section 2 series 66 final exam

An order to sell 100 shares of ABC at $50 GTC is a: market order limit order stop order

limit order A limit order specifies an execution price ("the limit"). An order to sell at $50 is a limit order. Market orders do not specify a price. Stop orders must state "Stop" with a price.

The Current Ratio measures: debt service coverage liquidity leverage

liquidity

The effect on the prices of securities due to the "changing tastes, likes and dislikes" of investors is: market risk business risk regulatory risk

market risk When investors like stocks, they buy them and stock prices rise. When investors don't like stocks, they either sell them or don't buy them and prices fall. This is market risk. Business risk is the risk that a negative event, bad management or bad products cause a company to become unprofitable.

A $1,000 par bond is issued with 5 years to maturity. The coupon rate on the bond is 3.50%. If the inflation rate for the next 5 years is 2.50%, the bond will be worth how much in 5 years? $1,000 $1,131 $1,188

$1,000 The bond matures in 5 years. At maturity, the bondholder receives par from the issuer. The 3.50% coupon ($35 in interest) is paid to the bondholder annually, divided into semi-annual payments. The inflation rate has nothing to do with this question.

A $1,000 par TIPS is issued with 5 years to maturity. The coupon rate on the bond is 3.50%. If the inflation rate for the next 5 years is 2.50%, the bond will be worth how much in 5 years?

$1,131

A U.S. based client purchases 10,000 yen for $110. If the yen drops to $.01, the purchase of 10,000 yen will now cost $90 $100 $110

$100 This question requires you to sharpen up your 6th grade math skills! Since 10,000 yen were purchased for $110, each yen has a value of $.011. If the yen falls to $.01, 10,000 x $.01 = $100 for the purchase.

An elderly mother's wedding ring was purchased many years ago for $3,000. The mother dies and wills the wedding ring to her daughter. On the date of death, the ring was valued at $5,000. Many years later, the daughter sells the ring for $7,500. What is the tax consequence to the daughter? No capital gain or loss because the item sold was personal property $2,500 long term capital gain $4,500 long term capital gain

$2,500 long term capital gain Personal property that is sold for a profit is subject to capital gains tax - and instead of the favorable 15% rate given to long-term holding of securities (this increases to 20% for individuals in the highest tax bracket), the tax rate is 28%! When an asset is inherited, the cost basis to the recipient is the market value at the date of death. Thus, the cost basis is $5,000 (this is called a "stepped up" basis). Since the ring was sold for $7,500, there is a $2,500 long term capital gain.

A customer, age 50, is in the 35% tax bracket. The customer has a non-tax qualified variable annuity separate account to which he contributed $15,000 that has a current market value of $35,000. The customer takes a distribution of $10,000 from the account. The tax that will be due on this distribution is $1,000 $3,500 $4,500

$4,500 Distributions from non-tax qualified variable annuity separate accounts are taxed on a LIFO (Last In First Out) basis. The original non-tax deductible contribution of $15,000 was the first in. The tax-deferred build up of $20,000 occurred second. When distributions are taken, the "build-up" portion comes out of the account first and is taxed at regular tax rates. After the build-up is depleted, the original investment of $15,000 comes out of the account and is not subject to tax. The customer is withdrawing $10,000 - which is all counted as "build-up" for tax purposes (last in - first out). This is taxable at 35%, plus the customer must pay a 10% penalty tax on a premature distribution (prior to age 59½). The total tax due is 45% of $10,000 = $4,500

A husband and wife wish to open a spousal IRA. The wife works while the husband does not. What is the permitted maximum contribution to this spousal IRA for the year 2022 $6,000 for the wife; $0 for the husband $6,000 for the wife; $6,000 for the husband

$6,000 for the wife; $6,000 for the husband For the year 2022, the maximum contribution for a spousal IRA, is $6,000 each, in two accounts, for a total of $12,000. It makes no difference if the spouse works or not

A stock has a beta of +1 and an expected return of 12%. Another stock has a beta of +1.4 and an expected return of 18.8%. What is the alpha of the second stock position? -2% +2% -6.8% +6.8%

+2% Alpha is any "excess risk adjusted return" of an investment. The second investment has a beta of +1.4 as compared to a beta of +1 for the first investment. If the first investment was at a comparable risk level, it would have to return 1.4 x 12% = 16.8% to be at the same risk level as the second investment. Because the second investment yields 18.8%, it gives an excess risk-adjusted yield of 2% more than the first investment. This is a +2% "alpha."

Investment A requires a $13,000 initial investment with a 3 year investment time horizon. It is expected to generate $5,000 of positive cash flow in Year 1, $5,000 of positive cash flow in Year 2, and $5,000 of positive cash flow in Year 3. Assuming that the market rate of return for investments of similar risk and investment time horizon is 10%, the NPV of this investment is:

-$565.75 At the end of Year 1, $5,000 of cash flow is received, discounted to today's present value using the 10% market rate of return = $5,000/1.10 = $4,545.45. At the end of Year 2, $5,000 of cash flow is received, discounted to today's present value using the 10% market rate of return = $5,000/(1.10 x 1.10) = $4,132.23. At the end of Year 3, $5,000 of cash flow is received, discounted to today's present value using the 10% market rate of return = $5,000/(1.10 x 1.10 x 1.10) = $3,756.57. The NPV is -$13,000 + $4,545.45 + $4,132.23 + $3,756.57 = -$565.75

Which of the following are included in the gross estate of a deceased person for estate tax purposes? I Roth IRA II Life Insurance on the decedent owned by a spouse III Revocable Trust IV Non-Revocable Trust

1 and 3

Which statements are TRUE regarding the annuitization of a variable annuity contract? I A Life Annuity payout option may be elected by the policy holder II Life Annuity-Period Certain is the preferred payout option III The number of annuity units is fixed; the annuity payment may vary IV The annuity payment is fixed; the number of annuity units may vary

1 and 3

An individual, for a fee, prepares a custom financial plan for a client that includes a section covering life insurance needs. In order to do so, the individual: I must be a licensed insurance agent in the State II is not required to be a licensed insurance agent in the State III must be a licensed investment adviser representative in the State IV is not required to be a licensed investment adviser representative in the State

1 and 3 To prepare customer financial plans for a fee, the individual must be licensed as an investment adviser representative in the State, but this does not cover life insurance! To sell life insurance, a separate State life insurance license is needed.

Which of the following are permitted investments in an IRA? I U.S. minted gold coins and gold bullion II Partnership units III Art IV REITs

1-2-4

If market interest rates rise from 6% to 7%, which security's price would be MOST adversely affected? 15 year Treasury Bond 15 year Treasury STRIP

15 year Treasury STRIP As market interest rates rise, the prices of fixed income securities drop, with longer maturities and lower coupon rate issues being most susceptible to interest rate risk. The longest maturity given is 15 years; and the lowest interest rate is "zero" - because a Treasury STRIP is a zero-coupon Treasury obligation.

Which of the following derivatives is NOT defined as a security? I LEAP II Swap III Real estate option IV Futures option

2 AND 3 LEAPs are long term options on single stocks or indexes that are exchange traded. They are defined as securities. Swaps are derivatives, but they are not defined as securities. A real estate option is a derivative, but it is not a security. Finally, while futures contracts are derivatives and are not securities; options contracts on futures are defined as a security.

When comparing an ETN to an ETF, which statements are TRUE? I ETNs are a type of investment company offering II ETFs are a type of investment company offering III ETNs are a debt instrument IV ETFs are a debt instrument

2 and 3

Which statements are TRUE when comparing an exchange trading floor to the OTC market? I It is possible for a stock to trade at 2 different prices at the same moment on an exchange floor II It is not possible for a stock to trade at 2 different prices at the same moment on an exchange floor III It is possible for a stock to trade at 2 different prices at the same moment in the OTC market IV It is not possible for a stock to trade at 2 different prices at the same moment in the OTC market

2 and 3

Which of the following statements concerning 529 Plans are TRUE? I Contributions are tax deductible to the donor II Distributions to pay for qualified higher education expenses are tax-free III The beneficiary can be changed to another family member without tax consequences IV Any plan balance must be distributed to the beneficiary at age 30

2 and 3 Contributions to a 529 Plan are not tax deductible. Distributions for qualified higher education expenses are tax-free. The beneficiary can be changed to another family member without tax consequences. there is no requirement that the plan balance be distributed to the beneficiary at any age, so this differs from the requirement for Coverdell ESAs that the funds be used by age 30.

When comparing dollar-weighted average return to time-weighted average return for a mutual fund investor, which statements are TRUE? I Time Weighted Average Return is affected by new cash inflows or outflows II Time Weighted Average Return is not affected by new cash inflows or outflows III Dollar Weighted Average Return is affected by new cash inflows or outflows IV Dollar Weighted Average Return is not affected by new cash inflows or outflows

2 and 3 Time Weighted Average Return is used by mutual funds on their performance charts to show average annual investment returns. It measures how well the fund manager performed in increasing the dollars that have been invested. Additional cash moving into the fund or out of the fund does not affect the computation. This is the average annual return that would be provided from a "buy and hold" strategy. Dollar Weighted Average Return is the same as the Internal Rate of Return. It is the discount rate that takes all of the cash flows from the investment. Dollar Weighted Return takes into account the impact of cash inflows and outflows from purchases and sales as well as growth in assets. The classic comparison of these 2 returns is where a fund receives a large cash inflow after a period of superior performance (which attracted the new investors to the fund) and then suffers a period of poor performance. Time Weighted Average Return shown over the following periods will be much higher than the Dollar Weighted Average Return experienced by the new investors.

Dollar Weighted Average Return: I is the return measure used for mutual fund performance charts II takes into account the timing of investment inflows and outflows III is the same as Time Weighted Average Return IV measures the performance achieved by a specific investor in a fund as opposed to the overall performance of that fund

2 and 4 Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return.

Stock options granted to an officer of a publicly-traded company: I create a tax event at the time of the grant II create a tax event if the options are exercised and the stock is subsequently sold at a profit III are subject to taxation as ordinary income IV are subject to taxation as capital gains

2 and 4 Stock options granted to an employee are not taxable unless the options are exercised and the stock purchased via the exercise is subsequently sold. The difference between the exercise price and the sale price is a capital gain, and the tax rate applied depends on the holding period of the stock. The holding period starts counting as of exercise date. If the stock is held for 1 year or less as of the date of sale, any gain is taxed at short-term rates. If the stock is held for more than 1 year as of the date of sale, any gain is taxed at long-term rates.

Which statements are TRUE regarding buy stop orders? I Buy stop orders will be elected at the stop price or lower II Buy stop orders will be elected at the stop price or higher III Once elected, buy stop orders will be executed at the stop price specified only IV Once elected, buy stop orders may be executed at, above, or below the stop price specified

2 and 4 Stop orders are placed "away" from the current market - sell stop orders are placed below the current market price (and elected at or below the stop price) while buy stop orders are placed above the current market price (and elected at or above the stop price). Once the "stop" price is reached, the order is elected and becomes a market order to be filled at the next price - which could be higher, lower, or the same as the stop price.

An individual owns a Traditional IRA from which she has never taken a distribution. Her 70th birthday falls on June 30th, 2022. Her first distribution must be taken no later than April 1st of: 2024 2025 2026

2025

Treasury investments yield 3.5%. Common stock investments yield 12.5%. Corporate bond investments yield 8%. The "risk free" rate of return is:

3.5%

A healthy husband and wife, ages 45 and 40 respectively, wish to start funding for retirement at age 65. What is the most appropriate time horizon for the portfolio? 5 years 10 years 35 years

35 years

Passive losses from an investment in a limited partnership can be offset by which of the following? I Earned Income II Interest Income III Capital Gains Income IV Passive Income

4 only Income received from direct investments in real estate and limited partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income; nor can they be offset against portfolio income such as interest received and capital gains.

What type of plan permits an employee to elect to have employer-matching contributions made directly to a student loan provider? UGMA account UTMA account 401(k)

401(k) UGMA, UTMA and IRA accounts are not employer-sponsored, and do not have matching contributions.

Which investment is LEAST likely to offer tax advantages? Growth stock S&P 500 index fund Real estate

Growth stock

A portfolio invested in actively managed funds that is rebalanced monthly is considered to be: Active/Active Passive/Passive Active/Passive

Active/Active rebalanced monthly and actively managed is called: "Active/Active;" rebalanced annually and actively managed is called: "Passive/Active;" rebalanced monthly and invested in index funds is called: "Active/Passive;"

Equity options are: American Style European Style

American Style Stock options are American style (exercisable any time). In contrast, index options (with only one exception) are only issued in European style (exercisable only at expiration).

What is included when calculating the benefit on a variable annuity contract? Actual Investment Return and Expected Mortality Assumed Interest Rate and Expected Mortality Assumed Interest Rate, Actual Investment Return and Expected Mortality

Assumed Interest Rate, Actual Investment Return and Expected Mortality The very first payment from a variable annuity contract takes the Total Investment Value at the moment; the customer's expected mortality (years until death from the mortality tables); and the Assumed Interest Rate used in contract; to find the annual payment that will deplete the account to "0." Essentially, the AIR is the discount rate that will deplete the account to "0" over the customer's expected remaining life. If the contract holder lives longer than this expected mortality, then the contract holder "wins" and if the contract holder lives shorter than this expected mortality, then the contract holder "loses."

From a technical standpoint, what is the benefit of using the Wilshire Index as the benchmark against which a portfolio's return is measured? Because the Wilshire Index is composed of 30 market-leading mega-capitalization stocks and is publicized daily in the news media, it is the index that is most understood by the public Because the Wilshire Index is composed of all listed companies in the United States, it gives a better measure of total market returns than other narrower indexes Because the Wilshire Index is share price-weighted, as opposed to market-capitalization weighted, it does not favor larger companies over smaller companies

Because the Wilshire Index is composed of all listed companies in the United States, it gives a better measure of total market returns than other narrower indexes

Which theory explains why markets are not necessarily "efficient" in pricing securities? Behavioral finance theory Rational investment theory Modern Portfolio Theory

Behavioral finance theory Herd mentality, self-attribution and confirmation bias are examples of "behavioral finance theory." It studies how human nature and psychological biases can influence investment behavior. It is human behavior can cause inefficient pricing, either overpricing or underpricing investments. Such human behavior includes:

Which business form has a limited life? S corporation General partnership Limited liability company

General partnership

All of the following accounts avoid probate upon death of an owner EXCEPT Totten trust JTWROS Tenants in Common Payable on Death

Tenants in Common

How is the market value of a zero coupon bond calculated? Multiply the final payment by the market rate of return Divide the final payment by the market rate of return Discount the final payment by the market rate of return Compound the final payment by the market rate of return

Discount the final payment by the market rate of return The formula to find the market value of a zero coupon bond is a version of the present value formula. Assume that a zero coupon bond has 3 years to maturity and that the current market rate of interest for a 3-year bond of similar credit quality is 4%. The $1,000 par received at maturity 3 years from now is discounted back to its present value. The discount factor is: 1.04 x 1.04 x 1.04 = 1.124864. The bond's market value is $1,000 / 1.124864 = $889.

Key features of Donor Advised Funds are: Immediate tax deduction and deferred donation to chosen charities Immediate tax deduction and immediate donation to chosen charities Deferred tax deduction and immediate donation to chosen charities

Immediate tax deduction and deferred donation to chosen charities Donors get an immediate tax deduction for amounts contributed, but contributions are irrevocable. The donor decides when and how much to contribute from the fund to various charities. Any assets not donated grow tax free and the donor decides how they should be invested

Which statement is TRUE regarding the tax treatment of bond interest income received by a C Corporation versus that received by an S Corporation? In a C Corporation, the interest received is taxable at the corporate level and if a dividend is declared based on the receipt of the interest, then the dividend is taxable at the shareholder level In both a C Corporation and an S Corporation, income is only taxable at the shareholder level In both a C Corporation and an S Corporation, income is only taxable at the corporate level

In a C Corporation, the interest received is taxable at the corporate level and if a dividend is declared based on the receipt of the interest, then the dividend is taxable at the shareholder level C Corporations are taxable entities. Net income is computed by the corporation and tax is paid at corporate income tax rates. If the C Corporation makes a distribution to its shareholders (a dividend), then the shareholders must include the dividend in their taxable income and pay personal income tax. Thus, corporate dividends are said to be "double taxed." In contrast, S Corporations are not taxable entities. Any income or loss "flows through" onto the shareholder's tax return and is only taxed at the shareholder level

Which statement about variable annuity contracts is FALSE? Annuity payments continue for the life of the purchaser A variable annuity contract is defined as a "security" Investment risk is borne by the issuer of the contract

Investment risk is borne by the issuer of the contract Variable annuity contracts do not promise a fixed monthly payment to the purchaser of the annuity. The performance of the underlying investments that fund the annuity determine the monthly amount to be paid. If the investments perform poorly, this will reduce the monthly annuity payment. Thus, investment risk is borne by the purchaser of the annuity and not by the insurance company that issues the contract - which is why it is defined as a "security" under Federal law. Also note that because insurance companies are regulated separately by each State, their products, including variable annuities, are also subject to State insurance regulation. Finally, as with any annuity, payments will continue for the life of the annuitant.

Which of the following annuity payment options will continue payments to another person for their life after the annuitant dies? life annuity Life Annuity with Period Certain Joint and Last Survivor Annuity Unit Refund Annuity

Joint and Last Survivor Annuity A joint and last survivor annuity pays another person (usually a spouse) when the annuitant dies.

Which annuity payout option usually results in the largest periodic payment? Unit Refund Annuity Joint and Last Survivor Annuity Life Annuity Life Annuity-Period Certain

Life Annuity the shorter the expected annuity period, the larger the payment. A life annuity lasts only for that person's life - this is the shortest expected period of those given. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

A corporation that has a market capitalization of $40,000,000 would be an appropriate investment for a: Micro Cap Mutual Fund Small Cap Mutual Fund Mid Cap Mutual Fund large Cap Mutual Fund

Micro Cap Mutual Fund

Which of the following is a computer-driven analysis of possible portfolio returns that can be achieved based on varying factors Efficient Market Theory Time Value of Money Monte Carlo Simulation

Monte Carlo Simulation Monte Carlo simulation is a computer-driven "decision-tree" analysis of possible portfolio returns that can be achieved based on varying factors, such as differing future interest rate levels; equity return levels; inflation rate levels, etc. It assesses the probability of getting the desired portfolio return over a long time horizon, during which these variables can change thousands of times.

When looking at the Price/Book Value ratio of a corporation, "Book Value" is best described as: Net Accounting Value Net Market Value Net Liquidation Value

Net Accounting Value The Price/Book Value Ratio of a corporation is the company's Market Price (per share) / Common Stockholders' Equity (per share). While the "price" is the market value per share, book value is simply the accounting value of common stockholders' equity. Liquidation value is not the same thing as accounting value. Liquidation value bases value as of today's market value. Common stockholders' equity is based on accounting as of the date each transaction happened, which could be years in the past. Thus, if the market values of those assets or liabilities booked years in the past have moved dramatically, then "book value" really has little meaning.

All of the following are types of joint accounts EXCEPT: Omnibus account Joint Tenants with Rights of Survivorship account Tenants by Entireties account

Omnibus account An Omnibus account is an account of pooled customer monies, where there is no specific identification to the broker carrying the account of who the specific customers are. Investment advisers who manage money for many customers often use such account

Which of the following is an advantage of investing in a real estate limited partnership? Federal tax liability is paid by the partnership before any after-tax earnings are distributed to the limited partners Each limited partner shares equally in income and loss Partnership earnings can be softened by depreciation deductions when they flow through to the limited partners

Partnership earnings can be softened by depreciation deductions when they flow through to the limited partners Limited partnerships are "flow through vehicles" - all items of income and loss "flow through" onto each limited partner's tax return, so net income is only taxed at the limited partner level - there are no taxes paid by the partnership, making Choice A wrong. Each limited partner shares in income and loss based on the size of his or her investment, making Choice B wrong. Real estate is a depreciable asset (even though, in the real world, it might be appreciating), and the non-cash depreciation deductions flow through to the limited partners, reducing reported income, making Choice C correct.

A portfolio invested in actively managed funds that is rebalanced annually is considered to be: Passive/Passive Active/Passive Passive/Active

Passive/Active

A divorced man, age 58 has 2 adult children. He is going to marry a widow, age 45, who also has 2 adult children. They decide that when each dies, the assets of that individual will go to that person's children. In addition, the husband wants to make sure that the wife has sufficient income for her remaining life, since she is considerably younger. What type of trust should be established? Testamentary trust QTIP trust Bypass trust

QTIP trust A QTIP trust is a Qualified Terminable Interest Property Trust. It allows the grantor to provide for the surviving spouse, and to also determine how the assets are distributed after the surviving spouse dies. Commonly used in second marriages, this is an irrevocable trust. The surviving spouse receives the income from the trust, and upon his or her death, the remaining assets are distributed to the named beneficiaries of the trust (which would be the children from both (now dead) parents).

Which of the following is an "asset class"? Jewelry Furniture Real Estate Life Insurance

Real Estate Full list of asset classes is Cash/Money Market Instruments Fixed Income Securities Equities Commodities Real Estate

Which business form allows for both limited liability and flow through of gain and loss? General Partnership C Corporation S Corporation

S Corporation Both general partners and sole proprietors can go into business without giving any notice to the State. They also take on unlimited liability when they do so! Any other business form must register with the State and the owners usually have limited liability. The shareholders of both C and S Corporations have limited liability. Only the S Corporation allows for flow through of gain and loss to shareholders. The C Corporation is taxable and does not offer the flow through benefit.

Which transaction is NOT permitted in a cash account? Purchase of a put Sale of a naked put

Sale of a naked put Options can be purchased in cash accounts or margin accounts - however they must be paid in full in either account. The sale of a covered call is permitted in a cash account because it is covered by the ownership of the stock (which must be fully paid in a cash account). The sale of a naked call or put can only be done in a margin account. Naked short positions expose the option writer to a high level of market risk - and a substantial margin deposit is required.

If an investor believes that inflation rates will be rising in the foreseeable future, he might rebalance his portfolio to include fixed annuities 5 year certificates of deposit Tangible assets US Gov bonds

Tangible assets In times of inflation, interest rate levels rise, so bond prices fall; and stock prices fall as well, since companies typically cannot raise prices to consumers fast enough to cover their increasing costs, causing profits to suffer. In times of inflation, any security that gives a fixed return, such as fixed annuities and certificates of deposit, are a bad bet. The payout on these instruments remains fixed over time, yet costs are rising. Tangible assets, such as real estate, collectibles, etc. tend to keep pace with inflation; as overall prices inflate, their prices inflate as well. This is the best choice of the ones offered

A client of an investment adviser wishes to invest in an index which consists of small capitalization issues. The investment adviser would recommend the: Dow Jones Averages Value Line Index russell 2000

The Russell 2000 index consists of 2,000 small capitalization issues. The Value Line Index consists of some 1,700 stocks followed by the Value Line Investment Survey, spread among NYSE, AMEX (NYSE American) and NASDAQ issues. The Dow Jones Averages consists of 30 industrials, 20 transportation and 15 utilities. The Wilshire Index consists of about 5,000 issues of companies headquartered in the United States that are listed on the NYSE, AMEX (NYSE American), or NASDAQ.

Which of the following is the LEAST important factor to consider when constructing an investment portfolio for a high net worth individual? The portion of the funding that should be allocated to tax-free investments The portion of the funding that should be maintained in readily accessible funds such as money market instruments The investment philosophy and strategies employed by the fund manager of the chosen mutual fund The customer's preference for investing via passively managed index mutual funds or via actively managed mutual funds

The investment philosophy and strategies employed by the fund manager of the chosen mutual fund The actual trading strategies employed by an active manager to achieve his results are not relevant to the portfolio construction.

Which statement is TRUE about convertible bonds? The parity price of the bond is fixed and the conversion price changes as the market value of the common stock moves The par value of the bond is fixed and the parity price of the bond changes as the market value of the common stock moves Both the parity price and par value of the bond change as the market value of the common stock moves

The par value of the bond is fixed and the parity price of the bond changes as the market value of the common stock moves

To determine the present value of an investment, which of the following is NOT considered? The amount of cash expected to be generated each year by the investment The time horizon of the expected investment returns The required sum needed at the end of the investment's life

The required sum needed at the end of the investment's life Present value takes the annual cash flows that are expected to be generated by an investment and discounts them at the market rate of interest to their "present value." Thus, the present value formula determines what those cash flows are worth today. In contrast, future value takes the cash flows generated by an investment and compounds them at the market rate of interest to their value at a set future date.

In what way are Class C mutual fund shares unique? They charge a redemption fee if redemption occurs within the first 7 years of purchase They charge a level annual load regardless of how long the shares are held They are subject to lowered sales charges (breakpoints) for larger dollar purchases

They charge a level annual load regardless of how long the shares are held

The potential to earn interest on money which affects its relative value is known as the Real Rate of Return of Money Time Value of Money Present Value of Money

Time Value of Money $100 today is worth more than $100 tomorrow. The reason is known as the "time value of money." The initial $100 could be invested in something which would make the investment "grow." Specifically, the "time value of money" is the potential to earn interest on money which affects its relative value. The productivity of money is known as its time value.

Which of the following investments has a known long-term internal rate of return? Low grade 7% corporate bond Investment grade 5% municipal bond Treasury STRIP

Treasury STRIP

Which statement is TRUE about claim priority in a corporate liquidation Unsecured creditors are paid before bondholders Preferred stockholders are paid before bondholders Bondholders are paid before unpaid wages and taxes

Unsecured creditors are paid before bondholders The priority of claim to corporate assets in a liquidation is: Secured creditors, unpaid wages and taxes, trade creditors (these are all unsecured creditors), unsecured bondholders, preferred stockholders, common stockholders.

An investor buys a $100,000, 10% corporate bond maturing in 2032 for $125,000. The bond is callable starting in the year 2022. What is the most appropriate measure for calculating yield? Total Return Current Yield Yield to Call Yield to Maturity

Yield to Call This investor is paying $125,000 for a 10% bond with a face value of $100,000. Thus, the investor is paying a 25% premium for the bond. If the bond is called prior to maturity (which is very likely, since current market interest rates must be lower than the coupon rate, otherwise the bond would not be trading at a premium, and the issuer, by calling in the bond, can refinance the issue at lower current market rates), then the premium will be lost more quickly than if the bond were held to maturity, reducing the effective yield. Thus, this bond's yield to call will be lower than yield to maturity. Furthermore, this bond is likely to be called, so using the call date is the appropriate time frame for computing the yield for this bond. By the way, this is a tough question!

For bonds trading at a premium, rank the yield measures from lowest to highest Nominal; Current; Yield to Maturity; Yield to Call Yield to Call; Yield to Maturity; Current; Nominal Current; Nominal; Yield to Call; Yield to Maturity

Yield to Call; Yield to Maturity; Current; Nominal

When computing standard deviation of returns against the mean, the measure used for the mean is: geometric mean arithmetic mean moving average mean

arithmetic mean Standard deviation of investment returns is computed by comparing all of the investment returns against the "average" investment return. The more broadly dispersed the investment returns are as compared to the arithmetic mean (which is simply the average of all investment returns), then the greater the standard deviation. Standard deviation is a "risk" measure. Geometric mean considers compounding of annual returns, as compared to arithmetic mean, which is a simple average. The other 2 choices are not tested.

A customer holds a position in a computer software company stock. The company has been accused by the Department of Justice of being a monopoly and is being sued in Federal court. The price of the stock dropped 25% on the day that the lawsuit was announced. This is an example of business risk financial risk market risk

business risk

The IRR (Internal Rate of Return) of an investment assumes that cash flows generated by the investment are reinvested at the risk-free rate of return cash flows generated by the investment are reinvested at the internal rate of return cash flows generated by the investment are reinvested at the total rate of return

cash flows generated by the investment are reinvested at the internal rate of return the Internal Rate of Return is the true yield maturity of an investment. It finds the yield that will discount the investment's cash flows to "0." Inherent in the IRR calculation is that any cash flows generated by the investment are reinvested at this same IRR.

The stock market has reacted negatively to the release of strongly negative economic indicators and has fallen by 15% over a 2 week time window. An investor that believes that this is a buying opportunity would be called a(n): opportunist contrarian technician

contrarian A "contrarian" is a person that goes against the conventional wisdom. Thus, when the market is rising rapidly, the contrarian believes that it is ready for a fall and will sell; and when the market has declined precipitously, the contrarian believes that the market will rise, and will buy.

If stockholders' equity is subtracted from total assets, you are left with: long term debt current liabilities and long term debt retained earnings

current liabilities and long term debt Total Assets = Total Liabilities + Stockholders' Equity If Stockholders' Equity is subtracted from Total Assets, you are left with Total Liabilities - which consists of both Current Liabilities and Long-Term Liabilities.

A trade confirmation for an Over-The-Counter Bulletin Board stock shows the following: "We sold to you 100 shares of XXXX @ $7 Net" In this transaction, the member firm acted as a(n): agent, and charges a commission included in the Net price dealer, and charges a mark-up included in the Net price

dealer, and charges a mark-up included in the Net price In an over-the-counter principal transaction, the member firm sells a security out of its inventory to a customer who wishes to buy; or buys a security into its inventory from a customer who wishes to sell. In this transaction, the firm acts as a dealer, and marks-up the stock to the customer who wishes to buy; or marks-down the stock from the customer that wishes to sell.

A sole proprietor has applied for and acts under a DBA. Under federal law, the tax return that must be filed is an individual return Form 1040 with Schedule C attached individual return Form 1040 with Schedule E attached

individual return Form 1040 with Schedule C attached sole proprietorships are simply formed by individuals going into business - there is no State formation procedure that limits liability, such as setting up a corporation or a limited partnership in the State. To report the income and loss from the business, a Schedule C (Profit or Loss from a Business) form is attached to that individual's tax return. Schedule E is used to report passive income and loss from real estate and partnership investments.

An account established by a 501(c)(3) sponsoring organization that allows for an immediate tax deduction for contributed funds and which can only be used to make charitable contributions either now or in the future is a: donor advised fund charitable foundation charitable lead trust

donor advised fund A donor advised fund (DAF) allows investors to donate directly to a charitable fund but retain control over the assets. DAF administrators qualify as public charities under Section 501(c)(3) of the tax code. Donors get an immediate tax deduction for amounts contributed, but contributions are irrevocable. The donor decides when and how much to contribute from the fund to various charities. Any assets not donated grow tax free and the donor decides how they should be invested. DARs can be administered by community foundations or religious organizations and are also administered by non-profit organizations associated with financial institutions such as Schwab

Modern portfolio theory suggests that a efficient portfolio can be constructed that yields the highest return for the level of risk assumed non-efficient portfolio can be optimized by using index funds as the investment vehicle non-efficient portfolio can be made into an efficient portfolio by adding additional investment choices to the portfolio's construction

efficient portfolio can be constructed that yields the highest return for the level of risk assumed Modern Portfolio Theory states that the best investments are those that on or above the "efficiency frontier." These are the investments that give the highest return per unit of risk assumed

Payment On Death (POD) registration would be most suitable for a(n): elderly widow who has grown children and wants to maintain control of her assets until death, avoiding probate when the assets are transferred 96-year old great-grandfather who wants to leave assets to his 1-year old great-grandson and wishes to avoid probate when the assets are transferred husband and wife who have a joint account held with rights of survivorship who wish to leave their assets to their adult child upon the death of the first owner of the account

elderly widow who has grown children and wants to maintain control of her assets until death, avoiding probate when the assets are transferred Payment On Death (POD) registration, also called TOD (Transfer On Death) Registration is typical for an elderly person who wants to leave assets directly to adult children upon death, avoiding probate Choice B is not suitable for a POD account because the issue here is that the kid is very young. Children have no legal capacity and cannot be owners of accounts. If the account is titled as "POD" - Payment On Death - with the child as the payee, then the assets will go to the child upon the great-grandfather's death, but the child's parents will have to go to court and be appointed as guardians to be able to actually receive the funds. Choice C is not suitable for a POD account because if the account is held jointly, the assets will not transfer to the adult child until the second owner of the account dies. When the first owner of the joint account dies, the second owner now 100% owns the account. Only when that person dies will the assets transfer to the adult child.

A socially responsible investor does not want to own oil or coal company stocks because of their contribution to global warming. This investment philosophy is an example of: tactical asset allocation extra-financial investment considerations dynamic asset allocation

extra-financial investment considerations

A limited partnership is formed as a legal entity by filing a certificate of limited partnership in the State filing a registration statement with the State having each partner sign the partnership agreement

filing a certificate of limited partnership in the State A limited partnership is formed as a legal entity in a State by filing a Certificate of Limited Partnership with the State. The Certificate names each of the general and limited partners, and details the ownership interest of each. Thus, if anyone wants to sue the partnership, the State has a record of the owners to give to the person initiating the suit.

dark pools are operated by NYSE and NASDAQ institutional investors institutional broker-dealers

institutional broker-dealers Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies. They allow institutions to buy or sell very large blocks without displaying their orders in a display system such as NASDAQ.

When comparing a "buy and hold" strategy to annual rebalancing of a portfolio consisting of 50% equities and 50% bonds, all of the following statements are true EXCEPT: there are negative tax implications associated with annual rebalancing that do not exist with a buy and hold strategy the asset allocation percentages are likely to shift over time with a buy and hold strategy but will remain relatively constant over time if the portfolio is rebalanced annually market risk of the portfolio over its life is more consistent with a buy and hold strategy than with a portfolio that is rebalanced annually

market risk of the portfolio over its life is more consistent with a buy and hold strategy than with a portfolio that is rebalanced annually there are costs associated with annual portfolio rebalancing. Commissions must be paid on the trades effected to rebalance the portfolio. If appreciated securities are sold, then capital gains taxes must be paid. If a customer just "Buys and Holds," these costs are not incurred. However, with a "Buy and Hold" strategy, as the asset values move and the percentages allocated to each asset class shift over time, the customer's relative risk exposure will move over time as well, since the portfolio is not being rebalanced.

A money manager that believes that a company that reports higher than expected earnings will continue to generate superior returns and stock price appreciation is a follower of: value investing growth investing momentum investing

momentum investing Momentum investors believe that stocks that show positive earnings momentum (e.g., higher than expected earnings) are more likely to continue to surprise investors (in a good way) and that will lead to a stock price rise. Conversely, they believe that stocks that show negative earnings momentum are more likely to continue to surprise investors (in a bad way) and that will lead to a stock price fall. This is really a "following the herd" theory, since investors tend to buy stocks on good earnings news and sell stocks on bad earnings news.

All of the following investment options would be appropriate for a Section 529 college savings plan EXCEPT a equity growth fund municipal bond fund balanced fund

municipal bond fund municipal bonds are not an appropriate investment for any tax-deferred vehicle. The bonds underlying a municipal bond fund are federally tax free, and thus give a lower yield than taxable corporate bonds. Since the earnings in a college savings plan build tax-deferred and qualified withdrawals are not taxed, why accept a lower return

all of the following statements are true regarding family limited partnerships EXCEPT only securitized assets can be held as investments the partnership must have at least 1general partner and 1limited partner the venture must have a legitimate business purpose other than tax avoidance

only securitized assets can be held as investments Family limited partnerships, like all partnerships, must have a least 1 general partner and 1 limited partner - but there is no stipulation on who must be the general and who must be the limited partner(s). The partnership cannot be formed just to avoid taxes - it must have a legitimate business purpose. Only a general partner can assume a management role - the limited partner(s) remain as passive investors. Finally, any assets can be held in the partnership - real estate is common - not just financial assets.

The disadvantage of owning a mutual fund that invests in common stocks is the risk of loss of: principal liquidity diversification income

principal

The Designated Market Maker (Specialist) on the floor of a stock exchange does all of the following EXCEPT: act as an auctioneer in the designated security when necessary to maintain an orderly market act as the buyer of last resort when no one else wants to buy on the floor and as the seller of last resort when no one else wants to sell provide general market commentary during the trading day for the designated security match orders of buyers and sellers that are routed to the exchange floor

provide general market commentary during the trading day for the designated security the DMM has the "positive obligation" of standing ready to buy if there are no other buyers in the market; and standing ready to sell if there are no other sellers in the market - thus, buyers and sellers who place market orders are always assured of getting their orders filled. the DMM has the "negative obligation" of taking him- or herself out of trading and acting as an auctioneer, conducting an orderly auction between floor brokers who want to buy and those who want to sell The DMM also maintains the book of open orders and fills the orders as the market moves.

The Net Present Value of an investment is lower than "0." This means that the rate of return from the investment is greater than the discount rate used in the computation rate of return from the investment is lower than the discount rate used in the computation investment will produce a return that is lower than the rate of inflation

rate of return from the investment is lower than the discount rate used in the computation Net Present Value takes all the cash flows that will be generated by an investment and discounts them back to their "present value." The rate of interest used to discount the cash flows to be received is the current market rate of interest. If the computation results in an NPV of "0," then the rate of return of the investment equals the discount rate used. If the computation results in an NPV of more than "0," then the rate of return of the investment exceeds the discount rate used. If the computation results in an NPV of less than "0," then the rate of return of the investment is lower than the discount rate used.

Which of the following investments is an "asset class" real estate gold coins mutual funds jewelry

real estate The typical asset classes are: Cash/Money Market Instruments Fixed Income Securities Equities Commodities Real Estate jewelry and gold coins are not asset classes. Mutual funds are not an asset class, HOWEVER a specific mutual fund can fall into a specific asset class (e.g., a money market fund would fall into the "Cash/Money Market Instruments" asset

A customer who is concerned with social and environmental issues would minimize which risk when making an investment decision? market opportunity regulatory

regulatory This customer believes in socially responsible investing, and thus would avoid companies such as tobacco, alcohol, fossil fuels, etc. These are companies that are under increasing regulatory pressure, and more stringent regulation is "regulatory risk." Financial risk is simply the risk that a company goes bankrupt. Market risk is the risk that the market falls, taking all stocks with it. There is no such thing as Opportunity Risk - rather there is Opportunity Cost - which is the amount of an investment return that is not earned when an inferior investment is chosen.

A bank has made a loan to a company secured by real estate owned by that company. The company becomes insolvent and the bank repossesses the real estate. The bank sells the real estate at auction and the sale proceeds are not sufficient to pay the outstanding balance of the loan. The amount that is still owed on the loan becomes a: residual claim on the assets of the company priority claim above all other debt holders of the company priority claim on any declared dividends of the company

residual claim on the assets of the company Secured creditors are paid first in a corporate liquidation from the proceeds generated by the sale of the assets that collateralize the debt. If the sale proceeds do not cover the principal amount, then the lender becomes an unsecured creditor for the balance due. Unsecured creditors' claims are paid next; then preferred stockholders' claims; and finally, common stockholders' claims.

A middle-aged couple that is renting an apartment wants to determine the amount of money needed today to buy a retirement home in 10 years. To calculate the amount of money that would be required to be invested today, all of the following are needed EXCEPT: expected rate of inflation assumed rate of return on investment risk free rate of return on investment

risk free rate of return on investment In this example, we need to determine the capital needed 10 years from now to buy the house. To do so, we would take the current cost of the house and inflate it over the next 10 years by the expected rate of inflation. Then we need to take this future dollar amount and discount it back by our assumed investment return, to get the dollar amount that must to be invested today to fund this capital need The risk free rate of return is not part of the formula (unless the couple wanted to make their required investment in ultra-safe short term Treasury securities, which will give an extremely low rate of return - not the best idea).

To find the real equity risk premium inherent in a stock portfolio, one would deduct: total return risk-free return expected return

risk-free return

The "Efficient Market Theory" states that: practitioners of fundamental analysis should realize superior investment returns as compared to technical analysts securities selection based on technical or fundamental factors is irrelevant since prices reflect all available information practitioners of technical analysis should realize superior investment returns as compared to fundamental analysts

securities selection based on technical or fundamental factors is irrelevant since prices reflect all available information

Which of the following option positions is used to generate additional income against a long stock position long call short call long put short put

short call A covered call writer owns the underlying stock position. He sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If he expects the market to fall, he would sell the stock or buy a put as a hedge. The customer would not sell a put to generate extra income against the long stock position, because if the market falls, the customer would be exercised on short put, and thus would have to buy another 100 shares at the strike price. Thus, in a declining market, the customer would lose double

A company's stock trades at a P/E ratio of 30. It is expected that the P/E ratio will go to 15 over the coming months. This means that the: stock price will likely fall company's sales are likely to decline

stock price will likely fall The P/E ratio is the Price / Earnings ratio (also known as the "multiple" as in the stock price is what multiple of earnings). Growth companies tend to trade at high multiples, mature companies at low multiples. If a company's "multiple" is expected to fall, this will happen either because the stock price declines or the company's earnings increase (or both).

If a corporation issues new stock at a price above par value, the excess above par is termed: surplus capital retained earnings earned surplus

surplus capital If a corporation sells stock at a price above par value, the par value received is shown on the balance sheet as "par value," while the excess funds are credited to the corporation's capital surplus account. Retained earnings and earned surplus are different names for the same account - corporate earnings that are not paid out as dividends are credited annually to retained earnings.

The payments received from a bond can be used to determine a bond's theoretical market price by: taking the present value of the payments and adding them up taking the future value of the payments and adding them up finding the geometric average value of the payments finding the arithmetic average value of the payments

taking the present value of the payments and adding them up

Cash dividends received are: Taxable as long term capital gains taxable as ordinary income at a preferential rate non-taxable if reinvested via a DRIP

taxable as ordinary income at a preferential rate Cash dividends received are taxable as ordinary income - not as capital gains. They are taxed at a preferential 15% maximum rate instead of the regular maximum rate of 37%. The 15% rate applies to individuals who are beneath the maximum tax bracket of 37%; for those in the maximum bracket, the rate increases to 20%. Long term capital gains are taxed under the same rules. The difference is that capital losses can only be offset against capital gains; capital losses cannot be offset against ordinary income. Also note that a DRIP is a Dividend ReInvestment Plan, that many companies offer to shareholders. Shareholders can have their cash dividends automatically reinvested in the purchase of new shares directly from the company at no cost. However, taxes must still be paid.

A secretary, age 50, has contributed $8,000 to a 401(k) plan. The account has a current value of $15,000. The secretary wishes to make a partial withdrawal of $8,000 from the plan. Which statement is TRUE regarding the tax treatment of this withdrawal The IRS considers the withdrawal a tax-free return of the original capital invested the cost basis of the withdrawal is zero, and the entire $8,000 is taxable as ordinary income The cost basis of the withdrawal is zero, and the entire $8,000 is taxable as long-term capital gain

the cost basis of the withdrawal is zero, and the entire $8,000 is taxable as ordinary income the rules on qualified retirement plans are simple. No contributions were included in taxable income, so there was no tax paid on the contribution amount. Thus, the COST BASIS IS 0. The build-up in the account is tax-deferred, so the cost basis is zero as well. When distributions commence, 100% of the distribution is taxable If an employee takes a premature distribution prior to age 59 1/2, the entire amount is subject to regular income tax plus a 10% penalty tax.

In order to determine whether a direct participation program is a suitable investment for a customer, inquiry should be made into all of the following EXCEPT: the customer's ability to meet future assessments, if any existing investments held by the customer the customer's need for tax deductions in previous years

the customer's need for tax deductions in previous years An investor buys a limited partnership interest for tax benefits in future years. The investor's need for tax benefits in prior years is irrelevant.

Limited partnership "democracy" provisions allow for all of the following EXCEPT the limited partners' claim to assets upon dissolution a majority vote of the limited partners before investments are sold or refinanced the limited partners' right to manage the partnership the right to inspect partnership records and receive reports about partnership operations

the limited partners' right to manage the partnership

The Price/Book Value ratio of a company is used to measure: the relative value of the bondholders' stake to the equity holders' stake in the company the relative value of the stock's market price to the fundamental value of the company's net assets the profitability of the company excluding any intangible assets

the relative value of the stock's market price to the fundamental value of the company's net assets

A customer is considering buying a new $30,000 car and will put $6,000 down and will borrow the remaining $24,000 from the automobile finance company. Assume that this customer has $24,000 in the bank earning 4% interest, but does not wish to use this money to pay for the new car. The loan terms offered are: 12 month loan: 0% 36 month loan: 2% 48 month loan: 6% To determine the cost of the loan, the customer should: perform a lump-sum analysis use total return use net present value

use net present value Net present value analysis can not only be used to assess the best investment choice that gives the best return; it can also be used to assess the least costly financing option (sort of a version of net present cost). This person has $24,000 in the bank earning 4%. The present value of this amount is simply $24,000. Each of the 3 loan options will result in the auto finance payment calculating a monthly payment. If these monthly payments are discounted at 4% (the rate that can be earned "risk-free" by this investor) to today's net present value, the option with the lowest net present value will be the lowest cost choice. Here is a simplified version of the analysis, which discounts the payments on an annual basis instead of a monthly basis.