Part 4- Client Investment Recommendations and Strategies

Which of the following vehicles make use of the unified estate tax credit? Bypass trust Generation-skipping trust Living trust Simple trust A) II and III B) I and IV C) I and II D) III and IV

C...Both the bypass trust and the generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

A 457 plan could cover which of the following? Employees of a corporation Independent contractors providing services to the county Employees of a nonincorporated business City employees A) II and III B) I and IV C) II and IV D) I and III

C...The 457 plan is a nonqualified deferred compensation plan for municipal employees, as well as for independent contractors performing services for those entities.

Which of the following entities would issue a Schedule K-1? A) REIT B) Sole proprietorship C) C corporation D) Limited partnership

D....Schedule K-1s are issued to owners of partnerships (limited or general), LLCs with more than one member, and S corporations. Sole proprietors use a Schedule C, C corporations report dividends and/or interest paid on a Form 1099, and the same is true for distributions from a REIT.

Which of the following employer-sponsored plans is NOT covered by ERISA? A) 401(k) B) Defined benefit pension C) 403(b) D) Deferred compensation

D...Deferred compensation plans are not ERISA-covered plans; that is what gives them greater flexibility than a covered plan.

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? Federal State Local A) I only B) I, II, and III C) II only D) II and III

B....Interest on foreign bonds is taxed in the United States by federal, state, and local governments.

Which of the following statements regarding modern portfolio theory is not correct? A) The optimal portfolio will always lie above the efficient frontier. B) The optimal portfolio for an investor depends upon the investor's ability to assume risk. C) The optimal portfolio has the lowest risk for a given level of return. D) The optimal portfolio offers the highest return for a given level of risk.

A.....The optimal portfolio for an investor will always lie on the efficient frontier. That is where, for any given level of risk, the return is the highest. Stated another way, for a given level of return, the risk is the lowest.

An investment strategy where a higher price is paid for a stock based on expected returns is A) dollar cost averaging B) futures investing C) growth investing D) return on investment.

C....A growth investor purchases shares that have exhibited faster-than-average gains in earnings over the past few years that is likely to continue to show high levels of margin. Over the long run, growth stocks tend to outperform the market but are riskier than most other stocks and generally pay little or no dividend.

An individual works for an accounting firm that does not have a retirement fund. She is paid $18,000 per year. During her spare time, she is a commercial artist and earned $16,000 doing this work last year. What is the basis for her contribution under a Keogh plan (HR-10)? A) $34,000.00 B) $18,000.00 C) $16,000.00 D) $0.00

C....Contributions to a Keogh must be based on self-employment income.

Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child's future education except A) the 529 plan has no earnings limitation on the donor. B) the 529 plan has no age limits. C) the 529 plan is counted at a lower percentage of assets when applying for financial aid. D) the 529 plan allows for higher contribution levels.

C....Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan.

KAPCO, Inc. has 100,000,000 shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) large-cap stock B) micro-cap stock C) small-cap stock D) mid-cap stock

D....Doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 - $10 billion are considered mid-cap.

A loss derived from a limited partnership may be offset against income from A) other limited partnerships B) dividends received from common stocks C) capital gains from municipal bonds D) bonuses received in addition to regular salary

A....A limited partner may use only passive income to offset the loss derived from a limited partnership. A passive loss cannot be used to offset dividends received from common stocks. Passive loss from partnerships may be used to offset passive gains from partnerships, not gains from municipal bonds.

Which of the following concerning a money purchase pension plan are TRUE? 1All employees must contribute to the plan. 2Voluntary employee contributions are optional. 3Employer contributions are required. 4Employer contributions are optional. A) II and III B) II and IV C) I and III D) I and IV

A....A money purchase pension plan is a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional. Employees who contribute to the plan usually contribute a percentage of their income.

Each of the following terms is commonly found in modern portfolio theory EXCEPT A) the efficient set B) the feasible set C) the internal rate of return D) the capital asset pricing model

C....Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms.

Opening a margin account involves significant documentation. Which of those documents discloses the interest rate charged by the broker-dealer, including the method of interest computation and situations under which interest rates may change? A) The interest computation agreement B) The loan consent agreement C) The credit agreement D) The hypothecation agreement

C...It is the credit agreement that discloses the terms of the credit extended by the broker-dealer, including the method of interest computation and situations under which interest rates may change.

A successful dollar cost averaging strategy requires 1stable market conditions 2volatile market conditions 3a fixed dollar amount invested monthly 4a fixed number of shares purchased monthly A) II and III B) II and IV C) I and IV D) I and III

A...Dollar cost averaging requires a fixed dollar investment on a periodic or monthly basis. This strategy is most effective when prices in the market are volatile.

An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 32% B) 25% C) 30% D) 27%

A...Total return is all distributions plus/minus appreciation/depreciation. In this question, the $1,300 includes the $250 capital gain so all we add is the $20 dividend. $320 divided by $1,000 equals 32% total return.

All of the following statements concerning IRA contributions are true EXCEPT A) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis B) if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15 C) between January 1 and April 15, contributions may be made for the current year, the past year, or both D) contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year

A....Contributions can be made to an IRA only until the first tax filing deadline (April 15), regardless of having filed an extension.

A client with a sizable estate would probably find it most efficient to pay estate taxes with A) proceeds from a life insurance policy B) proceeds from the liquidation of a diversified portfolio C) proceeds from the liquidation of a tax-deferred retirement plan D) cash

A....In general, people with estates where there is a potentially large estate tax liability find that the most efficient way to pay those taxes is through a life insurance policy.

Ms. Abbot has a joint account with her sister. She enters a sell order in the account and instructs that the proceeds check be made out to her only. If your firm sends the check but makes it payable to both Ms. Abbot and her sister, this is an example of A) the proper joint account procedure B) an unfortunate error that can be reconciled with the broker-dealer through a process called reclamation C) an unlawful practice because the transaction was unauthorized D) not following instructions, a prohibited practice under the Uniform Securities Act

A....In joint accounts, either party may act. However, by law, all checks must be made payable to all owners, so the firm is following required procedure.

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2? A) 15% B) 18% C) 9% D) 12%

A....In most questions of this type, we are given the market return. Here, there is a trick. We are told there is a market risk premium of 6%. That means that the market return must be 6% above the risk-free rate, or 9%. Now, we can plug in the formula. Expected return = 3% + ([9% -3%] × 2) = 3% + (6% x 2) = 3% + 12% = 15%. In this question, because we're already given the risk premium, we can avoid the first step. That would be 3% + (6% x 2) = 3% + 12% = 15%

Each of the following individuals is eligible to participate in a Keogh plan EXCEPT A) an executive of a corporation who receives $5,000 in stock options from his company B) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time C) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time D) a self-employed doctor in private practice

A....Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.

Which of the following statements concerning market efficiency is least accurate? A) An efficient market assumes one can generate abnormal returns with active portfolio management. B) If strong form of market efficiency holds, even insider information cannot be used to earn abnormal returns. C) If semi-strong form market efficiency holds, technical and fundamental analysis cannot be used to earn abnormal returns over the long run. D) If weak form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long run.

A....Market efficiency assumes active portfolio management cannot help earn abnormal (excess) risk-adjusted returns. The weak form indicates that technical analysis doesn't work. The same is true for the use of inside information under the strong form. Semi-strong says that neither technical nor fundamental analysis will work.

In order to comply with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is NOT required to open a margin account for a trust? A) A completed margin suitability form B) Approval of the account by the designated supervisory person C) Specific text in the trust agreement authorizing a margin account D) A margin agreement

A...A margin account allows the customer to borrow money from the broker-dealer in order to buy securities. Although that does entail assuming greater risk on the part of the trust, there is no such thing in the Statement of Policy as a margin suitability form. However, under the Statement of Policy, the margin forms and agreements must be completed promptly after the initial margin trade. All accounts, not just margin, or trust accounts, require the approval of an appropriate supervisory person.

The employer does not get a current tax deduction when offering which of the following retirement plans? A) Deferred compensation plan B) SIMPLE plan C) Defined benefit plan D) Money purchase plan

A...Because there is no constructive receipt of income until the deferral period is over, the employing company does not get a current tax deduction. Of course, the employee doesn't report taxable income until then. In the other plans, all qualified, any contributions made by the employer represent a current business expense and are deductible from the company's income.

Given the following information: StockBeta A2.16 B1.54 C.96 D1.28 Assume the risk-free rate of return is 2.75% and the market rate of return is 6.75%. An investor has a required rate of return of 9.5%. Which of these stocks would offer the best investment opportunity?

A...Calculate the expected rate of return of each stock using CAPM and compare the result to the investor's required rate of return. Stock A: E(r) = 2.75 + (6.75 - 2.75)2.16 = 11.39%. Stock B: E(r) = 2.75 + (6.75 - 2.75)1.54 = 8.91%. Stock C: E(r) = 2.75 + (6.75 - 2.75).96 = 6.59%. Stock D: E(r) = 2.75 + (6.75 - 2.75)1.28 = 7.87%. Based on a required rate of return of 9.5%, Stock A with an expected return of 11.39% is the best available investment opportunity.

Which of the following is NOT required under ERISA Section 404(c)? A) All plan participants must have been employed by the plan sponsor for a minimum of 3 years. B) Plan participants must have access to a broad range of investment alternatives. C) Each plan participant must have the ability to exercise independent control over assets in her account. D) Individual accounts must be provided for each plan participant.

A...ERISA Section 404(c) relieves the employer of fiduciary responsibility for investment decisions made by employees. To qualify for this protection, employees must enjoy the benefits and risks of their decisions (individual accounts), have the right to exercise independent control over the account, and have a sufficiently broad range of choices to make the right of control meaningful. Section 404(c) has nothing to do with the employee's length of employment.

When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted A) as a contra party to the trade B) as an agent C) in an unethical manner D) for the benefit of the client

A...In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra party to the other side of the trade.

In order to be considered a block trade, an order for common stock must be for at least A) 10,000 shares B) 100,000 shares C) 1,000 shares D) 100 shares

A...In the industry, the term block trade refers to a common stock transaction involving at least 10,000 shares.

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Review with the client the risks involved when trading options before the first options trade B) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade C) Assure that an options agreement has been signed prior to the first trade taking place D) Provide an options disclosure document no later than 15 days after the first trade

A...It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading takes place in the account.

If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) Tangible assets B) Annuities C) AAA bonds D) Preferred stock

A...Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed-dollar investments do not.

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client had net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by A) $3,000 B) $5,000 C) $9,000 D) $11,000

A...The $11,000 passive income is offset by the $6,000 of passive loss giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses giving a net increase to taxable income of $3,000.

Among the differences between a Coverdell Education Savings Account and Section 529 plans are one has adjusted gross income limits, the other does not one has contribution limits set by federal law, the other by the individual state if the money is not used, money reverts back to the donor in one and to the beneficiary in the other A) I, II, and III B) I and III C) I and II D) II and III

A...The Coverdell may only be used by persons who fall within certain income limits—no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.

A client buys 100 shares of a mutual fund on December 28, 2016, for $4,000 and receives a capital gains distribution of $2.40 per share on March 6, 2017, which is taken in cash. He sells his 100 shares for $4,300 on June 19, 2017. For tax purposes, this transaction will result in A) a $300 short-term capital gain B) a $240 long-term capital gain C) a $240 long-term capital gain and a $60 short-term capital gain D) a $60 short-term capital gain

A...The June sale of the shares purchased in December results in a short-term capital gain of $300. The distribution represents a long-term gain of $240, but this question only deals with the client's transaction.

Which of the following statements regarding the Sharpe ratio is TRUE? A) The Sharpe ratio is often used to measure risk-adjusted return of an entire portfolio. B) The Sharpe ratio uses beta in its formula. C) The Sharpe ratio cannot be used to measure risk-adjusted performance for a single security. D) Portfolios with lower Sharpe ratios provided higher excess returns per unit of risk assumed than those with higher Sharpe ratios.

A...The Sharpe ratio is used to measure risk-adjusted performance of either a portfolio or an individual security. The Sharpe ratio uses standard deviation as the denominator in its formula: the higher the Sharpe ratio, the better the portfolio or security has performed on a risk-adjusted basis.

All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan except A) the nonqualified plan provides an immediate income tax deduction for the employer. B) the nonqualified plan provides greater flexibility. C) the nonqualified plan can discriminate in favor of highly-compensated employees. D) the nonqualified plan is not subject to ERISA reporting and disclosure requirements.

A...The answer is 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 as income at some point in the future. They are, however, more flexible because they do not have to comply with ERISA reporting and non-discrimination requirements.

One popular method used to predict the expected return of a stock is the capital asset pricing model. Analysts using CAPM rely on all of these EXCEPT A) the standard deviation of the stock B) the expected return on the market C) the risk-free rate available in the market D) the beta coefficient of the stock

A...Under the CAPM, using the SML, we can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock's beta coefficient and the difference between the expected return on the market and the risk-free rate. Standard deviation is not a factor in this computation.

One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would be less than the bond's yield to maturity if A) the coupons were reinvested at a rate below the yield to maturity B) the bond was redeemed at a premium C) the investor purchased a put option on the bond D) the bond was called at a discount

A...The calculation of yield to maturity assumes reinvestment of the bond's interest at the coupon rate. Therefore, if the investor was only able to do less than that, the holding period return would be decreased. This is part of the concept of internal rate of return (IRR), which takes into consideration the time value of money (compounding). It is tempting to choose the answer "a call at a discount," but bonds are never called at a price below par. Just keep it simple: If the question says you can earn less than the YTM, your return will be lower than the quoted YTM.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is A) 2% B) 2.13% C) 6.34% D) 4.26%

A...The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%.

Regarding the treatment of estates by the IRS, it would not be correct to state any of the following EXCEPT A) the maximum tax rate on estates is the same as that on gifts B) estates may be valued either at date of death or 9 months later using the alternative valuation option C) income received by the estate is reported on Form 1040 D) a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion

A...The maximum tax rate on estates and gifts is 40% (the number is not tested; only that the rates are the same). The alternative valuation date is 6 months after death; 9 months after death is when the tax is due. Dead people can't make gifts and any income received by the estate before it is liquidated is reported on Form 1041.

Two of the major factors involved in the capital asset pricing model (CAPM) are interest rates stock risk premium tax rates market risk premium A) II and IV B) II and III C) I and II D) I and III

A...The model is made up of two separate components. One component is known as the stock risk premium and is the part of the model reflected by the following formula: (market return − the risk-free return) × beta of the stock. The other component is the market risk premium and is the part of the model reflected by the following formula: (market return − risk-free return). The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock, whereas the market risk premium is the incentive required for the individual to invest in the securities market in general.

Investment advisers who preach the benefits of strategic asset allocation do so because they believe A) the market is perfectly efficient because stock prices reflect all available information B) over the long run, strategic management will eventually outperform the market C) the market is basically inefficient and there is a strategy that can beat it D) active management of a portfolio offers tactical benefits

A...The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market.

A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A) 5% B) 15% C) 1.25% D) 10%

A...The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).

The risk/return pyramid where the bottom is lowest risk and the "point" is the highest, generally places commodities A) at the top. B) halfway between the middle and the top. C) at the bottom. D) in the middle.

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

The type of trust created by a will that becomes operative at death is A) a testamentary trust B) a revocable trust C) a Q-tip trust D) a living trust

A...The type of trust created by a will that becomes operative at death is A) a testamentary trust B) a revocable trust C) a Q-tip trust D) a living trust

The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) yield to maturity B) duration C) coupon rate D) current yield

A...The yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money.

An investor has her agent enter a sell stop order at 60, limit 60. Following the order entry, trades occur at 62.12, 60, 59.95, 60.06, 61. More than likely, the investor received A) 60.06 B) 61 C) 59.95 D) 60

A...This is really two orders. The first is to "stop" at 60. That is, once the stock trades at 60 or lower, enter my order. That second order is a sell, but with a limit of 60. So the first time the stock hits 60 (or less) is the trade at 60. That triggers the sell limit. The next trade is a 59.95. Because the limit order is saying, "Get me 60 or higher, the 59.95 is not an acceptable price." But, the next trade, 60.06 will meet the client's goal of receiving no less than 60.

What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 950? A) 5.26% B) 5.00% C) 5.26% plus the implied coupon rate D) The return cannot be determined without knowing current interest rates

A...To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond.

Money in an UTMA may be used to pay for certain expenses relating to the minor. Which of the following would be permitted usage of funds in an UTMA? A) Milk, bread, and eggs B) A vacation trip to Orlando C) A new suit D) Paying for the minor's share of the heating and lighting expenses

B...Although the custodian has wide latitude in how money in this account may be spent, in general, it is not permitted to use it for the basic necessities, such as food, clothing, and shelter.

During your annual review with your clients, Matt and Sally Eberhart, they indicate that they think it is time to start putting away some money for college for their 3-year-old son. They ask you to describe the advantage of using an UTMA account over a Coverdell ESA. You would likely point out all of the following as advantages EXCEPT A) contributions to the UTMA are made with after-tax dollars B) there are no earnings limits for making UTMA contributions C) withdrawals for other than qualified education expenses are not subject to any penalties D) there is no limit to the amount that can be contributed to an UTMA

A...We're looking for a feature possessed by the UTMA that is not found in an ESA, but in both cases, contributions are made with after-tax dollars. Therefore, you would not describe that as an advantage. Unlike the ESA where couples earning in excess of $220,000 per year are not eligible to contribute, no such ceiling is imposed on those donating or transferring property to an UTMA. Unlike the ESA, where there is a 10% tax penalty on the earnings withdrawn for nonqualified educational expenses, no such penalty applies to an UTMA. Unlike the ESA, which has a $2,000 per year per child limit, there is no limit to the amount that one can give to an UTMA. However, unlike the ESA, where all earnings are tax free if used for qualified educational expenses, earnings in an UTMA are taxable and, if over a certain amount, might be taxed at the parent's top marginal rate.

Construction of an investment policy statement (IPS) requires identifying the client's objectives and constraints. Which of the following would not be in the list of constraints? A) Risk tolerance B) Liquidity C) Taxes D) Time horizon

A...When constructing an investment policy statement (IPS) risk tolerance is an objective, not a constraint. Time horizon, taxes, and liquidity are all constraints. An easy way to remember the five constraints is TTLLU (time horizon, taxes, liquidity, laws, unique).

An individual has just received an inheritance of $15,000 and has the goals of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Bank-insured CDs B) Newly issued U.S. Treasury bonds C) Insured municipal bonds D) Public utility stocks

A...When preservation of capital is a goal and one of the choices is an insured bank CD, pick it. When the question refers to a low tax bracket, municipal bonds will never be the correct choice. Newly issued Treasury bonds have maturities of at least 10 years. During that time, changes to interest rates in the market place would cause the market price of those bonds to fluctuate. Although the public utilities will offer income frequently higher than the CD, there are no guarantees the principal will remain intact. (Some public utilities have gone bankrupt.)

Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) The cost to attend a summer camp B) A percentage of housing expenses, such as the utilities for his bedroom C) A percentage of food expense D) Clothing expense for child who has gone thru a growth spurt

A...You cannot use UTMA (or UGMA) money for the basics of food, clothing and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, sports league registration, would be permitted.

Ways in which a Section 529 plan differs from a Coverdell ESA include tax-free distributions when the funds are used for qualifying educational expenses. higher contribution limits no earnings limitations contributions that may be made by someone other than a parent or legal guardian A) II and IV B) II and III C) I and II D) I and IV

B...Contributions to an ESA are limited to $2,000 per beneficiary per year, while the 529 limit is set by the plan sponsor, sometimes as high as $300,000. Unlike the ESA where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.B

Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child's future education except A) the 529 plan has no age limits. B) the 529 plan is counted at a lower percentage of assets when applying for financial aid. C) the 529 plan allows for higher contribution levels. D) the 529 plan has no earnings limitation on the donor.

B...Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan.

Which of the following items are NOT included in the gross estate of a decedent? A) Property held in an account registered tenants in common B) Proceeds from a life insurance policy owned by the deceased's spouse C) Proceeds from a life insurance policy held in a revocable trust D) The first $250,000 of a primary residence if owned singly, $500,000 if owned jointly with spouse

B.....One popular estate-planning technique is to have life insurance owned by (and premiums paid by) someone other than the insured. In that case, proceeds are generally excluded from the gross estate of the deceased. If the trust was irrevocable, that same benefit might be achieved, but not with one that is revocable. There is an exclusion for income tax purposes on the sale of a primary residence, but that has nothing to do with the estate. Finally, when property is owned tenants in common, the percentage belonging to the deceased is part of the gross estate.

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $1,500 B) $6,500 C) $10,000 D) $4,500

B....All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.

For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? A) Pension plan B) General partnership C) Sole proprietorship D) C corporation

B....Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners. Although the suitability is based on the owner of a sole proprietorship, there is only one owner, so a question asking about collective suitability doesn't ring true for that.

A customer in the 25% tax bracket bought 200 shares of ABC at $93 per share plus commission of $50. Considering the customer's cost basis, when she sold 100 shares six months later at $96 per share, less commission of $50, her after-tax net was A) $150.00. B) $168.75. C) $56.25. D) $300.00.

B....Because the purchase and sale were of different lots, you must compute the net proceeds on a per share basis. Dividing the cost of $93 + commission of .25 ($50 ÷ 200 shares) gives you a total per share cost of $93.25. Selling for $96.00 - 0.50 ($50 ÷ 100 shares) = $95.50 proceeds per share. $95.50 - $93.25 = $2.25. $2.25 multiplied by 100 shares sold = $225.00. In a 25% tax bracket, this is a taxable short-term gain and 25% of $225.00 = $56.25. Therefore, her after-tax net was $168.65 ($225 - 56.25).

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax through the use of various tax preference items. Those preference items are added back to the taxpayer's ordinary income on IRS Form 6251 and would include A) straight-line depreciation taken on investment real estate. B) interest received from specified private purpose municipal revenue bonds. C) intangible drilling costs in connection with an oil drilling program. D) long-term capital gains in excess of $3,000 annually.

B....The Internal Revenue Code provides that interest on specified private activity bonds is an item of tax preference. Therefore, this interest must be added to a taxpayer's regular taxable income in order to compute the taxpayer's AMTI. Accelerated depreciation and excess intangible drilling costs are preference items. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.

When Felicity died, she left her estate, including her IRA, to her daughter, Courtney. Because of her financial circumstances, Courtney decided to abjure the inheritance. This would lead to her A) accepting the estate B) disclaiming the IRA C) becoming the executrix of the estate D) contesting the estate

B....When one wishes to refuse the receipt of an IRA, the procedure is known as disclaiming the IRA.

It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? Age Life stage Retirement savings Tax status A) I and II B) II and III C) III and IV D) I and IV

B...All of these are important suitability considerations for all customers. But when it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors.

Ian is a technical analyst who believes the market, as represented by the S&P 500 Index, is overbought. Over the next several months, there is a 12% correction. Which of the following strategies would have been successful for Ian? A) Buy futures contracts on the S&P 500 Index B) Sell futures contracts on the S&P 500 Index C) Sell put options on the S&P 500 Index D) Buy call options on the S&P 500 Index

B...Ian was obviously bearish on the market. When something is overbought, it means it is overvalued due to excessive buying at unreasonably high prices. In this case, it is likely the market is primed for a correction (a reversal). The 12% correction proves him to have been correct. Selling a futures contract is taking a short position. Just as with selling stock short, the investor profits when the price of the underlying asset declines. Ian could have also profited by going long (buying) put options on the index. Selling puts and buying calls generate profit in a bullish market, not a bearish one.

If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities as of December 31 of the year in which the gift is made B) the market value of the securities on the date of gift C) the market value of the securities as of April 15 of the year in which the gift is made D) the cost of the securities

B...If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents A) the offer price B) the bid price C) the premium D) the yield to maturity

B...If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price. What does the 5% coupon and the 15 years to maturity have to do with the question? NOTHING. And, knowing that treasuries are quoted in 32nds has nothing to do with it either. And, one more thing. The price quote is above 100, so it is at a premium, BUT the better answer is bid price because the question is referring to the quote.

Which of the following forms of joint ownership is most often used for real estate? A) Totten trust B) Tenancy by the entirety C) Joint tenants with right of survivorship D) Tenants in common

B...Tenancy by the entirety is most commonly used for ownership of real property (real estate).

The capital asset pricing model (CAPM) is based on several limiting assumptions. Which of the following statements is correct regarding the CAPM? A) The CAPM assumes that investors' expectations regarding risk and return are not identical but normally distributed. B) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. C) The CAPM does not assume that the expected excess returns for the market are known. D) The CAPM does not assume that investors have access to the same information.

B...The CAPM assumes that investors should construct a portfolio with the highest Sharpe ratio because that offers the highest risk-adjusted return. It also assumes that the expected excess returns for the market are assumed to be known in that investors have access to the same information. As well, it assumes that returns are normally distributed and investors' expectations for risk and return are identical.

The capital asset pricing model (CAPM) is most commonly used to determine an investor's A) holding period return B) expected return C) risk-adjusted return D) time-weighted return

B...The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf). Er stands for expected return, Rf is the risk-free return. Remember, expected return is a form of risk-adjusted return and is the more specific answer to this question.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is A) 4.26% B) 2% C) 6.34% D) 2.13%

B...The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%.

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 12%, and a particular stock's beta is 0.8 with a correlation coefficient of 0.60, the expected return would be A) 7.2% B) 10.0% C) 9.6% D) 11.6%

B...The formula for this computation is as follows: 12% (the return on the market is a beta of 1.0) minus the risk-free rate of 2%, or 10%. Then, multiply that by the beta of this stock (0.8) to arrive at 8%. That is, the stock should return 8% above the risk-free rate of 2%, or 10%. The correlation coefficient is not relevant to this computation.

Your client notices that the listing for the CDL $100 par common stock in the Wall Street Journal indicates that the current yield of the stock is 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of A) $1.60 B) $.40 C) $1.00 D) $4.00

B...The par value of the common stock is irrelevant to this question. In order for a stock selling at $40 to have a current yield of 4%, the annual dividend must be $1.60. Because common stock dividends are typically paid quarterly, more than likely, the quarterly dividend is $.40 per share.

A hedge fund with a 2-plus-20% fee structure has equal probabilities of a 10% loss or a 30% gain in its first year. The probable return to an investor in the fund for the first year is closest to A) 8.8%. B) 5.2%. C) -2.0%. D) 17.6%.

B...To our knowledge, the exam has never asked a question this complicated. But, things can always change so we wanted you to get the "flavor" of combining probable return (which is tested) with hedge fund performance fees. With a 30% gain, the fund would earn fees of 2% + 0.20(30% - 2%) = 2% + 0.20 (28%) = 2% + 5.6% = 7.6%. With a 10% loss, the fund would only earn its management fee of 2%. To the investor, the expected return is 0.5(-10% - 2%) = 0.5 (-12%) = -6% + 0.5(30% - 7.6%) = -6% + 0.5 (22.4%) = -6% + 11.2% = 5.2%.

Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk? A) Aggressive growth fund B) Money market fund C) Preferred stock fund D) High-yield bond fund

C...Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

Under the Securities Exchange Act of 1934, which of the following is (are) TRUE regarding the authority of the SEC to suspend trading? The SEC may suspend all trading on a specific exchange for up to 90 days. The SEC may summarily suspend trading on a particular nonexempt security for up to 10 days. The SEC may suspend trading on exempt securities. A) I, II, and III B) I and III C) I and II D) I only

C....The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification of the president of the United States and may summarily suspend securities trading in a registered security listed on a stock exchange for up to 10 days. The SEC does not have the authority to suspend trading in exempt securities.

Why are ERISA Section 404(c) and the accompanying Department of Labor regulations important for an employer who sponsors a Section 401(k) retirement plan and who offers at least 3 diversified categories of investments with materially different risk and return characteristics? A) This section permits the employer to avoid certain coverage and participation rules that would otherwise apply to a qualified plan. B) If followed, the employer need not provide a Summary Plan Description (SPD) to any employees participating in the plan. C) If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee. D) Union-negotiated contracts are exempt from Department of Labor review under this safe harbor section.

C....The importance of ERISA Section 404(c) to an employer sponsoring a Section 401(k) plan with self-directed investment or earmarking provisions is the relief from fiduciary responsibility for unsatisfactory investment results experienced by the employee.

John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $122,000 B) $138,000 C) $150,000 D) $130,000

D...The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.

A person providing which of the following services to an ERISA plan would be performing in a fiduciary capacity? A) Changing the level of employer contributions B) Amending the plan C) Selecting and monitoring third-party service providers D) Determining the age at which benefits are to be provided

C....The issue here is the distinction between fiduciary functions and something called settlor functions. ERISA defines fiduciary not in terms of formal title but rather in functional terms of control and authority over the plan. ERISA provides that a person is a fiduciary with respect to an employee benefit plan to the extent that such a person does any of the following: exercises any discretionary authority or control over the management of a plan or over the management or disposition of plan assets; renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of such plan; or has any discretionary authority or discretionary responsibility in the administration of such plan including appointing other plan fiduciaries or selecting and monitoring third-party service providers. The other choices given in the question are known as settlor functions. The most common settlor functions are design decisions involving: establishment of the plan, defining who are the covered employees and benefits to be provided, and amending or terminating the plan. Because the likelihood of an IAR ever performing settlor functions is quite remote (usually they are done by employees of the sponsoring employer), I cannot fathom why NASAA would ask something like this on the exam, but, just in case.

Which of the following orders would be most likely to add fuel to a bullish stock market? A) Buy limit B) Sell stop C) Buy stop D) Sell limit

C...Buy stop orders are placed above the current market price and are usually used by those with short positions. As prices increase, these stop orders are triggered, sending more buy orders to the trading floors.

One reason why employers like using deferred compensation plans is that A) they provide larger tax deductions than any other plan B) with all employees receiving the same benefit, plan administration is simplified C) they can be structured so that the employee's benefits are forfeited upon termination with cause D) IRS approval is easily obtained

C...Deferred compensation plans frequently provide that employees leaving before a certain period of time, going to the competition, or being terminated for cause forfeit plan benefits. There are no current tax deductions, the plans discriminate, and because they are nonqualified, there is no IRS approval.

For purposes of the maximum allowable annual contribution, an individual would have to aggregate contributions made to A) a 401(k) and a Roth IRA. B) a 403(b) and a 457. C) a 401(k) and a 403(b). D) a 401(k) and a 457.

C...Disregarding the catch-up provision for those age 50 and older, the maximum annual contribution in 2020 for the employer-sponsored plans is $19,500. An individual covered by a 401(k) or a 403(b) may contribute that plus another $19,500 to the 457. Likewise, contributing to an employer-sponsored plan does not affect the Roth IRA limit. However, maintaining a 401(k) and a 403(b) is similar to maintaining a Traditional and Roth IRA. The maximum is not doubled, it is aggregated.

An estate-planning technique often recommended for those with large taxable estates is the use of A) the capital needs analysis B) the alternative valuation date C) an irrevocable life insurance trust (ILIT) D) a testamentary trust

C...For those with large taxable estates, the purchase of life insurance to cover the potential estate tax liability is frequently recommended. The use of the ILIT will generally keep the proceeds out of the estate. The alternative valuation date only helps if the value of the estate drops sometime during the six months after death. A testamentary trust does little, if anything, to reduce estate taxes, and the capital needs analysis is used to determine the replacement value needed in the event of premature death—unlikely to have a need with this large of an estate.

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $2,500 long-term capital gain plus $1,000 short-term capital gain. B) $6,000 long-term capital gain plus $500 short-term capital gain. C) $6,500 long-term capital gain. D) $4,000 long-term capital gain.

C...Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.

A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to A) a grandchild of the donor. B) a sibling of the donor. C) the American Red Cross. D) a non-citizen spouse.

C...Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax. If the spouse is a non-citizen, there is a limit ($152,000 in 2018) and anything in excess of $15,000 to a grandchild or sibling is taxable unless the donor elects to use the excess against the lifetime exclusion ($11.2 million in 2018).

An agent explains dollar cost averaging to a mutual fund prospect, and implies that by investing the same number of dollars each month and reinvesting the distributions, the value in a mutual fund will increase. In this situation, the agent has A) accurately explained the result of dividend and capital gain reinvestment B) accurately explained the result of dollar cost averaging C) made a misleading statement to the customer D) made a misleading statement to the customer only if the fund has not increased in value within the previous 10 years

C...Implying that dollar cost averaging or dividend reinvestment will automatically produce profit for a mutual fund customer is misleading, regardless of the fund's past performance. The statement is misleading whether or not the fund has increased in value within the previous 10 years. The only permissible statement is that dollar cost averaging will produce an average cost per share that is less than the average price per transaction.

Keogh Plans are qualified plans intended for those with self-employment 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) A participant in a Keogh Plan may also maintain 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) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA.

C...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. Anyone with earned income may have an IRA, regardless of participation in another qualified plan, and the Keogh Plan contribution limits are much higher than those for an IRA.

Savant Investment Managers (SIM) has a client with a long position in PQR common stock. The position has an average cost per share of $30, and with PQR currently selling at $50 per share, the client is interested in a method that will allow her to protect some of the unrealized profit without an expenditure of funds. Her representative at SIM could suggest A) entering a sell stop order at $55. B) entering a buy stop order at $45. C) entering a sell stop order at $45. D) buying PQR 45 put options.

C...Sell stop orders, commonly called "stop loss" orders, are designed to halt a loss or protect a gain. These are sell orders placed below the current market that become triggered if it happens that the stock should trade at or through the specified stop price. Buying the put options would also offer the protection, but the question specified no expenditure of funds.

As part of its suitability determination, anOne of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up? A) Tenants in common B) Joint tenants with right of survivorship C) Tenants in the entirety D) Transfer on death IA firm requires that all potential nonbusiness clients complete a family balance sheet. Items that would be included are 1gold jewelry 2loan secured by the family automobile 3the amount paid thus far this year for Botox injections 4the balance owed to the dentist for new crowns A) I and IV B) II and III C) I, II and IV D) I, II, III and IV

C...The balance sheet contains assets and liabilities as of a specific point in time. Personal property currently owned, such as jewelry, is an asset. A loan still outstanding, such as the car loan and the debt to the dentist, are liabilities. The amount already paid for the Botox injections is no longer on the balance sheet.

An investment adviser representative is evaluating DEF stock to see if it is a good fit for a client's portfolio. Using the security market line (SML), what is the expected return for DEF when the return on the market is 8%, the 91-day Treasury bill is yielding 6%, DEF's beta is 1.50, and the inflation rate, as measured by the CPI, is 4%? A) 8% B) 5% C) 9% D) 12%

C...The formula for this computation is as follows: 8% (the return on the market is a beta of 1.0) minus the risk-free rate of 6%, or 2%. Then, multiply that by the beta of this stock (1.5) to arrive at 3%. That is, the stock should return 3% over the risk-free rate of 6%, or 9%. Inflation rate is only important if we are looking for the real (inflation-adjusted) return, not the expected return.

Which of the following is regulated by the Securities Exchange Act of 1934? A) Registration of new issues of stock B) Exemptions of new issues from registration requirements C) Regulation of exchanges D) Requirements for the provisions of a prospectus

C...The purpose of the Securities Exchange Act of 1934 is to regulate secondary market trading of securities that have already been issued. It created the SEC and requires that all securities exchanges and firms register with the SEC if they are involved in interstate commerce. It was the Securities Act of 1933 that dealt with registration and exemption from registration of new issues and prospectus delivery requirements.

Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio? A) Dollar cost averaging B) Discounted cash flow C) Time-weighted return D) Dollar-weighted return

C...Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals. Dollar-weighted return is more commonly used for evaluating investor performance.

An investor purchases 100 shares of Kapco stock at $50 per share. At the time of the purchase, the stock is paying a quarterly dividend of $0.25. The dividend increases 5% each year over the next 5 years. The purchaser sells the 100 shares 5 years after purchase for $82 per share. What is the total return for the investor over the 5 years holding period? A) 74% B) 11% C) 75% D) 10%

C...Total return includes capital appreciation plus income. The capital gain realized was $32 per share. The income was $1.00 per share (four quarterly dividends of $0.25) the 1st year, 5% higher the 2nd year ($1.05) and 5% higher each successive year. The total of the dividends received is $5.53. Adding that to the $32, we compute by dividing $37.53 by $50 resulting in a 75% total return.

The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2019 without incurring gift tax consequences? A) Unlimited B) $15,000 C) A limited amount because her spouse is not a U.S. citizen D) $100,000

C...Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2019, that limit is $155,000, (the amount is never tested).

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 capital asset pricing model (CAPM), what is the expected rate of return of this stock? A) 6.85% B) 5.06% C) 7.60% D) 10.12%

C...Use the CAPM to calculate the expected rate of return. Expected (required) return = 0.03 + [0.92 (0.08 − 0.03)] = 0.0760, or 7.60%.

Which of the following is the simplest portfolio management style for individual stocks? A) Moving averages B) Indexing C) Core D) Buy and holdWhich of the following is the simplest portfolio management style for individual stocks? A) Moving averages B) Indexing C) Core D) Buy and hold

D...The key to answering this question correctly is recognizing that it is dealing with individual stocks. If the question dealt with managing a portfolio, then indexing would be the simplest style.

All of the following statements regarding qualified corporate retirement plans are true EXCEPT A) all corporate pension and profit-sharing plans must be established under a trust agreement B) all qualified retirement plans are either defined contribution or defined benefit plans C) with defined benefit plans, the employee bears the investment risk D) they are covered under ERISA

C...With defined benefit plans, the employer (not the employee) bears the investment risk. The employer must fund the defined benefits, regardless of the investment performance of funds set aside for this purpose. The retiree receives a defined benefit regardless of investment performance. All corporate pension and profit-sharing plans must be established under a trust agreement. All qualified retirement plans are either defined contribution or defined benefit plans.

An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Laddering B) Diversifying C) Barbell bonds D) Bullet bonds

C...With the barbell strategy, the investor would place $25,000 into bonds maturing in 10 years and the other half into bonds maturing in two years. This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates (if they materialize).

This is the performance of your portfolio over the previous 4 years: Year 1 - 10% Year 2 - 45% Year 3 + 20% Year 4 + 35% In order for the portfolio to be equal to the starting investment, the return in Year 5 must be nearest to A) 20%. B) 0%. C) 25%. D) 33%.

C..Suppose the initial value of your portfolio is $1,000. In Year 1, you lose 10%. Your portfolio is now worth $1,000 x (1 - 0.1) = $1,000 x 0.9 = $900. In Year 2, you lose 45%. Your portfolio is now worth $900 x (1 - 0.45) = $900 x 0.55 = $495. In Year 3, you gain 20%. Your portfolio is now worth $495 x (1 + 0.2) = $495 x 1.2 = $594. In Year 4, you gain 35%. Your portfolio is now worth $594 x (1 + 0.35) = $594 x 1.35 = $801.9. You would like to know by how much your portfolio needs to appreciate in Year 5 to be worth its original value of $1,000. Let's set "y" to be this number. Then we have: $801.9 x (1 + y) = $1,000. Solving this equation for "y" gives: y = ($1,000 ÷ $801.9) - 1 = 0.247 = 24.7%. Rounding this answer in percentage terms (24.7%) to the nearest integer yields the desired answer of 25%. Your portfolio thus needs to increase by nearly 25% in Year 5 for it to be worth its original value of $1,000. Some might find it easier to look at the shortfall ($1,000 - $801.90) = $198.10. Divide that by the current value and you have 198.10 ÷ 801.90 = 24.7%. Some might just look at the number and recognize that you are about $200 short on a value of $800 and that is 25%.

GHI currently has earnings of $4 and pays a $0.50 quarterly dividend. If GHI's market price is $40, the current yield is A) 1.25% B) 15% C) 10% D) 5%

D...The quarterly dividend is $0.50, so the annual dividend is $2; $2 ÷ $40 market price = 5% current yield.

With respect to a qualified retirement plan, fiduciaries must act in all of the following ways except A) to diversify investments to minimize the risk of large losses, unless doing so is clearly not prudent under the circumstances. B) solely in the interest of plan participants and beneficiaries. C) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent professional would use. D) solely in the interest of the sponsoring employer.

D....ERISA's rules dealing with qualified plans require that the plan's fiduciaries place the interest of the plan participants and their beneficiaries first, not the employer.

A client is risk averse and is planning on retiring in 16 years. As the client's investment adviser, which of the following would you recommend? A) A government bond fund B) A high-yield bond fund C) A diversified open-end investment company concentrating in small-cap stocks D) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds

D....Even though the government bond fund carries less market risk, with a 16-year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection. The 50/50 mix would seem to be most appropriate.

An investor purchased 100 shares of GRA stock at $100 per share in a margin account. Two years later, the GRA was sold for $120 per share. If the investor's account was charged $700 in margin interest, it would be proper to state that this is an example of A) a speculative investment. B) a long-term capital gain of $1,300. C) negative margin. D) positive margin.

D....Positive margin means that, after taking into consideration the interest paid on the borrowed money in a margin account, a specific transaction was profitable (negative margin is the reverse). In this case, the sale resulted in a gain of $2,000 which is $1,300 more than the interest cost.

You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct? A) She may continue to contribute, but only a portion of her contribution will be tax deductible. B) She may continue to contribute, but her contribution will not be tax deductible. C) Her income for the year exceeds the allowable limit for making a contribution. D) She may continue to contribute and her contribution will be tax deductible.

D....The only time that there is an earnings limit is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.

A bond of standard size has a nominal yield of 6%, paid in the customary fashion. The bond matures in 10 years, is callable at $105 in 5 years, and is currently priced at $110. An investor calculating the bond's yield to call would include A) the loss of $100 at maturity. B) the gain of $50 when called. C) 20 payment periods. D) the semiannual interest payments of $30.

D....The yield to call computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon (nominal yield) will make $30 interest payments twice each year. Remember, unless otherwise stated, bonds have a par value of $1,000 and customarily pay interest semiannually. With a 5-year call, there are only 10 payment periods, not 20. The loss at call is $50 ($1,100 - $1,050); there is no gain and the loss at maturity of $100 is only relevant for YTM, not YTC.

When a brokerage firm sells stock from its own inventory, it is acting in the capacity of A) an agent, and charges a markup B) a principal, and charges a commission C) an agent, and charges a commission D) a principal, and charges a markup

D...A broker-dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge markups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker-dealer receives a commission.

In order to comply with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is NOT required to open a margin account for a trust? A) Approval of the account by the designated supervisory person B) Specific text in the trust agreement authorizing a margin account C) A margin agreement D) A completed margin suitability form

D...A margin account allows the customer to borrow money from the broker-dealer in order to buy securities. Although that does entail assuming greater risk on the part of the trust, there is no such thing in the Statement of Policy as a margin suitability form. However, under the Statement of Policy, the margin forms and agreements must be completed promptly after the initial margin trade. All accounts, not just margin, or trust accounts, require the approval of an appropriate supervisory person.

A computerized mathematical technique that is often used by investment advisers to project future financial outcomes, such as the probability of a client's funds lasting through retirement, is called A) capital asset pricing model (CAPM). B) efficient market hypothesis (EMH). C) asset allocation modeling (AAM). D) Monte Carlo simulation (MCS).

D...A popular form of mathematical modeling that uses computer-generated distributions is the Monte Carlo simulation (MCS). For those approaching (or in) retirement, it can be very useful to answer questions such as: "Do savings need to be increased?", "Can I retire earlier?", "Must I retire later?", "Do I need to reduce my withdrawal rate?", "Can I increase my withdrawal rate?".

Although not required by DOL regulations, if a plan administrator prepared a written investment policy statement meeting ERISA requirements, you would expect to find all of the following EXCEPT A) investment philosophy B) methods to be used for determining how the plan will meet future cash flow needs C) performance measurement parameters D) the identity of the specific securities to be chosen for the portfolio

D...Although not required by law, most qualified plans have an IPS. One thing not found in that statement is a listing of specific securities to be selected. The method for determining how they are selected will be there, but not the specific securities.

During your initial interview with a potential advisory client, you obtain the following information: He is 58, she is 56, and they both plan to continue working until she reaches 65 and is eligible for Medicare. As you begin to develop a plan for this couple, you would probably project their time horizon as A) 9 years B) 16 years C) 7 years D) approximately 30 years

D...An investor's time horizon is the length of time the planned investment strategy is designed to serve. In the case of a couple looking ahead to retirement, the time horizon is their life expectancy.

Which of the following employer-sponsored plans allows coverage to discriminate in favor of key employees? A) 403(b) plan B) Defined benefit pension plan C) 401(k) plan D) 457 plan

D...Because the 457 plan is technically non-qualified, it does not come under the non-discrimination rules of ERISA.

If an investor received a lump-sum distribution from a 401(k) plan when he left his job, he may 1roll over his account into an IRA within 60 days 2transfer his account without taking possession of the money 3keep the funds and pay ordinary income tax 4invest in a tax-exempt municipal bond fund to avoid paying tax A) II and IV B) I and II C) III and IV D) I and III

D...Because the client has already received the lump sum, he may either roll the money into an IRA account within 60 days, or retain the money and pay income tax (and possibly a penalty) on it. Any amount the client does not roll over will be taxed as income, even if invested in tax-exempt bonds. A direct custodian-to-custodian transfer is not permitted because the client has already received the distribution.

The employer does not get a current tax deduction when offering which of the following retirement plans? A) Defined benefit plan B) Money purchase plan C) SIMPLE plan D) Deferred compensation plan

D...Because there is no constructive receipt of income until the deferral period is over, the employing company does not get a current tax deduction. Of course, the employee doesn't report taxable income until then. In the other plans, all qualified, any contributions made by the employer represent a current business expense and are deductible from the company's income.

Under current federal tax law, which of the following would have an effect on the amount of taxes your client would pay? 1Age 2Citizenship 3Marital status as of the last day of the year 4Residency

D...Each of these can affect your tax rate. Taxpayers age 65 and older get an extra exemption, so that lowers their tax. If you are not a U.S. citizen, and are considered a nonresident alien, you are taxed somewhat differently than others. Only married persons can file a joint return, which usually, but not always, results in lower taxes. Residency determines if you will also have to pay a state income tax and receive deductions for that (or a state sales tax) on your federal income tax.

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) The policy is surrendered B) There is a cash withdrawal in excess of the cost basis C) The death benefit is paid D) A loan is taken equal to 95% of the policy's cash value

D...Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.

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) 4%. B) 6%. C) 8%. D) 5%.

D...In an efficient market, bonds are priced so that their NPV is zero. That means the bond's yield to maturity is equal to the current market interest rates for similar bonds. When that rate is 5%, as is given in this question, all AA bonds with 20 years remaining to maturity should have a YTM of 5%.

If an agent recommends that a client invest a portion of his portfolio in an international stock fund and is asked whether she should compare the performance of the fund against the S&P 500 Index, how should the agent respond? A) There is no appropriate benchmark against which an investor can compare a portfolio of foreign securities. B) Yes, the S&P 500 is an appropriate benchmark against which to compare the performance of all equity funds. C) No, it is preferable to compare the fund against the Russell 2,000 Index because it covers smaller corporation stocks. D) No, it is preferable to compare the fund against the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index because it covers international securities.

D...It is important that a particular mutual fund be compared against the appropriate benchmark. An international fund's performance should be compared against an index of foreign stocks such as the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index.

Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk? A) Aggressive growth fund B) Money market fund C) High-yield bond fund D) Preferred stock fund

D...Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

An elderly client explains to you that he is risk averse and wishes to find an investment that will provide him with preservation of capital. Which of the following might you recommend? A) Long-term U.S. government bonds B) An index fund C) Variable annuities D) Bank-insured CDs

D...Preservation of capital is almost always a sign that the client needs CDs. Sure, the U.S. government bonds will pay back the principal when due, but with long-term maturities, there will be plenty of interest rate risk that could affect the client if he needs the capital prior to maturity.

One of your clients has just completed a divorce. The client is a participant in a 401(k) and has a traditional IRA. The divorce settlement includes a QDRO providing for half of the client's account to go to the ex-spouse. The ex-spouse also receives half of the client's IRA. With regard to the ex-spouse, which of the following statements is correct? A) The ex-spouse has 60 days to rollover the distribution. B) Withdrawals from the 401(k)prior to age 59½ may be subject to the 10% penalty. C) The name of the former spouse must appear on the ex-spouse's IRA. D) Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty.

D...QDROs apply only to qualified plans and, therefore, if the ex-spouse withdraws funds from the 401(k) prior to age 59½, it will generally qualify for the exemption from the 10% penalty. In the case of withdrawals from the IRS, unless due to one of the allowable exceptions (death, disability) the 10% tax penalty applies. When there is a divorce and an IRA is split, the ex-spouse now has an IRA in his or her name with no mention of the previous owner. There is technically no distribution so there is nothing to rollover.

A 74-year-old widower has been your client since his early 50s. He is a well-informed investor and has always seemed capable of understanding most investment concepts you have presented. At least twice a year, the 2 of you meet to evaluate his current financial situation and objectives. In your last meeting, it seemed to you that he was distracted and somewhat forgetful. It would be appropriate for you to do all of the following EXCEPT A) take detailed notes on future conversations and meetings with him B) inform your supervisor of your concerns about his memory loss C) ask him to invite a friend or family member to accompany him to appointments with you D) wait to see if there are further causes for concern about his capabilities

D...Taking action in advance could help protect you and your firm should a client subsequently indicate that he does not remember having agreed to a recommendation. Taking detailed notes can help verify what has been discussed in conversations or at meetings. Having others present may help to verify what has been discussed and agreed upon.

The capital asset pricing model (CAPM) is most commonly used to determine an investor's A) holding period return B) risk-adjusted return C) time-weighted return D) expected return

D...The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf). Er stands for expected return, Rf is the risk-free return. Remember, expected return is a form of risk-adjusted return and is the more specific answer to this question.

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? A) $625,000 B) $0; it is below the $11.4 million exemption equivalent C) $750,000 D) $175,000

D...The question is asking for the net estate, not the amount of estate tax due. The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net or taxable estate. The math goes like this. The $1.1 million gross estate (add together the assets ($200,000 + $650,000 + $250,000) is reduced by the $850,000 left to his wife. That brings the net estate down to $250,000 ($1,100,000 minus $850,000). The net estate is further reduced by the $75,000 in debt and expenses. Subtracting $75,000 from $250,000 leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019.

Risk-adjusted return is calculated by A) multiplying the return of an investment by its standard deviation B) dividing the security's price by its beta C) dividing the remainder of the risk-free rate subtracted from the security's actual return by its standard deviation D) dividing the price of the stock by its standard deviation

D...The return from a security can be adjusted for the risk associated with it by subtracting the risk-free rate from the security's actual return and then dividing that by its standard deviation, the basic measure of unsystematic risk. This is commonly known as the Sharpe ratio.

It would be correct to state that the specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market the specialist stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market the market maker stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market the market maker stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market A) I and III B) II and III C) II and IV D) I and IV

D...The specialist performs his activities on the floor of an exchange, while the market maker performs a similar function in the OTC market. Note: The term specialist has been replaced by designated market maker (DMM), but specialist might still appear on the exam.

Which of the following is TRUE of the weak form of the efficient market hypothesis? A) It implies that insiders cannot make a profit from their trading. B) It implies that throwing darts is just as efficient as analyzing the market. C) It implies that stock prices react to information when it becomes publicly available. D) It implies that market information cannot be used to identify future price movements.

D...The weak form of the EMH states that all market information has already been incorporated into the current stock price. Therefore, having that information is of no help in predicting movements in the market.

A single individual earning $250,000 a year may 1open a Coverdell ESA 2not open a Coverdell ESA 3open a 529 college savings plan 4not open a 529 college savings plan A) I and III B) II and IV C) I and IV D) II and III

D...There are income limits that apply to Coverdell ESAs. Single individuals earning more than $110,000 per year are not permitted to open a Coverdell account, and married couples lose the ability to contribute when earnings exceed $220,000. However, there are no income limits restricting who is eligible to open and contribute to a Section 529 college savings plan.

One of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up? A) Tenants in common B) Joint tenants with right of survivorship C) Tenants in the entirety D) Transfer on death

D...Transfer on death, or TOD as it is usually called, would be the appropriate choice here. It avoids probate, but not estate taxes. It allows the account owner to specify different percentages for each beneficiary if desired.

You have a 70-year-old client who owns a whole life insurance policy. The face amount of the policy is $1 million and it currently has a cash value of $400,000. The client is interested in a life settlement. If the policy is accepted, the client would expect to receive A) the face amount plus the cash value. B) the $1 million face amount. C) less than $400,000. D) more than $400,000, but less than $1 million.

D...When a policy is sold through the life settlement process, the insured receives more than the cash value, but less than the face amount of the policy.

What investment style is employed by a portfolio manager whose list of eligible securities includes only those with a market capitalization in excess of $20 billion? A) Conservative B) Blue chip C) Indexing D) Large-cap

D...When you see market cap, there are 4 levels tested on the exam: large-cap is those with a market cap in excess of $10 billion; mid-cap is the $2 billion to $10 billion range; small-cap is $300 million to $2 billion; and micro-cap is $50 million to $300 million. This manager may be focusing on "blue chip" stocks, but that is not an investment style. Are large-cap stocks conservative? In many cases, yes, but that is not a management style. It is critical on the exam that you choose the answer best fitting the question.

One of the ways that individuals can accumulate funds for retirement is through individual retirement arrangements (IRAs). There are a wide range of investments eligible for inclusion in an IRA and would include all of the following except A) specified collectibles. B) exchange-traded funds. C) fixed annuity contracts. D) life insurance contracts.

D。。。。Life insurance policies are prohibited investments in an IRA and, in general, collectibles are prohibited as well. There are some important exceptions to the collectible prohibition. The IRS states that an IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application? A) A prepaid tuition plan B) A Coverdell ESA C) An UTMA account D) A Roth IRA

c Although the exact percentages will likely not be tested, 20% of the money in an UTMA (or UGMA) account is counted, while only 5.64% of a Section 529 plan (either option) is counted. Retirement accounts are not considered assets on the application for student aid, which means the value of a Roth IRA won't hurt the individual's chances for financial aid eligibility.