Unit 5: Checkpoint Exam

Which of these statements regarding a 529 plan is correct? A) One person can be both the beneficiary and owner B) The assets in the plan belong to the beneficiary C) Contributions are limited to $2,000 annually D) The beneficiary must be below age 18

A) One person can be both the beneficiary and owner

Last year Brownstone Properties, LP distributed $200 per unit to investors and reported a $500 business loss per unit on the K-1. For tax purposes the investors received A) a $500 per unit passive loss. B) a net $300 loss. C) $200 per unit of passive income. D) a $500 reduction in ordinary income.

A) a $500 per unit passive loss. Income and losses in an LP are always treated as passive and are reported to the investor via the K-1. The tax results for the year are included in that document.

A state sponsored investment pool designed for municipalities with short-term cash investment needs is called A) an LGIP. B) a tax-free money market. C) a city and county money plan. D) a 457 plan.

A) an LGIP. his is the basic definition of a Local Government Investment Pool (LGIP).

All of these are potential risks of private, nontraded, REITS except A) transparency. B) reliability of valuations. C) tax treatment. D) liquidity.

A) transparency. Nontraded REITs are taxed the same way as public (traded) REITs. There are concerns about the private REITs lack of liquidity, transparency in operations, and the difficulty of valuing the programs.

Which type of DPP would be most likely to enable the investor to claim a deduction for depletion? A) Real estate limited partnership B) Oil and gas income program C) Oil and gas exploratory program D) Equipment leasing

B) Oil and gas income program

Which of these statements regarding a general partnership is correct? A) Partners participate in the gains and losses of the business and are partially shielded from the businesses liabilities. B) Partners participate in the gains and losses of the business and are fully liable for the businesses actions. C) Partners participate in the gains and losses of the business and are fully shielded from the businesses liabilities. D) Partners participate in the gains but not the losses of the business and are fully shielded from the businesses liabilities.

B) Partners participate in the gains and losses of the business and are fully liable for the businesses actions. In a general partnership, the results of the business flow through to the partners and there is no liability protection in this type of organization.

Which of these is not considered an advantage of owning an exchange-traded fund? A) Tax efficiency B) Pass through of losses C) Liquidity D) Intraday pricing

B) Pass through of losses ETFs are taxed using pipeline theory and do not pass losses through to investors. The others all considered advantages of ETFs.

Your customer, Amelia, is excited about an investment she recently purchased from another firm. At maturity, in five years, she will receive her principal back plus an interest payment based upon the returns of five well-known technology companies. It pays no interest during the five years. She has likely invested in A) an ETN. B) an ETF. C) a VA. D) a mutual fund.

B) an ETF. It appears Amelia has purchased an exchange-traded note (ETN). ETFs, VAs, and mutual funds do not have set maturity dates. ETFs and mutual funds may pay dividends, not interest.

Yusef would like to save money for his 10-year-old daughter's college tuition costs. She has her heart set on a small liberal arts school with a growing reputation in the arts. His biggest concern is the potential increase in cost over the next several years. The program best suited to hedge against the increasing cost of college tuition at the school is a A) Coverdell ESA account. B) custodial account in the child's name. C) 529 prepaid tuition program. D) 529 college savings program.

C) 529 prepaid tuition program.

An investor considering the differences between purchasing open-end investment company shares or ETFs with a similar objective should understand which of these? I. Each time an investor purchases and sells ETFs there is a commission. II. The operating expense ratio for an ETF is generally very high because they usually track indexes such as the S&P 500. III. It is possible that an investor liquidating ETF holdings will receive less than the NAV per share. IV. The margin requirements to purchase an ETF are higher than that for an open-end investment company. A) II and IV B) I and IV C) I and III D) II and III

C) I and III Because ETFs usually track an index, the operating expense ratios are generally lower than that of open-end companies. That advantage can be canceled out by the commission charges when purchasing and selling an ETF. An open-end investment company must redeem shares at the NAV per share; ETFs pricing is based upon supply and demand making it possible to receive less than NAV. One cannot purchase open-end shares on margin.

Which of these trading strategies are employed by hedge funds but are generally prohibited to mutual funds? I. The act of limiting investments to a narrow group of securities II. The use of borrowed money to purchase portfolio securities III. The act of taking long positions in speculative stocks IV. The act of taking short positions in NYSE listed stocks A) I and IV B) II and III C) I and III D) II and IV

D) II and IV Under most conditions, mutual funds are prohibited from purchasing securities on margin (i.e., using leverage—borrowed money) and from selling short. However, both of those strategies are commonly employed by hedge funds.

A REIT that owns and operates an office building in the Dallas Metroplex is an example of A) a mortgage REIT. B) a hybrid REIT. C) a leasing REIT. D) an equity REIT.

D) an equity REIT. A real estate investment trust that owns properties but does not hold mortgages is an equity REIT. One that holds mortgages but not the property is a mortgage REIT. One that does both is a hybrid REIT. There is no such thing as a leasing REIT.

All of these are risks associated with limited partnerships except A) liquidity risk. B) audit and recapture risk. C) business risk. D) limited liability risk.

D) limited liability risk. One of the primary benefits to an investor is the limited liability of an LP. An audit by the IRA may result in a recapture of prior tax benefits. All businesses are subject to business risk, and limited partnerships are famous for their lack of liquidity.

The primary risk associated with ETNs is A) business risk. B) call risk. C) reinvestment risk. D) risk of default.

D) risk of default. Exchange-traded notes (ETN) are debt instruments (that is what note means) and subject to default. Business risk is not a significant concern as these notes are not normally based on the cash flow of a business. They are not callable nor do they pay an ongoing interest payment, so no significant call or reinvestment risk exists.

All of these are true for an Achieving a Better Life Experience account except that A) the onset of the disability must have occurred before the owner turns 26. B) the account owner and beneficiary must be disabled. C) the income is tax-free. D) the account must be opened before the beneficiary turns 26.

D) the account must be opened before the beneficiary turns 26. The account does not need to be opened before the owner turns 26, but the qualifying disability does need to have begun before that age. Income from an ABLE account is received tax-free.