Investment vehicle characteristics

The interest from which of the following bonds is exempt from Federal Tax? 1. State of CA bonds 2. City of Anchorage bonds 3. Treasury bonds 4. GNMA bonds

1 & 2 Municipal bonds (state, city, county issued) are exempt from federal income tax. treasury bonds are exempt from state tax but not federal. GNMAs are subject to federal, state, and local income tax

The tax consequence of transferring proceeds from one fund to another within the same family of funds is: a. on the date of the transaction, any gain or loss is recognized for tax purposes. b. gains are taxed and losses are deferred. c. no gain or loss is recognized until redemption d. losses are deducted and gains are deferred

a. on the date of the transaction, any gain or loss is recognized for tax purposes. an exchange is the sale and then a purchase of a new security and is therefore a taxable event.

A company's dividend on its common stock is a. specified in the company charter b. determined by its board of directors c. voted on by shareholders d. mandatory if the company is profitable

b. determined by its board of directors a common stock's dividend payment and amount are determined by the company's board of directors.

The writer (the seller) of a call option a. pays the premium b. receives the premium c. has the right to sell the underlying asset. d. is obligated to buy the underlying asset.

b. receives the premium The option premium is the money paid by the buyer of an option to the writer (seller) at the beginning of the options contract. In turn, the call writer (seller) is obligated to sell the underlying at the exercise price to the call buyer.

Many investment advisors follow a program of asset allocation. Which of the following categories of assets is most classified as an alternative asset? a. Preferred stocks b. Cash c. Callable bonds d. Real assets

d. Real assets traditional assets in an allocation program include cash, bonds, and stocks. Alternative assets include 4 major categories: real assets, hedge funds, private equity, and structured products.

Which of the following is not included in the calculation of a mutual fund's NAV per share? a. Accrued management fees b. Closing values of portfolio assets c. Accrued custodian bank fees d. Accrued sales charge

d. accrued sales charge sales charge has nothing to do with a mutual fund's NAV. the NAV is computed by subtracting all liabilities (it is the investor who pays the sales charge, not the fund) from the fund's assets. The principal asset is the portfolio and that is valued as of the close of the markets.

Treasury bills are a. callable b. issued at par c. Issued in book entry form d. issued in bearer form

c. issued in book entry form All treasury securities are issued in book entry form. Treasury bills are always issued at a discount and are never callable.

All of the following positions expose a customer to unlimited risk EXCEPT a. Short 2 XYZ uncovered puts (allows the owner to lock in a certain price to sell a stock) b. Short (sell) 2 XYZ uncovered (risky) calls (contract between a buyer and a seller to purchase a stock at a certain price up until a defined expiration date) c. Short (sell) 200 shares of XYZ d. Short (sell) 200 shares of XYZ and short (sell) 2 XYZ puts (allows the owner to lock in a certain price to sell a stock)

a. Short (sell) 2 XYZ uncovered (risky) puts (allows the owner to lock in a certain price to sell a stock) A put writer (person agreeing to buy the underlying stock at a reduced price) will lose money if the stock goes down, but the furthest it can drop is to zero. Therefore, the potential loss is not unlimited. All of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises.

Which of the following would NOT generally be considered a passive form of real estate investing? a. Flipping houses b. Investing in an equity REIT c. Purchasing a RELP d. Moving into a luxury condominium

a. flipping houses flipping houses generally requires work on behalf of the investor. that makes it active rather than passive. Investing in REITs or RELPs requires no effort on the part of the investor. Buying a condo for personal use is not considered investing in real estate.

An investor is long (owns) stock in a cash account and does not expect the price to change in the immediate future. His best strategy to generate income may be to a. sell a call b. buy a call c. buy a put d. sell a put

a. sell a call selling a call against a security will generate additional income (the premium). An investor who writes (sells) a put receives additional income from the position but must also be willing to increase his position should the put be exceeded. An investor who buys a put is speculating the stock will soon fall, not stay steady in price.

The long party (owner) to a put option contract has a. the right to sell the underlying asset b. the obligation to buy the underlying asset. c. the obligation to sell the underlying asset. d. the right to buy the underlying asset.

a. the right to sell the underlying asset Being long a put option means owning the option. Owners have rights while sellers have obligations. A put option gives the owner the right to sell the underlying asset at the exercise price. The seller of the put option is obliged to take delivery and pay the exercise price if the buyer exercises the option.

The straitened corporation has filed for bankruptcy. One of your clients held a mortgage secured by the corporation's building. when the building was sold, the proceeds were less than the mortgage balance creating a deficiency balance. Where does this investor's claim stand? a. After the secured creditors b. As a general creditor on a pro rata basis c. There is no further claim once the building has been sold d. After the unsecured creditors

b. as a general creditor on a pro rata basis. Secured creditors, such as those holding mortgage bonds, always have priority in liquidation. If it happens, as in this question, that the assets securing the debt are insufficient to satisfy the claim, the balance is considered to be unsecured debt. In that case, those boundaries are considered general creditors and share in any remaining assets proportionate to the amount of the deficiency.

When comparing active to passive real estate investing, the primary benefit to active is a. a smaller capital commitment. b. control c. lower risk. d. liquidity.

b. control The main benefit of active investing is control. Passive investing generally carries lower risk and has less liquidity. With active investing, the management of the property or properties is under the investor's control.

A customer purchased new issue bonds at par 2 years ago. Since then, the CPI has declined by almost half and the current yield on his bonds has also declined. Which of the following best describes the value of the bonds he purchased? a. Their market price has declined. b. Their market price has remained unchanged. c. Their market price has increased d. This cannot be determined from the information presented.

c. Their market price has increased. Because inflation is down and bond yields have declined, the bonds are selling for a premium due to an increase in value.

Which of the following statements is NOT true? a. Limited partners are not liable for funds in excess of the amounts they have invested or otherwise committed for. b. It is the general partners rather than the limited partners who bear the liability for partnership debt c. Management of the enterprise is solely within the jurisdiction of the general partner(s) d. Limited partners have the option of actively managing the business operations.

d. Limited partners have the option of actively managing the business operations. Limited partners are passive investors in a partnership whose liability is limited to the amount of funds they have invested and committed to but have not yet contributed. They do not manage the funds in the partnership; the general partner has that responsibility.

A 47-year-old investor purchases a single premium deferred variable annuity from the ABC Insurance Company with an initial premium payment of $25,000. Six years later, a 1035 exchange is made to an annuity offered by the XYZ Insurance Company when the value of the account is $35,000. Seven years later, the account has a current value of $50,000 and the investor withdraws $20,000. The tax consequence of this withdrawal is a. no tax until the withdrawal exceeds $25k b. ordinary income tax on $20k plus a 10% penalty c. ordinary income tax on $15k d. ordinary income tax on $20k

d. ordinary income tax on $20k Withdrawals from a nonqualified annuity are taxed on a LIFO basis. The 1035 exchange doesn't affect the cost basis because it is nontaxable. Therefore, the earnings are withdrawn first and are all taxable as ordinary income.

Net asset value per share for a mutual fund can be expected to decrease if a. the fund has experienced net redemptions of shares b. the issuers of the securities in the portfolio have made dividend distributions c. the securities in the portfolio have appreciated in value d. the fund has made dividend distributions to shareholders

d. the fund has made dividend distributions to shareholders if dividends are made to shareholders, the fund's assets will decrease and value per share will fall accordingly.

A sudden decrease in market interest rates will have the effect of increasing the trading price of an existing bond because a. lower interest rates will result in a higher rating for the bond b. a reduction in market interest rates generally signifies a stronger economy c. the future value of the bond's present cash flows increases d. the present value of the bond's future cash flows increases

d. the present value of the bond's future cash flows increases Bond valuations using discounted cash flow take into consideration the present value of the bond's future cash flows. that is, the greater the value of the interest payments to be received in the future, the higher the price of the bond. When market rates decline, because the coupon rate of the existing bond is fixed, the present value of those interest payments increases, creating a higher value for the bond.

All of the following are characteristics of rights offering EXCEPT a. it issued to current stockholders b. the subscription is below the CMV c. the rights are marketable d. the subscription period is up to 2 years

d. the subscription period is up to 2 years Rights offerings are usually very short lived (30-45 days)