Series 66 Content Chapters 15-24
A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a 501(c)(3) charity, how much can he claim as a tax deduction for this donation?
$18,000 Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000.
Company X has an ownership interest in the common equity of Company Z, and as the shareholder of record on the record date, Company X has received a cash dividend in the amount of $2,500. Given a tax rate of 35%, what is the taxable liability for Company X with respect to this dividend?
437.5 This a question about the IRS corporate dividend exclusion rule. Cash dividends received by one domestic company from another domestic company are subject to taxation on 50% of the amount of the dividend. In this case, the taxable amount of the dividend is $1,250 (50% of the total dividend). Company X has a tax liability of 35% on the $1,250, which is $437.50.
A customer is selling inherited stock. The decedent originally paid $50 per share and on the date of the decedent's death, the stock was worth $60 per share. On the day the customer sells the stock, the price per share is $62. What is the investor's cost basis in the stock?
60 The IRS allows a step-up in basis for inherited stock. The customer's cost basis is the fair market value of the stock on the date that the decedent died.
Which of the following statements regarding a QDRO is correct?
A QDRO applies only to assets in a qualified employer plan.
Which of the following best characterizes a "living will"?
A directive regarding what steps should be taken, usually medical in nature, should the author of the will become unable to make decisions on their own. A "living will" , sometimes referred to as an 'advance healthcare directive', provides specific instructions, authored by the creator of the document, as to what steps/procedures should be taken in an end-of-life situation.
describe deferred compensation
Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited.
The party responsible for the management of assets for the account of a deceased person, as reflected in the party's will, is the
Executor. This is the role of the Executor. This party will be specially designated in the will of the deceased person, and is legally empowered to act on behalf of the deceased party.
Which factor is least important when assessing a defined benefit pension?
Investment performance of the fund Under a defined benefit plan, the pension payable is related to the length of service and usually expressed as a proportion of final earnings. The investment performance of the fund is therefore the least important factor to consider.
What would be the time horizon for a 65-year-old client who has just retired?
It depends on the individual's life expectancy.
Which of the following items are not included in the gross estate of a decedent?
Proceeds from a life insurance policy owned by the deceased's spouse
A meeting with a client is scheduled for next week to discuss life insurance, during which time a full capital needs analysis will be performed. Which of the following items will be least relevant during this meeting?
The composition of the family investment portfolio.
Which of the following is a characteristic of a bank insured CD?
The face value is fixed and they are not marketable. These products do not trade in the secondary market, and they have a fixed value. They are a preferred product for an investor who is looking for preservation of their capital. They are insured by the FDIC, not SIPC. Their interest rate is set by the issuing bank, not the FRB.
P/E ratio
The price-to-earnings ratio (P/E) is only calculated on the common stock, never the preferred.
quick asset ratio
The quick asset ratio (also known as the quick ratio or the acid test ratio) is calculated in one of two ways. One way is the analyst takes all of the current assets, subtracts the inventory, and then divides that by the current liabilities. The other, and the one used in this question, is to take all of the current assets excluding the inventory, and divide that by the current liabilities.
One of your very generous clients has used up her lifetime gift exclusion. Continuing to make gifts, she gives $50,000 to a grandchild and $18,000 to the child of a friend. What are the tax consequences of these gifts?
The tax rate on the $50,000 gift will be higher than that on the $18,000 gift. Gift taxes and estate taxes are progressive.
In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old but sometimes still used term to describe this kind of account, is
Totten trust.
An investor has three different holdings in HMK common; one block at 25, another at 28, a third at 31. An order placed to sell a block, no further instructions provided, will result in
a sale of the block purchased earliest. Absent specific client instruction, the IRS assumes the shares are being sold on a FIFO basis.
A Schedule K-1 would be received by an individual with an ownership interest in all of the following
an S corp, an LLC, a partnership
A technical analyst would be least concerned with
book value per share A technical analyst is not concerned with any fundamental aspects of a company, including company financials.
The terms mean, median, and mode are all measures of
central tendency
A divorce decree was executed on June 1, 2019. An alimony payment involved in the divorce settlement
is not considered income to the party receiving the payment. As of January 1, 2019, the party paying the alimony cannot deduct the payment, and the party receiving the payment will not report it as income.
There is a distinct possibility that Country A will be unable to meet its upcoming obligation on its national debt commitments. Holders of Country A debt may be experiencing
sovereign risk, given the possibility of Country A not being able to meet its commitments. This is an example of sovereign risk, the risk that a country may default on its commercial debt obligations.
An individual opened a ROTH IRA six years ago with a deposit below the maximum allowable level. Distributions taken from this account are
tax-free if the individual is at least 59.5 years of age
When a participant in a nonqualified retirement plan takes a distribution,
the amount of the distribution above the cost basis is subject to ordinary income tax. Distributions from a nonqualified plan are subject to ordinary income tax on the amount above the basis of the account, or the initial contribution.
If the required rate of return is higher than anticipated in a present value calculation, the effect would be that
the present value would be lower
One of the assumptions underlying the CAPM is that
there are no transaction costs or taxes
Cash dividends paid to shareholders may be "qualified", meaning that the dividend
will be taxed at a maximum rate, often times lower than an individual's ordinary tax rate.
A bond is paying $100 per year in annual interest and is selling at par. If the discount rate is 10%, the net present value is
zero A bond paying $100 in interest per year has a coupon rate of 10%. Whenever the coupon rate is equal to the discount rate, the NPV is zero. That is, the present value of a bond paying 10% interest when the current market rate is demanding a 10% interest rate is the bond's par value (as is the case with this bond).
Which of the following items is not part of the equation for the capital market line?
Alpha & Beta measurements The alpha and beta coefficients are not used in the equation for the capital market line.
Which of the following statements are correct regarding 'joint' brokerage accounts?
Any named party may place a trading instruction, but all distributions must be made payable in the account name and endorsed by all parties. With all types of joint accounts (JTIC & JTWROS) any account owner may place orders for the account, but distributions must be endorsed by all account owners.
Which of the following pairs of assets provides the greatest level of diversification?
Assets 1 and 2, with a correlation coefficient of -0.78
Based on the following information, which stock is most attractive to a value investor?
Book value of $22 per share, current market value of $17 per share Value investors look for stocks that appear to be underpriced in the market. These stocks are characterized by prices that may be below book value, low P/E ratios, and higher dividend yields
Various business structures provide for limited liability for owners, as well as flow -through of income and losses. Which of the following structures would be inappropriate for these goals?
C Corporation The "C" corporation does not offer a 'flow-through' treatment of income and loss, so would not be the preferred business structure in this case.
Which of the following would generally not result in any income tax liability?
Death benefit proceeds from a life insurance policy Death benefits from life insurance policies are invariably tax free.
Which of the following employer-sponsored plans would never be covered by ERISA?
Deferred compensation Deferred compensation plans are never ERISA-covered plans; that is what gives them greater flexibility than a covered plan. Depending on the employer, some 403(b) plans are covered under ERISA while others are not.
Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15?
III. Multiple-member LLC electing to be treated as a corporation IV. S corporation For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15.
A father has made a gift of XYZ stock to his daughter for graduation. Does this gift create a current tax liability for either party?
No. The daughter will assume her father's original cost basis for the shares.
Which of the following is an example of a regressive tax?
Sales tax Regressive taxes are those where the rate remains the same, regardless of the cost of the item subject to the tax. For example, if your state has a 6% sales tax, it makes no difference if you are buying an item for $1 or $10,000—the tax rate is the same 6%.
A portfolio manager who is engaging in rebalancing on a semiannual basis is most likely using which portfolio management style?
Strategic Asset Allocation At least annually, and sometimes more frequently, a portfolio manager who follows strategic asset allocation will examine the relative proportion of the selected asset classes and, based on market performance, rebalance the portfolio to bring it back to its ideal.
Which of the following accounts can only be opened by spouses?
Tenants in the entirety
Which of these is an advantage of using a Coverdell ESA rather than a 529 plan to fund a child's future education?
The Coverdell offers greater investment flexibility With a 529 plan, donor is limited to whatever is available in the state plan chosen.
What type of fixed-income strategy would be best for an investor who will need a specific amount of cash at a particular point in time?
The bullet strategy In cases where a specific amount of cash is required at a given point in time, the best strategy to use is the bullet. This is where bonds are purchased at different times but all have the same maturity.
An investor wants to deploy some of her capital into products that will generate income for her portfolio. Which of the following investments should she NOT include in her strategy?
Unlisted real estate investment trusts (REIT)
Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax?
When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000
Which of the following is not a tax preference item under the alternative minimum tax (AMT)?
Interest income from a high- grade corporate bond. Interest income from corporate bonds is a taxable item under the traditional income tax system, thus it is not a tax preference item for AMT purposes.
It is generally agreed that one of the primary benefits offered by UTMA over UGMA is
greater flexibility in the type of property that may be transferred to the minor The property that may be transferred into an UGMA account is generally limited to cash and securities, while in an UTMA account, almost any kind of property—real or personal, tangible or intangible—can be transferred to the custodian.
what does a growth investor do
growth investors look for stocks in companies that are growing very quickly. Because they focus on growth rates, they do not look so closely at price when they make their investments; they don't mind paying a high price for a stock they believe will continue to grow
A portfolio that utilizes indexing is one which
incurs relatively low costs due to lower levels of portfolio turnover. Indexing is an investment technique where a portfolio is constructed based on the composition of a particular index. As such, it is not actively managed and therefore incurs comparatively lower costs and expenses.
An individual seeking a vehicle to transfer property to a charitable foundation may wish to utilize a
living trust. A trust is an entity that enables an individual to transfer property or assets to another party. There are many different types of trusts, each with unique features and tax implications. These are best set up in consultation with an attorney specializing in this area.
The possibility that a $1 million investment can become worthless is the reality behind
market risk Market risk is systemic in nature, and very difficult to diversify against
Insurance agents frequently use a capital needs analysis to help determine the correct amount of life insurance needed by their clients. That analysis would look at all of these except
market volatility Of these choices, the only one that we cannot in anyway predict is market volatility. We can factor in an estimated inflation rate, project future earnings, and look at the mortality tables to obtain life expectancy. But nothing can project market volatility with any degree of accuracy.
A 50-year old owner of a ROTH IRA makes a withdrawal of her earlier contribution. This withdrawal is
not subject to ordinary income taxes or penalties. Regular contributions may always be withdrawn from a ROTH IRA, as these are made non-deductible contributions.
rule of 72
number of years it takes for a deposit to double-->72 / rate of return With an earnings rate of 9%, the rule tells us that money will double in 8 years (72 divided by 9 = 8). With an 8-year accumulation period and a goal of $200,000, the deposit required to reach that by doubling is $100,000.
An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be
I. unsuitable and unethical III. grounds, in extreme cases, for suspension or revocation of the agent's license In this case, such a recommendation is probably unethical and could result in suspension or revocation of the registered agent's license.
Which of the following purchases will not cause a wash sale violation if executed within 30 days of the date of sale?
Preferred stock of the same issuer A wash sale occurs when a security is sold for a loss, and a substantially similar security is purchased within 30 days (before or after) of the date of sale. While convertible securities of the same issuer are considered substantially similar assets, non-CV securities are not.
A comparison of a Simple Trust and a Complex Trust will show that a
Simple trust must distribute all of its income each year, whereas a complex trust may accumulate its income and not make distributions Simple trusts are required to make income distributions during the year that income is received into the trust. Complex trusts are permitted to retain that income and not make any distributions.
An investor purchased a corporate bond paying a coupon of 3.75%, due to mature in 15 years. Five years later, interest rates have declined to 3.25%. Which of the following statements is TRUE?
The investor will be unable to reinvest the cash flows from the bond at the original rate for the duration of the investment. This is an illustration of "reinvestment risk". Investors will not be able to reinvest interest payments at the same rate as when the bond was originally issued, if prevailing rates are lower today than they were five years ago.
Your client often makes irrational financial decisions because she bases her decisions on information that should have no influence on the decision at hand. The client's behavior is known as
anchoring Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring.
An individual has $250,000 in a money market fund. Investments in a money market fund
are not guaranteed by the FDIC Investments in a money market fund are NOT insured or guaranteed by the FDIC or any other government agency. These products are covered by SIPC, up to the coverage limit of $500,000 for securities.
An investment strategy where a higher price is paid for a stock based on expected returns is
growth investing
A life insurance needs analysis should not include
interest rate volatility
what does a technical analyst rely on
market trends and supply and demand factors, as well as chart indications such as resistance and support levels
The statistical measurement of the total risk of a security or portfolio is known as
standard deviation.
the CAPM assumes
that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios.
During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from
the person appointed as administrator of the estate.
Taxation is an important part of investment planning. In general, it is correct to state that a taxpayer's effective tax rate
is lower than the marginal tax rate The marginal tax rate is the rate you pay on each additional dollar you receive as income. The effective tax rate, however, is the overall rate of tax you pay on your total taxable income. Because income tax in the U.S. is progressive, as your earnings increase, so does the tax rate.
The spouse of a deceased individual has started to receive a life insurance benefit from her spouse's policy. This benefit
is not subject to federal income tax liability. Generally, proceeds from life insurance policies are not subject to federal income taxes.
An investor has realized a $5,000 long-term capital gain from the sale of $100,000 par value state general obligation (municipal) bonds. This gain is
subject to income tax liability as a long-term capital gain. Capital gains from the sale of any security, including municipal bonds, are subject to federal tax liability. It is the interest from a municipal bond which is exempt from federal tax liability.
The lower the cost basis of an asset for an investor,
the greater the capital gain.
Who is the last creditor to be repaid in a corporate liquidation?
unsecured bondholders The last creditor to be repaid is an unsecured bondholder. Key point here, bondholders are creditors and stock holders are owners (NOT creditors).
A well-diversified securities portfolio can help minimize
unsystematic risk It is very difficult, if not impossible, to diversify away systematic risk, but unsystematic risk can be mitigated through a program of diversification.
Which of the following incorrectly states the relationship between NPV, IRR, and required return?
If NPV > 0, then IRR < required return. If the NPV is a positive number, the investor's internal rate of return (IRR) is greater than the required rate of return (it is a good buy). When used with bonds, the required rate of return is the current market interest rate. Conversely, if the NPV is a negative number, the investor's IRR is less than the required rate of return (not a good buy). When the NPV is zero, the investor's IRR is equal to the required rate of return
what is Internal Rate of Return
The internal rate of return (IRR) is the discount rate that, when applied to the cash flows of an investment, equates the net cash inflows to the net cash outflows.
do traditional IRAs have an earnings limit for tax deductibility
The only time there is an earnings limit for tax deductibility is when the individual is covered under an employer-sponsored retirement plan
Beverly has two stocks with a correlation coefficient of zero. Which of the following is correct?
These stocks will move independently of each other. A correlation coefficient of zero means that the two stocks will move independently. They may move in the same direction, or they may not. The zero correlation coefficient indicates that there is no pattern to the relationship between their price movements.
REMEMBER
When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits.
Mary teaches physics at the local high school and makes about $70,000 per year. She could maximize her annual retirement savings by participating in
a 403(b) and a 457 plan. Employees of public schools can legally maintain both a 403(b) plan and a 457 plan.
A frequent concern of parents initiating a savings plan for the college education of their child is the lack of control over the assets, particularly if the child decides to forego higher education. When you have a client who shares this concern with you, it would be most appropriate to suggest
a Section 529 plan One of the features of the Section 529 plan is that the donor maintains control over the funds in the account. Therefore, should the child not go to college, the money can either be transferred to another family member or withdrawn by the donor
The notion that investors can have a difficult time altering their existing beliefs, even in the face of updated information, is a core tenant of
conservatism.
An investor who wants to maintain the same level of cash in the equity portion of her portfolio would want to adopt the
constant dollar plan This objective may be accomplished using the constant dollar plan. In this model, the goal is to maintain the same dollar valuation in one security or category, which may require occasional adjustments.
The investment policy statement is a primary element
created to maximize the efficiency of an asset allocation plan. The investment policy statement (IPS) is used as the benchmark to establish an appropriate asset allocation program for a client.
When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has
stronger governance. Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics. In the case of private funds, there are very few shareholders and they generally take less of an interest in ESG (environment, social, and corporate governance) matters.
When a will calls for property to be distributed per stirpes, it means that
the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants. When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received.
A customer within 1 year of retirement informs his agent that he wants to use the equity in his house to make enough money within the year to fully fund his retirement. According to the Uniform Securities Act, the agent should
urge the customer to reconsider his investment strategy Making unsuitable recommendations to customers is prohibited, and this investor's time frame is unrealistic because the customer cannot meet his objectives in the time allotted.
Taxes which represent a larger percentage of one individual's income versus another individual's income are said to be
regressive taxes. A type of tax that consumes a greater percentage of one person's income over another person's income is said to be a regressive tax. Examples of these include sales and excise taxes. These taxes will consume a greater portion of a lower income earner's wages as compared to a higher income earner.
Which of the following items is not included in the adjusted gross income (AGI) of an individual taxpayer?
Interest received from state general obligation bonds, a type of municipal security. Interest income from municipal bonds is not included in an individual's adjusted gross income (AGI).
Which of the following retirement plans is not legally required to establish vesting, funding, and eligibility requirements?
Payroll Deduction Plan A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.
May an individual take a tax deduction from margin interest expense incurred in a margin account?
Yes, except if the margin loan is used to finance municipal bonds. Margin interest is a tax-deductible expense, except in the case of interest incurred when financing municipal bonds. This is due to the tax-exempt nature of municipal bond interest.
If the Smiths want to open a joint account at AAA Securities Corporation and have their securities transferred to their three daughters upon the death of the last surviving account holder, their agent should recommend that the Smiths open
a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form.
A sister, who is a surgeon, shares a TIC account with her brother , who is a vice principal in the local elementary school. The investment advisor rep (IAR) who is handling this account should make investment recommendations that are
appropriate based upon the brother's financial situation. In this type of situation, suitability is typically based on the profile of the lower wage earning party, which in this case would be the brother who works in a school.
what does a balance sheet consist of
assets and liabilities as of a specific point in time. Personal property currently owned, such as jewelry, is an asset. A loan still outstanding, such as the car loan and the debt to the dentist, are liabilities. The amount already paid for the Botox injections is no longer on the balance sheet.
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?
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).
