Unit 5 Checkpoint Exam

Yusef would like to save money for his 10-year-old daughter's college tuition costs. She has her heart set on a small liberal arts school with a growing reputation in the arts. His biggest concern is the potential increase in cost over the next several years. The program best suited to hedge against the increasing cost of college tuition at the school is a

529 prepaid tuition program The 529 prepaid tuition plan is designed to pay tuition costs, at today's rate, to be used later. It is the best-suited option to cover tuition inflation. Both the college savings and ESA accounts allow for investing that has good growth potential, but not specifically locking down costs in today's dollars. A custodial account has similar issues, and the account is in the child's name, potentially harming scholarship and grant eligibility

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

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

Which type of DPP would be most likely to enable the investor to claim a deduction for depletion?

Oil and gas income program

Which of these statements regarding a 529 plan is correct?

One person can be both the beneficiary and owner Anyone can establish and contribute to a 529 plan. This means parents, other family members, friends, and even the designated beneficiary can establish a 529 plan. A Section 529 College Savings Plan is a type of tax advantaged account used to save for education expenses. The person who opens the 529 plan is the account owner and the beneficiary is the future student. Most 529 plans are set up for children by parents or other family members, but there is no requirement that the owner and beneficiary have to be related. Plan assets belong to the account owner, not the beneficiary. The account owner has the right to change the plan's beneficiary. For example, if a parent had two children and one received a full scholarship, assets could be shifted for the benefit of the other child. Coverdell Education Savings Account (ESA) plans limits contributions to $2,000 annually

Which of these statements regarding a general partnership is correct?

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

Which of these is not considered an advantage of owning an exchange-traded fund?

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

Which of these trading strategies are employed by hedge funds but are generally prohibited to mutual funds? - The act of limiting investments to a narrow group of securities - The use of borrowed money to purchase portfolio securities - The act of taking long positions in speculative stocks - The act of taking short positions in NYSE listed stocks

The use of borrowed money to purchase portfolio securities The act of taking short positions in NYSE listed stocks Under most conditions, mutual funds are prohibited from purchasing securities on margin (i.e., using leverage—borrowed money) and from selling short. However, both of those strategies are commonly employed by hedge funds.

Last year Brownstone Properties, LP distributed $200 per unit to investors and reported a $500 business loss per unit on the K-1. For tax purposes the investors received

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

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

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

A state sponsored investment pool designed for municipalities with short-term cash investment needs is called

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

A REIT that owns and operates an office building in the Dallas Metroplex is an example of

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

All of these are risks associated with limited partnerships except

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

The primary risk associated with ETNs is

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

All of these are potential risks of private, nontraded, REITS except

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

All of these are true for an Achieving a Better Life Experience account except that

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