Cannon Post Test Study Guide 1-5

Carmen purchases $16,000 worth of securities by borrowing $8,000 from her brokerage firm and paying $8,000 in cash. If the market value of the securities drops to $12,000, and the brokerage firm has a 25 percent maintenance requirement, how much additional cash must Carmen come up with to maintain the required amount of margin?

$0

The maximum amount of acquisition indebtedness on which interest may be deducted assuming grandfathering and guidelines in 2018 is ______________.

$1,000,000

The maximum amount of a home equity loan interest in 2018 which may be deducted assuming grandfathering and guidelines is up to _____________ in loan principal.

$100,000

To gain the favorable tax treatment of an ISO, the maximum exercise of incentive stock options in a single tax-year is __________ of fair market value at time of grant.

$100,000

Hillary owns a deferred annuity. She purchased the annuity in 1985 when she was a mere 20 years old. Now, she needs the cash value to pay for her son's college tuition. Her investment in the contract consists of her single premium contribution of $45,000. Her cash value is $48,000. If she withdraws $10,000, how much is taxable income to her.

$3,000

Robert's account balance in his 401(k) is $60,000. What's the maximum amount he can borrow from the plan?

$30,000

Bill, age 65, has a life expectancy of 20 years. The amount of his monthly annuity benefit is $500. His investment in the contract is $30,000. How much of his monthly benefit is taxable?

$375

Five years ago, John bought a $1,000 10-year Treasury note at face value for par. Assume the current market value is $1,060. If John sells the Treasury note now, what is the tax implication?

$60 capital gain

If a brokerage firm's initial margin requirement is 70 percent, the investor must put up _________to buy shares initially worth $1,000.

$700

Todd receives a non-qualified stock option grant as a signing bonus for joining the company; the fair market value of the stock at time of grant and its exercise price is $2 per share. How much ordinary income will Todd recognize per share if he exercises the options when the fair market value of the stock is $10 per share?

$8

Of the following loans, which has more risk in an economy with rising interest rates?

1-year ARM loan

Employees who are less than 10 percent owners have how long to exercise Incentive Stock Options?

10 years

An option contract normally represents how many shares of stock?

100

If a stock has a Beta of 1.14, it is expected to have a return that is _________ greater than the market in an up market.

14%

John is considering a $500,000 investment in real estate. John's agent tells him he can buy the property for 20 percent down and finance the rest with a loan. Due to the real estate boom in the area, the agent believes John will be able to sell the property in a year for $650,000, with no further investment. If everything goes as planned, what is John's expected return on his equity (ignore taxes and interest)?

150%

Ten years ago, Bob purchased 500 shares of stock in a company for $20 per share. Five years ago, the stock rose to $100 per share and split 2-for-1. This year, the stock again rose to $100 per share and had another 2-for-1 stock split. How many shares of the company stock does Bob own after the second stock split?

2,000

Employees of a government organization are eligible to contribute to which of the following types of qualified retirement plans?

457

What is the earliest age an individual can receive Social Security retirement benefits?

62

Alice finances the purchase of a $50,000 diamond necklace with a $45,000 home equity loan; she pays the remainder in cash. If Alice sells the necklace six months later for $54,000, what is her return on equity for this investment? Ignore taxes and interest.

80%

A firm's Employee Stock Purchase Plan (ESPP) may offer employees the right to purchase company stock at a discounted amount. What is the minimum value an employee must pay for stock acquired under such a plan?

85 percent of the fair market value of the stock on the date of grant or exercise whichever is lower

What is the highest rating A.M. Best Company gives a life insurance company?

A++

Which of the following is NOT an advantage to investing in Exchange Traded Funds (ETFs)?

Active management

Which of the following is a characteristic of an adjustable rate mortgage?

Advisable for the short-term when an interest rate cap is available

Who among the following is eligible for Medicare Part A?

All U.S. citizens age 65 or older who are eligible for Social Security

Which term below represents the mathematical estimate of the return on a security when the return on the market as a whole is zero?

Alpha coefficient

The definition of "designated beneficiary" includes ____________.

An individual

One way for executives to exercise stock options is to exchange shares of stock they already own in the company for the new options being exercised. This method is called ___________.

Pyramiding

Your client is going through a nasty divorce. He wants to be sure that he retains rights in his spouse's 401(k). What tool would you recommend?

QDRO

Tara re-married following a divorce. Which tool assures that her new spouse will receive a lifetime income benefit while children from her first marriage will receive the remaining principal?

QTIP

What is the effect of a transfer-for-value of a life insurance policy to a non-exempt transferee?

The death benefit in excess of consideration paid and subsequent premiums paid is taxable to the beneficiary as ordinary income

Diversification helps protect against which of the following?

Unsystematic risk

Tandem stock appreciations rights (SARs) ___________________.

Are SARs issued in tandem with a stock option

Why are insurers cautious about issuing disability income insurance to an individual for whom most income is unearned?

As the proportion of unearned income increases, the risk of disability claims also increases

Under what circumstances are Real Estate Investment Trusts (REITs) free of federal income tax at the corporate level?

At least 90 percent of the net annual earnings are distributed to shareholders

To find a client's net worth, the advisor reviews which of the following?

Balance sheet

An employer may take a deduction for contributions to rabbi trusts when __________________.

Benefits are paid to the employee

If you thought a stock price is too high and is likely to go down, which action below would be most appropriate?

Buy a put

If interest rates are expected to fall, what should an investor do?

Buy bonds

The real value of prepaid forward contracts is that they ___________________.

Can be used as collateral for a loan

Recent surveys of HNW clients reveal which of the following attitudes regarding their feelings and decisions on investing?

Clients are likely to be more focused today than in the past on real life goals than arbitrary investment goals

Your client recently died. He had a Traditional IRA with a large account balance. Which of the following tax consequences apply? The entire value is included in his gross estate under IRC Section 2039 To the extent the contributions were deductible to your client, the beneficiary must include distributions in income The beneficiary is entitled to an income tax deduction for federal estate taxes attributable to inclusion of the IRA in the client's estate

I, II, and III

A non-conventional mortgage loan is likely to demonstrate which of the following characteristics? Backing by the U.S. government Lower underwriting costs Higher loan to value ratio

II and III only

What characteristics are common to clients for whom a Roth conversion makes sense? The client expects to rely on the converted IRA benefits for retirement income The client expects taxes to rise in the future The client expects to leave converted IRA benefits untouched for the foreseeable future

II and III only

Which of the following are acceptable collateral? Individual retirement accounts Marketable securities Real estate

II and III only

Which of the following are common cash management products offered by banks to affluent and high net worth individuals? Annuities Checking accounts Savings accounts

II and III only

Which of the following are probably covered by an umbrella liability policy? Damage or injury arising from intentional acts of the insured Non-business-related personal injury claims, such as slander, libel, wrongful eviction, and false arrest Personal injuries or property damage caused by the insured, members of his family/household, or hazards on their property, for which they are found legally liable

II and III only

Why is life insurance often the best alternative to replace income lost due the insured's death?

Life insurance is available when needed, and it relieves survivors of having to worry about cash for living expenses

A _________ loan provides temporary financing for a borrower in cases where the timing and source of funds do not coincide, like buying a new house before selling the original house.

Liquidity

In the Contemplating Retirement Stage of the client life cycle, what are a clients primary borrowing needs?

Loans for business buyout or wealth transfer

Normally, an investor expects the most price volatility from a bond with a _______.

Long maturity

A(n)____________ must invest primarily in employer stock.

ESOP

Which of the following is true regarding Exchange Traded Funds (ETFs)?

ETFs may be bought and sold on an exchange anytime throughout the trading day

The sale date of an option is the date when the ______________.

Employee legally disposes of the stock acquired through the exercise of the option

The grant date of an option is the date when the ______________.

Employer legally conveys the option to the employee

What type of coverage protects against discrimination in hiring for maids, butlers, or other personal and home maintenance staff?

Employment Practices Liability for household and personal staff

If client Jasmine wants to improve her credit score, the most important thing she should do is______________.

Make payments on current debt on time

What is the greatest downside to an indirect rollover from a QRP to an IRA?

Mandatory 20 percent withholding is imposed

Max and Irma are co-shareholders in a closely held business, M&I, Inc. They currently have an unfunded cross-purchase buy-sell agreement under which the survivor is obligated to buy out the deceased partner in the event of death. They are interested in acquiring life insurance to fund the buy-out. What is the recommended manner for structuring the insurance?

Max should own a policy on Irma's life and name himself beneficiary; Irma should own a policy on Max's life and name herself beneficiary

Ricky is interested exchanging his life insurance policy A for another life insurance policy B. What advice would you give him? The exchange of life insurance solely for life insurance is, generally, tax-free His basis in policy A carries over to policy B The death benefit on policy B becomes taxable due to the transfer-for-value rule

I and II only

Under which of the following circumstances is a Section 83(b) election advisable? The amount of income reportable due to the election is small The potential stock appreciation is great The potential for forfeiture is great

I and II only

What ratios are lenders likely to take into account in underwriting a loan? Debt to income ratio Loan to value ratio Ability to pay ratio

I and II only

Which of the following are examples of systematic risk? Interest rate risk Political unrest risk Management risk

I and II only

Which of the following are exceptions to the early-withdrawal penalty from non-qualified annuities? Death Disability Financial Hardship

I and II only

Which of the following items are typically found on a credit report? Personal data, such as marital status, date of birth, and Social Security number Public records, such as information on bankruptcy or lawsuits Spouse's credit history

I and II only

Which provisions in the Internal Revenue Code have influenced and continue to influence the structure of executive compensation plans? Limits on a public company's non-incentive compensation deduction with respect to its top executives to $1 million per executive per tax year [IRC Section 162(m)] Restrictions placed on amounts deferred under non-qualified deferred compensation plans [IRC Section 409A] The requirement that publicly-traded companies phase-out "excessive" executive pay over a five-year period beginning January 1, 2012 [(IRC Section 6051(a)]

I and II only

Which of the following are advantage(s) of incentive stock options? Avoidance of income tax at option grant Exemption of "bargain element" at exercise from the Alternative minimum Tax Taxation of gain at sale at capital gains rates (provided holding period requirements are met)

I and III

A rabbi trust offers which of the following benefits to executives covered by a non-qualified retirement plan (NQRP)? Protection in the event management defaults Protection from the claims of the employer's creditors Protection in the event of a hostile takeover

I and III only

Lil is applying for a life insurance policy. What will the insurer likely consider in underwriting the policy?

I and III only

Richard wants to measure portfolio performance by utilizing a risk-adjusted measure. Which of the following are examples of approaches his advisor might use? Sharpe's Ratio Cannon's Beta Jensen's Alpha

I and III only

What would you expect to find on a client's balance sheet? Unsecured loans Credit history Assets

I and III only

Which statements are accurate with respect to Social Security retirement benefits? Retirement benefits are paid on the basis of the amount of contributions made during working years, not on the basis of need Retirement benefits stop once individuals receive the amount they paid into the system Eligibility for retirement benefits is determined by an individual's work credits

I and III only

Your client, age 73, expects to receive a lump sum distribution of $75,000 from his employer's qualified retirement plan in 2023. What options are available for avoiding current income taxation? Rollover to a Traditional IRA Rollover to a Roth IRA Transfer the distribution to a charity immediately after rolling it over to an IRA

I and III only

John is an excellent prospect for private placement insurance. What characteristics is John likely to display? More focused on investment opportunity than death benefit Interested in non-traditional investments Willing and able to invest a minimum premium of $5 million

I, II, and III

Strategic uses of debt include which of the following? Increase and/or transfer wealth Protect wealth Enhance current lifestyle

I, II, and III

To determine a client's net capital need for life insurance, what do you need to know? Present value of projected survivor income needs Present value of projected income streams Present value of current capital needs

I, II, and III

Under what circumstances should clients re-evaluate their liability coverage? A child begins to drive The client starts a new business The client begins driving further to work and back

I, II, and III

What factors determine the premium for a long-term care policy? Applicant's age and health Waiting period Amount and duration of the benefit

I, II, and III

When it comes to underwriting loans, which of the following are lenders likely to consider? Cash flow Character Collateral

I, II, and III

Which of the following are goals of leverage? Raise return on equity Increase purchasing power Maximizing tax efficiencies

I, II, and III

Which of the following should be considered when reviewing an executive's life insurance needs? The amount of the life insurance needed for survivor income, to create liquidity for estate taxes and to facilitate the transfer of business interests The type of policy (term or permanent) The adequacy of existing coverage

I, II, and III

Whole life insurance has several uses. Which uses are common? Income replacement Estate liquidity Funding buy-sell agreements

I, II, and III

Why should even high-net worth individuals consider purchasing long-term care insurance? To avoid the hassle factor of repositioning assets to pay for long-term care The risk of needing long-term care is high The cost of long-term care is high

I, II, and III

Ray received a non-qualified stock option grant on January 4, 2021. Under the terms of the grant, he may purchase 1,000 share of company stock for $5 per share provided he remains employed with the company for at least three years. At the time of grant the company stock was trading at $7 per share. What are the likely tax consequences?

Ordinary income taxes on the "bargain element" in the year of grant, plus a 20 percent penalty plus interest

What is the greatest indicator of post-retirement spending?

Pre-retirement spending

What type of qualified retirement plan (QRP) bases the employer's annual contribution on a formula or is discretionary and each participant has an individual account in the plan?

Profit sharing plan

Which of the following best describes a convertible bond?

A bond that can be converted into stock in the company

Modern Portfolio Theory supports which of the following?

A collection of investment assets with a collectively lower risk than any individual asset can generate the same or higher yield than the individual asset

Which of the following best describes an ERISA excess plan?

A non-qualified deferred compensation plan that restores only the qualified plan amounts lost due to IRC Section 415 limits

Jason is trying to decide which company to select to insure his life. The least reliable factor is the __________________?

Company's policy illustrations

A convertible term policy is a policy that permits which of the following?

Conversion into permanent insurance within a specified period and without evidence of insurability

The major goal of the Investment Policy Statement is to ___________________.

Coordinate the development of a client's investment strategy and monitor it on an ongoing basis

A balance sheet lists which of the following items?

Current assets and current liabilities

What are the likely tax consequences to employees that participate in a formally funded non-qualified deferred compensation plan?

Current taxation of employer contributions

Dan bought a call option in Stock A. Which of the following is true concerning this transaction?

Dan's profit potential is unlimited

Corporate bonds are securities representing corporate ___________.

Debt

As a general rule for income tax purposes, investment interest is ___________.

Deductible to the extent of net investment income

Janice estimates that she has $500,000 in expenses each year. Her planner thinks this figure will decrease in her retirement years and believes her annual after-tax retirement income needs will be about $350,000. What type of method is her planner using to determine her retirement needs?

Expense Method

What shortcoming have some researchers noted with Modern Portfolio Theory?

Failure to take into account investors' need for personal safety

Conventional mortgage loans are characterized by__________.

Government guarantees

Stocks of companies with earnings that grow at a faster annual rate than the earnings of companies in general are known as _______ stocks.

Growth

A Cash Management Account (CMA) combines the features of which of the following? Brokerage account Checking account Certificate of deposit

I and II only

Corporations use disability income insurance for which of the following? Funding buy-sell agreements Reimbursement for loss of a key person Generating tax-advantaged income

I and II only

Exercise of non-qualified stock options followed by their sale more than a year later at a price higher than the exercise price triggers which of the following? Ordinary income at exercise Capital gain on sale Alternative minimum tax at grant

I and II only

If a client dies after the Required Beginning Date and the surviving spouse is the designated beneficiary, his or her options include which of the following? Roll over the qualified plan or IRA assets to an IRA or QRP of his or her own Choose to be treated as the beneficiary of the deceased participant or IRA account holder's assets (with the option of delaying the commencement of the benefits until the participant would have turned age 73) Require the IRA custodian or QRP trustee to use the assets to acquire life insurance on the surviving spouse

I and II only

Key ratios for assessing a client's ability to borrow include which of the following? Debt to asset ratio Household debt to disposable income Auto debt to mortgage debt

I and II only

Which method, for determining retirement income needs, assumes that the standard of living enjoyed during the years prior to retirement dictates that standard of living requirement in the first year of retirement?

Income Method

Which of the following is correct concerning taxation and managed accounts?

Investors can direct the sale of specific securities in order to harvest tax losses

Premature distributions from qualified retirement plans are, generally, subject to________.

Ordinary income taxation plus a 10 percent penalty

In general, what has happened to the ratio of household debt to disposable income since 2009?

It has declined

Which of the following is accurate in connection with long-term care?

It is often defined in terms of an individual's ability to perform activities of daily living.

Jeff is considering his borrowing options. He currently has a personal auto loan and considerable personal credit card debt. As it stands right now which of the following statements is accurate regarding his debt position considering the 2018 rules and guidelines?

Neither is tax deductible

At what value is the exercise price for an incentive stock option set?

No less than the fair market value on the date the option is issued

What is the maximum limit on the exercise of non-qualified stock options in a single tax-year?

No limit

What is the maximum length of the exercise period for non-qualified stock options?

No maximum length

Earnings and gains in a qualified retirement plan (QRP) are _______.

Non-taxable until distributed

When interest rates rise, existing bond prices ____________.

Normally fall

Defined benefit plans generally favor which individuals?

Older employees

The client wishes to remain invested 60 percent in stocks and 40 percent invested in bonds. Recently, stocks experienced a 15 percent gain, while bond prices remained flat. What should the advisor do?

Rebalance the portfolio by selling stocks and purchasing bonds to return to original allocation

The Dodd-Frank Act "clawback" provisions require which of the following?

Recovery of executive compensation in the event of certain accounting restatements

How do companies often assure that non-qualified stock options lack a "readily ascertainable value" at time of grant?

Require a vesting period in the stock option agreement

When considering the Department of Labor's new fiduciary standard as applied to retirement accounts, which of the following can be the most problematic for advisors when discussing with clients?

Rollovers

Life settlements permit which of the following?

Sale of the policy in return for cash

What happens when an employee finally receives benefits from an unfunded non-qualified deferred compensation plan?

The benefits are fully taxable as ordinary income

What form of retirement benefit from a QRP will generate the largest monthly benefit?

Single life annuity

Which of the following is true of yacht coverage?

Specialists in the field of yacht coverage typically design custom programs to cover the unique circumstances of the craft or crafts owned by a client

Frank is the Sales Director for Custom Plywood, a closely held corporation. During his last five years in this position, Custom Plywood has experienced tremendous growth in earnings and sales. The company would like to give Frank the opportunity to share in its future growth, without diluting the ownership interests of the present shareholders. What is the most appropriate form of compensation plan Custom Plywood could offer Frank?

Stock appreciation rights

Which of the following is true of loans to exercise stock options?

Such loans may increase return on equity

Which of the following is a type of non-qualified deferred compensation program?

Supplemental executive retirement plan

Tax deductions for non-qualified retirement plans are available to the employer when:

The benefits become taxable to the employee

An unsecured loan that funds on 08/01/19 and is fully due and payable on 08/01/23 is an example of a ___________ loan.

Term

Jake needs life insurance to protect against death occurring during the next ten years while he carries significant debt associated with the start up of a new business operation. What type of insurance would you recommend to insure the debt?

Term

Which of the following types of life insurance lacks a cash value?

Term

A combination of investments offering the highest possible yield at a given risk or the minimal possible risk at a given yield level is referred to as ______________________.

The Efficient Frontier

Which of the following is a correct statement about the use of life insurance to informally fund non-qualified deferred compensation plans?

The employer should be the owner and beneficiary

What is a taxpayer's basis in stock acquired under a restricted stock plan, assuming no Section 83(b) election is made?

The fair market value of the stock at the time it vests

Under what circumstances would an executive avoid being taxed on the exercise of a non-qualified stock option?

The stock acquired via exercise of the option is subject to a "substantial risk of forfeiture"

Which stage of retirement planning involves a "reality check" to confirm that the client has enough for retirement?

Transition

Which of the following is a characteristic of restricted stock grants?

These plans are hybrid plans combining elements of a cash bonus and a stock bonus

Which of the following is an advantage of investing in Treasury notes?

They are essentially default proof

What is a distinguishing characteristic of dynasty trusts?

They continue for successive generations

What is a primary reason for using an Irrevocable Life Insurance Trust to provide estate liquidity?

To keep the death proceeds from being subject to estate taxes

Which best describes the one key difference between term and variable life insurance?

Traditional term policies have increasing premiums, whereas variable life policies have fixed or variable premiums

What estate planning option is available with non-qualified stock options that is not available with incentive stock options?

Transfer of the option prior to exercise

Marissa wishes to acquire a life insurance policy that gives her both premium flexibility and the ability to participate in the equity market. She should purchase_______.

Variable universal life insurance

What type of coverage should a client purchase to protect against loss of vintage wine stored in his home?

Wine coverage for "uniquely valuable" bottles

What is a major distinction between mutual funds and managed accounts?

With a mutual fund, investors own shares of a pool of securities; with a managed account, investors own the underlying portfolio of securities

In general, how are withdrawals from a life insurance policy taxed?

Withdrawals are tax-free up to the basis in the contract; amounts withdrawn in excess of basis are taxed as ordinary income

Defined contribution plans generally favor which individuals?

Younger employees

Which of the following is also the market price for an option?

premium