SIE Review
Scenario: Client is long ABC Common Stock that has a sizable increase in price. The Client is scared for a SLIGHT DOWNTURN, and wants to protect his profits. What provides MAXIMUM protection.
- BUY a PUT option (when you have an existing long position), because it is the best protection for existing positions - in this case, fearing a downturn will make you want to put it to the seller at a SLIGHTLY lower price
Roth IRA
- Contributions are NOT tax deductible from the owner's gross income - Contribution dollars can be withdrawn at any time without penalties - At retirement, withdrawals of both contributions and earnings in the account can be made tax free. - benefits individuals who anticipate being in a higher tax bracket upon retirement - Individuals who will be at least 50 may contribute an additional "catch-up" amount to an IRA - Contributions may continue to be made after the owner reaches 70 1/2
Roth 401(k)
- Contributions to a Roth 401(k) are made on a AFTER-TAX basis and QUALIFIED DEDUCTIONS are TAX FREE
Defined Benefit Plans
- Qualified Plan - Benefits received by employees are computed using a PREDETERMINED formula based on COMPENSATION, YEARS OF SERVICE, and AGE. - High salaried employees near retirement benefit the most. - Benefits are taxable as ordinary income - Actuary regularly reviews contribution amounts to ensure the fund will meet future payment obligations
Defined Contribution Plan
- Qualified Plan - employees OR employer (or BOTH) make contributions to employee's individual accounts - employers may make matching and profit sharing contributions FIXED by a predetermined formula -retirement benefits cannot be calculated in advance but depends upon the amount of the contributions and the performance of investments in the account.
Keogh plan (HR-10 PLan)
- Qualified, TAX-DEFERRED retirement plan for SELF-EMPLOYED individuals that can be set up as a defined contribution plan or a defined benefit plan - distributions may begin 59 1/2, mandatory 70 1/2 (required minimum distributions)
Who receives an annuity contract's surrender value? surrender charge?
- The owner of the account is entitled to the surrender value of the contract. The annuitant is entitled to the annuity payments. The beneficiary is entitled to the death benefits. - The issuer (insurance company) issues the contract, and receives the surrender charge if the owner so chooses to withdraw the contract
Profit-Sharing Plan
- company shares its profits with its employees - dependent on company profits - all funds in the plan are tax-sheltered -deductible contributions may not be carried forward to the next tax plan year
An individual who buys a variable annuity assumes what type of risk? Investment or Mortality?
An individual purchasing a variable annuity assumes the investment risk of the security. Mortality risk is assumed by the insurance company. Political and legislative risks are already present and are not assumed by the individual when purchasing an annuity.
What options positions would give the investor MAXIMUM protection when hedging using options?
Long Calls + Long Puts - they provide the most protection - the only benefit a writer (short the option) can get is the amount of the premium received when the option is written -especially if you DONT EXERCISE
What type of securities transactions are not reported on the Consolidated Ticker Tape?
Odd Lot transactions
For an open-end investment company (mutual fund), when must capital gains be distributed to shareholders?
On an annual basis. some funds choose monthly, quarterly, but 100% of capital gains are distributed to shareholders
How would the exercise price on a foreign currency option be displayed?
The price of the U.S. Dollar per foreign currency unit
How is the appreciation of the value of the variable annuity taxed during the accumulation periods?
The tax is deferred until annuitization (annuity payments to the investor begin)
A Day Trader trading blue chip common stock would concerned with which risk?
Timing Risk
Eurodollars
U.S. Dollars deposited in foreign banks outside the US and is used to settle foreign transactions
Under the regulations of the security industry, can unlisted securities be sold short by an OTC trader?
Yes, OTC traders are allowed to sell short their shares. There are no restrictions for said transactions
What is the maximum deductible contribution to an IRA for an individual and an eligible UNEMPLOYED spouse?
$12,000 ($6,000 each)
Traditional IRA
- contributions may be made annual up to 100% of earned income not to exceed specified limits - contributions are tax deductible - Taxes on contributions and earnings are deferred until the owner retires and begins taking withdrawals, when he may be in a lower tax bracket - Individuals NOT ACTIVE in a retirement plan at work MAY DEDUCT ALL of the contributions up to the contribution limitations - Individuals ACTIVE in a retirement plan at work MAY be able to deduct a contribution to an IRA depending on taxpayer's filing status and adjusted gross income - Distributions may begin at 59 1/2, mandatory by age 70 1/2 - Funds withdrawn are taxed as ordinary income - Funds withdrawn before age 59 1/2 are subject to a 10% penalty tax except for certain circumstances and up to 50% for late insufficient distributions
SIMPLE (Savings Incentive Match Plan for Employees) Plan
- for small business owners and their employees (100 or fewer employees) - tax deduction for contributions they make to the employees SIMPLE IRA plan - elective deferrals of their pre-tax compensation to the plan. -similar to a 401(k) type but offers simpler and less costly administration
Under regulations of the Federal Reserve, margin accounts must be "marked to market" to reflect the current market value of securities at...
- no less than once daily, typically at the close of trading. - Margin accounts must be marked to market daily at the close of trading under Federal Reserve Board Rules. So, the market value that is used in relation to securities in a margin account per regulations is the closing price from the previous trading day.
Under Reg T, when a security has been purchased and the account does not have funds available to pay for securities at settlement, and no extension has been granted, what happens?
- position gets liquidated - account is frozen for 90 days
401(k)
- type of defined contribution plans - allows workers to save for retirement by deferring a portion of their salary into a personal 401(k) account - sometimes called "CODA" Plans - voluntary by employers, who may match with incentives, that may have profit sharing programs attached - CONTRIBUTIONS AND EARNINGS GROW TAX-DEFERRED - Rollovers can be made directly from a 401(k) plan to a ROTH IRA - Employees are also allowed to make after-tax contributions but hose would NOT be TAX DEDUCTIBLE. - Distributions may begin by 59 1/2, mandatory by 70 1/2. - Funds withdrawn before subject to 10% penalty - Distributions TAXED as ORDINARY INCOME
Some time after a short sale of 100 ABC, while the client is still short, ABC pays a 6% stock dividend. To close the short, the seller will deliver or purchase...
-106 shares -To cover a short position, customers are required to deliver or buy the original number of shares sold short, PLUS, any additional shares from stock dividends or splits.
Commercial paper
-short-term unsecured debt issued by large corporations generally in Book-entry form -at a discount -redeemed at face value on a specified date -NOT normally issued as callable
Dissolution of a Limited Partnership - How are claims paid?
1. Creditors - secured, then unsecured 2. Limited Partners - Profit Claims, Capital Claims 3. General Partners - Profit Claims, Capital Claims
What happens if the IRS determines a tax shelter to be abusive?
1. Deductions are disallowed 2. Taxpayer is CHARGED interest on back taxes 3. Taxpayer is CHARGED penalties 4. Taxpayer may be charged with intent to defraud
What are some disadvantages of investing in limited partnerships?
1. Lack of liquidity - limited partners may not sell their interest back without restriction 2. Limited partners lack control over management 3. Possible changes in the Tax Code 4. Loss of all or part of the investment 5. Possible assessment of additional funds 6. Additional IRS scrutiny 7. Potential Alternative Minimum Tax consequences
ADRs
American Depositary Receipts -certificate that represents ownership of a foreign company by a US investor. -stock of the company typically held by a third party bank in the country where the stock is issued -held by custodian who is 3rd party to ownership
Features of a 529 Education Savings Plan
Beneficiaries of the 529 educational savings plans can be changed - Do not have annual limitations on contributions - Owner of the account maintains control over the account -As long as withdrawals are qualified, federal income tax does not apply
Which with highest risk/yield and which bonds have the lowest risk/yield?
Corporate - highest risk/yield. Taxable at fed, state, local Government - lowest risk/yield. Taxable at fed
A customer contributes the MAXIMUM $2,000 to an educational savings account which she will use for elementary school education costs. What type of account is this most likely?
Coverdell Account - educational savings account which can be used for elementary, secondary, and educational costs with a MAXIMUM annual contribution limit per beneficiary of $2,000
An equity investor is primarily concerned with preservation of capital. Currently, interest rates have been rising and are forecasted to continue to rise. Which of the following stock recommendations is most appropriate for this investor?
Defensive Stock - least affected by rising interest rates and because he wants to preserve capital
True or False: Preferred shareholders have preemptive rights ahead of common shareholders.
False; Preemptive rights are rights given to common shareholders only not preferred stockholders.
A Keogh Plan is a type of retirement plan that allows self-employed individuals to contribute (2020 tax year)...
For 2020, Keogh contributions are allowed up to $57,000 or 100% of earned income, whichever is lesser. Keogh plans are for self-employed individuals
An investor expects the general market will have a narrow trading range in the near future. Which of the following option strategies would be most appropriate?
If the market trades within a narrow range, this would be the best time to use a neutral market strategy with options. Therefore the short (sell) straddle would work the best since investors use short straddles when they expect the market to remain neutral.
Which funds offers high yield?
Income funds - objective to maximize income by buying dividend-paying stocks and bonds with high yields -An equity income fund would combine income and capital appreciation
How do rising interest rates affect Utility stock?
Rising interest rates = negatively impact them because they carry a lot of debt so they will have to pay more interest to their investors
When exchanging shares of one fund with shares of another fund that is within the same fund family, what is not an important consideration?
Sales Charge Load
Which U.S. gov securities are classified as money market instruments (T-bills, notes, bonds, strips)?
T-Bills - they are short-term (12-mo or less maturity) discounted government debt securities
