Test 1 Part 4 - Weak Parts
What is the tax penalty for the withdrawal of money from an IRA before age 59½?
10% Early withdrawals from an IRA are subject to a tax penalty amounting to 10% of the taxable portion of the distribution.
An investor purchases a 5% callable convertible subordinated debenture at par. EXACTLY 1 YEAR LATER, the bond is called at $104. The investor's total return is
9%. Total return consists of income plus gain. Buying a bond at par and having it called at $104 results in a $40 gain. With a 5% coupon, there will be two semiannual interest payments of $25 in a one-year holding period. Adding the $40 + $50 = $90 total return on an investment of $1,000 which = 9%.
Which of the following orders would be most likely to add fuel to a bullish stock market?
Buy Stop Buy stop orders are placed above the current market price and are usually used by those with short positions. As prices increase, these stop orders are triggered, sending more buy orders to the trading floors.
Olga holds XYZ stock. The stock recently increased in value by 50%. She would like to preserve as much of this gain as possible and retain the potential for additional price increases. Which strategy best meets Olga's goal?
Buy a put option Buying a put option would allow Olga to hold the stock for additional gain but reserve the right to sell at or near the current value if the stock price plummets. Shorting the stock would lock in Olga's gain but not allow her to take advantage of additional price increases; additional price increases would be offset by the cost of replacing the shorted stock. Writing a call option would provide some offset to a drop in price but would not allow for potential gain in value. Buying a call option would not provide any downside protection.
Where would you be most likely to find an IPS?
Defined benefit plan The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.
Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include constant dollar plan constant ratio plan dollar cost averaging DRIPs
I and II In both a constant dollar plan and a constant ratio plan, the goal is to maintain a balance between equity and debt securities in the portfolio. This is done by selling equities as their price rises (the proportion has now changed) and buying equities when the prices fall to get back to the constant dollar or ratio.
The chief financial officer (CFO) of a company approaches an investment adviser representative who happens to be the trustee of the corporation's qualified plan requesting a loan from the plan to help the company meet some short-term obligations. Which of the following would be the appropriate action to be taken by the IAR?
The IAR is prohibited from making this loan because of his fiduciary responsibility to the plan. As the plan fiduciary, the IAR is prohibited from taking any action that is against the rules. Companies cannot use their qualified plan assets to finance their business operations.
Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty?
When the distribution is paid in equal annual amounts over the owner's life A distribution from an IRA taken in equal annual amounts over the owner's life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.
Under ERISA, a fiduciary must act in all of the following ways EXCEPT
confining investments to only those most likely to achieve growth Under ERISA, a fiduciary is not limited to confining investments to only those most likely to achieve growth. The fiduciary is required to diversify investments so as to minimize the risk of losses, unless doing so is clearly not prudent under the circumstances.
Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan EXCEPT
employer contributions to the plan are not subject to current taxation to the employee.
The bulk of "dark liquidity" represents trades
engaged in by institutional traders and trading desks away from the exchange markets.
A stop order can be used to do all of the following EXCEPT
give the broker-dealer discretion regarding time and price A stop order becomes a market order when the stop price is reached or penetrated. Stops can be used to protect both long and short positions. The stop order does not give the agent or the firm any discretion.
The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does NOT address
maintenance margin Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).
In projecting future cash requirements, one of the tools is a capital needs analysis. When doing one, all of the following would be considered capital needs EXCEPT
rolling over a 401(k) into an IRA A capital needs analysis attempts to determine money that would be needed in the event of an individual's sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset such as the 401(k) is not a need; it is something that will help meet the need.
Trade confirmations sent by broker-dealers to their customers must always include
the amount of commission charged Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed.
Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor?
A money market fund Preservation of capital means no fluctuations. Money market funds are the only logical choice here. True, the Treasury bonds do not have default risk, but because they can have maturities as long as 30 years, they are subject to interest rate risk.
Investors wishing to employ a passive strategy for their bond portfolios would most likely elect which of the following?
Buy & Hold Among investing strategies, it is hard to find one more passive than buy and hold—nothing is traded until maturity. Each of the other strategies involves some degree of activity.
It would be correct to state that the specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market the specialist stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market the market maker stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market the market maker stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market
I and IV The specialist performs his activities on the floor of an exchange, while the market maker performs a similar function in the OTC market. Note: The term specialist has been replaced by designated market maker (DMM), but specialist might still appear on the exam.
A 69-year-old client of yours indicates that she is interested in changing the portfolio mix of her IRA. She wishes to sell most of the bonds in the account and replace them with 3x leveraged ETFs. You would probably infer from this that the client
has insufficient retirement savings. Most studies have indicated that seniors with insufficient retirement savings attempt to compensate by being tempted to reach for higher returns to maximize retirement assets. They frequently do so without full consideration of the increased risk that comes along with the possibility of higher returns.
When a participant in a 401(k) plan dies before retirement, the proceeds are distributed
to the designated beneficiary without going through probate. Most qualified retirement plans require naming a designated beneficiary (or beneficiaries). Upon the death of the participant, the account proceeds are distributed without going through the probate process. This is done without regards to the terms of the will, similar to the beneficiary of a life insurance policy.
Which of the following statements are TRUE about both an individual Roth IRA and a Roth 401(k) plan? Contributions are made with after-tax dollars. One must have AGI below a certain level in order to maintain either Roth. If all the conditions are met, withdrawals are tax free. There are no RMDs at age 70½.
I and III In any Roth plan, contributions are made with after-tax dollars, and assuming all conditions are met, withdrawals are tax-free. However, unlike the individual Roth IRA, there are no earnings restrictions on participants in a Roth 401(k) plan and RMDs must begin at age 70 ½.
Which of the following are disadvantages of index investing relative to active portfolio management? Indexed portfolios have higher transaction costs. Indexed portfolios have lower management fees. Indexed portfolios restrict the universe of potential investments. Indexed portfolios may not represent optimal performance for a specific investor.
III and IV Indexing means that it is only possible to select securities that are within the index, meaning that the universe of investable securities is restricted. An index may not represent optimal performance if the index does not adequately match the investor's objectives. That is, a conservative investor should not be in a small-cap index and, conversely, the S&P 500 Index would be a poor choice for an aggressive one. There are lower, not higher, transaction costs, and lower management fees are certainly not a disadvantage.
