AAMS Module Quizzes (1-10)
Which of the following has a direct bearing on which investments are appropriate for achieving a goal?
time horizon
Which one of the following is the better written financial goal?
to accumulate $15,000 for a boat purchase in two years This goal is well written because it contains a specific dollar amount and a specific time frame.
Which one is a debt ratio?
debt-to-equity ratio
Stock ABC has an average return of 9.0% with a standard deviation of 7.0%. What is the range of expected returns for ABC 68% of the time?
+2.0% to 16.0% 68% of the time the returns will fall with one standard deviation of the average return. One standard deviation below the mean is 9% - 7% = 2% while one standard deviation above the mean is 9% + 7% = 16%.
What are some bond strategies?
1. barbell 2. pure yield pickup swap 3. tax swap
Which one of the following is not considered to be a major benefit of tax-deferred plans (excluding Roth IRAs)?
A retiree's income tax bracket may be higher at the time of distribution. All of these are considered major advantages except d, as most retirees are assumed to be in a lower income tax bracket in retirement.
For finding Net worth
Assets-Liabilities (remember NOT to include cash flows such as auto payments)
Which one of the following explains an investment planning consideration during retirement that is related to the length of the retirement period?
Because the retirement period can be long, clients should consider taking greater risk for greater return to keep up with inflation. Greater risk and greater return are usually necessary to keep pace with inflation over a long period of time.
Which of the following statements regarding the level of trust in the financial services industry is correct?
Despite the overall stock market recovery since the market meltdown in 2008, trust levels of financial services remain low. This is true. Ever since the Great Recession in 2008-2009, trust levels of the financial services industry has remained low relative to other sectors, according to the Edelman Trust Barometer.
The "suitability rule" is one of the key rules of the
FINRA Conduct Rules. The FINRA Conduct Rules require that recommended investments be "suitable" for clients.
Which of the following are elements of any investment policy statement?
I. the client's investment goal II. suitable and unsuitable investment vehicles III. an acceptable risk level IV. a provision for periodic review
Assume each of the asset classes below has the following correlation to long-term government bonds: Treasury bills: 0.67 Corporate bonds: 0.81 Large stocks: 0.37 Small stocks: 0.12 Which one of the following correctly states the impact of diversification on a portfolio of long-term government bonds?
Small stocks provide more diversification than large stocks. Because the correlations of small stocks to long-term government bonds are less than that of large stocks (even though both are positive), small stocks provide more diversification than large stocks.
Which one of the following statements comparing the suitability standard and the fiduciary standard is correct?
Verbal disclosure may be adequate under the suitability standard but not the fiduciary standard. Fiduciaries have written disclosure requirements whereas verbal disclosure may be all that is required under the suitability standard.
A disadvantage to using life insurance to informally fund a nonqualified plan is
additional death benefit proceeds would be paid to a beneficiary of an executive with potentially a very large estate. Paying additional death benefits to a beneficiary of an executive with a large estate is a disadvantage if there is no need for the protection, and it may cause additional estate taxes to be owed.
Ms. Arbuckle paid approximately $23,500, or 23.5% of her taxable income of $100,000, to the IRS. What does this percentage represent?
average tax rate The average tax rate is defined as the tax liability divided by the taxable income.
The failure of highly skilled institutional investors to outperform on a regular basis "unmanaged" benchmarks, like the S&P 500 stock index, strengthens the argument of which one of the following investment strategies?
buy-and-hold Unmanaged benchmarks, like the S&P 500 index, are based on the efficient market hypothesis; a buy-and-hold strategy supports the efficient market hypothesis.
In which of the following types of ownership is property acquired during a marriage considered to belong one-half to the wife and one-half to the husband, regardless of whose name is on the title?
community property In community property states, property acquired during a marriage is considered to belong one-half to the wife and one-half to the husband, regardless of whose name is on the title.
Which one of the following correctly lists characteristics of the downturn period of a business cycle?
declining interest rates, increased unemployment, lower lending activities In a downturn economic period, there is usually increased unemployment, declining interest rates, lower consumer demand and decreased lending activities.
Which type of trust is one from which the grantor receives all income earned by the trust?
grantor retained income trust (GRIT) The GRIT provides for the grantor to receive each year all of the income from the trust.
Earnings in a variable deferred annuity
grow on a tax-deferred basis. Earnings in a variable deferred annuity grow on a tax-deferred basis and are taxed only when paid out from the annuity.
An enemy of effective strategy is
inadequate time horizons. One enemy of effective strategy is inadequate time horizons.
Assume a growth stock mutual fund has a beta of 1.3. If the stock market increases by 9%, you would expect this mutual fund to
increase by 11.7%. You would expect any fund with a beta of 1.3 to increase by 11.7% (1.3 × 9%).
The recent regulatory and industry developments regarding fiduciary advice will most likely
increase client expectations of advisers and put downward pressure on fees. The bar is being raised since the fiduciary standard is a higher standard than the suitability standard. This will increase client expectations of advisers and put downward pressure on fees, especially high fee products that have better, lower fee alternatives available.
Which one of the following is an activity ratio?
inventory turnover Inventory turnover, which is determined by dividing sales by average inventory, is an activity ratio.
Upon retirement, the bulk of a client's assets generally should be
invested in growth investments to preserve purchasing power. Because the investment time horizon for retirement is often very long, a significant portion of a retiree's assets should stay in growth-oriented investment vehicles to keep pace with inflation.
The relationship between investment strategy and investment policy is one in which
investment strategy is compliant with the investment policy. Investment policy provides the guidelines to be used in managing a portfolio, including investment strategies that may be employed.
Which one of the following periodic pension benefit payments will result in the highest monthly payment?
life annuity A life annuity will provide the highest monthly payment because payments are spread out over the life of the participant only—at their death, all benefits cease.
Of the following, which one describes a key attribute of an investment policy statement?
long-term perspective—to take advantage of the positive bias in the markets A key attribute of an investment policy statement is that it should be created with a long-term perspective to use the positive bias in the markets that occurs with the passage of time.
Each after-tax annuity payment is
partly a tax-free return of capital and partly income that is subject to ordinary income taxation. A portion of each annuity payment represents a tax-free return of capital, and a portion is subject to ordinary income taxation.
The BIC (best interest contract) exemption from the vacated Department of Labor fiduciary rule requires advisers to do all of the following except
provide the best recommendation. The vacated DOL fiduciary standard requires that any advice be "prudent" and not the more difficult to define "best." The DOL states that "prudent advice is advice that is based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor, without regard to the financial or other interests of the adviser, financial institution, or their affiliates, related entities, or other parties."
Securities Act of 1933
required that new companies provide full disclosure through the issuance of a prospectus
Investment Advisers Act of 1940
requires investment advisers to register with the SEC
Life insurance proceeds paid to beneficiaries are generally
tax-free. Generally speaking, life insurance proceeds paid to beneficiaries are income-tax-free.
Who bears the main responsibility for decision making in an investment policy statement?
the client
What are the major steps in the asset management process
1. gather data 2. establish goals 3. analyze information 4. make and implement recommendations 5. monitor
Over time, the cash value of a permanent life insurance policy could grow substantially. This cash value can be used to
1. help supplement retirement expenses 2. help pay for college expenses 3. pay for a vacation
Trusts can provide
1. income tax savings 2. gift tax savings 3. estate tax savings
Bob received 100 shares of stock from his uncle, Raymond. Raymond purchased the stock eight years ago for $12 per share. Bob received the stock as a gift from uncle Raymond two years ago, when the fair market value of the stock was $15 per share. Assume Bob sold the stock this year for $19 per share. What would be Bob's basis in these shares?
$12 per share In the case of an asset received as a gift, if the fair market value on the date of the gift is greater than the donor's adjusted basis, the recipient has a carryover basis. In this case, uncle Raymond had purchased the stock for $12 per share and had gifted it to Bob when the fair market value was $15 per share. Bob subsequently sold the stock for $19 per share. Thus, the carryover basis from uncle Raymond would be $12 per share.
If an investor contributes $5,000 to her IRA at the beginning of each year for 20 years, and earns 8% annually, how much will she have accumulated?
$247,114.61 Using the HP 10bII+, set the calculator to begin mode and one compounding period per year. Then 5,000 +/- PMT, 8 I/YR, 20 SHIFT N, FV = $247,114.61.
The Securities Investor Protection Act of 1970 insures customers' cash up to
$250,000. The Securities Investor Protection Act of 1970 insures customers' accounts to a maximum value of $500,000, $250,000 of which may be cash.
According to research reports from your firm, CodeHead Software's earnings for this year are estimated to be $2.00 and next year are estimated to be $2.25 per share. The current P/E ratio of similar software vendors is 15, but CodeHead typically sells at a 10% premium to these other vendors. What stock price would you estimate for CodeHead next year?
$37.13 First determine the P/E for CodeHead. It sells at a 10% premium so the P/E of the industry, 15, has to be increased by 10%. 10% of 15 = 1.5, which added to 15 = 16.5. Then taking next year's earnings of $2.25 × 16.5 = $37.125 or $37.13.
If a stock pays a dividend of $1.60 per share, the growth rate of that dividend is 6%, and the required return is 10%, what is the intrinsic value of the stock according to the dividend discount model?
$42.40 The dividend discount model is D1/r-g where D1 is the dividend value at the end of the first year, r is the required return, and g is the dividend growth rate:(1.60 × 1.06) / (.10 - .06) = $1.696 / .04 = $42.40
Company XYZ has earnings this year of $1.80 per share, expects earnings next year to increase by 15%, and generally trades at a 10% premium to the S&P 500 index. Currently, the P/E of the S&P 500 index is 20. What is the expected value of XYZ next year?
$45.54 The P/E is correct [20 × 1.10 = 22] and is multiplied, correctly, by next year's earnings ($1.80 × 1.15 = $2.07) to get $45.54.
Technology Startup Inc. (TSI) grants a nonqualified stock option to Doug Edwards, one of its vice presidents, to purchase 1,000 shares of TSI stock after five years of employment. As a startup company, the value was not ascertainable at the time of the grant. Today, the fair market value of the stock is $30 per share and Doug decides to exercise the option at this time at a price of $10 per share. Doug's marginal tax rate is 25%. The tax due upon exercise of the option by Doug is
$5,000. The tax due upon exercise of the option by Doug is $5,000 ($20,000 × .25).
Carol Taylor has $10,000 to invest at the end of each year for five years, and she can earn a fixed rate of 8%. "How much," she asks, "will my money be worth in five years?"
$58,666 This is an ordinary annuity problem with n = 5, i = 8, and PMT = 10,000, then FVOA = $58,666.
An investment professional is assessing the life insurance needs of the Robinson family. As it stands, Mr. Robinson has determined that the family's immediate cash flow requirements in the event of his death are $65,000. The amount needed to meet all future funding requirements (net of Mrs. Robinson's income and Social Security and pension benefits) is estimated to be $550,000. The family owns a home in which their equity interest is $200,000. Based upon these figures, the investment professional would recommend life insurance with a face amount of
$615,000. $65,000 + $550,000 = $615,000; the $200,000 equity in the home does not represent a truly liquid asset to offset these expenses (though it could possibly be tapped with a home equity loan).
Based on the 2008 Aon Consulting Worldwide study cited in the module, a client with a preretirement income of $90,000 will need approximately how much income during retirement?
$70,200 This is 78% of preretirement income, which is the range cited in the study.
Which of the following parties providing guidance and advice to a client would be considered a fiduciary under CFP Board's Rule of Conduct 1.4?
1. investment manager 2. pension manager 3. plan trustee
Jensen's Alpha
1. it assumes that the portfolio being evaluated is well diversified 2. both alpha and beta appear in the formula for the ratio 3. it indicates by how much the realized return differs from the return required by the capital asset pricing model (CAPM)
Lily has several accounts with Progress Bank, which is FDIC insured. She has the following balances: $300,000 in a single account $280,000 in a joint account with her son $280,000 in a joint account with her daughter $225,000 in an IRA Lily is concerned about the safety of her funds and has asked you how much FDIC coverage she has personally.You would advise her that the total amount of her coverage is
$725,000. Lily receives personal coverage of $250,000 for her single account, $225,000 for her IRA, and is then limited to a total of $250,000 of the $560,000 combined value in the joint accounts (due to the like registration).
Assume a client has $30,000 in a money market fund, $2,000 in a checking account, a mortgage loan of $110,000 (not to be paid off, as it will be transferred to the spouse), an auto loan of $20,000, and credit card balances of $5,000. Assume that if he died, postmortem expenses would be $15,000. What would be the cash requirements for this client?
$8,000 The cash requirements would be debt of $25,000 ($20,000 + $5,000—the mortgage is excluded because it will not be paid off), + expenses of $15,000 - liquid assets of $32,000 ($30,000 + $2,000) = $8,000.
What was the approximate dollar amount of U.S. retirement assets held in IRA accounts at the end of 2018?
$8.8 trillion According to the Investment Company Institute at the end of 2018 there was $8.8 trillion being held in IRA accounts. Total U.S. retirement assets (including all U.S. retirement accounts, not just IRAs) stood at $27.1 trillion at the end of 2018. A fee of just 10 basis points on $27.1 trillion would be $271 billion.
Victoria Gregory's financial situation is as follows: Cash/cash EquivalentsL $15,000 Short Term debts: $23,000 LTDs: $140,000 Taxes: $8000 Invested Assets: $45,000 Use Assets: $192,000 What is her net worth?
$89,000 Assets = Cash/cash equivalents + Invested assets + Use assets ($15,000 + $45,000 + $192,000 = $252,000). Liabilities = Short-term debts + Long-term debts ($23,000 + $140,000 = $163,000). Assets - Liabilities = Net Worth, so $252,000 - $163,000 = $89,000.
Your client has a 7% coupon bond with a duration of 7.5 and a maturity of 12 years. Your client is concerned that rates may go up 0.50% in the coming months, and wants to know what impact this would have on her bond. You tell her that the approximate price movement would be
-3.75%. The correct answer is -3.75%, calculated as follows: -7.5 × .50 = -3.75. Remember to use the minus sign in front of the duration figure, as that will automatically account for the inverse relationship between the direction of the interest rate movement and the value of the bond.
During the past year, the portfolio of your largest client had a return of 10% and a beta of 1.1. During the same year, the average T-bill rate was 1.25%. What is the Treynor ratio for the performance of this portfolio?
.0796 The Treynor ratio divides the excess return (return - risk-free rate) by the beta—in this case, (.10 - .0125) ÷ 1.1 = .0796.
P.R.I.M.E Systematic Risks
1. Purchasing Power Risk 2. Reinvestment Risk 3. Interest Rate Risk 4. Market Risk 5. Exchange Rate Risk
All of the following provide a clearer picture of the client's needs
1. anticipated retirement lifestyle 2. bad experiences w/ particular investments 3. succession planning in place, if any, for a client involved in ownership of small business
Which of the following is a matter that needs to be clarified before making investment recommendations?
1. client's goals 2. risk parameters of the client 3. time horizons of the goals
When analyzing information gathered from a client, which of the following are important factors to look for?
1. mismatches between the current investment position or resources and stated goals. This is an important factor in the analysis step. Any mismatches between the client's goals and the investment vehicles used to attain those goals should be highlighted. 2. the validity of the client's stated goals. This is an important factor in the analysis step. If the client's goals are unrealistic, this problem needs to be addressed immediately. 3. tax problems that might be ameliorated through investment planning. This is an important factor in the analysis step. Potential tax problems should be addressed as part of the investment strategy.
What are the three characteristics of a well-defined goal?
1. purpose 2. specific dollar amount 3. defined time frame
Life insurance can be used to address which of the following needs?
1. the care of aging parents 2. the payment of estate taxes 3. replacement of a spouse's income
Four main attributes of a good business plan
1. written and shared with someone who has an interest in your success 2. include realistic action steps and personal goals 3. professional development goals
What is the estimated annual cost of conflicted advice according to the 2015 White House report?
1.0% The annual cost of conflicted advice is about 1% a year, according to the White House report. Various sources have disputed this amount, but the general consensus is that there are retirement investors paying too much in fees, which can significantly impact the value of their nest egg when they retire. At the end of 2018, U.S. retirement assets totaled $27.1 trillion, and a 1% fee on this amount (100 basis points) would amount to $271 billion.
Assume that the standard deviation of a stock is 30, the standard deviation of the market index is 18, and that the correlation coefficient between the stock and the market is .68. What is the beta of the stock?
1.13 Beta = (30 / 18) x 0.68 = 1.13
Which one of the following betas indicate a stock that is more volatile than the market?
1.2 Beta is a relative measure of volatility, so anything greater than 1.0 indicates more volatility than the market.
One of the characteristics regarding growth stocks is that the earnings per share growth rate should be at least what percentage?
15% One of the typical characteristics of growth stocks is earnings per share growth rate of 15% or more.
Which one of the following is not an invested asset?
180-day certificate of deposit A certificate of deposit is a cash equivalent and therefore should be listed under Cash and Cash Equivalents.
Which of the following rates apply to net long-term capital gains from a stock portfolio if a taxpayer's taxable income places them in the 37% marginal income tax bracket?
20%. In 2020, if a taxpayer is in the 37% marginal bracket ($500,000+ Single or $600,000+ MFJ), then their taxable income also exceeds the threshold(s) for the 20% long term capital gains rate ($441,450+ Single or $496,600 MFJ).
The "kiddie tax" applies to children under age 19, and also to children who are age 19 and are full-time students, but under the age of _____, provided the child's earned income does not exceed one-half of his/her support?
24 The "kiddie tax" applies to full-time students age 19, but under the age of 24, provided the child's earned income does not exceed one-half of his or her support.
With current economic conditions, which one of the following would be the most prudent assumption for inflation with respect to planning for retirement income and expenses?
4% Historically, inflation was estimated at 3%, but in light of events over the past decade and current economic conditions, many believe inflation should be estimated at 4%, to be more conservative.
Investment professional Bill Winters received the latest long-term total return data for different asset classes. He sees that common stocks returned 8% compounded with a standard deviation of 19.0; T-bills had a 1.25% return with a standard deviation of 3.4. What is the expected return of a portfolio of 60% stocks and 40% T-bills?
5.3% This correct calculation is: (.6 × 8%) + (.4 × 1.25%) = 5.3%
If a minimum distribution from an IRA is not taken in the calendar year after reaching age 70½, there is a _____excise tax?
50% If a minimum distribution from an IRA is not taken in the calendar year after reaching age 70½, there is a 50% excise tax on the amount that should have been withdrawn.
While both are living, the spouse of a Social Security recipient is entitled to _____of the recipient's retirement benefit, subject to a family maximum, as long as the spouse is of full retirement age.
50% The spouse is entitled to 50% of the recipient's retirement benefit unless the spouse is entitled to a larger benefit in his or her own right, in which case there would be no spousal benefit paid.
The nonworking spouse of a Social Security recipient is entitled to what percentage of the recipient's retirement benefit while the recipient is alive?
50% The spouse of a Social Security recipient is entitled to 50% of the recipient's retirement benefit while the recipient is alive.
Cindy Dawson just paid $9,750 for a 7%, $10,000 par value bond with 15 years to maturity. What is the yield to maturity (YTM) of this bond? Using the time value of money functions on the financial calculator, use the following assumptions on a semiannual basis: FV = 10,000 PV = -9,750 N = 15 (x2) PMT = 3507.28%
7.28% (USE ONLINE CALCULATOR) HP 10bII+: Set calculator to end mode and two compounding periods per year. Then 9,750 +/- PV, 10,000 FV, 350 PMT, 15 SHIFT N, I/YR = 7.28%.
The risk-free rate is 1.25%, the market rate of return is 8%, the standard deviation of XYZ stock is 20, and the beta of XYZ stock is 1.10. Using the capital asset pricing model in conjunction with this information, what is the expected return of XYZ stock?
8.68% CAPM is the risk-free rate plus beta times excess return, or Rs = 1.25% + (8% - 1.25%) 1.1 = 8.68%.
Acme GNMA fund must have at least what percentage of its assets in GNMAs?
80% A fund that has a security in its name must have at least 80% of its assets in that type of security.
A REIT (real estate investment trust) that distributes _____% of its taxable income to its shareholders does not have to pay taxes.
90% REITs that distribute at least 90% of their taxable income to shareholders do not have to pay taxes.
Which one of the following is a tax preference item or adjustment for purposes of the alternative minimum tax?
bargain element on exercise of an ISO The bargain element on exercise of an ISO is a preference item for the alternative minimum tax.
Which one of the following is a mismatch between a client's time horizon and stated goal?
A 55-year-old client with no current retirement savings says that saving for retirement is her top priority; she plans to retire at age 62. Seven years is not enough time for this client to amass the principal needed to support a retirement period of 15 to 20 years (or longer).
Banker's Acceptance
A BA is a time draft that, when accepted by the bank, has the promise of payment from that bank.
Which one of the following accurately represents the general tax consequences to an employer and employee under a nonqualified plan?
An employer does not receive a deduction for a contribution to an employee until the employee recognizes the income upon receipt. An employer receives a deduction for a contribution when an employee recognizes the income, and not before that.
Yankee Certificate of Deposit
A Yankee CD is a U.S. dollar-denominated CD issued by foreign banks from their U.S. branches.
One of your clients is interested in investing in a real estate limited partnership. He has heard of the tax law requirements limiting the use of passive activity losses in sheltering other income. What can you tell him about these requirements with respect to the real estate limited partnership?
A limited partner's participation is strictly "passive." Limited partners are considered passive investors who provide most of the capital for a project.
Which one of the following generally represents the tax consequences to an employer and employee under a nonqualified deferred compensation plan?
An employer will receive a deduction when the employee recognizes income. As a general rule, an employer-sponsor of a nonqualified deferred compensation plan will receive a deduction for benefits paid by the plan when such benefits are taxable income to the participant.
Which one of the following industries would be expected to perform well in the early stage of an economic expansion?
consumer credit Consumer credit is one industry that would be expected to perform well in the early stage of an economic expansion.
Which of the following is a key element that all investment policy statements should contain?
An investment policy statement should include statements regarding acceptable investment vehicles, the portfolio's asset allocation, and the client's risk tolerance level.
Which of the following are attributes of a growth stock?
Attributes of a growth stock include the absence of significant competition, high profit margins, and higher than average P/E ratios.
Which one of the following explains an investment planning consideration during retirement that is related to the length of the retirement period?
Because the retirement period can be long, clients should consider taking greater risk for greater return to keep up with inflation. Once retirement occurs, the investment time horizon for retirement income can be long, but it is not certain in its length. The implication for allocation decisions is that a fair amount of risk can be taken with a substantial amount of the portfolio. Sudden "conservative" allocation changes due to the mere fact of retirement beginning are not in order for clients who plan for a long retirement period—25, 30, even 35 years—and who have increasing income needs to merely keep up with inflation.
Which one of the following statements regarding excess benefit plans is correct?
Both management and non-management employees may be covered by a plan. In contrast to a top hat plan, an excess benefit plan may cover both management and non-management employees.
Brenda Bradford is the owner of a whole life policy on her husband, Rolf. Their daughter, Vera, is named in the policy as the contingent beneficiary. In issuing the policy, the insurance company has asked that a settlement option be selected. Which one of the following individuals is currently empowered to make the selection?
Brenda, the policy owner As the owner of the policy, Brenda is entitled to make any changes to the policy, including the selection of a settlement option.
The principal of a Treasury inflation protected security (TIPS) is tied to
CPI. TIPS adjustments are tied to the consumer price index (CPI), which is useful in measuring inflation.
Assume an investor sells a 25-year, A-rated, 5% municipal bond and reinvests in a 30-year A-rated 6.5% municipal bond. Both bonds are callable in five years. Which one of the following is likely to occur with this pure yield pickup strategy?
Call risk is increased. A higher coupon rate increases call risk.
A "walk in" customer tells you how his best friend has made a profit through rapid trading of small over-the-counter (OTC) stocks. He wants to do the same. You explain the high risks involved in such a strategy and your personal reservations about it. He gives you all the information you need for your new account form. The next week, he requests that you buy large positions in two thinly traded OTC issues. You think the order is too risky given his circumstances and tell him so, but he insists that you initiate the transaction. Which one of the following would represent an appropriate course of action?
Consult with your branch manager about what to do. When faced with a difficult customer situation, investment professionals should consult with their branch manager.
Marcia Simpson has analyzed her client's situation and has concluded that her client will come short of attaining the amount of capital he would like to have by the time he plans to retire. The client is a low risk taker and will have limited funds for future periodic investments. Before making a recommendation, Marcia should do which one of the following?
Discuss the problem and ask the client to clarify how he wishes to adjust his accumulation goal, risk level, or periodic investments. After being informed of the various constraints, implications of their decisions, and other options they have, the client can choose to make adjustments with which he is comfortable.
Which one of the following is not a requirement of IRC Section 409A?
Elections to defer compensation must occur by the end of the calendar year that services are delivered for the compensation. Elections to defer compensation must occur in the year prior to the tax year of the delivery of services
A U.S. dollar-denominated instrument that is a CD issued by foreign branches of major American and foreign commercial banks is a
Eurodollar certificate of deposit. A Eurodollar CD is a U.S. dollar-denominated CD issued by foreign branches of major U.S. and foreign commercial banks.
All of the following are permissible deductions for the federal estate tax except
the annual exclusion. The annual exclusion is deductible only in the gift tax calculation, and only when the donee has received a present interest gift.
Which act repealed a prohibition that had been in place preventing financial institutions from offering a combination of commercial banking, investment banking, and insurance services?
Gramm-Leach-Bliley Act of 1999 The Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act, repealed the part of Glass Steagall that had previously prohibited financial institutions from consolidating and offering a combination of commercial banking, investment banking, and insurance services.
Growth stocks typically have which of the following characteristics?
Growth stocks have high profit margins, carry high betas, and pay small dividends.
Gary Trapp is employed by the city of Great Rapids, and his sister, Julie, teaches first grade in the Great Rapids public school system. They each participate in deferred compensation retirement plans through their employers: Gary participates in a 457 plan and Julie participates in a TSA.Which of the following statements correctly indicate how their respective plans compare to each other? I. Both plans are based on contracts with the employer. II. Both plans are subject to an $19,500 limit on salary deferrals in 2020. III. Neither plan is able to use forward-averaging tax treatment for distributions. IV. Both plans are subject to the minimum distribution requirements that apply to qualified plans.
I, II, III, and IV Both the Section 403(b) plan (TSA) and the Section 457 plan are based on contracts with the employer (the salary deferral agreement). Deferrals are limited to $19,500 in 2020 plus catch-ups, if applicable, and distributions from both of these plans are subject to ordinary income taxation, not forward-averaging treatment. Both plans are also subject to the minimum distribution requirements that apply to qualified plans.
Which of the following describe life insurance life income settlement options? I. The proceeds are paid to the beneficiary on the basis of life expectancy, and payments stop upon the death of the beneficiary. II. The beneficiary is paid a life income with a minimum number of payments guaranteed. III. The beneficiary is paid an income for life with any remaining proceeds paid to a contingent beneficiary. IV. The proceeds are left with the company, and interest is paid to the beneficiary.
I, II, and III only Proceeds held by the company with interest paid to the beneficiary are not an actual life income option. Most companies will not allow proceeds to be left at interest indefinitely, so a life income cannot be provided by this option.
Who ultimately makes the investment decision in the asset management process?
the client
Which is the valuation date for gifts?
the date on which the transfer is completed The date of completion of the gift is the valuation date for gifts.
Supplemental executive retirement plans (SERPs) are characterized by which of the following? I. SERPs are designed for all employees. II. SERPs are designed for a select group of management or highly compensated employees. III. SERPs must be unfunded. IV. Benefits are paid by the employer out of general assets.
II and IV only Excess benefit plans are open to all employees, while SERPs and top hat plans are more restrictive. A SERP may be either funded or unfunded. Benefits are indeed paid out of the employer's general assets.
Several individual investments each have high standard deviations. Which of the following are true about the standard deviation for a portfolio of these same investments? I. has to be high since the standard deviations are high II. has to be low since the standard deviations are highI II. can be low if there is a low correlation of returns between the investments IV. can be high if there is a high correlation of returns between the investments
III and IV only If the investments have a low correlation coefficient between them, they will reduce investment risk, which can result in a portfolio with a low standard deviation. If the investments have a high correlation of returns between them, then they will not reduce investment risk, and the portfolio will continue to have high systematic risk, hence a high standard deviation for the portfolio.
A potential implication of a salary reduction plan is that
Income tax is paid at the employee's marginal tax rate in retirement, with the expectation it will be a lower rate at that time. While future tax rates are unknown, the employee expects to be taxed at a lower rate in retirement.
Joan Allen recently terminated from the Carson County School District. She plans to roll her 403(b) plan account into her IRA (account number 235472) at Mega Mutual Funds and wants to avoid the 20% withholding. Which one of the following statements correctly instructs her on the procedure?
Instruct the plan administrator to make the distribution check to "Mega Mutual Funds, account #235472, for the benefit of Joan Allen." She should mail to or deposit that check with Mega Mutual Funds. After separation from service, a 403(b) plan participant can elect to move her assets to certain other retirement arrangements. And, like distributions from employer plans, the amounts must be directly rolled over from the 403(b) custodian to the other retirement arrangement to avoid a 20% withholding tax.
The provision that certain mutual fund policies cannot be changed without shareholder approval is addressed in the
Investment Company Act of 1940. The regulation of mutual funds is covered in the Investment Company Act of 1940.
Which of the following are characteristics of the Sharpe ratio?
It adjusts the return for variability by using standard deviation as the measure of risk
Which one of the following statements is correct?
Jensen's alpha may be used by itself to judge an investment. Beta is the risk measure for the Jensen's alpha, but the Sharpe ratio uses standard deviation as its risk measure. Therefore, the reliability of beta is relevant for Jensen's alpha. Jensen's alpha can be used by itself to judge an investment; the Sharpe ratio must be used in comparison with another Sharpe ratio in judging an investment. A negative reading for Jensen's alpha indicates the investment did not perform as well as expected given the risk taken. For example, an alpha reading of -1 means the investment underperformed by 1% compared to what it was expected to return. Accordingly, a negative alpha does not necessarily mean the investment lost money. The Treynor ratio uses beta as its measure of risk.
The risk-adjusted ratio that can be used by itself (without comparison to something else) is the
Jensen's alpha. The Jensen ("alpha") compares a portfolio's actual return with the return that could be expected based on the risk incurred in managing that portfolio, and therefore can be used by itself.
Which one of the following statements comparing the suitability and fiduciary standards is correct?
Legally, suitability disputes are often resolved in arbitration whereas fiduciary disputes are ultimately resolved in the courts. Broker-dealers require arbitration agreements with clients, and disputes are normally settled in arbitration. The fiduciary standard for investment advisers has been well established by the courts, yet the vacated Department of Labor fiduciary standard would have allowed for class action lawsuits.
With a standard universal life policy, which of the following is always fixed?
NOTHING is fixed in a standard universal life policy A major reason some life insurance buyers like universal life is that the policy is flexible in many ways, including its face value, its cash value, and its premiums.
Portfolio X had a Sharpe ratio of 1.10, while Portfolio Y had a Sharpe ratio of .55. Based on this information, which one of the following statements is correct?
Portfolio X had better performance than Portfolio Y on a risk-adjusted basis. A higher Sharpe ratio does indicate better performance based on the risk taken, as measured by standard deviation.
Under ERISA, which of the following statements is correct?
Prohibited transactions are allowed, but an exemption must be met. Prohibited transactions apply to transactions that have such potential conflicts of interest that fiduciary advisers must either avoid them or meet the requirements of an exemption.
Of the following options, which is the most appropriate use of life insurance by a business?
Provide money to help continue the business at the death of a partner or other owner. When a key person (especially a partner or other owner) dies, life insurance can provide needed money to fund a buy-sell agreement or to keep the business operating.
Which of the following statements about the prudent investor rule is the most accurate?
Prudent investing requires that fiduciaries must diversify their investments. The standard of prudence is applied to any investment as part of the total portfolio—it is not applied to each individual investment. The prudent investor rule recognized that there are risk and return tradeoffs, and that there are benefits to diversification. Delegation of trust investment and management functions is allowed.
All of the following assets in a decedent's estate require probate except
the decedent's interest in property held in joint tenancy with right of survivorship that the decedent left to his son in his will. Right of survivorship (JTWROS) property bypasses probate.
Which one of the following is a characteristic of mortgage-backed securities?
Quoted yields are based upon anticipated prepayments of the underlying mortgages. Mortgage-backed securities pay monthly payments that vary from month to month depending on any prepayments of principal. As such, yields are quoted based on these anticipated prepayments.
A major difference between excess benefit plans and supplemental executive retirement plans (SERPs) is(LO 7-3)
SERPs often provide for disability retirement benefits. SERPs are generally provided to high-level executives, and are primarily designed to provide adequate post-retirement income, including the possibility of a disability-related retirement.
The sources of retirement income typically referred to as the "three-legged stool of retirement income" are
Social Security, pension income, and individual investments. Social Security, pension income, and individual investments are all important sources of retirement income.
Which of the following describes a "skip person"?
Someone who is two or more generations below the person making a transfer. A "skip person" is someone, like a grandparent to a grandchild, who is two or more generations below the person making a transfer.
According to Ibbotson data, which one of the following had the smallest standard deviation since 1926?
T-bills T-bills had a standard deviation significantly lower than that of long-term corporate bonds, government bonds, or common stocks.
For tax purposes, which one of the following correctly identifies a rule that applies to the depreciation deduction for post-1986 real estate?
The depreciation expenses taken over the years are treated as capital gains on the sale of the real estate. Depreciation deductions are, in essence, converted into long-term capital gains upon sale of the realty. The gain created by the depreciation deductions are known as unrecaptured Section 1250 income, and is subject to a maximum long-term capital gain rate of 25%.
Which one of the following is part of Benjamin Graham's approach to value investing?
The dividend yield should be no less than two-thirds of the AAA bond yield. One of Graham's guidelines was that the dividend yield should be no less than two-thirds of the AAA bond yield.
Which one of the following is an advantage of using a charitable remainder trust funded with appreciated stock?
The donor can take an income tax deduction for the current fair market value of the stock, decreased by the present value of the income stream. The donor can deduct the current fair market value of the stock (if held long term), but the deduction is decreased by the present value of the income stream.
Which one of the following is a tax consequence of a rabbi trust?
The employer is taxed on taxable earnings in the plan as they accumulate. Taxable plan earnings are taxed to the employer as the earnings accumulate.
Which one of the following statements regarding a qualified plan is correct?
The employer's deduction is available in the year that a contribution is made. With a qualified plan, the employer may deduct plan contributions in the year that those contributions are made.
A client, age 55, takes a $3,000 distribution from his rollover IRA to pay for a semester of his son's college tuition; his son is age 21. Which one of the following correctly explains the tax consequences for the father?
The entire distribution is subject to income tax, but it is free from the 10% early withdrawal penalty. There generally is a 10% penalty (with some exceptions) for distributions taken from an IRA if the individual is under 59½ years old; these same distributions are also subject to current income taxation. Penalty-free withdrawals may be taken from rollover IRAs if the withdrawal is to be used pay for qualified education expenses, such as college tuition for a son or daughter.
A client, age 55, takes a $3,000 distribution from his rollover IRA to pay for a semester of college tuition for his 21-year-old son. Which one of the following correctly explains the tax consequences for the father?
The entire distribution is subject to income tax, but it is free from the 10% early withdrawal penalty. There is no 10% early withdrawal penalty for funds withdrawn to pay for higher education. The distribution is, however, subject to ordinary income taxation.
Which of the following statements regarding the fiduciary standard is correct?
The fiduciary standard is considered a higher standard than the suitability standard. The fiduciary standard is a higher standard than that required under the suitability standard. For example, an investment recommendation might be suitable, but not necessarily in the best interest of the client.
Which one of the following statements best describes the income statement and its major components?
The income statement indicates, for a certain period of time, an individual's cash inflows and outflows. Its components include gross income, expenses, and surplus or deficit. The income statement describes cash flow for a period of time and contains the components of gross income, from which expenses are subtracted to determine the surplus or deficit.
The investment policy statement would most likely need to be changed if which of the following occurred?
The investment policy statement would most likely need to be changed if a client experienced a major event in his or her life. Examples of such changes would include inheriting a large amount of money, divorcing a spouse, and taking an early retirement from his or her company.
Which one of the following statements about the marital deduction is false?
The limit on the marital deduction for gift tax is lower than the limit for the estate tax marital deduction. The marital deduction is unlimited for qualifying transfers to a U.S. citizen spouse for both gift and estate tax.
Which one of the following must be done in order to exclude the accrued interest on EE bonds used to pay higher-education expenses from income?
The money must always be used to pay the higher-education expenses of the bondholder, the bondholder's spouse, or the bondholder's dependents. To qualify for the exclusion, the bonds must be purchased by an individual 24 years of age or older, and held in that person's name, or jointly with a spouse, and then be redeemed to pay for the higher education expenses of the taxpayer, the taxpayer's spouse, or the taxpayer's dependents. Also, the AGI phaseout must be taken into account. Higher education expenses can be incurred at a public or a private university.
Which one of the following is a requirement of an unfunded excess benefit plan?
The plan has no disclosure or filing requirements under ERISA. A nonqualified plan does not need to comply with either the disclosure requirements or the filing requirements of ERISA. In fact, an unfunded excess benefit plan is fully exempt from ERISA requirements.
What is the tax treatment for a shareholder participating in a common stock's dividend reinvestment program?
The shareholder is treated as if he received a cash dividend equal to the fair market value of the shares purchased under the plan. The dividend paid from the stock is simply used to purchase more shares of stock. The tax treatment is simply that the fair market value of the shares purchased is treated as dividend income. If the dividends are "qualified dividends," the income is subject to long-term capital gain rates.
Which one of the following statements is correct regarding dollar-cost averaging?
The time period between investments is fixed. One characteristic of dollar-cost averaging is that investments are made at fixed intervals, such as the first of each month.
The 10% penalty for withdrawals before age 59½ from qualified retirement plans is not assessed on distributions made
There are several situations when a person is not assessed a 10% penalty for withdrawals before age 59½ from qualified retirement accounts, including disability, separation from service after age 55, and distributions made pursuant to a qualified domestic relations order.
Gary Stevens would like to know the weighted beta coefficient for his portfolio. He owns 100 shares of ACE common stock with a beta of 1.1 and total current market value of $5,000; 400 shares of BDF common stock with a beta of .70 and total current market value of $8,000; and 200 shares of GIK common stock with a beta of 1.5 and total current market value of $10,000.What is the overall weighted beta coefficient for Gary's portfolio?
This can be done long-hand, using the following steps:$5,000 + $8,000 + $10,000 = $23,000 total value of the portfolio([$5,000/$23,000] x 1.1) + ([$8,000/$23,000] x 0.7) + ([$10,000/$23,000] x 1.5) = 1.13478 = 1.13
Stefan's business plan includes the following goal: "I will contact 50 prospective clients and document this activity in the CRM for tracking purposes." Which primary element of a good goal is missing?
This goal is not time-framed. The acronym to remember for goal setting is SMART, which stands for Specific, Measurable, Achievable, Relevant, and Time-Framed. The primary flaw in this goal is that it is not time-framed. Because it is not time-framed, it is difficult to tell if this is achievable, but it is certainly measurable and very likely relevant.
Which one of the following is a better measure of a mutual fund portfolio manager's performance?
Time weighted returns because cash flows are not taken into consideration Time weighted returns negate the effects of contributions and withdrawals made by investors and are therefore a better measure of a manager's performance. Dollar weighted returns take cash flows into consideration but are a better measure of performance for a client.
Which one of the following generally is true with respect to the life insurance needs of the typical family?
Total life insurance requirements may decrease as an individual approaches retirement. Life insurance needs generally decrease as an individual reaches retirement.
Which one of the following lists the investments in order of least risk to most risk?
Treasury securities, high-grade convertibles, REITs, collectibles Ranked from least risk to most risk in the investment pyramid are Treasury securities, high-grade convertibles, REITs, and collectibles.
Which one of the following is a correct statement of a tax consequence of an off-shore rabbi trust?
Under Section 409A, the employee is taxed immediately on all deferrals to the plan and interest dating from each deferral, and is assessed a 20% penalty on the resulting taxable income. The employee is taxed immediately on all deferrals to the plan and interest dating from each deferral, and is assessed a 20% penalty on the resulting taxable income.
A mutual fund sales load that is assessed on a descending scale if the fund is sold within the first five or six years of purchase is called a
contingent deferred sales charge. A contingent deferred sales charge is a sales load assessed on a descending scale if the fund is sold within the first five or six years of purchase.
Which one of the following best explains a fundamental investment strategy for accumulating funds to be used during retirement?
You should begin investing many years before retirement so that compounded returns increase your retirement fund. In accumulating a pool of capital to support retirement income, the first principle is to begin as early as possible, even if the amounts are small. The mathematics of compounding underscore the need to begin early and stay with it.
Which one of the following best explains a fundamental investment strategy for accumulating funds to be used during retirement?
You should begin investing many years before retirement so that compounded returns increase your retirement fund. Time is one of the greatest assets available to an investor, so the sooner an investor starts saving for retirement, the better.
Which one of the following provides a means by which a person who has accumulated a large amount of her company's stock can convert that stock into a cash flow stream for retirement (without her selling the stock)?
a charitable remainder trust Clients who are cash flow poor, but asset rich, may find establishing a charitable remainder trust (CRT) with appreciated equities to be an ideal solution to increasing their retirement income. Meeting the requirements for such trusts, as delineated in the tax code, can result in turning a highly appreciated asset that produces little or no income into a source of lifetime income that also carries an income tax deduction.
For whom can an UGMA be used to benefit?
a child up to a maximum age UGMAs can be used for the benefit of a child up to a maximum age, as specified by individual state law.
A qualified plan may be established by
a company only. Only a company may establish a qualified plan.
Which one of the following indicators would a contrarian investor interpret as a bearish indicator?
a decreased short-interest ratio A decreased short-interest ratio indicates the consensus view that the market will rise, so contrarians would view this as a bearish indicator.
A rabbi trust is
a form of irrevocable grantor trust established by an employer. A rabbi trust is a form of irrevocable grantor trust established by an employer.
Money from a 403(b) plan may be rolled over to an IRA or
a government-sponsored 457 plan. another 403(b) plan. a 401(k). The 2001 Tax Act generally allows for rollovers between different types of plans. A qualified plan, however, is not required to accept rollovers.
Which would a person who wants to provide directives concerning life-sustaining medical measures that are to be used on that person execute?
a living will People create a "living will" when they want to dictate ahead of time their wishes concerning life-sustaining medical measures that are to be used on them.
Which one of the following is a bearish contrarian signal?
a low put-call ratio A low put-call ratio is typically seen at market tops as investors buy calls (expecting prices to rise) and do not buy puts (which would be done when expecting prices to fall). Since the put-call ratio is a contrary indicator, a low ratio is a bearish sign
If an investor were looking to add another investment to his or her portfolio, which of the following correlation coefficients would provide the greatest risk reduction?
a managed futures fund with a correlation of -0.25 The scale for correlation coefficients goes from -1.0 (perfectly negatively correlated) to 1.0 (perfectly positively correlated). The further to the left you go on the scale, the lower the correlation and the greater the risk reduction.
Gift splitting allows
a married couple to double their allowable annual exclusions. Gift splitting allows a gift of property owned by one spouse to be treated as if it were made one-half by each spouse, thereby doubling the allowable annual exclusions.
Fine Inc. is a small publicly traded corporation. The company wants to provide an incentive for Ian Good, its vice president of sales, to continue with the company. However, the company does not want to deplete its much-needed cash account. Based on the characteristic of providing the greatest incentive without depleting cash, Fine Inc. should establish
a restricted stock plan. A restrictive stock plan uses no cash, and it also provides an incentive for Ian to stay with the company.
Confidentiality is an important ethical obligation for all those who render investment advice. The CFP Board, however, allows the unauthorized disclosure of confidential client information in
connection with a civil dispute between a CFP certificant and a client. Confidential client information may be released only to those authorized to have access. Presumably one such situation is during a civil dispute between a CFP certificant and a client.
Hi-Tech Solutions Inc. is a small publicly traded corporation. The company wants to persuade Tom Salazar, its vice president of sales, to continue with the company and is seeking an incentive for Tom to achieve this end. However, the company needs to avoid any withdrawal from its much-needed cash account. Based on these characteristics, Hi-Tech Solutions Inc. should establish
a restricted stock plan. The fact that the company does not want to increase costs would indicate they should use the restricted stock plan since it does not create additional expenses or claims on cash flow. All the other choices would increase company expenses.
Dividends received from a participating life insurance policy are
a return of unused premium payments. Unlike cash dividends from stock, dividends from a participating life insurance policy are a return of excess premium payments, and not taxable.
Which one of the following types of investors is concerned with losing what he or she has accumulated in the past?
a risk-averse investor A risk-averse investor is concerned with losing what he or she has accumulated in the past.
Your client, Ann Whitelaw, age 50, received a $300,000 inheritance from her late parents' estate. She would like to invest this money in a safe place, where it will grow in value until she takes early retirement at age 60. Which one of the following would be the most logical choice for Ann?
a single-premium deferred annuity A single-premium deferred annuity allows Ann's inheritance to grow on a tax-deferred basis and allows her to start taking withdrawals at age 60.
One change in a client's situation that would require an adjustment in the asset management process would be
a sudden early retirement from his employer. A sudden early retirement is a major change that would require an adjustment to the asset management process.
A Crummey power is
a type of power of appointment. A Crummey power is a type of power of appointment.
All other factors being equal, which of the following bonds have the greatest duration?
a zero-coupon bond Duration is inversely related to the coupon rate. The zero-coupon bond would have the longest duration, all other factors being equal.
The amount remaining after subtracting adjustments to income from total income is the definition of which one of the following?
adjusted gross income Total income minus adjustments to income equals adjusted gross income.
The gross estate is best defined as
all property that is subject to the federal estate tax. The property that is subject to the federal estate tax is considered the gross estate.
Life insurance proceeds paid from a policy owned by the decedent are __________ subject to estate tax
always If the policy is owned by the decedent, the proceeds are generally always included.
A Section 1035 exchange is not permitted from
an annuity to a cash value life insurance policy. A Section 1035 exchange can be used to move money from a cash value life insurance policy to an annuity but not in the reverse direction. Moving from an annuity to a life insurance policy would bypass underwriting, which would not be allowed.
Which of the following is qualified to determine whether a deed creates joint tenancy between two clients?
an attorney Only an adviser who is licensed to practice law in the client's state of residence may answer such a question.
Investors who strongly believe in the efficient market hypothesis would select which one of the following types of mutual funds?
an index fund An index fund (which operates on the assumption of market efficiency) is an appropriate choice for a supporter of the efficient market hypothesis.
Which one of the following is not a type of equity-based compensation plan?
an unrestricted stock plan Restricted stock is a type of equity-based compensation. There is no such thing as an unrestricted stock plan.
A living will
applies only when a patient is terminally ill and incompetent to make medical decisions. Only when a patient is terminal and incompetent to make medical decisions will the provisions of a living will apply.
Incentive stock options
are a form of deferred compensation. Incentive stock options provide a company with one way to set up deferred compensation for an executive.
All of the following are true for dividends left to accumulate in a policy except they
are taxable as earned. One of the benefits of life insurance cash values is that they grow on a tax-deferred basis, so choice b. is false and therefore the correct answer.
Sarah Hamilton is a management consultant whose business operates under the cash method, or cash basis, of accounting. Her tax year coincides with the calendar year. In late November 2019, she finished a consulting job and billed the client, who sent her a check on January 6, 2020. How should she treat this income, and why?
as 2020 income, because the check was received in 2020 Because Sarah, a cash basis taxpayer, received the check in 2020, she should report the income for 2020.
In "A Random Walk Down Wall Street," Burton Malkiel wrote that "A simple policy of buying and holding will be __________ any technical procedure.
as good as Malkiel wrote that "A simple policy of buying and holding will be at least as good as any technical procedure."
All of the following are indicators that a contrarian investor would use as cues for their own buying and selling of stocks, except
average daily trading volume Contrarian investors would use short selling, specialists' sentiment, mutual fund cash positions, investment advisory opinions, and put-call volume ratio.
Ms. Arbuckle paid approximately $22,100, or 22.1% of her taxable income of $100,000, to the IRS. What does this percentage represent?
average tax rate Ms. Arbuckle's tax liability of $22,100 divided by her taxable income of $100,000 equals her average tax rate of 22.1%.
The quick ratio subtracts __________ in its numerator.
inventory The formula for the quick ratio is (current assets - inventory) / current liabilities and is a measure of liquidity.
Equity-based compensation plans may
be established for executives only and do not have to cover rank-and-file employees and are therefore not generally subject to ERISA requirements Equity-based compensation plans may be established for executives only and do not have to cover rank-and-file employees. As a general rule, equity-based compensation plans are not subject to the coverage and participation, and other requirements of the Employee Retirement Income Security Act of 1974 (ERISA) because they are not considered to be "employee benefit plans"; that is, employee pension plans or employee welfare benefit plans subject to the requirements of ERISA.
Equity-based compensation plans may
be established for executives only and do not have to cover rank-and-file employees and are therefore not generally subject to ERISA requirements. Equity-based compensation plans may be established for executives only and do not have to cover rank-and-file employees. As a general rule, equity-based compensation plans are not subject to the coverage and participation, and other requirements of the Employee Retirement Income Security Act of 1974 (ERISA) because they are not considered to be "employee benefit plans;" that is, employee pension plans or employee welfare benefit plans subject to the requirements of ERISA.
If disability premiums are paid with pretax dollars, any benefits payments received would
be subject to income tax. If disability premiums are paid with pretax dollars, any benefits received would be subject to income tax and the employer would be required to match the FICA portion of payroll taxes. Choice b. is therefore incorrect. Choice c. is incorrect because benefit payments would never be tax deductible, and choice d. is incorrect because this simply does not apply to disability benefits.
When mutual fund cash positions rise above 10% or more, this is an indication for contrarian investors to
become more bullish When mutual funds have large cash positions, 10% and more, and when investment advisers are all doom and gloom, contrarians grow bullish.
A measure of a security's systematic risk is
beta. Beta measures the degree to which a security moves with the market or systematic risk.
Using the P/E ratio as a valuation tool, which type of earnings can be used?
both The P/E (price-to-earnings) ratio can be calculated using either historical or projected earnings.
Benjamin Graham's style of investing can be described as which of the following?
bottom-up Graham's style of investment was "bottom-up," looking first to the financial dynamics of an individual company and then considering the larger economic environment.
The SEC commissioned a RAND study, which found that there was a great deal of confusion for investors as far as understanding the differences between
broker-dealers and investment advisers. The RAND study found that there was a great deal of investor confusion between investment advisers and broker-dealers, including confusion over their duties, the titles they use, the services they offer, and the fees they charge.
Years ago, June O'Leary purchased a deferred annuity with a fixed rate of return of 4%. She believes that she could do much better in the future if she had a variable rate annuity tied to the stock market. June has held on to this fixed-rate annuity out of fear that surrendering it would trigger a tax event and a penalty. You explain that she
can avoid the tax and the penalty by making a Section 1035 exchange. June can avoid the tax and penalty by making a Section 1035 exchange to a variable rate annuity.
Value averaging
can require a sale of the securities being averaged. If, between periods, the account value increases more than the target increase in value, value averaging would require the sale of shares to decrease the account's value to the target value.
Technology Startup Inc. (TSI) grants a nonqualified stock option to Doug Edwards, one of its vice presidents, to purchase 1,000 shares of TSI stock after five years of employment. Doug's marginal tax rate is 25%. As a startup company, the value was not ascertainable at the time of the grant. Five years ago, when the fair market value of the stock was $30 per share, Doug exercised the option at a price of $10 per share. Three years later, the stock is worth $50 per share, and Doug decides to sell his holdings. Doug would owe
capital gains taxes on his gain of $20,000. Because Doug paid income taxes when he exercised his option five years ago, his basis is $30,000 and he owes capital gains taxes on the gain, which is $20,000 ($50,000 from the sale - his $30,000 basis).
Which one of the following industries tends to do well in the late stage of an economic expansion?
capital goods Capital goods (companies manufacturing machinery used to produce finished goods) tend to do well in the late stage of an economic expansion.
Which of the following is not an itemized deduction?
capital losses Capital losses are deductible in calculating total income. The other items are allowable itemized deductions.
Based only on the listed descriptions, which one of the following types of clients has been identified as the best prospect for cash value life insurance?
clients who prefer the discipline of regular, periodic investments Cash value life insurance generally requires monthly, quarterly, or yearly payments, so it is a good fit for clients that like the discipline of regular, periodic investments.
Which one of the following types of brokerage clients has been identified as a good prospect for cash value life insurance?
clients who prefer the discipline of regular, periodic investments Most cash value life insurance policies require regular periodic premium payments providing a discipline that, if followed, will result in significant capital accumulation (cash value) over time.
Which one of the following best describes the requirements of an investment strategy?
competencies, resources, goal, method All of these elements—competencies, resources, goal, and method—are requirements of an investment strategy.
One implication of the Brinson study is that investors should
concentrate on asset allocation with less attention given to securities selection and market timing. The implication from the Brinson study is to give considerable attention to asset allocation and less attention to securities selection and market timing.
In 2010 Dodd Frank tasked the SEC to study the feasibility of drafting a harmonized fiduciary standard for both investment advisers and broker-dealers. In April 2018 the SEC proposed
continuing both a suitability standard for brokers and a fiduciary standard for advisers. The proposals released by the SEC in April 2018 did not recommend a harmonized fiduciary standard but rather maintained two different standards—a suitability standard for brokers and a fiduciary standard for advisers. Both standards would have additional requirements and expectations under the proposed rules released by the SEC.
Money market mutual funds invest in all of the following except
corporate bonds Corporate bonds will generally have high marketability, but are not necessarily safe from default, and they will carry high market risk.
Which one of the following is frequently used to informally fund a deferred compensation plan?
corporate-owned cash value life insurance Corporate-owned cash value life insurance is typically used to informally fund a deferred compensation plan because the cash value increase is not currently taxed and the cash value can be borrowed against it.
Securities Exchange Act of 1934
created the SEC and empowered the commission to regulate exchanges and broker-dealers, and to require information from public companies
Which one of the following is a unique risk associated with international bonds?
currency risk Currency risk is unique to international bonds (and stock) because of the possibility of some loss in converting a foreign currency into U.S. dollars.
Which one is a liquidity ratio?
current ratio
If the market rate on coupon bonds similar to Bond A increases, Bond A's duration will
decrease. There is an inverse relationship between a bond's duration and changes in market interest rates.
If the market rate on bonds similar to Bond A increases, Bond A's present value will
decrease. When market interest rates increase, bond prices (present value) decreases.
Which one of the following risks does not apply to preferred stock?
default risk While preferred stock is a hybrid security that acts like a bond, there is no indenture (like a bond has) that legally requires preferred stock to pay dividends. If a company was to go under, bonds would default, whereas preferred stock would go through bankruptcy liquidation.
Which of the following is the more important factor in establishing trust with a client?
demonstrating professionalism and honesty Demonstrating professionalism and honesty is the most important factor in establishing trust with a client.
For full Social Security retirement benefits, full retirement age
depends on your year of birth. In order to receive full Social Security retirement benefits, a person has to attain the full retirement age as defined by the Social Security Administration. Depending on the individual's year of birth, that age increases gradually to 67 for persons who reach age 62 in 2022.
A major responsibility of FINRA is
developing rules and regulations for its members.
A major responsibility of FINRA is
developing rules and regulations for its members. FINRA is the largest securities industry self-regulating organization and, therefore, develops rules and regulations for its members.
As described in this course, many individuals and households overlook the potential needs for
disability income and long-term care insurance. Both disability income and long-term care insurance are intended to provide income when an individual is unable to work and may be incurring costs for medical care.
As described in this module, many individuals and households overlook the potential needs for
disability income and long-term-care insurance. It is common for many individuals to overlook the need for disability income and long-term-care insurance.
Which set of characteristics is typically associated with growth stocks?
distinctive products or services; high price-to-book ratios Growth stocks typically have distinctive products or services and high price-to-book ratios.
Asset allocation can best be defined as the process of
distributing portfolio investments among various investment categories. The essence of asset allocation is having portfolio investments divided among different investment categories.
With respect to a MEC (modified endowment contract) all of the following constitute a distribution, except
dividends retained (by insurer) to purchase paid-up insurance. A distribution does not include dividends retained by the insurer to pay premiums or purchase paid-up insurance.
A potential client, Ross Walker, is contacted by Amy Taylor, an investment professional. Ross is interested in trading complex options and is willing to open an account if Amy is knowledgeable about options. Amy implies to Ross that she is an expert in option trading but, in fact, knows only the basic elements of it. Looking solely at Amy's lack of competency in this area, which fiduciary duty has not been met?
duty of care Lacking the competency to provide advice in the best interest of the client falls under the fiduciary duty of care.
The fundamental duty of a fiduciary adviser is to look out for the client's best interest. Which fiduciary duty is most directly tied to making sure all actions are being made solely for the benefit of the client?
duty of loyalty The duty of loyalty requires a fiduciary to always put the client's interest ahead of their own, and that all actions be made solely for the benefit of the client.
You have just sold one of your customers some speculative stocks without knowing her risk tolerance level. In which one of the following ethical duties may you have failed your customer?
duty to diagnose An investment professional who does not "know the customer," including her risk tolerance level, violates the duty to diagnose.
You sell your client a GNMA based on your explanation that they are "safe" because they are guaranteed by the U.S. government. In which one of the following ethical duties may you have failed your customer?
duty to disclose The duty to disclose requires an investment professional to explain the risks of investments sold to clients, even those backed by the U.S. government. Even though they are free of default risk, GNMAs are still subject to many other risks, such as interest rate and purchasing power risk.
An investment professional who reads investment journals is complying with the
duty to keep current. The duty to keep current requires an investment professional to be up to date with subjects relating to his or her job.
Managing client expectations is best achieved through which of the following?
educate the client Educating your clients is the best way to help set and manage their expectations.
The impartial conduct standards that were enacted by the Department of Labor (and then vacated by the court) require all of the following except
eliminate conflicts of interest. The impartial conduct standards require that any advice be in the best interest of the client, that any fee be reasonable, and that the adviser does not make any misleading statements. It is a requirement that conflicts of interest must be disclosed, not eliminated.
Which one of the following is considered a "foundation" goal?
emergency fund An emergency fund is a "foundation" goal because it is an essential goal for survival in the event of a dramatic life event.
The Employee Retirement Income Security Act (ERISA) was primarily passed because of concern regarding the integrity and safety of
employer-sponsored retirement plans. ERISA was the direct result of concern over the safety and integrity of workers' company retirement plans.
The amount of life insurance an individual needs is
equal to the total of the cash requirements needed to pay off debts and final expenses plus replace lost income. The cash requirements are only part of the amount of life insurance needed. The other part is the funds needed to maintain the survivors' lifestyles. The total need is the amount to cover both parts.
The federal generation-skipping transfer tax (GSTT) is in addition to which to of the following types of tax?
estate tax or gift tax The intent of the GSTT is to tax the transfer of property as it passes from each generation, and is in addition to any gift or estate tax on the transfer.
If international stocks were added to a portfolio of U.S. stocks, which one of the following risks would specifically be added to the portfolio?
exchange rate risk International stocks specifically add exchange rate risk to a portfolio since their value is affected by changes in the values of foreign currencies relative to that of the U.S. dollar.
Which of the following is an employer-provided life insurance plan where the employer bonuses the premium amount to the employee?
executive bonus plan Under an executive bonus plan, the employer covers both its own and the executive's costs of the premium on the policy insuring the executive's life. The employer pays the executive a bonus equal to the amount of the entire annual life insurance premium. This allows the employer to deduct the cost of the premium as a compensation expense.
Income from a Treasury bond is
exempt from state and local taxation. A Treasury bond pays interest that is exempt from state and local taxation.
Which one of the following rates is most directly affected by the Federal Reserve Board?
federal funds rate The Fed directly affects the federal funds rate through open market operations.
The "duty of loyalty" is the
fiduciary duty. The fiduciary duty is also known as the duty of loyalty, requiring the utmost good faith.
In the absence of an intentional choice, the IRS assumes a taxpayer uses which one of the following methods to report mutual fund sales?
first-in, first-out First-in, first-out (FIFO) is the method assumed by the IRS if a taxpayer fails to select another method.
Your client buys an annuity that guarantees an annuity payment of $500 per month for life, starting in two weeks. What type of annuity does your client have?
fixed immediate annuity A fixed immediate annuity provides fixed periodic payments soon after the annuity is purchased.
On "May Day" (May 1, 1975) which of the following events occurred?
fixed rate commissions were abolished On "May Day," fixed rate commissions were abolished, and the first discount brokers came into existence. Prior to May Day, commission rates had been set by the NYSE.
Which one of the following is a "best practice" for complying with the fiduciary standard?
focus on "advice" and not "sales" Providing sound advice at a reasonable fee is a best practice. Disclosure is important, but there are limits to its effectiveness, and too much disclosure can actually get in the way of a client making a sound decision. Complex products become more problematic under the fiduciary standard since these products often have higher fees and less transparency than traditional investments.
Earned income usually ceases when a person retires. From what sources will a retired person typically receive income?
invested savings, Social Security, and employer-sponsored retirement plans Typically, there are three income sources that are used to pay retirement expenses: Social Security, employer-sponsored pension and profit sharing plans, and the individual's accumulated investments. These sources are known as the "three-legged stool" of retirement income.
The goal of marital deduction and bypass planning is to
fully use a person's applicable credit amount and achieve proper use of the marital deduction if the person is married. The cardinal rule of estate planning is to use both spouses' applicable credit amounts to the fullest extent necessary to prevent transfer taxation in both estates. If the decedent is survived by a spouse, the unlimited marital deduction can be used to shield some or all of the decedent's remaining estate that cannot be covered by the estate tax applicable credit amount. The first spouse to die can also transfer any unused exclusion amount to the surviving spouse by timely filing an estate tax return even if the estate does not owe any tax. Marital deduction and bypass planning may reduce the gross estate of the surviving spouse, but this result is not the primary objective.
With respect to the investment pyramid discussed in the module text, which one of the following would provide the greatest potential for capital appreciation?
futures contracts As you move up the investment pyramid, you increase potential for capital gain, and futures contracts are at the top of the pyramid, largely due to the high degree of leverage used in trading futures contracts.
Grantor Retained Unitrust (GRUT)
grantor receives a specified percentage of the value of the trust funds annually
The asset management process can be used to adjust to changes in a client's financial situation by
helping the client to ignore market "noise." The asset management process is designed to help the client ignore market noise and respond only to significant events (major changes in personal situations and discontinuous changes in the markets).
If a decedent dies intestate,
her property that does not pass by will substitute will be distributed according to her state's intestate succession statute. In these circumstances, state law determines who receives which property and in what amount.
When determining a client's retirement income needs, inflation is
important because most retirees have a life expectancy long enough that inflation could impact their standard of living. Inflation increases the dollars needed during retirement to maintain the same lifestyle as today. Because the average life expectancy at age 65 is about 18 years, this is a sufficiently long period of time for the inflation rate to significantly impact one's standard of living.(LO 6-1)
A barrier of effective investment strategy is
inadequate time horizons One of the biggest enemies of effective strategy is inadequate time horizons, since many effective strategies can take years to unfold.
The constructive receipt doctrine states that
income is taxable when it is constructively received though it may not be actually received. The constructive receipt doctrine is a tax concept that states that any income constructively, though not actually, received is still includible in the income of the individual who is receiving the constructive benefit.
A potential implication of a salary reduction plan is that
income tax is paid at the employee's marginal tax rate in retirement, with the expectation it will be a lower rate at that time. While future tax rates are unknown, the employee expects to be taxed at a lower rate in retirement.
For finding net cash flow
income-expenses (remember NOT to include balance sheet items such as credit card balance and checking account)
A U.S. investor owns a bond denominated in Mexican pesos. If the bond earned 8% while the value of the peso increased against the U.S. dollar by 4%, the investor's total return was
increased by the strengthening peso. When the investor converts the Mexican bond into American dollars, the investor can buy more dollars with fewer pesos; therefore the investor's total return was increased by the strengthening peso. In general, when a foreign currency is strengthening (the U.S. dollar is weakening), that will increase the return for a U.S. investor.
A correlation of 0.0 between two securities means that the returns of the two move
independently—there is no relationship between the two. A correlation of 0.0 means there is no relationship between the returns of the two securities. Perfectly positively correlated securities (1.0) move in the same direction and perfectly negatively correlated securities (-1.0) move in opposite directions.
Which one of the following types of distributions from a qualified retirement plan may be subject to mandatory 20% withholding?
indirect rollover
Which one of the following is not one of the sources of the traditional "three-legged stool" of retirement income?
inheritances Inheritances have traditionally not been considered a part of the "three-legged stool," as they are difficult to anticipate.
A client has decided to move the funds from her former employer's 403(b) plan into an IRA. The best way to avoid a 20% withholding tax or any taxable income, would be if she
instruct the pension plan to roll over the funds directly to her new IRA. Direct rollovers avoid the 20% withholding.
A potential client, Dr. Shepard, is contacted by James Hyde, an investment professional. Dr. Shepard tells James that he is a regular investor in biotech companies, and that if James was knowledgeable about the industry, he would do business with him. James tells the doctor that he has lots of contacts in the industry and that many of his best clients are active investors in biotech issues. Actually, James has only one such client, from whom he takes unsolicited orders. James clearly is violating the principle of
integrity
Bonds fell in price on news of higher interest rates. To which one of the following risks are the bonds most likely to be subject?
interest rate risk Interest rate risk centers on the inverse relationship of interest rate changes and bond prices, so, in this situation, if interest rates go up, the price of George's bonds go down.
Which term describes the process to be followed if a person dies with no will?
intestate. Intestate refers to the situation where a person dies without a will.
A qualified tuition plan account
is considered an irrevocable gift. Contributions to a qualified tuition plan account are considered irrevocable gifts that are entitled to the gift tax annual exclusion. These accounts can be established for a beneficiary of any age. The other options are characteristics of Coverdell education savings accounts.
A life insurance's policy dividend generally
is not taxable. There is generally no tax on life insurance dividends because they are a return of premium. In other words, they are generally excluded from income.
A top hat plan
is subject to the reporting and disclosure requirements of ERISA. Although not subject to the other provisions of ERISA, a top hat plan must comply with that law's reporting and disclosure requirements.
Treynor Ratio
it assumes that the portfolio being evaluated is well diversified
Time is of critical importance in an investment policy statement because
it determines the feasibility of the investment professional making recommendations that meet the client's goals. The amount of time available for a financial goal determines if the investment professional can make recommendations that will achieve that goal.
Which one of the following is the best investment strategy for a 55-year-old who is in good health, has $500,000 in stocks earmarked for retirement, and plans to retire at age 65?
keep most of the $500,000 in stocks but convert part of the portfolio into less volatile investments Since this person is age 55, most of the portfolio needs to be kept in stocks in order to keep ahead of inflation.
Which form of employer-provided life insurance does not create a tax liability for the employee?
key employee life insurance Since there are no benefits paid to the employee, there are no tax consequences to the employee from a key employee life insurance policy.
A bond investor buys $10,000 of 1-year bonds, $10,000 of 2-year bonds, and so on—with the final $10,000 invested in 15-year bonds. What type of strategy is this investor using?
ladder strategy The ladder strategy spreads equal amounts of bond holdings among different maturities.
A person's marginal tax rate equals the rate of tax paid on the __________?
last dollar of income. The marginal tax rate is the tax rate paid on the last dollar of income.
Confidentiality is an important ethical obligation for all those who render investment advice. The CFP Board and NASAA allow the unauthorized disclosure of confidential client information during
legal procedures that require disclosure. The principle of confidentiality means ensuring that information is accessible only to those authorized to have access, so it does not preclude disclosure required under legal proceedings.
A beneficiary who is guaranteed payments for life (with a minimum guarantee of 10 years of payments) has selected which one of the following settlement options?
life income with period certain A "life income with period certain" settlement option guarantees payments for life to the primary beneficiary with a guarantee of 10 years of payments minimum to a contingent beneficiary should the primary beneficiary be unable to collect. If the first beneficiary dies prior to collecting the 10 years of payments, the second beneficiary gets the remaining payments.
For most clients, the two most commonly overlooked risks are
long-term care insurance and disability insurance. For most clients, the needs for (1) disability insurance and (2) long-term care insurance are the most commonly overlooked risks. Most people recognize the need for at least some life insurance. Accidental death and dismemberment is typically a rider available with life insurance or a stand-alone employee benefit option.
The skilled, intermediate, or custodial level of care that individuals often need when they get older is
long-term care. Long-term care is the skilled, intermediate, or custodial level of care that individuals often need when they get older. Long-term care insurance, on the other hand, is the insurance product specifically designed to help pay for the long-term care needs individuals may have. Medicare is a government insurance plan that may provide some limited long-term care benefits under specific circumstances. Medicaid is a welfare program that does pay for long-term care.
One reason to use passive investing is that
long-term returns can be better when compared with the returns of active management. Passive investing often provides better returns over time than with active investment management.
Sara White bought a stock that has subsequently dropped 50%. She plans to hold on to the stock in the hopes of getting back to even. What investor mistake is Sara most likely making?
loss aversion Loss aversion is the reluctance to take losses and is associated with a "get-even-itis" mentality.
Which one of the following is not a characteristic of a growth stock?
low to average betas Growth stocks typically have high betas, not low betas.
The longer an investor's time horizon, the level of annual payments needed to meet a particular goal are
lower. The longer the time horizon, the lower the payments required, as the investor has more time to allow for an investment to grow and compound.
Roger Jones is considering recommending one of two mutual funds for a client. Although both funds are generally appropriate for the client, one is a proprietary fund that pays Roger a higher commission and the other has a better risk/return profile. Roger decides to recommend the latter fund to the client. With which of the following fiduciary duties has Roger complied?
loyalty The fiduciary duty of loyalty requires the adviser to look out for the best interest of the client, which is what Roger had done. The proprietary product may be suitable, but not in the best interest of the client since another similar fund is available with a better risk/return profile.
The advent of advanced technology has
made management of brokerage firms more difficult. With the increased sophistication of technical specialists, managing and controlling them has become more difficult for managers at brokerage firms.
Tax deferral in an unfunded plan
may be achieved if plan assets are subject to company creditors. The employer's promise must be merely a naked promise and must not be secured in any fashion.
According to David Dreman, which set of characteristics should the contrarian investor look for in a stock?
medium-to-large listed companies; strong financial positions, low P/Es Dreman's advice is to invest in medium-to-large listed companies (large companies on the Amex or Nasdaq) with low P/E ratios and solid financial positions.
Which behavioral mistake is defined as a misunderstanding that an investor has in relating nominal rates of return to real (inflation-adjusted) rates of return?
money illusion Money illusion is a misunderstanding that an investor has in relating nominal rates of return to real (inflation-adjusted) rates of return.
How frequently do mortgage pass-through bonds make payments?
monthly Pass-through bonds make monthly payments of principal and interest as they pass through mortgage payments, which are made monthly, to investors.
Disability insurance is concerned with ___________ risks, and life insurance is concerned with _____________ risks.
morbidity / mortality The difference between life insurance and disability insurance is the difference between mortality and morbidity. Life insurance protects against the risk of premature death—mortality. Disability insurance products (and other health insurance products) protect against morbidity risks, which are risks associated with reduced health.
Tactical asset allocation attempts to
move assets from those that appear overvalued to those that appear undervalued. Tactical asset allocation uses securities selection and market timing techniques to shift assets from those perceived to be overvalued to those that are perceived to be undervalued.
Tactical asset allocation is utilized to
move assets from those that appear overvalued to those that appear undervalued. Tactical asset allocation uses securities selection and market timing techniques to shift assets from those perceived to be overvalued to those that are perceived to be undervalued.
When determining the taxation on capital gains or losses, the first step is
netting long-term gains and long-term losses. Netting long-term gains with long-term losses (as well as netting short-term gains with short-term losses) is the first step in determining capital gains taxation.
Can certain levels of inflation be ignored when calculating retirement income needs?
no Inflation cannot be ignored at any level—even at low levels, a retiree's standard of living will be eroded over time—especially if that time period is 20 years or more.
Can the interest paid on funds borrowed to purchase municipal bonds be deductible?
no Interest paid on funds to purchase municipal bonds is not deductible.
At what age must mandatory distributions begin for a Roth IRA owner?
none There are no mandatory distribution requirements for the owner of a Roth IRA.
Section 457 plans cover employees of
nonprofit organizations only. Section 457 plans cover employees of state and local governments and tax-exempt organizations, but they do not cover employees of for-profit organizations.
Generally, loans taken against the cash value of an in-force life insurance policy (not classified as a MEC) are
not currently taxable. Except in the case of a MEC, there are no taxes generated from loans taken against the cash value of life insurance policies. If a policy is surrendered or lapses with a loan outstanding, all or part of the loan amount may be taxable.
A client can best estimate his or her old age Social Security benefits by
obtaining an estimate of future benefits directly from the Social Security Administration. The Social Security Administration is the best source for an estimate of Social Security old-age benefits.
Which one of the following is not an indicator utilized by contrarian investors?
open interest Open interest simply shows how many open positions exist in a given option contract.
How are dividends from REITs taxed?
ordinary income tax rates Dividends from REITs are not "qualified dividends" and are taxed at ordinary income tax rates.
An investor notices that technology stocks are in a strong bull market and wants to take advantage of it. Even though valuations are at record high levels, he buys a technology stock that a brokerage firm is recommending. Which one of the following is the investor demonstrating?
rationalization/illusion of validity Rationalization/illusion of validity occurs when an investor relies on information that supports her decisions or ignores or dismisses information that does not support those decisions.
A contingent (standby) trust
receives the donor's income tax basis if the value of the property equals or exceeds the donor's basis. The recipient receives the donor's income tax basis if the value of the property equals or exceeds the donor's basis.
Which of the following is not an example of a discontinuous change?
receiving a 10% raise at work Discontinuous changes represent a significant departure from a trend or pattern.
Sam was born in 1954, so his FRA is 66. If he begins receiving Social Security benefits early, the amount of his monthly Social Security checks will be
reduced for the rest of his life. Early retirees born in 1954 will have their retirement benefits reduced throughout the remainder of their lives.
A return of capital dividend from a stock
reduces the investor's basis in the stock. A return of capital dividend itself is not taxed but instead reduces the investor's basis in the stock.
Dan Smith has bonds maturing in two weeks. Since he bought the bonds, interest rates have fallen. Dan's bonds are most likely subject to which one of the following risks?
reinvestment rate risk Reinvestment rate risk is the risk associated with reinvesting interest and/or principal payments when interest rates have fallen.
Which one of the following is a type of systematic risk? It is the "R" in the acronym "P.R.I.M.E."
reinvestment risk Reinvestment risk is a type of systematic risk.
A nonspringing durable power of attorney
remains effective after the principal becomes incapacitated. The very purpose of any durable power of attorney is to give the attorney-in-fact authority to act after the principal becomes incapacitated. However, such authority does not survive the principal's death. Such authority is created in an independent document, and is effective immediately in this type of power of attorney.
A custodial account for a minor is
required to terminate when the minor reaches the age of majority as specified by state law. Custodial accounts must terminate when the minor reaches the age of majority as specified by state law.
An entity buy-sell agreement
requires the business entity to purchase the share of the business for any deceased owner who is a party to the agreement. In an entity agreement, the business entity is obligated to purchase an owner's offered interest. To make certain that it has the money to fulfill its purchase obligation, the entity purchases an insurance policy on each owner from whom it may have to purchase. Option c. is a characteristic of a cross-purchase buy-sell agreement. With either type of agreement, actual transfer of the interest takes place in the future, not immediately. Buy-sell agreements can be used with any type of business entity.
Which one is a profitability ratio?
return on assets
David Dreman's advice to the investor centers on three rules. Which of the following is not one of those rules?
select only industry average P/E stocks Dreman's three rules were select only low P/E stock, diversify with 20?30 stocks in 15+ industries, and invest only in medium or larger companies listed on the NYSE.
When using a tax swap strategy, an investor would
sell one bond at a capital loss and buy another different bond issue. A tax swap involves selling one bond at a loss and buying a different bond to maintain the investor's overall position. Keep in mind, however, that if a security is sold at a loss, and that security or a "substantially identical" security is bought within 30 days of the sale (either before or after the sale date) the loss is disallowed (called a wash sale).
As described by Gerald Perritt, which one of the following best describes a sound small-cap stock investment strategy?
sell when 40% of the company's shares become owned by institutional investors; own 20?30 issues; three- to five-year holding period Perritt suggests owning 20?30 issues, having a three-to five-year holding period, and sell when 40% of the company's shares become owned by institutional investors.
Under certain circumstances, an alternate valuation date can be used as the estate valuation date. Which of the following correctly describes the alternate valuation date
six months after the decedent's death Under certain circumstances, a date of six months after the decedent's death can be used as the estate valuation date.
The executor of a decedent's estate may elect to value the property for estate tax purposes as of an "alternative valuation date," which is __________ months __________ the date of death?
six months, after If the "alternative valuation date" is elected, the property will be valued for estate tax purposes six months after the date of death.
Based on historic performance data in the course, which class of assets has provided the greatest pretax total return since 1926?
small cap
The relative performance of different asset classes is dependent on the holding period selected. Based on historical performance data, which class of assets would be likely to provide the greatest pretax total return over the long term?
small company stocks Small company stocks have generally outperformed all other asset classes over the long term according to Ibbotson and other major tracking data.
With the joint and survivor annuity payment option, retirement plan benefits are
spread over two or more lives. Retirement plan benefits are spread over two or more lives when the joint and survivor annuity payment option is selected.
Measurement of total risk
standard deviation
One assumption of technical analysis is that
stock prices move in trends. Technical analysis assumes that stock prices move in trends.
An individual who owns an annuity has elected to receive income for life. After receiving payments for five months, she dies and payments cease, with no additional payments to beneficiaries. She elected which annuity income option?
straight life income option The straight life income option is based on only one person's life, so when that beneficiary dies, all payments end. Life income with period certain or refund would provide a benefit to beneficiaries and a joint life income option would continue to make payments to the survivor.
A person with no heirs (or anyone who is a financial dependent) would most likely select the
straight life income option. A straight life income option may be best for someone who has no heirs, because upon the individual's death, payments stop. Income payments will be higher than payments with a longer guaranteed income period (e.g., joint life or 10 years certain).
Which one of the following approaches to asset allocation tries to identify the asset mix that provides an optimal balance of risk and return for a long investment horizon?
strategic asset allocation Strategic asset allocation tries to identify the asset mix that provides an optimal balance of risk and return for a long investment horizon.
Which of the following is the most important area of concern that was addressed in the Dodd-Frank Wall Street Reform Act?
systemic risk Concern over systemic risk and the need to maintain a stable financial system is the primary issue that Dodd-Frank addressed. The financial system itself almost came to a grinding halt in 2008. Derivatives did contribute to the crisis, but the crisis spread well beyond the derivatives market into areas that no one expected, such as the commercial paper market. Hedge fund regulation was addressed but was not the most important area of concern. Dodd-Frank asked the SEC to look into a uniform fiduciary standard for both broker-dealers and investment advisers.
Buying a municipal bond to generate income is an example of
tax avoidance. Interest received from municipal bonds is generally exempt from federal taxation, so tax can be avoided on this interest.
A self-employed client opens and funds a SEP-IRA on the advice of her investment professional. The most immediate effect on her tax situation for this year is
tax reduction. Because the contribution to the SEP-IRA can be claimed as a deduction, this client's taxable income has been reduced for this year.
A self-employed client opens a SEP-IRA on the advice of her investment professional. The most immediate effect on her tax situation for this year is
tax reduction. The SEP-IRA is currently deductible. Thus, tax reduction is the most immediate effect on the tax situation. The funds placed into the account grow tax deferred, but the most immediate effect is the tax reduction.
Cash value life insurance policies build cash value on what type of basis?
tax-deferred basis Cash value life insurance policies grow tax-deferred until the cash value is withdrawn from the policy.
Which one of the following is a tax preference item or adjustment for purposes of the alternative minimum tax?
tax-exempt interest on private-activity municipal bonds issued in 2007 Private-activity municipal bond interest is generally a preference item for AMT purposes. Remember that interest from private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT. Qualified mortgage interest is an allowable itemized deduction for the AMT, and is not a preference or adjustment. Neither the penalty on early withdrawal of savings nor the student loan interest deduction is a preference or adjustment. Both are allowable in the computation of the regular federal income tax, and the AMT.
In general, withdrawals for a retiree's cash flow should be taken from
taxable accounts first. In general, withdrawals should be taken from taxable accounts first—capital that compounds tax-deferred will grow to more dollars than capital that is taxed every year.
In a taxable account, corporate zero-coupon bonds generate annual
taxable income. In a taxable account, corporate zeros do generate taxable income without generating the cash to pay the taxes (phantom income); in a tax-deferred account, income from zeros is deferred.
A tax credit reduces which of the following by a specified amount?
taxpayer's tax liability A tax credit is a direct dollar-for-dollar reduction of a taxpayer's liability in a specific amount and is therefore more valuable to a taxpayer than a deduction in the same amount.
Which form of property ownership is available for spouses only?
tenancy by the entirety Tenancy by the entirety is a type of joint ownership specifically between spouses.
Mrs. Bartlett purchased a life insurance policy that will pay $100,000 to her beneficiary should she die at any time during the next year. The policy guarantees the right to renew every year for the next five years, and builds no cash value. Mrs. Bartlett has purchased a
term life insurance policy. Mrs. Bartlett owns a renewable five-year term life insurance policy. Such a policy would have a guarantee-to-renew provision.
Mrs. Bartlett purchased a life insurance policy that will pay $100,000 to her beneficiary should she die anytime during the next year. She is guaranteed the right to renew this policy every year for the next five years. The policy is not expected to have any cash value. Mrs. Bartlett has purchased a
term life insurance policy. Term insurance generally provides nothing other than a cash payment in the event of death, only if the loss occurs within the policy period.
In the early years of his or her business, a self-employed individual may be a good candidate for
term life insurance. Because cash flow is often limited in the early years of a business, term insurance often makes sense for self-employed individuals.
Which of the following is not one of the four areas that the CFP Board looks at to determine whether a CFP® professional is a financial planner or carrying out material elements of financial planning?
the CFP® professional's understanding of the engagement It is the client's understanding and intent in engaging the adviser that the CFP Board considers, not the CFP® professional's understanding of the engagement. All of the other choices are areas that the CFP Board takes into account to determine if a financial planning engagement is taking place.
All of the following are advantages to implementing a nonqualified deferred compensation plan, except
the NQDC is offered in lieu of the qualified plan. The NQDC is supplemental to any qualified plan that is in place.
With respect to cash value life policies, what part of the policy value, if any, is subject to income taxation when the policy is surrendered?
the amount of the cash value that exceeds the total net premiums Any cash value in excess of total net premiums is subject to income taxation.
With respect to cash value life policies, what part of the policy value, if any, is subject to income taxation when the policy is surrendered?
the amount of the cash value that exceeds the total net premiums If a cash value policy is surrendered, the amount of cash surrender value that exceeds the total net premiums paid (basis) is subject to taxation as ordinary income.
All of the following assets would be included in a decedent's gross estate except
the decedent's vested interest in a single life annuity on the decedent's life. Because no payments will be made to a survivor as a result of the decedent owning this asset, there is nothing to include in the decedent's gross estate.
When an annuity payment is made (assuming it is not in a qualified retirement plan account), the portion of the payment that is taxed is
the earnings only. The only amount of an annuity payment that is subject to taxation is the earnings. Most annuity payments will be made up of both principal and earnings.
David Vandercamp passed away in 2020, leaving a sizable estate. His will left, among other things, 2,000 shares of GE to his daughter, Bianca. These shares had been purchased as a single lot in 2011. Bianca and her husband sold the stock. What was their cost basis in these shares?
the fair market value on the day Mr. Vandercamp died Because Bianca inherited the stock, her basis is the fair market value of the shares on the day her father died.
negative alpha means
the fund underperformed the benchmark (does NOT mean that it's a negative return, it's just LOWER than the benchmark)
A tax disadvantage of making a lifetime gift rather than a transfer at death is that
the gift tax exclusion amount is not portable between spouses, but the estate tax exclusion amount is portable. There is no portability of the gift tax exclusion amount, but the estate tax exclusion amount is portable.
Grantor Retained Annuity Trust (GRAT)
the grantor receives a fixed dollar amount from the trust fund annually
The higher the standard deviation of an investment in relation to its rate of return,
the greater the level of risk for a given rate of return. The greater the dispersion of returns around an average rate of return, the greater will be the standard deviation and, consequently, the higher the level of risk for a given rate of return.
Treynor Ratio/Index
the higher the better—so the logical conclusion would be that Portfolio A had better risk-adjusted performance than Portfolio B.
Which one of the following is not a federal transfer tax?
the income tax There are now only three federal transfer taxes; the income tax is assessed on the accumulation of wealth, not its transfer.
What portion of the payments received from mortgage-backed securities are subject to taxation?
the interest portion The interest portion, but not the principal portion, of payments from mortgage-backed securities are taxable.
As the investment policy statement formulation moves to policy implementation,
the investment professional takes a leading role. The investment professional, using the guidelines already established in the investment policy statement, takes the lead role during the policy implementation phase of the process.
Which one of the following has a direct bearing on which investments are appropriate for achieving a goal?
the investor's time horizon The time horizon has a direct bearing; net worth does not, and beta and alpha are measures of volatility and performance, respectively.
One reason to use active investment management is the potential for downside protection.
the potential for downside protection. The potential for downside protection, where the active manager moves to cash to cushion a bear market, is one possible reason to use active investment management.
To exclude the accrued interest on Series EE bonds used to pay higher education expenses from income,
the redemption proceeds must be used to pay the higher education expenses of the bondholder, the bondholder's spouse, or the bondholder's dependents. Only qualifying expenses incurred by the bondholder, the bondholder's spouse, or the bondholder's dependents are eligible for the Series EE interest exclusion.
The Investment Company Act of 1940 addresses which one of the following?
the requirement that mutual funds must send semiannual and annual reports to shareholders One provision of the Investment Company Act of 1940 is that semiannual and annual reports must be sent to shareholders.
If a shareholder participates in a public utility's dividend reinvestment program,
the shareholder is treated as if he or she received a cash dividend equal to the fair market value of the shares purchased under the plan. Income is recognized in an amount that equals the fair market value of the shares purchased under the plan.
Which one of the following statements best describes the term "estate tax base"?
the taxable estate plus the decedent's adjusted taxable gifts In the estate tax computation, the tentative tax is computed on the estate's tax base, which is the sum of the taxable estate plus adjusted taxable gifts made by the decedent since 1976. Option a. defines the taxable estate.(LO 9-2)
When established correctly
the trust assets are available only to pay benefits to the employees and earnings on the assets are taxable to the employer. As per the definition of a grantor trust, the trust earnings are currently taxable to the grantor, or employer, rather than imposed upon the employee.
When accessing cash values through policy loans
there are no income taxes due as long as the amount borrowed does not exceed premiums paid. There would be no income tax on a policy loan that is lower than the total of premiums paid.
In which way is an ETF (exchange-traded fund) different from a mutual fund?
they can be sold short Unlike mutual funds, ETFs can be sold short.
What is the primary function of central clearing counterparties (CCPs) that have been set up as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?
to facilitate the netting of swap contracts CCPs facilitate the netting of swap contracts in order to reduce systematic risk.
Which one of the following is not a motivating factor to engage in a bond swap?
to lock in a tax loss by selling a bond at a loss and then immediately repurchasing the same bond This is a wash-sale—the loss will be disallowed and is also added to the basis of the newly purchased bond.
George Billups recently retired. Prior to his retirement, he and his wife agreed that she should sign the required waiver to allow the money purchase plan to pay George's retirement income as a single life annuity with no period certain. Which one of the following statements best explains why George and his wife would select the single life annuity distribution option from his retirement plan?
to maximize the periodic payment because George and his wife have no need or desire to have any portion of the plan benefits left after his death Persons with no dependents or others they wish to benefit, and those who wish to maximize monthly cash flow, may find a single life annuity attractive. A permanent life insurance plan may make this attractive even to married persons or those who want to leave an estate.
Which one of the following best explains why a client would select a single life annuity distribution option from a retirement plan?
to maximize the periodic payment if the client had no need or desire to have any portion of the plan benefits left after death Since payments will cease upon the annuitant's death, the single life option will provide the highest periodic payment from an annuity.
Which one of the following best describes the purpose of an investment policy statement (IPS)?
to provide a foundation on which the client's portfolio is constructed, and to provide a basis for review and adaptation to changing conditions An investment policy statement's primary purpose is to provide broad guidelines with which to establish a foundation for portfolio construction, and to provide a basis for periodic review.
Which of the following describes one purpose of an investment policy statement?
to provide guidelines around which the portfolio is to be constructed and managed One of the purposes of an investment policy statement is to provide guidelines for managing the portfolio. The other answers are elements that should be in an investment policy statement.
The marital deduction for a recipient spouse who is a U.S. citizen is
unlimited. For a recipient spouse who is a U.S. citizen, the marital deduction is unlimited.
Which one of the following is a source of ethical conflict in the securities industry?
unrealistic client expectations A client with unrealistic expectations can result in a situation whereby the client expects a very high rate of return. In trying to get that return, the investment professional might have the ethical conflict of selling an investment with high risk, while knowing that the client should not take that much risk.
A client who expects his portfolio of intermediate-term government bonds to earn 13% a year suffers from which one of the following?
unrealistic expectations Historically, intermediate-term government bonds have had an annual return of between 5% and 6%, so this client has very unrealistic expectations.
An exchange-traded note is a(n)
unsecured debt. An exchange-traded note is an unsecured debt obligation, usually of an investment bank or commercial bank that trades like a stock and represents promises by the issuers to match the returns of an index or commodity, minus fees.
Which of the following types of risk can be reduced through diversification?
unsystematic risk
An investment professional who is not an attorney is engaged in the unauthorized practice of law when he or she counsels a client regarding the
validity of a living will. Determining the validity of a living will is not an allowable activity for an investment professional.
Assume that an employer plans to use corporate-owned life insurance to informally fund a nonqualified deferred compensation agreement and would like to have the flexibility to invest in a number of different asset categories. Which one of the following types of life insurance should this employer choose?
variable life insurance Variable life insurance permits the cash value of the policy to be invested in a number of different accounts of the insurer, such as indexed equities, blue chip growth, growth and income, international, bonds, and so forth.
What is the main difference between a revocable living trust and a contingent (standby) trust?
when trust funding occurs A revocable living trust is funded when the trust is created. A contingent trust is funded only after the grantor becomes incapacitated.
Which one of the following is not included in an investment policy statement?
which securities to include in the portfolio While an investment policy statement determines which types of securities may be included in a portfolio, it does NOT make recommendations as to specific securities to purchase.
A funded deferred compensation plan
will be taxable to an employee if nonforfeitable. If the employee has constructive receipt of plan compensation (funds are nonforfeitable), such compensation will be taxable to the employee.
A power of appointment trust
will entitle the grantor to a marital deduction. A power of appointment trust is a marital trust that automatically qualifies for the marital deduction. Because the grantor's spouse is given a general rather than special power of appointment, the trust property does not bypass, but rather must be included in the spouse's gross estate. The grantor's spouse is entitled to all trust income.
Tenancy in common is a form of property ownership that
will require probate upon the death of a tenant. Property held in tenancy in common is subject to probate.
Traditional community property is a form of property ownership that
will require probate upon the death of an owner. Traditional community property does not have a right of survivorship feature, and therefore must be transferred at an owner's death through the probate process. Community property is only for husbands and wives, who have equal ownership interests.
Can an individual continue to make contributions past age 70½ in a Roth IRA?
yes, if the individual has earned income Individuals can contribute to a Roth IRA past age 70½ as long as they have earned income.
