1
Q
Unit 1
A
7 Questions
2
Q
Define a Security
A
investment of either ownership stake OR debt stake
3
Q
How do you buy Ownership?
A
bought through shares of company stock
4
Q
How do you buy Debt?
A
bought through an issuer’s bonds (gov. or corp.)
5
Q
Traits of Common Stock
A
- equity (ownership) in a corp
- voting rights
- elect board of directors
6
Q
*Traits of Preferred Stock
A
- Equity: usually pays fixed dividends
- has priority claims
- NO voting rights
- no right to subscribe to rights offering
7
Q
Equity securities do NOT…
A
represent a lending interest in a corporation
8
Q
**How does Preferred Stock Price work?
A
Price reacts to the market like a bond
- fixed dividend payments
- price sensitive to Interest Rate
9
Q
What is Capital Appreciation?
A
increase in the market price of securities
10
Q
*How are Capital Gains taxed?
A
Not taxed until realized (sold)
11
Q
What is a Stock Split?
A
- Increases your # of shares
- decreases the value of each stock
12
Q
2-for-1 stock split = ___
A
2x the stocks, 1/2 the price
13
Q
**What’s a Record Date?
A
Time investor must be the recorded owner to recieve announced dividends + voting rights
14
Q
Limited Liability
A
Investor’s only at risk for amount invested
(in case of company bankruptcy)
15
Q
Types of Preferred Stock (4)
A
- Straight (noncumulative)
- Cumulative Preferred
- Callable Preferred
- Convertible Preferred
16
Q
Straight (noncumulative) Preferred
A
- Only stated dividends
- missed dividends are not paid
17
Q
Cumulative Preferred
A
- Missed or reduced dividends are eventually paid back
- paid before common stockholders
18
Q
What type of Preferred Stock would be most suitable for an investor seeking steady income?
A
Cumulative Preferred Stock
19
Q
Callable Preferred
A
Company can buy the stock back from investors @ stated price
(Similar Example: refinancing a mortgage)
20
Q
Convertible Preferred
A
The owner can exchange the shares for a fixed number of common stock shares
21
Q
*Convertible Preferred Price
A
Price tends to fluctuate with the price of the common stock
22
Q
Unit 2 (5 questions)
The terms of the loan written in a document:
A
Bond’s Indenture
23
Q
Money borrowed for min. 5 years (common length 10-30yrs)
A
long-term debt
24
Q
securities restricted from immediate resale for 6 months
A
Restricted securities
25
stock held by a control person
Control stock
26
corporate director, an officer, a large stockholder, or the immediate family of any of the preceding residing in the same home
control person
27
what is considered control?
ownership consisting of 10% or more of the voting stock
28
What type relationships doe bond prices have with interest rates?
Inverse
29
A bond would be considered speculative below which of the following Moody's ratings?
Baa
30
Corporate & muni bonds are quotes as...
A % of par
31
Bond quoted at 90¼ =
bond quoted at 101¾ =
$902.50 (90% × $1,000 = $900 + ¼ × $10 [$2.50]
$1,017.50 (101% × $1,000 = $1,010 + ¾ × $10 [$7.50]
32
Gov bonds quoted as...
% of par (each point is $10, and each 0.1 represents 1/32 of $10 ($0.3125)
33
A government bond quoted at 90.8 (or 90.08) =
$902.50 (90% × $1,000 = $900 + 8/32 [which is 1/4)] × $10 [$2.50] = $902.50).
34
Bond quote = DEF 5s35 @106...
DEF is the issuer
5 is the nominal or coupon rate
35 is the maturity date of 2035
106 is the price ($1,060)
35
debt Issued by corporations only
Convertible debt
36
the grant or exercise price:
strike price
37
minimum time the employee must remain with the company in order to be able to use the option
vesting period
38
When the test states a bond pays interest at a rate of 6% semiannually, it means:
$60 per year, or $30 every 6 months
39
The interest stated on the face of a bond:
Nominal Yield
40
Annual interest payments in $ =
nominal yield x face amount of the bond ($1,000 unless stated different)
41
Current Yield =
Annual interest or return / current market price
42
A bond selling above par value =
Premium
43
A bond selling below par value =
Discount
44
if you pay less, you get more.
if you pay more, you get less.
45
The dollar amount that will be returned at maturity...
Par value
46
If you buy a premium bond, at par value you will receive...
If you buy a discount bond, at par value you will receive...
Less money
More money
47
A bond with a 5% coupon & a current return of 4%...
Bond must be selling at a premium to par.
48
YTM... it reflects the internal rate of return from the bond investment is aka...
Market-driven yield
49
Measures the gain or loss when the bonds are redeemed at maturity...
Yield to Maturity
50
A bond with a call feature may be redeemed...
before maturity (at issuer's option)
51
Rate of return the bond provides from purchase date to call date & price
Yield to Call
52
CY = Current Yield YTM = Yield to Maturity YTC = Yield to Call
53
* What is the current yield of a 6% bond trading for 80 ($800)?
Current yield = annual income ÷ current market price
$60 / $800 = 7.5%
Bond is trading at discount... when prices fall, yields rise.
54
* What is the current yield of a 6% bond trading for 120 ($1,200)?
Current yield = annual income ÷ current market price
$60 / $1,200 = 5%
bond is trading at premium. The price is up so the yield is down.
55
When bonds are at par, coupon & current yields are...
equal
56
When bonds are at premium, the CY is...
< coupon
57
When bonds are at discount, the CY is...
> coupon
58
IR & bond prices move...
counter to eachother
59
* Disregarding commissions, an investor selling a U.S. Treasury bond for a price of 104:16 will receive...
1,045.00 (104% of par + 16/32 = 0.5%) 104.5% x $1,000 = $1,045.00
60
* A 4.67% convertible debenture is selling at 102. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be
1000 / $25 = 40 shares
1000 x 1.02 = 1020
1020 / 40 = $25.50 per share
61
* Five percent XYZ debentures are trading for $1,250.
What is the current yield on the 5% XYZ debentures?
1000 x 5% = 50
50 / 1250 = 4% CY
62
Treasure bills (T-bills) are issued every week with maturities of
4, 13, and 26 weeks.
63
Every 4 weeks, T-bills issue
a 52 week maturity t bill
64
T Bill characteristics
- pays no interest
- issued at discount of their par value
- At maturity, the profit of the T-bill is considered interest income
65
Key points of T-Bills
- always issued and traded at a discount
- They're the only Treasury security issued without a stated interest rate
- highly liquid
- 13 week (91 day) t-bills are used in market analysis as the "risk free" investment
66
US Treasury Notes Characteristics:
- pay semiannual interest (% of stated value)
- Maturities of 2, 3, 5 ,7, & 10 yrs
- mature at par value
- noncallable
67
US Treasury Bonds Characteristics:
- pay semiannual interest (% of stated value)
- Long-term maturities of 10-30 years
- mature at par value
- noncallable
68
Par or Face value of Bonds are always $__
$1,000
69
Treasury Inflation-Protected Securities (TIPS) help protect investors against...
purchasing power risk
70
TIPS characterisitcs
- issued with fixed interest rate
- principal amount is adjusted semiannually = Consumer Price Index (CPI)
- Issued @ Maturities of 5, 10, 30 yrs
71
TIPS interest payments are subject to ___ tax, nut exempt from ___ & ___ taxes.
- Federal
- State & Local
72
Pays monthly:
Ginnie Maes
73
Pays semiannually:
Treasury Notes
Treasury Bonds
TIPS
74
2 types of Muni Bonds
- General Obligation (GO)
- Revenue
Tax free (regarding after tax yield)
75
GO
generally very safe
76
Revenue Bonds
payable from earnings of revenue producing enterprises (water, sewer, electric...)
77
Taxation of Corporate Bonds
Ordinary income on both state and federal level
78
Taxation of Treasury Debt
Only taxed federally
79
Tax Equivalent Yield (TEY) formula:
Muni bond coupon / (100% - investor's tax bracket)
80
Any long term debt instrument issued and sold outside of the country with different currency
Eurobond
81
Eurodollar bonds pay in ___
Eurobonds pay in ___
- US dollars
- Foreign currency
82
Yankee Bond
Maple bond
- US currency bond issued by non US entity
- Canadian currency bond issued by non Canadian entity
83
Eurdollar Bonds Advantages
- no currency risk
- rated by US aganecies (risk is clear)
- may offer higher yields than domestic bonds from same issuer
84
Eurdollar Bonds Disdvantages
- political and country risks
- less liquid
85
Brady Bonds (Latin America bonds)
No brady bond carries a US government gaurentee
86
Zero Coupon Bond Characteristics
- always issued at a discount
- no reinvestment risk
- no interest payments
- more volatile than other bonds of similar quality
- Pay taxable interest (phantom income)
- useful for target goals (college, qual retire plan)
87
Callable bonds
permits the issuer to pay off the principal before maturity
88
When is the call feature often exercised?
When IR (borrowing costs) have declined [called refunding]
89
An issuer would not redeem the bonds when:
IR go up & bond prices go down
90
Call price usually at:
premium to par
91
The # of years into the issue before issuer may use call
Call protection
92
Convertible Debt (advantages to investors)
Downside protection - if stock goes down, the investor holds debt in company
Upside potential - If company goes up, can convert bond to stock
93
The amrket for buying & selling short term loanable funds:
Money Market
94
Money market Characteristics
- all mature in 1 year or less
- many issued at a discount
- dont pay interest
95
Negotiable CD's do not have:
prepayment penalty
96
FDIC insurance applies up to $___
$250,000
97
Which CD's pay interest semiannually?
Jumbo CD's
98
Negotiable CD's are always issued at ___, not a ___
par, discount
99
Time deposits at local bank:
No interest rate risk
100
Corp/trust where investors can get large interest& diverse portfolios by pooling their funds with other investor's funds (w/ professional money manager):
Investment Company
101
Investment Company Act of 1940 classifies 3 types of investment companies:
- Face-amount certificate (FAC)
- management investment
- Unit investment trusts (UITs)
102
Closed or open end investment company such as mutual funds
Management investment company
103
How do management investment companies value themselfes?
NAV: [All assets (the largest of which is the portfolio) - liabilities] / # shares outstanding
104
The definition of Investment Company does NOT include ___
holding companies
105
What % of board of directors in a management investment company must be "outside" directors?
40%
106
Prohibited activities of ___:
- purchase on margin
- be involved in joint accounts
- sell short
- acquire > 3% outstanding voting securities of another inv comp
Mutual Fund (investment companies) may not do these things
107
Company must have net worth of ___ to make public offering:
$100,000
108
A person directly or indirectly owning, controlling, or holding, with power to vote, 5% or more of the outstanding shares in the inv comp:
An "affiliated person"
109
Inv comp must file financial reports with the SEC... how often?
Annually
110
Shareholders of Inv comp must receive financial info... how often?
semiannually
111
Open end investment company is AKA...
Mutual Fund
112
Before any solicitation happens with potential mutual fund investor, what must be given first?
the Prospectus
113
- doesn't specify exact # shares it will issue
- can raise unlimited investment capital by issuing new shares
- investors are always purchasing a new issue
- Can ONLY issue common stock
Characteristics of Mutual Funds
114
Closed end Investment Companies aka:
Publicly Traded Funds
115
Close end fund shares usually trade at...
premium or discount to the share's NAV
116
***
- trade based on supply/demand
- buying and selling price does NOT relate to the NAV of shares
-
Characteristics of Closed-end inv comp
117
Open end funds may charge a __ when funds are withdrawn
back-end load
118
An expense ratio of 1.72% = fund spends __ per year for every $100 invested
$1.72
119
More aggressive funds have __ expense ratios
higher
120
Mutual Fund distributors use 3 different methods to collect the fees for sale of shares:
Front-end loads
back-end loafs
12b-1 fees
121
Charges added to the NAV when investor buys shares:
Front-end loads (aka Class A shares)
122
Charged when investor redeems mutual fund shares:
Back-End loads (aka contingent deferred sales charge)
123
Permits MF to collect fees for promotion, determined as % of fund's average net assets yearly
12b-1 Asset Based Fees
124
12b-1 fee is used for:
marketing & distribution purposes ONLY
125
(front end): investors pay the charge at time of purchase
Class A Shares
126
(back-end load): declines over time, investors pay at redemption:
Class B Shares
127
(level load): no sales charge to purchase, continuous 12b-1 charge:
Class C Shares
128
aka private equity funds - limit ownership, > 100 investors, NOT considered registered inv companies
Private Funds
129
which exemption > 100 investors, NOT considered registered inv companies
3(c)(1) fund exemption
130
which exemption requires all investors to be qualified purchasers (ppl with at least $5 million in investments
3(c)(7) exemption
131
2 categories of Private Funds
- Those that make Direct investments
- Those that make Portfolio investments
132
Which funds are Limited partnerships that make inv decisions by general partner w/ capital coming from limited partners
Venture capital (VC) funds
133
form of fund generally organized as a limited partnership with no more than 100 investors that does not have to register with the SEC
HEDGE Fund
134
Difference between Hedge fund & Mutual fund:
Hedge fund's lack of transparency
135
Which rate has an incentive fee thats paid if the fund return exceeds a set threshold return?
Hurdle Rate
136
** Hedge funds have very high initial investment minimums
** the high minimum is a reason why these funds are suitable for only a small percentage of investors.
137
** Most hedge funds are organized as limited partnerships with the portfolio managers investing along with the investors.
**The partnership is the issuer of the ownership units.
138
an unmanaged investment company organized under a trust indenture:
unit investment trust (UIT)
139
- do not have boards of directors;
- do not employ an investment adviser; and
- do not actively manage their own portfolios (trade securities).
Characteristics of UITs:
140
**Know the following features of UITs:
- UITs are not actively managed; there is no board of directors (BOD) or investment adviser.
- UIT shares (units) must be redeemed by the trust.
- UITs are investment companies as defined under the Investment Company Act of 1940.
141
An exchange-traded fund (ETF) registers with the SEC under the Investment Company Act of 1940 either as:
UIT ETF or Open-End ETF
142
some U.S.-listed ETFs that are available for commission-free trading on certain select platforms
typically proprietary funds
143
Which is NOT an advantage of purchasing ETFs instead of index mutual funds?
Performance is usually better than underlying index
144
a company that manages a portfolio of real estate investments to earn profits and/or income for its shareholders:
Real Estate Investment Trust (REIT)
145
REITs normally:
- own commercial property (equity REITs);
- own mortgages on commercial property (mortgage REITs);
- or do both (hybrid REITs).
146
** Four important points to remember about REITs follow.
* An owner of REITs holds an undivided interest in a pool of real estate investments.
* REITs are liquid because they trade on exchanges and over the counter.
* REITs are not investment companies (mutual funds).
* REITs offer dividends and gains to investors but do not flow through losses like limited partnerships, and therefore are not considered direct participation programs.
147
* for exam purposes, assume the REIT is publicly traded unless the question states otherwise
148
Common characteristics of pooled investment vehicles (2):
- Diversification
- Professional Management
149
BENEFITS of Mutual Funds:
- Diversification
- Professional Management
- Choice of Objectives
- Convenience
- Liquidity
- Minimum Initial Investment
- Convenient tax information
- Combination Privilege
- Exchanges within a family of funds
150
** Any exchange of funds is considered a sale for tax purposes. Any gains or losses are fully reportable at the time of the exchange.
(mutual funds)
151
** It is generally agreed that the number one advantage to investing in mutual funds is the diversification offered.
(Mutual funds)
152
RISKS of Mutual Funds:
- Market Risk
- fees and expenses
- other factors (services offered, costs, taxation, etc.)
- Net redemptions
153
BENEFITS of Private Funds:
- opportunity for large profits
- investors get a say in management/development of company
- Added diversification due to low correlation to overall market
154
RISKS of Private Funds:
- Business Risk
- Liquidity Risk
- Lack of Transparency
155
BENEFITS of Hedge Funds:
- generate positive returns in both rising and falling markets.
- large variety of available investment styles
- may reduce overall portfolio risk and volatility and increase returns.
- uncorrelated returns (aka more diversification)
156
RISKS of Hedge Funds:
- high expenses
- risky strategies
- liquidity risk
- general partner approval
157
BENEFITS of REITs:
- professional property selection
- negative correlation to the stock market
- Reasonable income and/or potential capital appreciation
158
RISKS of REITs:
- lack of control
- high price volatility
- dividends are not "qualified"
159
Unit 4
5 Questions
160
Options are ___: derive their value from an underlying instrument (stock, stock index, ir, foreign currency)
Derivative Securities
161
___ is a contract that establishes a price and time frame for the purchase or sale of a particular underlying instrument.
An Option
162
Options issued on common stocks:
Equity Options
163
Your customer is long 10 ABC Jul 50 calls at 4.50. How many shares of stock will change hands if the option is exercised?
1,000 (10 calls x 100 shares)
164
2 types of option contracts:
Calls & Puts
165
The right to buy a stock for a specific price within a specified time frame:
CALL
166
The right to sell a stock for a specific price within a specified time frame:
PUT
167
An options cost:
Premium
168
A customer has the right to sell 100 shares of MNO at 60 any time between July and October. Which term best describes this situation?
Long Put
169
A tool for remembering the difference between American and European exercises is to look at the first letter.
A for American means Anytime
E for European means Expiration date
170
**You must remember that all options, regardless of their length, are ___ securities
Derivative
171
"Call up and Put down"
You buy a call in hopes the price will go up.
You'd buy a put in hopes of the stock price going down.
172
Bullish:
beleive the price will go up
173
Bearish:
beleives the price will go down
174
** Those who buy a straddle will profit from volatility, while those who sell a straddle will profit if the market is stable because the options will expire unexercised.
175
** Futures are most commonly used by ____, while forwards are used by ____.
That explains why such a small % of futures contracts ever end with delivery.
speculators; producers
176
** a clearing firm is the counterparty and guarantor of exchange-traded activity, acting as the buyer to all sellers and seller to all buyers. This eliminates counterparty risk when investing in futures contracts.
177
A term derivative would NOT include:
REITs (would: IR swaps, futures on commodities, LEAPs)
178
UNIT 5
4 questions
179
Commonly limited partnerships, this class of investment allows the economic consequences of a business to flow-through to investors:
Direct participation programs (DPPs)
180
DPPs are very liquid or illiquid?
illiquid, because they are privately placed
181
In a direct participation program, liability for the debts of the business falls upon the:
General partner(s)
182
Who has management in a DPP
Management of the enterprise is always in the hands of the general partner(s).
183
**Leveraged and inverse ETFs use ___ and other derivatives to achieve their goals.
options
184
** in most cases, ___ would not be suitable investments for buy and hold investors or those with other than a very short time horizon.
ETFs
185
Inverse ETFs are least suitable for investors:
with a long time horizon
186
Disadvantages of DPPs
- Liquidity Risk
- Legislative Risk
- Risk of Audit
- Depreciation Recapture
187
Unit 6
6 Questions
188
4 stages of Business Cycle
- expansion
- peak
- contraction
- trough
189
mild short-term contractions
recessions
190
more severe contractions
depressions
191
when business activity stops declining and levels off
trough
192
highly sensitive to business cycles and inflation trends
Cyclical Industries (durable goods & raw materials)
193
if the industry is growing faster than the economy as a whole because of technological changes, new products, or changing consumer tastes.
Growth phase (growth industries)
194
Least affected by normal business cycles
Defensive Industries
195
the cost of borrowing money
Interest Rate
196
the actual rate of interest a borrower pays on the borrowed money.
Nominal Rate of Interest
197
*
When the yield curve is normal, long-term interest rates are higher than short-term interest rates. On a graph, the normal yield curve is upward sloping.
198
**
You will need to be able to recognize the different yield curves from their "shape." A normal (positive) curve slopes upward. An inverted (negative) curve slopes downward. And there is such a thing as a flat yield curve, which, as the name implies, is level throughout all of the maturities.
199
What index measures inflation
CPI
200
**
Because inflation is a global issue, not just confined to the United States and our dollar, a universal definition would be "a decrease in the value of the monetary unit."
201
*
An increase in real income means the percentage increase in income is greater than the rate of inflation. Buying power has increased.
202
**The exam may want you to know that net exports will lead to an __ in GDP.
Increase
203
measurements that change four to six months after the economy has begun a new trend and serve to confirm the new trend.
lagging indicators
204
Unit 7
4 Questions
205
Provides company's assets, liabilities = owners equity / net worth
Balance Sheet
206
Assets - liabilities = owner's equity
Balance Sheet equation
207
*
Although intangible assets may have great value to the corporation owning them, they generally carry little value to other entities.
208
-Accounts payable
-Accrued wages payable
-Current long-term debt
-Notes payable
-Accrued taxes
Current Liabilities
209
*the difference between its current assets and its current liabilities:
working capital
210
*
Long-term debts include mortgages on real property, long-term promissory notes, and outstanding corporate bonds.
211
**Under current accounting practice, deferred tax credits are treated as a ____.
liability
212
Capital stock =
par value
213
AKA additional paid-in capital, capital surplus, or paid-in surplus
Capital in excess of par
214
AKA earned surplus & accumulated earnings
Retained Earnings
215
tock that has been issued and then reacquired by the issuing corporation:
Treasury Stock
216
AKA profit/loss statement: shows company's revenues/sales
Income Statement
217
operating income - interest payment expenses.
Pre-Tax Income
218
**3 primary components of an income statement:
Revenue , COGS , Pre-Tax Income
219
*
Interest payments reduce a corporation's taxable income
dividend payments to stockholders are paid from after-tax dollars
220
*GAAP means:
generally accepted accounting principles
221
**Part of the audit is the auditor's opinion.
The best is an unqualified opinion
a qualified opinion means the auditor has some reservations
222
**
Most financial professionals add revenues and expenses that do not involve cash inflows or outflows
223
**Cash flow from operations will use: items from income statement
Cash flow from financing activities will use: balance sheet items.
224
This form is used to report newsworthy events to the SEC
Form 8-K
225
** One thing that would not trigger a Form 8-K is the relocation of a wholly owned subsidiary
However, sale of that subsidiary would require a filing and that, like any other Form 8-K filing, must be done within four business days of the event.
226
Most domestic public issuers must file an annual report to the SEC on __
Form 10-K
227
Filed quarterly... contains unaudited financial statements:
Form 10-Q
(Hint Q for Quarterly)
228
**
SEC rules provide that a company may provide shareholders with a copy of the Form 10-K instead of sending an annual report.
229
Unit 8
2 Questions
230
***what is NOT a security:
-any product from a life insurance company that does not use the word "variable"
-Interest in a retirement plan, such as an IRA or 401(k) plan
-Collectibles
-Commodities such as precious metals and grains, including futures and forward contracts
-Condominiums used as a personal residence
-Currency
231
*Which of the following is defined as a security under the Uniform Securities Act?
An investment contract
232
**Under the Uniform Securities Act, with respect to certificates of interest; participation in oil, gas, or mining titles or leases; or in payments out of production under such titles or leases, there is not considered to be any issuer.
233
A primary transaction is:
a new offering of an issuer sold to investors.
234
*A security is exempt because of the nature of the ___, not the purchaser.
issuer
235
**During the cooling-off period, underwriters may not:
-take orders; or
-distribute sales literature or advertising material.
236
**During the cooling-off period, underwriters may:
-take indications of interest;
-distribute preliminary prospectuses; or
-publish tombstone advertisements to provide information about the potential availability of the securities.
237
**Although most registration statements are filed by the issuer,
they may also be filed by any selling stockholder like an insider or broker-dealer
238
*A stop order is used to deny effectiveness to, or suspend or revoke the effectiveness of, any registration statement.
239
**These reports CANNOT be required more often than quarterly.
Ongoing Reports
240
**A registration statement may be amended after its effective date to change the number of shares to be offered and sold if the public offering price and underwriter's discounts and commissions are unchanged.
241
Unit 9
6 Questions
242
*A person giving advice on which of the following investments would be deemed to be giving advice on securities?
Common Stock
243
Which investment advisers would be permitted to use the term investment counsel?
A firm whose exclusive business is placing their client's assets into model portfolios which are monitored on a daily basis
244
* if the sports agent advises the football player to invest his money in specific securities...
he would be considered an investment advisor
245
means excluded from, or not included in, a definition:
Exclusion
246
means not being subject to the registration provisions of the acts even though that person meets the definition:
Exemption
247
investment advisers who are solely under federal jurisdiction and are specifically excluded from the definition of investment adviser in the Uniform Securities Act:
Federal covered investment adviser
248
* compensation to the broker-dealer or salesperson in excess of that which they would be paid for providing a brokerage or dealer service alone:
Special Compensation
249
** If the investment newsletter is issued from time to time in response to episodic market events...
the exclusion is lost
250
**hedge fund managers generally register with the SEC even though the funds do NOT.
251
*Any person registered with the SEC as an investment adviser who manages one or more private funds and had at least $150 million in private fund assets under management as of the last day of its most recently completed fiscal year is:
required to file Form PF
252
**An investment adviser registered under state law whose assets reach $110 million under management has ___ to register with the SEC.
90 days
253
**A federal covered investment adviser whose assets under management fall below $90 million no longer qualifies for SEC registration and has ___ to register with the state(s).
180 days
254
**Under the USA, when an investment adviser accepts prepayments of fees of more than $____ for a contract period of six months or more, it is known as a ___.
$500, substantial prepayment.
255
**under the Investment Advisers Act of 1940, it does not become a substantial prepayment until it exceeds $____.
$1,200
256
**Typically, the net worth required of investment advisers with discretionary authority is $10,000 and that for those taking custody, whether or not they are exercising discretion, is $35,000.
257
**if a state-registered IA meets the net worth or surety bonding requirements of the state where its principal office is located, that is sufficient in any other state in which it may be registered.
258
issued by an insurance company who guarantees payment of a specified sum to an injured party when the securities professional causes damages by their actions or fails to perform.
Surety Bond
259
"the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser."
Principal Office
260
**Section 222 of the Investment Advisers Act of 1940 states that when it comes to federal covered advisers, any financial or bonding requirements, as well as rules relating to recordkeeping, are solely ____
under federal jurisdiction
261
**The proper term to use when referring to the financial requirements of an investment adviser is net worth, while for broker-dealers it is net capital. However,
if you want to get the question right, answer it the way they give it to you.
262
when an advisor trades on the anticipated short-run market activity that may result from the recommendation:
Scalping
263
**You will need to remember that the record retention requirement for investment advisers is ___ years from the end of the year in which the record was originally generated.
5 years
264
Unit 10
4 Questions
265
A ____ is any partner, officer, director, or individual employed/associated with an investment advisor and is registered under U.S.A. (unif sec act):
Investment Adviser Representative (IAR)
266
Investment Adviser Representative (IAR) characteristics:
- Makes any recommendations or otherwise renders advice regarding securities
- Manages accounts or portfolios of clients
- Determines which recommendation or advice regarding securities should be given
- Solicits, offers, or negotiates for the sale of or sells investment advisory services
- Supervises employees who perform any of the foregoing
267
3 exemptions from Registration as IAR:
- person represents a state-registered adviser
- snowbird exemption
- person represents a federal covered investment adviser
268
An individual representing a state-registered investment adviser would not qualify for the de minimis exemption in a state if, over a 12-month period, she had ...
6 or fewer retail clients
269
**If there should be a change to any material information in Form U4, an amendment must be filed within ____ days.
30
270
Unit 11
4 questions
271
any person engaged in the business of effecting transactions in securities for the accounts of others or for its own account:
Broker-Dealer
272
*People who buy and sell securities for their own accounts are NOT broker-dealers
273
**Broker dealers typically earn a spread or commission when they do:
underwriting
274
Broker Dealers are NOT:
-agents
-issuers
-banks, savings institutions & trust companies
275
**there is NO de minimis exemption for ___ ___.
broker-dealers
276
**Under the USA, you are a broker-dealer if:
1. you have a place of business in the state regardless of the nature of your clients; or
2. you have even one retail client in the state
277
**Under the USA, you are NOT a broker-dealer if:
1. you have no place of business in the state AND
2. your only clients are other BDs, institutions, and issuers of the security involved in the transaction; or
3. you are registered in a state where you do maintain a place of business and only do business in this state with existing clients who are not residents of this state (snowbirds).
278
**Focus on EXEMPTIONS of Broker-dealers
279
Under the Uniform Securities Act, a broker-dealer is defined as any person who:
is in the business of effecting securities transactions for its own account or for the accounts of others.
280
Agents AKA:
Registered Representatives
281
**ASSOCIATED PERSONS:
Even "outside" directors or partners whose only connection to the firm is the contribution of capital are considered associated persons of the broker-dealer. If that is their only function, they are not required to register as agents.
282
Securities exempt from registration are called:
Transactions exempt from registration are called:
Exempt Securities
Exempt Transactions
283
**Individuals representing broker-dealers in a sales capacity must register as agents whether they sell registered securities or securities exempt from registration or engage in exempt transactions.
284
**Included in the recordkeeping requirements are electronic communications, particularly emails.
However, it is not required to maintain emails of a personal nature sent to nonclients
285
**Although it is required to keep all records relating to customers, there are no requirements to keep copies of their tax returns.
286
**You will have to know that broker-dealers who meet the SEC's net capital or bonding requirements cannot be required to meet higher ones in any state in which they do business.
287
**In lieu of a surety bond, the Administrator will accept deposits of cash or securities.
288
The Administrator may establish ___ ___ ___ for broker-dealers.
net capital requirements
289
**If an agent terminates employment with a broker-dealer, both parties must notify the Administrator promptly.
in the case of an agent, the first letter, A, tells us that All the parties involved must notify the Administrator. All notifications must be made promptly. Please note how this differs from the termination of an IAR.
290
There are no financial requirements, or net worth requirements, to register as an ____.
agent
291
**unlike FINRA registration requirements, individuals applying for registration do NOT have to submit fingerprints.
292
*Renewal applications for Canadian broker-dealers and agents who file for limited registration must be filed before December 1 each year.
293
Unit 12
2 Questions
294
* The SEC's authority does not extend over state securities regulation
(the Uniform Securities Act).
295
difference between a sale and an offer to sell:
Offer = attempt... no transaction
Sale = actual transaction
296
**"A purported gift of assessable stock is considered to involve an offer and sale."
Assessable stock
297
**gift of nonassessable stock is ___ considered a sale
NOT
298
**when shares of nonassessable stock are given free as a bonus with the purchase of something else..
It IS an offer or a sale, NOT a gift
299
**A radio or television program is considered to originate in the state where the microphone or television camera is located.
300
**If the Administrator of State A wishes to investigate a BD registered in State A, but whose principal office is located in State B, does he need the approval of the State B Administrator?
No!
The Administrator can go in during normal business hours and doesn't need to make an appointment.
301
What accurately describes a cease and desist order as authorized by the Uniform Securities Act?
An Administrator’s order to refrain from a practice of business she believes to be unfair
302
The Administrator may cancel the registration of an adviser if:
-a court has declared the adviser to be mentally incompetent.
-the adviser is not in the business any longer.
-mail is returned with notification that the forwarding notice has expired.
303
*The exam may refer to the interest paid to the client as being at the state's legal rate.
304
**Penalties of violating the Uniform Securities Act
Federal law is $10,000 and five years. State law is $5,000 and three years.
305
If an agent chooses to appeal an Administrator's order, when must the agent file for review of the order with the appropriate court?
Within 60 days after the entry of the order
306
Unit 13
10 QUESTIONS
307
What type of transaction does the adviser act as agent for both advisory client and the party on the other side of the trade?
Agency cross transaction
308
**In an agency cross transaction, the adviser may ___ recommend the transaction to ___ parties of the trade.
NOT ; both
309
**If your sister was a control person for the company you were selling shares of...
you must disclose the conflict of interest to your clients
310
**All broker-dealer fees must be disclosed in document
311
**Broker-dealer fee disclosure document EXCLUSIONS:
- commissions
- markups and markdowns
- advisory fees
312
**If justified, a broker-dealer, but not an associated person of the firm, may correct a bona fide error. An associated person of a broker-dealer cannot do this because of the concern that any such payment may conceal individual misconduct.
313
**If a broker-dealer forms a subsidiary that registers as an investment adviser, existing clients of the BD wishing to become clients of the IA must enter into a __ ___ for advisory services.
new contract
314
**In the event of clients suffering losses
WAIVERS are NOT permitted.
if you are given a question where clients agree to waive their rights to sue, the agreement is null and void.
315
WAIVERS:
Are notttt permitted or valid.
316
*When is it required to file the brochure supplements?
Only in the case of state-registered investment advisers
317
**What type of clients are not suitable for a wrap fee account ?
"buy and hold"
318
SEC registered advisers are required to deliver a firm brochure to each client... if
there are material changes
319
Which of the following legal or disciplinary actions occurring within the past 10 years would NOT have to be disclosed on an investment adviser's brochure?
Conviction of a misdemeanor in a civil action regarding payment of parking tickets
(unrelated to business)
320
* 2 types of social media under SEC
Static content
Interactive content
321
content posted until changed (company websites, profiles, backgrounds, or walls)
Static social media content
322
content with input from both the creator and the viewer (blogs, Facebook, Twitter, Instagram, and LinkedIn)
Interactive social media content
323
**investment advisers who advertise a charting or similar system must indicate that there are ___ & ___ inherent in using such programs.
limitations & difficulties
324
**Look for the terms fair and balanced as a description of the content of any advertising.
325
**You may NOT use the initials IAR on business cards or such things
Never
326
Unit 14
11 Questions
327
Investment advisers and their representatives have an obligation to place their clients' needs ahead of their own. This is legally known as:
fiduciary responsibility.
328
**With performance based fiduciary compensation... advisers must use net performance:
= gains + losses
329
**With performance based fiduciary compensation... the Administrator has the power to authorize this type of fee even when:
the client doesn't meet the financial requirements
330
compensation to an investment adviser from a broker-dealer that will generally not be considered unethical:
the Section 28(e) "safe harbor" description
331
**Safe Harbor dollar compensation examples: (what counts)
-research reports analyzing the performance of a particular company or stock;
-financial newsletters and trade journals could be eligible research if they relate with appropriate specificity;
quantitative analytical software;
-seminars or conferences with appropriate content;
-effecting and clearing securities trades.
332
**Safe Harbor dollar compensation exclusions: (what doesn't count)
-telephone lines;
-office furniture, including computer hardware;
travel expenses associated with attending seminars;
-rent;
-any software that does not relate directly to analysis of securities;
-payment for training courses for this exam;
-internet service.
333
Custody of funds and securities definiton:
holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.
334
**Most investment advisers do NOT take custody and, therefore, are unable to accept direct delivery of customer securities or funds except under limited conditions, however:
broker-dealers are not held by this rule
335
**if a state-registered investment adviser has custody because it advises a pooled investment vehicle (see Unit 14), the adviser must also keep true, accurate, and current audited account statements. The records required to be made and kept include:
-the date(s) of the audit;
-a copy of the audited financial statements;
-evidence of the mailing of the audited financial statements to all limited partners, members, or other beneficial owners within 120 days of the end of its fiscal year.
336
**When...
Advisers having custody solely due to direct fee deduction and who keep the required records and make the required notifications to clients
Advisers having custody solely due to advising pooled investment vehicles and who keep the required records and make the required notifications to clients
the adviser net worth/bonding requirements are WAIVED in these 2 cases
337
**Filing of Form ADV-E is required only when the investment adviser maintains ___ of customer funds/securities.
custody
338
an account set up with preapproved authority for a securities professional to make transactions without having to ask for specific approval:
Discretionary Account
339
the authority to decide:
-which security;
-the number of shares or units;
-whether to buy or sell.
Discretion
340
**To identify a discretionary order, try this method: an order is discretionary if any one of the three A's is missing from the customer order:
- Activity
- Amount
- Asset
341
*Discretion does NOT apply to :
decisions regarding the timing of an investment or the price at which it is acquired.
342
**The 10-business-day period is equal to two normal work weeks.
(If a client opens a discretionary account with an investment adviser and gives the OK orally, but three weeks have passed by since the initial trade and the written authorization has not been received, the IA can't exercise discretion in the account.)
343
**the greatest concern of the regulators when it comes to discretionary accounts is the possibility of the account being ____.
CHURNED
344
**when a securities professional is effecting transactions in a discretionary account that are excessive in size or frequency
CHURNING
345
**Making blanket recommendations ....(recommending the same security to most or all clients without regard to individual suitability)
is an UNETHICAL business practice
346
advisers lending & borrowing money/securities with clients is ____
UNETHICAL
347
Any adviser's supervised persons who:
- has access to nonpublic info about clients
- involved in making securities recommendations to clients
"Access person"
348
**____ is necessary for an access person to acquire a beneficial interest in an IPO or a private placement
Preapproval
349
An investment adviser who falls under the requirements of Section 13(f) of the Securities Exchange Act of 1934 must file Form 13F:
quarterly
350
**Excessive trading also means ___
Churning
351
**A complaint received by electronic means (email) is considered a ___ complaint.
written
352
**broker-dealers, investment advisers, and investment adviser representatives are never permitted to share in the profits or losses in their client's accounts.
duhh
353
**Any trade made off the books of the broker-dealer is...
is unethical
354
On occasion, two registered agents cooperate on a sale. In that case, the commissions earned may be split in all of the following cases except:
when the agents are not registered with the same or an affiliated broker-dealer.
355
a broker-dealer can operate on the premises of a financial institution when...
Retail deposits are taken
356
*any information about a company that has not been communicated to the general public and that would likely affect the value of a security:
Material nonpublic inside info (MNPI)
357
an officer, director, or owner of more than 10% of the voting stock of the company, or the immediate family of any of these persons
Insider / Control Person
358
the term used to describe the procedures followed by these firms to insulate information from reaching the wrong hands.
"Chinese Wall" or information barrier
359
**Regarding insider trading:
Sharing private information is not wrong, its when you use it to make atrade
360
**when a person sells a security and repurchases it within 30 days prior to or after the sale
a Wash Sale
361
*simultaneous buying and selling of the same security in different markets to take advantage of different prices:
Arbitrage
362
*a fraud committed or attempted using the identifying information of another person without authority:
Identity Theft
363
*a pattern, practice, or specific activity that indicates the possible existence of identity theft:
Red Flag
364
*Accounts under Red Flags Rule as offered by financial inst. or creditors for personal, family, households involving multiple transactions, or accounts with a forseeable identity theft risk:
Covered Accounts
365
**Broker-dealers and investment advisers backing up client data should make sure it is ___.
Encrypted
366
Regulation S-P distinguishes between a ___ and a ___.
Customer & Consumer
367
Unit 15
2 Questions
368
**In a progressive tax system: the term used to describe the highest rate paid on income (aka next dollar / last dollar received)
is the individual's ___ tax rate
MARGINAL
369
**Your tax filing status is based on your marital status as of the end of the year...
(December 31)
370
Other factors of tax filing status:
Age, State of residence, Citizenship
371
Most important sources of income:
-Earned Income
-Alimony
-Child support
-
372
___ ___ includes salary, bonuses, tips, and income derived from active participation in a trade or business:
Earned income
373
payment made under a (divorce) court order to an ex-spouse:
Alimony
374
**For purposes of an IRA contribution, alimony from pre-2019 is considered eligible income while alimony from a divorce after 2018 is not.
Child support is never eligible income.
375
*Although interest income from municipal bonds is tax free, capital gains are fully taxable. Capital gains occur when:
the bond is sold for a price that is greater than the investor's cost basis (investment) in the bond.
376
**TIPS are exempt from state and local income tax... However...
the annual interest payment received is taxable on a federal basis as ordinary income
377
**interest-on-interest plan:
similar to banking account, compounding interest ---- taxable in the year received
378
**Regardless of fluctuations in the market price, as long as a dividend is paid, investors participating in a DRIP will always have more shares in their account at ___
the end of the year, NOT at the beginning.
379
when a security is sold for a price higher than its cost basis:
Capital Gain
380
when a security is sold for a price lower than its cost basis:
Capital Loss
381
*A lower cost basis results in a ____ capital gain
Larger
382
*What type of gains does the wash sale rule apply to?
realized LOSSES (not realized gains)
383
*Items that must be added back in for the purpose of the AMT computation:
Tax Preference Items
384
Unit 16
6 Questions
385
Joint Tenants with Right of Survivorship (JTWROS)
ownership says that a deceased tenant's interest in the account passes to the:
surviving tenant(s)
386
*Whenever the test uses the term joint tenants, it means ___ (not tenants in common).
JTWROS
387
**Tenants in common can own __ interests in the account
Unlike joint tenants with right of survivorship, who always share ___.
unequal ; equally
388
**Tenants by the entirety are considered a single owner—
no separate shares.
389
**TIC does not avoid ___.
probate
390
**Checks or distributions must be made payable in the account name and endorsed by all parties.
Regarding Tenants in Common (TIC / JTIC)
391
simplest form of business organization and is treated like an individual account:
Sole Propriertorship
392
unincorporated association consisting of two or more individuals:
General Partnership
393
the management (and liability) is assigned to the general partner(s) while the limited partner(s) are passive and have liability limited to their investment:
Limited Partnership
394
-taxed like a partnership
-offers investors the limited liability associated with corporations in general
-The profits and losses are passed through directly to the shareholders in proportion to their ownership
-may not have more than 100 shareholders
S Corporation
395
-a business structure that distinguishes the company as a separate entity from its owners
-the corporation's officers and directors are shielded from personal liability for the corporation's debts and losses
C Corporation
396
* earnings are subject to double taxation
C Corporation
397
**If a sole proprietorship operates under a DBA (Doing Business As) name that might seem to imply it is a corporation, it does not remove the full liability from the individual owner.
398
Which of the following business accounts requires a minimum of two owners?
General Partnership
399
Which of the following business entities is directly responsible for paying taxes on its income?
C Corporation
400
**allows entering of buy and sell orders but not the withdrawal of funds. Entry of orders and withdrawal of funds is only allowed if full power of attorney is granted.
Limited power of attorney/limited trading authorization
401
**A durable power of attorney survives the physical or mental incompetence of the grantor but NOT the ___ of either party
death
402
the person who supplies the property for the trust
Settlor
403
**
- must distribute all of its annual income
- not obligated to distribute all of its annual income
Simple trust ; Complex trust
404
when the settlor retains control over assets until death:
testamentary trust
405
**If the trust or estate has income, it must be reported on IRS ____.
Form 1041
406
3 primary ways to avoid Probate:
- designate a benficiary
- using a POD (pay on death) / TOD (transfer on death)
- have assets titled in names of 2+ ppl as "joint tenants after death"
407
When a donor makes a gift of securities or virtually any asset, the cost basis to the recipient (the donee) is the donor's cost basis:
Carryover basis
408
**The step-up provision does not apply when inheriting an ___.
annuity
409
Federal estate tax is calculated using a formula that begins with the ___
Gross estate (all interests in property held by an individual at the time of death)
410
**If an asset is sold after death at a greatly reduced price from its appraised value in a transaction that does not meet the definition required under fair market value, the IRS will use the ___ value.
higher
411
**Estate tax computation is done on Form ___.
Estate Income tax computation is done on Form ___.
706 ; 1041
412
Unit 17
7 questions
413
-current expenditures;
-debt obligations;
-tax status;
-income sources;
-a balance sheet containing the client's assets
-laibilities
financial profile should include:
414
**A family balance sheet includes only assets and liabilities, NOT:
not income like salary, dividends or interest, or amounts paid for expenses.
415
**An example of a question that could help an adviser determine the client's risk tolerance is:
"How much of a loss of principal are you willing (or able) to accept: 5%, 15%, 30%, or even more?"
416
Categories of Risk Tolerance
-Agressive
-Moderate
-Conservative
417
*An investor who claims to be aggressive but is unwilling to sustain losses is actually ___
Conservative
418
3 primary investment objectives:
-growth
-income
-stability (capital income)
419
An objective that's max income/growth with no regard to stability:
Speculation
420
Which of the following is properly referred to as an investment goal rather than an objective?
Endowing a scholarship at your alma mater
421
**On the exam, the first choice for preservation of capital should always be ___
bank-insured CDs
422
**An application for disability insurance coverage can be denied in the case of a ___ ___.
hazardous occupation
423
**The longer the time horizon, the more market risk the account can accept and vice versa.
424
A married couple is 55 and 57 years old. The older of the two plans to retire at 62 and the younger at 65, and both are healthy. What is the most appropriate estimate of the time horizon for their retirement portfolio?
More than 20 years
425
Which of the following is an investment constraint?
Time horizon
426
funds who invest in stocks of rapidly growing corporations:
Growth Funds
427
fund that stresses current income over growth:
Income fund
428
(also called a growth and income fund) may attempt to combine the objectives of growth and current income;
Combination Funds
429
funds that specialize in particular economic sectors or industries
Specialized (Sector) funds
430
these funds buy securities of companies that may benefit from a change within the corporations or in the economy:
Special Situation Funds
431
these funds invest in securities to mirror a market index, such as the S&P 500
Index Funds
432
these funds invest mostly in the securities of companies that have their principal business activities outside the United States
Foreign Stock Funds
433
**Be aware that an investment in a ___ ___ fund is not insured or guaranteed by the FDIC or any other government agency
money market
434
One of your clients has received sales literature on a lifecycle fund. A common name for this kind of fund is:
target date
435
Based on reports indicating a likely slowdown in economic activity, the portfolio manager of the UVW mutual fund has reduced the fund's exposure to equities and increased the cash. UVW is most likely
an asset allocation fund.
436
Unit 18
7 Questions
437
Simply, income tax is put off (deferred) to a later time.
Tax-deferred:
438
An employer-sponsored plan, such as a pension, 401(k), or 403(b)
Qualified plan:
439
: This term by itself means that contributions are made with pre-tax dollars and earnings in the account are tax deferred until the funds are withdrawn
Qualified
440
An employer-sponsored plan, such as a deferred compensation plan
Nonqualified plan:
441
The contribution made by the individual, whether an employee contribution to a qualified plan such as a 401(k) plan, or by any individual to an IRA
Deductible contribution:
442
A contribution to a qualified plan or an IRA that is made with after-tax dollars
Nondeductible contribution:
443
*Although we may include some actual contribution limits, it is unlikely that you will have to know any others than the IRA and Coverdell numbers.
444
allows a maximum tax-deductible annual contribution of the lesser of $7,000 per individual or $14,000 per couple, or 100% of taxable compensation for the taxable year 2025.
Traditional IRA
445
*For divorce decrees signed prior to January 1, 2019, alimony is considered earned income to the recipient.
446
*For divorce decrees signed after December 31, 2018, under the TCJA of 2017, alimony payments are/aren't considered compensation?
ARE NOT
447
**The exam may want you to know that the ___ is responsible for the catch-up provisions.
EGTRRA
448
**You should know that a TAX extension does NOT give you more time to pay your taxes; it only extends the time that you have to file your ___.
return
449
**although tax-exempt income from municipal securities is shown on Form 1040, it is NOT included in ___.
AGI
450
**___ are people who can't benefit from real estate held in an IRA or qualified plan as any "member of the family'
Prohibited Persons
451
A taxpayer has earned income of $25,000 in 2025. Contributions to that individual's IRA may be made until
April 15, 2026.
452
*The early withdrawal penalties for all IRAs are waived in the event of ___ or ___.
death or disability
453
**Assume questions are about traditional IRAs unless they specifically state otherwise.
454
**Income and capital gains earned from investments in any IRA account are not taxed until the funds are ___ and, if a qualified withdrawal, are not taxed at all in the case of a Roth.
withdrawn
455
*How does a direct rollover differ from a transfer?
it involves two different types of plans.
(For example, one would use a direct rollover to move funds from a 401(k) plan to an IRA, while the transfer is from an IRA at one brokerage firm to an IRA at another.)
456
*IRAs and employer-sponsored qualified plans have a beneficiary designation. That designation supersedes any contrary provision in a will.
457
**Only earnings from __-___count toward determining the maximum that may be contributed.
self-employment
(For example, if a corporate employee had a part-time consulting job, only that income, not the corporate salary, could be included in the computation.)
458
**Unlike an annuity payout or life insurance premium, contributions to a defined benefit plan are not affected by the participant's __.
sex
459
Employer contributions to defined benefit or defined contribution (money purchase) pension plans are ___.
manditory
460
A ____ plan established by an employer allows employees to participate in the business's profits
profit-sharing
461
**An employer-sponsored ___ plan may be established with no required employer or employee contributions.
401(k)
462
**One of the benefits of investing through a 401(k) plan is that it takes advantage of __ ___ ___, a technique described in Unit 21, which always results in a lower cost per share in a fluctuating market.
dollar cost averaging
463
this plan is:
a contractual agreement between a firm and an employee in which the employee agrees to defer receipt of current compensation in favor of a payout at retirement:
nonqualified deferred compensation (NQDC) plan
464
**Although pre–age 59½ withdrawals from IRAs for education and a first-time home purchase escape the early withdrawal penalty, withdrawals from qualified plans for those purposes do not.
465
*After a person begins taking distributions from an IRA under Rule 72(t), contributions, asset transfers, or rollovers are ___ permitted while receiving payments.
NOT
466
What regulates almost all types of employee benefit plans and personal retirement plans?
ERISA aka Pension Reform Act,
467
**___ cannot delegate certain fiduciary duties, such as determining the amount and timing of distributions.
trustees
468
*A plan participant or beneficiary who controls his or her specific plan account is not a ___.
fiduciary
469
**The IPS will NOT include ___ security selection.
specific
470
These ESAs allow after-tax contributions for student beneficiaries:
Coverdell ESAs
471
**Here are some key test points about Coverdell ESAs:
-Contributions can be made by parents and other adults; the total for one child is still $2,000.
-Contribution limit is $2,000 per year per child until the child's 18th birthday.
-Contributions are not tax deductible, but all earnings are tax deferred.
-Distributions are tax free if they are taken before age 30 and used for eligible education expenses.
-If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member.
472
**The earnings portion of a nonqualified distribution is taxable to the individual who receives the payment, either the account ___ or the designated ____.
owner; beneficiary
473
** Federal tax law allows a tax-free rollover of any or all of a 529 account from the current 529 plan to a different 529 plan, but...
only 1x per year period
474
**U.S. ___ bonds are not available as investment options in Section 529 plans.
savings
475
**difference between investments in an ESA and in a 529
ESA: acts like self directed IRA
529: limited to the choices offered by the plan
476
For 529 plans:
contributions are NOT deductible on the donor’s federal tax return.
477
**UGMA/UTMA account applications must contain the custodian's name, minor's name and ___
Minor's Social Security number
478
a person makes a gift of securities to a minor under the UGMA/UTMA laws:
donor
479
*The FSA holds money deducted from the employee's pay and remains with the company—
it is not investible, and, if you don't use it, you lose it.
480
Unit 19
6 Questions
481
the risk in the return of an investment that is associated with the macroeconomic factors that affect all risky assets:
Systematic Risk
482
*___ risk is measured by a security's beta
Market Risk
483
*___ risk cannot be diversified away
Market Risk
484
*the risk that a security's value will fluctuate as a result of a change in market interest rates:
Interest Rate Risk
485
**___ risk can be minimized through portfolio diversification.
Unsystematic Risk
486
**___ risk is highest for investors whose portfolios contain stock in only one issuer or in lower rated bonds.
Business Risk
487
*Listed stocks and mutual funds have virtually no liquidity risk.
Thinly traded stocks, many municipal bonds, and most tangible assets have a greater degree of inability to liquidate rapidly at your price.
488
**You should know that the PRIMARY systematic risks are the following, ((think: PRIME)):
* Purchasing power (inflation)
* Reinvestment
* Interest rate
* Market
* Exchange rate (currency)
489
**6 primary unsystematic risks:
-Business
-Financial (credit/default)
-Legislative
-Liquidity (marketability)
-Political
-Regulatory
490
**If an exam question includes taxes and wages, those would have the highest priority of the ___ creditors but would be behind those who are ___.
unsecured ; secured
491
Which of the following securities is considered the most senior?
Subordinated debenture
492
Unit 20
7 Questions (2-3 about NPV)
493
**FV formula:
FV = PV × (1 + r)^n
494
*To find PV, you must already know the FV.
To find FV, you must already know the PV.
495
**PV Formula
PV = FV ÷ (1 + r)n
496
**If our actual return is less, the PV (the required initial deposit) is going to be higher than we computed.
if the actual return was higher than the PV , the PV (the amount we would have had to deposit) is less.
same for FV...
If the actual return is higher than projected, the FV will be higher
497
**Rule of 72 Formula
72 / Rate of return
498
**the difference between an investment's present value and its contemporaneous cost (current market value, or CMV)
Net Present Value (NPV)
499
**A positive NPV of $10 means that an investment that is selling for $100 must have a discounted present value (PV) of $__ for an NPV of $10.
$110
If the PV is $90, there is a negative NPV of $10 because the price is above the present value.
500
*NPV is expressed in dollar amounts and NOT as a rate of return.
501
*If the NPV is (pos/neg?), the investment is a worthwhile addition to the investor's portfolio.
positive
502
___ is the discount rate (r) that makes the FV = to its PV
Internal Rate of Return (IRR)
503
*The IRR calculation can be used to determine whether an investment meets the investor's required rate of return.
*If an investor requires an investment return of 10% and the IRR for a proposed investment is 12%, the investor will view that investment as attractive because it returns a higher rate than the investor's required rate.
504
**__ is the method of computing long-term returns that takes into consideration time value of money.
Internal rate of return (IRR)
505
**The yield to maturity of a bond reflects its ___.
IRR
506
**The investment is a good one if it has a ___ NPV; stay away if the NPV is ___.
positive ; negative
507
**___ is generally considered more important than IRR.
NPV
508
**When an investment's IRR is = to the discount rate (aka required rate of return), the NPV = zero.
In an efficient market , bonds should be priced so that their NPV is ___.
zero
509
**The quickest way to identify IRR vs. NPV is that IRR is always expressed as a %, while NPV never is. It is usually shown as a dollar amount. So, one is a "___" (%), while the other is a "___" ($).
rate ; value
510
2 components to computation
Int rate & duration
If maturity dates are similar, the bond paying the highest coupon rate will always have the shortest duration, and that with the lowest coupon, the longest duration.
511
*With no periodic interest payments (that's why it's called zero coupon), the duration of a zero coupon bond will always equal its length to maturity.
512
**If you were managing a portfolio of bonds and expected interest rates to decline (bond prices will rise), you would ___ the average duration of the portfolio
lengthen... (vice versa)
513
Formula of Average Duration
durations added up / how many durations
514
*The duration of a bond with coupon payments is always shorter than the maturity of the bond.
also, the duration of a zero coupon bond is equal to its maturity.
515
*A five-year zero coupon bond has a duration of five because it takes five years to make the money back; the buyer gets a single payment (par) at maturity five years after purchase.
516
**If you should be asked, "Which of the following is the most useful in determining the price volatility of a bond to a significant change in interest rates?" the correct choice is ___.
convexity
517
*The ___ the discounted cash flow (DCF), the more valuable the investment.
Higher
518
Unit 2
5 Questions
519
Unit 3
6 Questions
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