S7 Mastery Exam (Part 2)
Fees can have a major impact on long-term performance of an investment. Your client interested in purchasing a periodic payment deferred annuity would not be concerned about A) 12b-1 fees. B) death benefit fee. C) surrender charges. D) M&E fees.
A) 12b-1 fees. 12b-1 fees only apply to open-end investment companies while all of the others are typical fees or charges levied against variable annuities. LO 13.g
A registered representative has a recently retired couple in their late sixties as her customers. They each have modest monthly pensions and collect Social Security benefits putting them in the lowest income tax bracket. They have accumulated savings and investments totaling $175,000 that they want to reallocate now that they are both retired. Which of the following portfolio asset allocations is most suitable for their current circumstances? A) 25% domestic equities, 60% investment grade bonds, 15% cash B) 10% domestic equities, 40% bonds, 10% cash, 40% international equities C) 30% domestic equities, 30% bonds, 30% international equities, 10% cash D) 50% domestic equities, 40% Treasury bonds, 10% Treasury bills
A) 25% domestic equities, 60% investment grade bonds, 15% cash Given their age and modest fixed income, investing more than half of their assets in debt securities, such as highly rated bonds, would be appropriate to provide additional current income. A smaller percentage of assets invested in equities would not only provide for some potential growth but also add a hedge against inflation and purchasing power risk. Some reserves in cash to meet unexpected expenses would be appropriate as well. International investments would be less appropriate given the inherent risks generally associated with investing abroad. LO 13.a
A couple with a child 10 years away from entering college has saved $160,000 for that single purpose. Which of the following portfolio mixes would be the most suitable for meeting the investment objective? A) 30% T-notes, 70% zero-coupon bonds B) 20% T-bills, 10% corporate bonds, 70% equities and equity funds C) 85% corporate bonds, 15% zero-coupon bonds D) 30% corporate bonds, 70% equities
A) 30% T-notes, 70% zero-coupon bonds Zero-coupon bonds, which are purchased at a discount and mature at face value, are the most suitable investment for future anticipated expenses such as college tuition. The T-notes, which are medium term U.S. government securities, would additionally be a suitable investment where risk of principal loss wouldn't be a concern as it would with equities or corporate bonds. LO 5.a
Proper handling of customer accounts requires adhering to a number of rules. Which of the following is an example of a rule that must be followed? A) A customer whose account holds a penny stock purchased four months ago must receive a monthly statement even if no activity occurred this month. B) A customer whose account holds a penny stock purchased four months ago must receive a quarterly statement even if no activity occurred since that purchase. C) A member is required to disclose on a customer confirmation the mark-up on a transaction in corporate debt securities with an institutional customer if the dealer also executes one or more offsetting principal transaction(s) on the same trading day as the customer transaction in an aggregate trading size that meets or exceeds the size of the customer trade. D) A member shall include in a customer account statement a per share estimated value of a listed real estate investment trust (REIT) security, developed in a manner reasonably designed to ensure that the per share estimated value is reliable.
A) A customer whose account holds a penny stock purchased four months ago must receive a monthly statement even if no activity occurred this month. Securities and Exchange Commission (SEC) Rule 15g-6 requires that, in most cases, account holding penny stocks must receive monthly statements, even when no activity occurred that month. Markups on corporate debt securities must be shown under the conditions stated in our choice except that it is for transactions with retail (non-institutional clients, not institutions. Estimated values must be shown for REITs (and DPPs) that do not trade on national stock exchanges. LO 15.b
Which of the following direct participation programs typically generates a dollar-for-dollar credit against federal income taxes? A) Rehabilitating certified historic structures B) Equipment leasing to minority controlled business C) Exploratory oil and gas drilling D) Building new residential housing
A) Rehabilitating certified historic structures Dollar-for-dollar reductions on taxes owed are known as tax credits. These are typically available in certain real estate direct participation programs (DPPs). Those would include rehabilitation credits for certain buildings originally placed in service before 1936 and certified historic structures and buildings located in historic districts. Another program offering tax credits is government sponsored low income housing, not just any residential housing. LO 11.f
A firm has prepared a research report on the equity securities issued by the CDT Corporation. Regarding the report and its distribution from broker-dealers to clients, which of the following statements is not true? A) The report must disclose whether, within the last five years, the firm has received fees for investment banking services from CDT Corporation. B) A broker-dealer presenting the report to a client must disclose that the report was prepared by a third-party and not the broker-dealer. C) A broker-dealer can base a recommendation on a report prepared by another party. D) The report must disclose whether, within the last 12 months, the firm has received fees for managing or co-managing a public offering for CDT Corporation
A) The report must disclose whether, within the last five years, the firm has received fees for investment banking services from CDT Corporation. To avoid conflicts of interest the report must disclose whether, within the last 12 months (not five years), if the firm has received fees for investment banking services from CDT Corporation. LO 19.d
A customer wishes to transfer his account positions to another broker-dealer. After validating the positions, the carrying broker-dealer is required to complete the transfer within how many business days? A) Three B) Four C) Five D) Seven
A) Three Once a request for account transfer has been validated, which must occur within one business day, the carrying firm has three business days to complete the transfer. LO 15.d
Some information found on a municipal bond confirmation is only relevant to new issues. One example of this type of information is A) the dated date. B) the name of the guaranteeing corporation if the issue is an industrial revenue bond. C) the in-whole call dates. D) the source of revenue backing a revenue bond.
A) the dated date. The dated date is the first day that interest begins to accrue on a new issue. Once the bond makes its first interest payment, the dated date is no longer relevant. LO 6.e
An investor purchases a Treasury Inflation Protection Securities (TIPS) bond with a 4% coupon. If during the first year the inflation rate is 9%, the approximate principal value of the security will be A) $1,040. B) $1,092. C) $1,090. D) $1,045.
B) $1,092. The principal value of a TIPS bond is adjusted semi-annually by the inflation rate. The exact calculation would be $1,000 × 104.5% × 104.5% which equals $1,092.025. Each six months, the interest is paid on that adjusted principal and that is why the security keeps pace with inflation. LO 7.a
An appeal of an adverse Code of Procedure decision may be made by either party within A) 30 days of the decision date. B) 25 days of the decision date. C) 45 days of the decision date. D) 10 days of the decision date.
B) 25 days of the decision date. Either party may appeal a ruling from a disciplinary hearing within 25 days of the rendering of the decision. The first appeal is to the National Adjudicatory Council. LO 18.d
Your customer sells 2 IJK October 50 calls at 4 and 2 IJK Oct 50 puts at 3. The customer will break even when the price of IJK is A) 44 and 58. B) 43 and 57. C) 47 and 54. D) 36 and 64.
B) 43 and 57. The customer sells calls and puts with the same strike price and expiration date, so the position is a straddle. The fact that the customer sold two of each has no effect on the breakeven point. Straddles have two breakeven points: the strike price plus and minus the sum of the two premiums. In this case, the sum is seven so it is plus seven and minus seven. LO 10.h
You have several clients interested in a tax sheltered annuity (TSA), but one of them is not eligible to participate. Who is it? A) An administrator for a charity given tax-exempt status by the IRS B) A student enrolled full time in the local community college C) A minister tending to the congregation for a small church D) A maintenance worker at a large state university
B) A student enrolled full time in the local community college Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs). Students are not employees. LO 1.h
Jim and Pam Thomas have been married for many years. How will the estate be taxed when transferred to the remaining spouse if one of them dies? A) There is no exclusion or deferral of estate taxes at the state or local level for a surviving spouse. B) Taxes will not be owed on the estate until the death of the surviving spouse. C) Taxes are due at the federal level only at the time the estate is transferred to the surviving spouse. D) An estate transferred to a surviving spouse is taxable at all levels at the time of transfer.
B) Taxes will not be owed on the estate until the death of the surviving spouse. Married couples are allowed to transfer their entire estate to the surviving spouse at death with no tax imposed on any level; federal, state, or local. Taxes will however be owed at the death of the surviving spouse. LO 13.h
Securities exempt from regulation under the Trust Indenture Act of 1939 include A) corporate debentures and municipal bonds. B) U.S. Treasury and municipal bonds. C) short-term commercial paper and secured corporate bonds. D) U.S. Treasury and secured corporate bonds.
B) U.S. Treasury and municipal bonds. The Trust Indenture Act of 1939 deals only with corporate bonds. Treasury bonds and municipal bonds would be exempt from regulation under the Act of 1939. Promissory notes, such as commercial paper, would be covered if the maturity was over 270 days. LO 20.c
Your client has sold 300 shares of stock. All of the following are considered good delivery except A) three 60-share certificates, two 40-share certificates, two 20-share certificates. B) four 75-share certificates. C) two 100-share certificates, one 70-share certificate, and one 30-share certificate. D) one 300-share certificate.
B) four 75-share certificates. Certificates of 100 shares or larger are considered good delivery as long as they can be evenly divided by 100. Certificates in denominations smaller than 100 shares must be stackable into groups of 100. While four 75s do equal 300, there is no way to place them into stacks of 100. LO 17.c
In a direct participation program limited partnership for tax purposes, A) income for the general partners and limited partners is considered earned income. B) income for the general partners is earned income, but for the limited partners it is passive income. C) income for the general partners is earned income, but for the limited partners it is tax credits. D) income for the general partners and limited partners is considered passive income.
B) income for the general partners is earned income, but for the limited partners it is passive income. In a direct participation program limited partnership for tax purposes, income for the general partners is earned income, but for the limited partners it is passive income. LO 11.f
The MSRB has no jurisdiction or authority to regulate A) municipal bond quotes. B) municipal bond issuers. C) municipal bond registered representatives. D) municipal bond broker-dealers.
B) municipal bond issuers. The MSRB has no jurisdiction over municipal issuers. It sets standards for quote and registration requirements for dealers and registered representatives. LO 6.h
A municipality's statutory debt limit imposes a limit on A) the raising of tax rates within the municipality. B) the issuance of additional general obligation (GO) bonds. C) the raising of property taxes within the municipality. D) the debt coverage ratio on the municipality's bonds.
B) the issuance of additional general obligation (GO) bonds. A municipality's statutory debt limit is similar to the credit limit on a credit card. Once the limit is reached, no more borrowing is permitted unless the debt limit is amended. Only GO bonds have a statutory debt limit and it should be noted that exceeding the limit, or needing to amend the limit can have an adverse effect on the ratings of a municipal issuer's bonds. LO 6.c
A registered representative interviewing a new client learns that the client has an investment objective of earning income and is willing to assume moderate risk to do so. The objective and risk tolerance of the client can be met by which of the following mutual funds? A) A money market fund B) A U.S. government bond fund C) A preferred stock fund D) A high-yield bond fund
C) A preferred stock fund A preferred stock fund will generate the income the client seeks in the form of dividends while taking moderate risk. A U.S. government bond fund has a very low risk and a commensurately low return. A money market fund will typically have low yields not suitable for an income objective. Although high-yield bonds provide current income, they entail a high degree of risk. LO 8.g
An investor holds shares of the CTS Balanced Fund and wants to exchange them for shares of the CTS Growth Fund. One of the features the CTS fund family offers to shareholders is the conversion privilege. The exchange of one fund for another within the same fund family would have which of the following consequences? A) Shares of the CTS Growth Fund would be purchased at the NAV with a sales charge assessed and any gains from the sale of the CTS Balanced Fund would be taxable. B) Shares of the CTS Growth Fund would be purchased at the POP and any gains from the sale of the CTS Balanced Fund would taxable. C) Shares of the CTS Growth Fund would be purchased at the net asset value (NAV) without a sales charge and any gains from the sale of the CTS Balanced Fund would be taxable. D) Shares of the CTS Growth Fund would be purchased at the public offering price (POP) and any gains from the sale of the CTS Balanced Fund would be non-taxable at this time.
C) Shares of the CTS Growth Fund would be purchased at the net asset value (NAV) without a sales charge and any gains from the sale of the CTS Balanced Fund would be taxable. The conversion privilege, when offered, allows shareholders to sell shares of one fund and purchase shares of another at the NAV (no sales charge) within that fund family. Any gains realized from the sale in the conversion process are taxable. LO 8.e
An investor sold short 1,000 shares of LUMN at 52 on January 10. If the investor covered the short position at 43 on January 15 of the following year, which if the following statements is true? A) Buying the same stock back within 30 days created a wash sale. B) Only $3,000 of the investor's loss is deductible against ordinary income. C) The investor has a short term capital gain. D) The investor has a long-term capital gain of $9,000.
C) The investor has a short term capital gain. The customer would have generated a short term capital gain of $9,000 on the position by selling short at 52 and covering (buying the stock) at 43. Although the period of time that the investor remained short exceeded one year, there is no holding period for the stock (the customer did not own the stock for more than one year. There is no wash sale because there is no loss. LO 13.h
The volatility market index (VIX) is best characterized as A) an index option traded on the NYSE. B) a highly volatile index-tracking exchange-traded fund ETF. C) a "fear" index, measuring the expectations of market volatility. D) a measurement of the implied stability of options written on the S&P 500
C) a "fear" index, measuring the expectations of market volatility. LO 10.g
A local school district needs to invest funds short term. They do so in a trust formed specifically for this purpose, which allows the municipal entity to purchase shares or units of the trust's investment portfolio. This investment vehicle is known as A) a real estate investment trust (REIT). B) a unit investment trust (UIT). C) a local government investment pool (LGIP). D) a bond anticipation note (BAN).
C) a local government investment pool (LGIP). States establish local government investment pools (LGIPs) to provide other government entities such as cities, counties, school districts, or other state agencies with a short-term investment vehicle to invest funds. The LGIPs are formed as trusts in which municipalities can purchase shares or units in the pools investment portfolio. LO 6.g
In late September, a customer sells 5 XYZ calls for total premiums of $750. One month later, the investor closes this position when the contract is trading at 2. The result is A) a loss of $50. B) a gain of $250. C) a loss of $250. D) a gain of $50.
C) a loss of $250. The proceeds minus the cost will determine a gain or loss. The proceeds total $750, while the cost to buy back is $1,000. LO 10.h
A new registered representative is a member of your team and asks you about prospectus delivery requirements. It would be correct to state that delivery of a prospectus to a customer is not required for the purchase of A) a U.S. government bond mutual fund. B) a variable annuity. C) a new issue of general obligation bonds. D) a new issue of AAA rated corporate bonds.
C) a new issue of general obligation bonds. GO bonds, as municipal securities, require the delivery of an official statement, not a prospectus. But, aren't they really the same thing? Yes, except the exam expects you to know the proper terminology. Corporate bonds are not exempt from the prospectus requirements. Mutual funds, even those whose portfolio consists solely of U.S. government bonds, must register with the Securities and Exchange Commission (SEC) and meet the prospectus delivery requirements. Variable annuities are securities with a prospectus, but fixed annuities are not. LO 20.d
The term for the annual increase of cost basis of a municipal bond purchased at a discount is A) basis adjustment. B) internal rate of return. C) accretion. D) amortization.
C) accretion. When a municipal bond is purchased at a discount, accretion of the discount will adjust the cost basis annually. LO 6.e
The resale restrictions of Securities and Exchange Commission (SEC) Rule 144 would apply to A) the niece of the company's CEO. B) a regional sales manager of the company who acquired the stock in the secondary market. C) an individual who owns 100 shares of the company's stock and is the daughter-in-law of the company's CFO. D) an individual who owns 100 shares of the company's stock and is a registered representative of the firm who did the underwriting of the company's initial public offering (IPO).
C) an individual who owns 100 shares of the company's stock and is the daughter-in-law of the company's CFO. Among other things, SEC Rule 144 deals with the resale of control stock. Immediate family (spouse, parents, and children—including in-laws) of a control person (officer, director, or more than 10% stockholder) come under the reporting requirements. The registered representative of the underwriter would be a restricted person as far as purchasing shares of the IPO, but once the securities are acquired in the secondary market, there are no restrictions due to that relationship. Unless something indicates that the regional sales manager is in a control position, the individual is just an ordinary investor and not subject to Rule 144's restrictions. Immediate family does not include nieces. LO 20.f
Certain order types on the order book are reduced for cash dividends on the exdividend date. These order types are A) sell stop limits and buy stops. B) buy limits and buy stops. C) buy limits and sell stop limits. D) sell stop limits and sell limits.
C) buy limits and sell stop limits. Only orders placed below the market, buy limits and sell stops (remember the acronym BLiSS), will be adjusted for cash dividends. Sell limits and buy stops are placed above the prevailing market and are not adjusted for cash dividends. LO 16.a
When one of the partners in a partnership account dies, the registered representative (RR) must A) automatically retitle the account in the names of the remaining partners. B) allow existing orders to be executed or expire and then freeze the account until further instructions are received. C) cancel any unexecuted orders and freeze the account. D) cancel any unexecuted orders, liquidate the account, and hold all assets in cash until further instructions are received.
C) cancel any unexecuted orders and freeze the account. When a partner in a partnership account dies, all open (unexecuted) orders should be canceled and the account frozen until an amended partnership agreement is received. Freezing the account does not require the assets to be liquidated. LO 15.f
An exchange traded fund (ETF) differs from a mutual fund in that A) its NAV is not computed after 4 pm ET. B) it is usually an open-end investment company. C) it can be sold short. D) only ETFs can track an index.
C) it can be sold short. Exchange traded funds can be sold short or purchased on margin, much like any other listed stock. Almost all ETFs are open-end investment companies but so are mutual funds, so there is no difference. There are index mutual funds just as there are index ETFs, and just like mutual funds, an ETF's net asset value (NAV) is computed after the 4 pm market close. LO 8.h
One of the concerns of the Employee Retirement Income Security Act of 1974 (ERISA) is fair treatment of all employees. Towards that goal, ERISA established certain eligibility requirements to ensure there would be A) vesting. B) funding. C) nondiscrimination. D) rollovers to IRAs.
C) nondiscrimination. One of the requirements under ERISA for a plan to be qualified is the absence of discrimination between highly and lower-paid employees.
A customer wants to know who guarantees that the contra party to a listed yield-based option on T-bonds she owns will deliver the cash if she exercises the option contract. Her registered representative should answer A) the federal government because it is the issuer of the underlying security B) there is no guarantee with any investment or security C) the Options Clearing Corporation (OCC) because it guarantees all listed option contracts. D) the FRB because the contract is based on Treasury-notes
C) the Options Clearing Corporation (OCC) because it guarantees all listed option contracts. LO 10.b
A customer of a broker-dealer has opted to use share identification for tax reporting when selling shares of her mutual funds. With this method of tax reporting, she would want to identify the shares to be sold as those that have A) the highest cost basis generating the greatest gain. B) the lowest cost basis generating the least gain. C) the highest cost basis generating the least gain. D) the lowest cost basis generating the greatest gain.
C) the highest cost basis generating the least gain. For tax reporting purposes, showing the lowest taxable gain is always the most advantageous. One way to do this when selling shares is to identify the shares that cost the most when purchased, those that give one the highest cost basis. The higher the cost basis, the lower any gains will be. LO 13.h
An investor is interested in a limited partnership and asks his registered representative to explain the "crossover point" referred to in discussions about the tax consequences of the program. The best definition would be A) the point at which the program begins to generate losses instead of taxable income, which generally does not occur until near the time the partnership is expected to be dissolved. B) the point at which the program begins to generate losses instead of taxable income, which generally occurs in later years. C) the point at which the program begins to generate taxable income instead of losses, which generally occurs in later years. D) the point at which the program begins to generate taxable income instead of losses, which generally occurs quickly if not in the very first year.
C) the point at which the program begins to generate taxable income instead of losses, which generally occurs in later years. The crossover point is the point at which the program begins to generate taxable income instead of losses. This generally occurs in later years when income increases and deductions decrease. Most partnerships are scheduled to end at or near to the crossover point because of the diminished tax advantages. LO 11.f
One of your clients interested in a hedge fund notes that the fund invests in blank-check companies. He seems uncertain what blank-check companies are, so you explain that they are sometimes known as special purpose acquisition companies (SPACS) and are unique in that A) they carry high risk because the funds will always be invested in the best available opportunity even though it isn't immediately identified. B) they carry unique risks because in a blank-check company, shareholders have no vote on any business opportunity targeted for investment. C) they have no business operations but instead raise money for the sole purpose of seeking out a business to engage in. D) they are synonymous with blind-pool companies that sell shares to investors without telling them what the specific use of the funds raised will be or what industry or sector might be targeted.
C) they have no business operations but instead raise money for the sole purpose of seeking out a business to engage in. Blank-check companies, sometimes known as special purpose acquisition companies (SPACS), are unique in that they have no business operations. Instead, they raise money for the sole purpose of seeking out a business to engage in. Once businesses are targeted, proposals will be presented to shareholders who can vote to approve or not. While a blank-check company doesn't indicate what industry or sectors might be targeted, blind-pool companies generally do. LO 12.a
XYZ Corporation issued 7 million shares of common stock in its initial public offering. It later purchased 500,000 shares of Treasury stock. XYZ recently engaged an underwriter to raise capital by selling an additional 3 million shares through a standby rights offering. By the expiration date of the offering, only 2 million shares were sold through exercise of the rights. As a result, how many shares will XYZ have outstanding? A) 9 million B) 10 million C) 8.5 million D) 9.5 million
D) 9.5 million After the 500,000 issued shares were repurchased for the Treasury, there were 6.5 million outstanding. In a standby rights offering, the underwriter agrees, on a firm commitment basis, to pick up any unsold shares and bear the responsibility for selling them to the public. Therefore, all 3 million of the additional shares are now outstanding for a total of 9.5 million shares. LO 3.f
Your customer tells you she is very bearish on the market and thinks she can capitalize on that view by purchasing an inverse exchange traded fund (ETF) that tracks the Dow Jones Industrial Average (DJIA). In a subsequent, discussion she explains her understanding of how the fund works and makes several comments that are all accurate except one. Which is the inaccurate statement that as her registered representative you would want to correct? A) If I have a change of view I can pretty much expect to be able to sell these shares right away, not like mutual fund shares where I have to wait until they're priced again. B) It's like any other fund regarding potential losses in that I can't possibly lose more than I invest. C) The fund is managed to perform opposite of the DJIA, and because I'm bearish on the market owning, these fund shares align with my view. D) If the DJIA decreases by 10%, this ETF is managed to increase by twice that amount.
D) If the DJIA decreases by 10%, this ETF is managed to increase by twice that amount. An inverse ETF is managed to perform the opposite of the index it is tracking. It is not managed to perform at any stated multiple of that performance as would be the case if it were a leveraged (two or three times) ETF. If the market falls, the inverse ETF is managed in such a way as to attempt to rise by the same percentage. In other words, perform the opposite. The invested amount is the most one can lose and like all other exchange traded products, shares can be sold intraday in the open market. LO 8.h
Which of the following statements is correct? A) The difference between the purchase price and maturity value of a U.S Treasury bill is taxed as short-term capital gain. B) Coupon interest paid on TIPS bonds is taxable on the federal level and any increase to principal is taxed as capital gain when the bond matures. C) Interest received on U.S. Treasury notes and bonds is taxable on the state level, but not the federal level. D) Interest received on GNMA securities is taxable on both the state and federal level.
D) Interest received on GNMA securities is taxable on both the state and federal level. Unlike Treasury issues, which are taxed only on the federal level, the interest on GNMA securities is taxable on both the state and federal level. The increase to principal on a TIPS bond is reported each year and taxed as interest income. The difference between the discounted purchase price of a T bill and its maturity value is considered interest income. LO 7.e
A customer of a broker-dealer is long 1 MMS July 60 call and short 1 MMS July 70 call. Which of the following is true? A) The position has an unlimited loss potential and a limited gain potential. B) The position has an unlimited loss potential. C) The position has an unlimited gain potential. D) The position has a limited gain and loss potential.
D) The position has a limited gain and loss potential. This is a spread position. All spreads (debit or credit), whether put or call spreads, have a limited gain and loss potential. LO 10.h
Among the items shown on a customer confirmation for a bond transaction is the amount of accrued interest. The amount of accrued interest is A) subtracted on the buyer's confirmation and added to the seller's confirmation. B) subtracted on both the buyer's and the seller's confirmations. C) added on the buyer's confirmation and subtracted on the seller's confirmation. D) added on the buyer's confirmation and added on the seller's confirmation.
D) added on the buyer's confirmation and added on the seller's confirmation. On customer confirmations, the amount of accrued interest is added to the buyer's confirmation to show the net amount to be paid and is added to the seller's confirmation to show the net amount that is to be received. LO 15.a
When the holder (owner) of an index option exercises the contract, the account of the holder will be A) debited the in-the-money amount. B) debited the out-of-the money amount. C) credited the out-of-the-money amount. D) credited the in-the-money amount.
D) credited the in-the-money amount. One will exercise an index option when it is in the money by more than the premium paid. Because exercise of an index option settles in cash, the account of the holder will be credited the in-the-money amount. LO 10.g
Direct participation limited partnerships offer a number of benefits for those in high income tax brackets but there can be tax consequences that are not advantageous, one of which is A) recourse debt assumed included in cost basis. B) tax credits. C) tax deductions. D) depreciation recapture.
D) depreciation recapture. When a partnership unit is sold, depreciation recapture may apply if the partnership has been depreciating its fixed assets using accelerated depreciation. If the depreciation deductions are in excess of what would have been taken had the partnership been using the straight-line method, the difference is subject to ordinary income tax making the recapture a disadvantage. LO 11.g
The calculation of accrued interest for a municipal bond A) includes interest through the settlement date. B) is not made when a bond trades "and interest." C) is based on an actual day month. D) includes interest from and including the last payment date.
D) includes interest from and including the last payment date. Accrued interest represents the amount of interest that has accrued back through and including the last interest payment date. It is computed up to, but not including, the settlement date and, for corporate and municipal bonds, is based upon a 30-day month and a 360-day year. LO 6.e
The 5% markup policy applies to each of the following transactions except A) agency trades occurring on a listed exchange. B) agency transactions in nonexempt unlisted securities. C) principal transactions occurring in the OTC market. D) new issue transactions.
D) new issue transactions. The 5% policy does not apply to exempt securities transactions such as municipal bond trades or new issue (primary market) transactions. The policy does apply to nonexempt securities and transactions on an exchange and in the OTC market, and it applies to transactions where the participants were acting in either an agency or principal capacity. LO 13.g
An agent has recommended investments in the XYZ fund family to his customers for 10 years. He is referred by one of his customers to a prospect who has inherited $500,000 as beneficiary of a life insurance policy. The prospect tells the agent she has never invested in the market before, is risk averse, and wants safety of principal to be the first priority with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares $200,000 XYZ large-cap growth and Income B shares $150,000 XYZ liquid reserve money market $150,000 The recommendation is A) suitable because it addresses the customer's liquidity objective. B) suitable because he recommended conservative investments. C) suitable because it addresses the customer's safety objective. D) unsuitable because it does not address the customer's two primary objectives.
D) unsuitable because it does not address the customer's two primary objectives. The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective. As a "real" world example, although not a formal rule, very few mutual fund companies will accept purchases of Class B shares that exceed $100,000. At that level, the reduced sales charge on the Class A shares invariably makes them a better deal for the client. LO 8.g
