Client Invesment Recommendations

Nonqualified corporate retirement plans differ from qualified retirement plans because 1. nonqualified plan contributions are not exempt from current income tax 2. nonqualified plan earnings accumulate on a tax-deferred basis 3. the corporation need not comply with nondiscrimination rules that apply to qualified plans. 4. the corporation must comply with ERISA requirements dealing with communications to plan participants

1 & 3 Two of the primary ways in which nonqualified corporate retirement plans differ from qualified plans is that contributions are not exempt from current income tax. Only qualified corporate retirment plans need to follow ERISA communication requirements.

When performing capital needs analysis for a client, factors to be considered would include 1. the client's projected earnings 2. the projected inflation rate 3. projected market volatility 4. the client's age

1, 2, and 4 A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. Projected market volatility does not impact the analysis because the amount of the selected death benefit will remain constant regardless of changes in the market.

The current market interest rate for a bond rated AA with 20 years to maturity is 5%. In an efficient market, a similar bond with a coupon of 4% could be expected to have an internal rate of return of a. 5% b. 8% c. 6% d. 4%

a. 5% In and efficient market, bonds are priced so that their NPV is zero. That means the bond's ytm is equal to the current market interest rates for similar bonds.

XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the CAPM, what is the expected rate of return on this stock? a. 7.6% b. 5.06% c. 6.85% d. 10.12%

a. 7.6% Use the CAPM to calculate the rate of return. Expected return= RF+ (MR- RF) * Beta

An investor purchases shares of ABC stock at $50 per share. One year later, ABC is selling for $54 per share and, at the end of the second year, the price is $52 per share. ABC has paid dividends of $2 per year. Upon liquidation, the investor would have earned a return of a. $2 per share b. $6 per share c. $8 per share d. $4 per share

b. $6 per share the investor paid $50 and sold it for $52 for a $2 per share gain. During the 2-year holding periods, $4 in dividends were paid. That is a total of $6 per share.

The risk/return pyramid where the bottom is lowest risk and the "point" is the highest, generally places commodities a. at the bottom. b. halfway between the middle and the top. c. at the top d. in the middle

c. at the top The risk/return pyramid shown in your LEM places commodities at the very top, the point of the pyramid.

your client indicates that they think it's time to start putting money away for college for their 3-year-old son. they ask you to describe the advantage of using a UTMA account over a Coverdell ESA. You would likely point out all of the following as advantages EXCEPT a. There is no limit to the amount that can be contributed to a UTMA b. there are no earnings limits for making UTMA contributions c. contributions to the UTMA are made with after-tax dollars d. withdrawals for other than qualified education expenses are not subject to any penalties.

c. contributions to the UTMA are made with after-tax dollars We are looking for a feature that the UTMA has and is not found in an ESA. Contributions for both an ESA and a UTMA are made with after-tax dollars and therefore, it is not considered an advantage.

A man is planning to start his own business, he wants to be able to deduct his anticipated losses for the first 2 years. He anticipated that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to0day business decisions. What business form do you recommend? a. General partnership b. Limited partnership c. S corp d. C corp

b. Limited Partnership. A limited partnership as general partner would allow for additional investment capital without having to give up management control.

A customer is selling inherited stock. The decedent originally paid $50 per share and on the date of the decedent's death, the stock was worth $60 per share. On the day the customer sells the stock, the price per share is $62. What is the investor's cost basis in the stock? a. 55 b. 50 c. 60 d. 62

c. 60 The IRS allows a step-up in basis for inherited stock. the Customer's cost basis is the fair market value of the stock on the date that the decedent died.

It is agreed by most IA's that diversifying an investment portfolio can reduce the overall risk. Benefits of diversification would include all of the following EXCEPT a. mitigating the effect of a bankruptcy of a security held in the portfolio b. lowering the volatility of the portfolio c. lowering trades costs d. increasing risk-adjusted returns

c. lowering trades costs If anything, diversifying a portfolio will increase trade costs.

In a financial market that IS efficient, a. the prices of securities will not differ from their justified values for any length of time b. investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities. c. new information will be slowly reflected in securities prices. d. investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH).

a. the prices of securities will not differ from their justified values for any length of time An efficient market is a market that quickly reflects all new information. Securities will not depart from their justified economic value for any extended period of time. Investors who believe in EMH are passive investors because they believe you can't beat the market. investors who do NOT believe in EMH are active investors and seek to identify undervalued securities.

If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? a. She will pay income taxes on the full $1 million immediately. b. She will pay income tax on the full amount she withdraws each year. c. She will pay income taxes only on a portion of the withdrawals which exceed $1 million. d. She will pay no income taxes because the estate taxes have already been paid.

b. She will pay income tax on the full amount she withdraws each year. An inherited IRA will be subject to income taxes to the beneficiary at the time of withdrawal, on the same terms as if it had been distributed to the original owner.

Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with a. capital losses b. tax preference items c. losses on options positions d. gains associated with variable annuity portfolios

b. tax preference items Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private purpose municipal revenue bonds. Another example is accelerated depreciation. These types of items are known as tax preference items. The benefits are lost for those who are subject to AMT because these items must be added back into the investor's taxable income.

Keogh Plans are qualified plans intended for those with self-employed income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is NOT true? a. The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA. b. Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution. c. A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. d. A participant in a Keogh Plan may also maintain an IRA.

c. A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. Rollovers are permitted into an IRA regardless of any plans maintained. Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct.

One of the portions of the USA Patriot Act of 2001 that affects the opening of an account for a new customer is a. the Transportation Security Administration (TSA) b. the requirement to obtain suitability information c. the "know-your-customer rule" d. The customer identification program

d. The customer identification program (CIP) is mandated by the Patriot Act and requires that BD's obtain specified information about new customers. The Patriot Act, through the CIP, is concerned with validating identity, not suitability.

An investor is of the opinion that the recent bull market has run its course, and she wants to protect her portfolio consisting largely of equities with a market cap of less than $1 billion. Her best choice would be to a. buy puts on the S&P 500. b. sell puts on the S&P 500. c. sell futures on the Russell 2000. d. buy puts on the Russell 2000

d. buy puts on the Russell 2000 When a bull market runs out of steam, a decline usually follows. the best way to protect her positions is purchasing a put option on a benchmark that represents her holdings. The appropriate benchmark for hedging small cap stocks is the Russell 2000.

A client of a BD is obligated to replace stock she sold after borrowing it from the BD. From this information, you can conclude that she a. took a short position in a put option b. was front running c. took a short position in a call option d. engaged in a short sale of the stock

d. engaged in a short sale of the stock. in a short sale, an investor borrows stock, most commonly from the BD, to sell at the market. The investor is hoping that the price of the stock will decline. if she is correct, she will have the BD purchase the stock at the current market price and replace the borrowed stock.

Under ERISA Section 404(c), plan participants must be able to reallocate plan assets a. once a week b. daily c. annually d. once every 3 months

d. once every 3 months although many 401(K) plans provide for daily reallocation of plan assets, section 404(c) requires plan participants be able to reallocate plan assets, through internet trading or other methods, at least once every 3 months.

All the following would be reason for an employer to choose a nonqualified plan over a qualified plan EXCEPT a. The nonqualified is not subject to ERISA reporting and disclosure requirements b. the nonqualified plan provides greater flexibility c. the nonqualified plan can discriminate in favor of highly compensated employees d. the nonqualified plan provides an immediate income tax deduction for the employer

d. the nonqualified plan provides an immediate income tax deduction for the employer Nonqualified plans DO NOT provide a tax deduction to the employer until the employee receives the economic benefit at some point in the future.