT correct. I. They are FDIC insured. II. They offer unlimited check writing privileges. III. They are primarily offered by open-end investment companies. IV. They require a minimum balance.

II and III

Income or dividends produced by which of the following securities is exempt from federal income tax?

Municipal bonds

Which of the following accurately describes the certificate of deposit investment strategy known as laddering?

Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity

A risk-averse client, living in Iowa, holds a high proportion of his investment portfolio in cash and cash equivalents in U.S. financial institutions in dollars. The advisor should point out to the client that the portfolio is most subject to which of the following risks?

Purchasing power risk

Grant calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.75 for his shares. Select the type of order that his broker should place to sell the stock.

Stop limit order

Your client, Ralph, has $15,000 of capital gains and $20,000 of capital losses in the current tax year. How much unused loss may Ralph carry forward to the following tax year?

The answer is $2,000. After netting capital gain and losses, the client has a net capital loss of $5,000. Because $3,000 of net losses can be deducted during any one tax year, the client will carry over the remaining $2,000 capital loss.

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Assuming the maintenance margin is 40%, what would the price of Aardvark be before Cosmo would receive a margin call?

The answer is $33.33. Margin call = (50% × $40) ÷ (1 - 0.40) = $33.33.

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call.

The answer is $41.54. The client will receive a margin call when the price of the stock drops below $41.54, calculated as follows: Margin call = ($60 × 0.45) ÷ (1 - 0.35) Margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54

Which of the following statements regarding cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is CORRECT?

They are fully taxable to the investor

Identify the incorrect statement regarding passbook savings accounts.

They require a minimum balance of $500

All of the following statements concerning the types of orders used to buy and sell securities are correct except

a market order has the lowest priority and is subject to the fluctuations and timeliness of the market.

All of the following correctly describe disadvantages of cash and cash equivalents except

an investor may quickly convert a money market deposit account to cash to meet short-term needs.

When considering the purchase of a limited partnership interest, an investor should be most concerned with

economic viability.

All of the following are features of limited partnerships except

the limited partners may participate in the management of the partnership.

To be eligible for preferential dividend tax rates

the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date.

Equity investments made for the launch, early development, or expansion of a business are known as

venture capital

A client has $12,000 of capital gains and $15,000 of capital losses. How much unused loss is carried forward to the following tax year?

$0

Nellie has accumulated $500,000 in a money market deposit account at ABC Bank and Trust. She is worried about the number of bank failures in the recent years and transfers $250,000 into a money market mutual fund paying a slightly higher return offered by her friend's investment firm. Determine the amount she has insured by the Federal Deposit Insurance Corporation (FDIC).

$250,000

Carly purchased $80,000 of JEM stock for $40 per share utilizing her margin account. She used $40,000 in her money market fund plus she borrowed $40,000 from her broker. She acquired a total of 2,000 shares of JEM stock. JEM stock is currently trading at $39.65 per share. Calculate the stock price that Carly would receive a margin call from her broker. Assume a maintenance margin requirement of 35% and an initial margin requirement of 50%.

$30.77

On December 27, 2020, Jackie sells ABC stock for a loss at $12 a share that she originally purchased for $28 per share. On January 9, 2021, she repurchases the shares for $15 per share. What is her cost basis on the repurchased shares?

$31

On December 18, 20X9, John sells some stock for a loss at $15 a share that he originally purchased for $40 per share. On January 9, 20X0, John repurchases the shares for $22 per share. What is his cost basis on the repurchased shares?

$47

Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55%, and the maintenance margin is 40%. Calculate the market price at which Amanda will receive a margin call.

$50.25

An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. Assuming the stock quickly falls to $40 per share, calculate the additional capital that the investor must provide to cover a margin call.

$600