6 - Securities Analysis, Taxation & Federal Law Flashcards Preview

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Flashcards in 6 - Securities Analysis, Taxation & Federal Law Deck (189)
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1
Q

Tax rate increases as income increases

A

Progressive tax

2
Q

Taxes that are levied equally regardless of income

A

Regressive taxes

3
Q

Three examples of regressive taxes

A

Sales, excise, property

4
Q

Two examples of progressive taxes

A

Income, estate

5
Q

Three types of income subject to taxation

A

Earned, passive, portfolio

6
Q

Two sources of passive income

A

Limited partnerships, rental property

7
Q

Three taxable forms of portfolio income

A

Interest, dividends and capital gains

8
Q

Minimum holding period for lower long-term capital gains tax rate

A

1 year and 1 day

9
Q

Short-term holding period for capital gains tax computation

A

1 year or less

10
Q

Maximum amount of capital loss that can be used to offset current income each year

A

$3,000

11
Q

Maximum tax rate applicable to long-term capital gains

A

20%

12
Q

Period of time for which capital losses can be carried forward

A

Indefinitely

13
Q

Transaction which disqualifies capital loss because substantially similar securities are repurchased within 30 days

A

Wash sale

14
Q

Number of days before or after a sale for a loss for which a purchase of substantially similar securities must be avoided

A

Thirty days

15
Q

Under the wash sale rule, purchases of any of these four securities of the same issuer are considered substantially identical to purchases of the issuer’s stock

A

Long calls, rights, warrants and convertible bonds

16
Q

Three accounting methods available for determining which shares to liquidate

A

FIFO, share identification, average basis

17
Q

Method of share identification assigned by the IRS if no other method is chosen

A

FIFO

18
Q

Maximum tax rate that applies to qualified dividends

A

20%

19
Q

Cash dividends that are eligible for taxation at the same rate as long-term capital gains

A

Qualified

20
Q

Minimum holding period of stock for dividends to be classified as qualified

A

Sixty-one days

21
Q

Tax implication of stock splits and stock dividends

A

Reduction to cost basis; no current taxation

22
Q

The amount of investment in property; used to determine the gain or loss at time of sale

A

Cost basis

23
Q

The accounting method that allows an investor to select which shares to liquidate for tax purposes

A

Share identification

24
Q

Shares that would be liquidated first to result in the lowest possible capital gain

A

Shares with highest cost basis

25
Q

The process of adjusting the cost basis of a bond purchased at a discount

A

Accretion

26
Q

The process of adjusting the cost basis of a bond purchased at a premium

A

Amortization

27
Q

A change of two of these three municipal bond characteristics avoids the wash sale rule

A

Issuer, coupon, maturity

28
Q

The cost basis at maturity of a municipal bond purchased at a price of 108 with 8 years to maturity

A

Cost basis = par

29
Q

The date which determines the amount of the tax deduction for charitable donations of appreciated property

A

Date the donation is made

30
Q

The amount of tax deduction available for gifts of securities made to family members or others

A

None

31
Q

The recipient’s cost basis for gifts of securities from family members or others

A

Original cost basis of the donor

32
Q

The cost basis of securities that are left to an heir

A

Market value of the securities on the date of the death of the owner

33
Q

The current annual gift tax exclusion amount

A

$16,000

34
Q

The tax provision that allows married persons to transfer their entire estate to the surviving spouse at death without taxation

A

Unlimited marital deduction

35
Q

The person responsible for payment of gift taxes due

A

Donor

36
Q

Amount of dividends that may be excluded from taxation by U.S. corporations

A

50%

37
Q

Tax calculation performed to ensure that deductions that have been claimed do not reduce tax liability beyond a certain minimum level

A

Alternative minimum tax computation

38
Q

Interest on bonds of these two issuers is taxable at the federal, state and certain local levels

A

Corporate and agencies

39
Q

Interest on bonds of this issuer is taxable at state and certain local levels, but is exempt from taxation at the federal level

A

Municipal

40
Q

Interest on bonds of this issuer is taxable at the federal level but exempt from taxation at the state and local level

A

U.S. Government

41
Q

Two investments that generate passive income

A

DPPs and real estate

42
Q

Amount of gift tax that applies to gifts between married couples

A

No gift tax regardless of amount

43
Q

A short-term economic contraction

A

Recession

44
Q

The four phases of the economic cycle

A

Expansion, peak, trough, and contraction

45
Q

Longer term, severe economic contraction

A

Depression

46
Q

A nation’s annual output of all goods and services

A

Gross Domestic Product (GDP)

47
Q

Measures the general rate of increase or decrease in prices paid for certain standard goods

A

Consumer Price Index

48
Q

General increase in the level of prices

A

Inflation

49
Q

Two economic conditions that generally accompany deflation

A

Severe recession, rising unemployment

50
Q

The three types of economic indicators

A

Leading, lagging and coincident

51
Q

Type of indicator that predicts a trend in the economy

A

Leading

52
Q

Leading, lagging or coincident indicator? The money supply

A

Leading

53
Q

Leading, lagging or coincident indicator? Employment levels

A

Coincident

54
Q

Leading, lagging or coincident indicator? Corporate profits

A

Lagging

55
Q

Leading, lagging or coincident indicator? Industrial production

A

Coincident

56
Q

Leading, lagging or coincident indicator? Average duration of unemployment

A

Lagging

57
Q

Leading, lagging or coincident indicator? New orders for consumer goods

A

Leading

58
Q

Leading, lagging or coincident indicator? Stock prices

A

Leading

59
Q

Leading, lagging or coincident indicator? Personal income

A

Coincident

60
Q

Leading, lagging or coincident indicator? GDP

A

Coincident

61
Q

Leading, lagging or coincident indicator? Manufacturing and trade sales

A

Coincident

62
Q

Leading, lagging or coincident indicator? Ratio of inventories to sales

A

Lagging

63
Q

Economist who theorized that aggregate demand controls employment and prices

A

John Maynard Keynes

64
Q

The originator of monetarist theory

A

Milton Friedman

65
Q

The economist associated with supply side economic theory

A

Arthur Laffer

66
Q

Three tools used by monetarist theory to regulate the economy

A

Reserve requirement, discount rate, federal open market operations

67
Q

Believes market forces should determine prices of all goods; federal government should reduce spending and taxes

A

Supply side economics

68
Q

Two critical fiscal policy tools used to impact economic performance

A

Level of taxation and government spending

69
Q

Economic theory that promotes strong government involvement in economic policy

A

Keynesian economics

70
Q

Economic theory that promotes less government spending and lower taxes

A

Supply side economics

71
Q

Most readily available type of money

A

M1

72
Q

Acts as agent of the US Treasury

A

Federal Reserve Board

73
Q

Regulates the U.S. money supply

A

Federal Reserve Board

74
Q

Conducts the U.S. government’s open-market operations

A

Federal Open Market Committee (FOMC)

75
Q

Impact on the money supply of FOMC purchase of securities

A

Increases

76
Q

Impact on interest rates of FOMC purchase of securities

A

Decreases

77
Q

Interest rate charged between banks for loans of excess reserves

A

Federal funds rate

78
Q

Minimum amount of customer deposits that commercial banks must deposit with the Federal Reserve

A

Reserve requirement

79
Q

The Interest rate charged by the Fed to member banks for short-term loans

A

Discount rate

80
Q

Economic policy that centers on federal spending, taxation and federal budgets

A

Fiscal policy

81
Q

Impact of tight monetary policy on interest rates

A

Interest rates rise

82
Q

The flow of money from low-yielding investments to higher yielding investments

A

Disintermediation

83
Q

Impact of a weak dollar on U.S. exports

A

Exports will rise

84
Q

Impact of a weak dollar on U.S. imports

A

Imports will fall

85
Q

Impact on balance of payments when U.S. exports exceed U.S. imports

A

Surplus in the balance of payments

86
Q

Impact on balance of payments when foreign interest rates are higher than U.S. interest rates

A

Deficit in the balance of payments

87
Q

Uses charts and historic trading patterns to determine when to move in to and out of the markets

A

Technical analysis

88
Q

Bases investment decisions on broad-based market trends, and analysis of financial firm financial reports

A

Fundamental analysis

89
Q

Defensive, Cyclical or Growth Industry? Food

A

Defensive

90
Q

Defensive, Cyclical or Growth Industry? Utilities

A

Defensive

91
Q

Defensive, Cyclical or Growth Industry? Steel

A

Cyclical

92
Q

Defensive, Cyclical or Growth Industry? Automobile

A

Cyclical

93
Q

Defensive, Cyclical or Growth Industry? Technology

A

Growth

94
Q

Basic balance sheet equation

A

Assets - Liabilities = Net Worth

95
Q

Financial statement that summarizes revenues and expenses

A

Income statement

96
Q

Features charting and market timing

A

Technical analysis

97
Q

Predicts company performance based on financial statements and overall economic health

A

Fundamental analysis

98
Q

Characterized by falling stock markets, rising inventories, declining GDP

A

Contraction

99
Q

Characterized by low unemployment , increased business activities

A

Expansion

100
Q

Requires registration of new issues; regulates primary market activity

A

Securities Act of 1933

101
Q

Regulates secondary market activity; requires registration of broker-dealers

A

Securities Exchange Act of 1934

102
Q

Created the SEC

A

Securities Exchange Act of 1934

103
Q

Requires corporate bond issuers to appoint trustees to protect the interests of bondholders

A

Trust Indenture Act of 1939

104
Q

Amends the Act of 1934 and specifies penalties for the use of non-public material information

A

Insider Trading and Fraud Enforcement Act of 1988

105
Q

Defines registration of securities at state levels

A

Uniform Securities Act

106
Q

Authorizes the regulation of credit to the Federal Reserve Board

A

Securities Act of 1934

107
Q

Prohibited the use of inside information in trading activity

A

Securities Act of 1934

108
Q

Regulates the exchanges and over-the-counter market

A

Securities Act of 1934

109
Q

Exempts U.S. government securities from registration requirements

A

Securities Act of 1933

110
Q

Requires the delivery of prospectuses for full and fair disclosure

A

Securities Act of 1933

111
Q

Prohibits fraudulent activity in underwriting and distributing new securities

A

Securities Act of 1933

112
Q

Three characteristics of bonds subject to provisions of Trust Indenture Act of 1939

A

Issued by corporations, size over $5 million in a 12 month period, maturity of 9 months or more

113
Q

The barrier that must be established between departments to prevent a free flow of sensitive information

A

Firewall (Information barrier, Chinese Wall)

114
Q

Civil penalties for violation of the Insider Trading and Securities Fraud Enforcement Act of 1988

A

300% of profits made or losses avoided

115
Q

Minimum length of the cooling off period during the registration process

A

20 days

116
Q

Disclosure document used to gather indications of interest during the cooling off period

A

Preliminary prospectus (red herring)

117
Q

The day that the SEC releases a new issue for sale

A

Effective date

118
Q

Securities that are exempt from the filing requirements of the Act of 1933

A

U.S. government, municipal bonds, fixed insurance products, national and state bank securities, non-profit securities, commercial paper and bankers acceptances with maturity of less than 270 days

119
Q

Exemption from registration requirements for corporate offerings of less than $5 million in a 12 month period

A

Regulation A

120
Q

Also known as a private placement exemption

A

Regulation D

121
Q

Exemption from registration requirements for securities that are sold only within a state

A

Rule 147 (Intrastate offering)

122
Q

The disclosure document that must be provided to investors in a Reg A offering

A

Offering circular

123
Q

The maximum number of accredited investors that can participate in a Reg D offering

A

Unlimited

124
Q

The maximum number of nonaccredited investors that can participate in a Reg D offering

A

35

125
Q

The net worth and income criteria for an accredited investor under Regulation D

A

Net worth of $1,000,000 (exclusive of residence) and annual income of $200,000 or more ($300,000 jointly with spouse) in each of the two most recent years

126
Q

Regulates the sale of control and restricted securities

A

Rule 144

127
Q

Addresses the sale of nonregistered foreign and domestic securities to institutional investors

A

Rule 144A

128
Q

Holding period required before restricted securities can be sold

A

6 months

129
Q

Length of time a Form 144 filing covers

A

90 days

130
Q

When a Form 144 must be filed

A

Concurrent with the sale

131
Q

Addresses reclassifications, mergers or consolidations, and transfers of company assets

A

Rule 145

132
Q

The amount of control securities that can be sold in a 90-day period under Rule 144

A

Greater of 1% of the total outstanding shares, or the average weekly trading volume of the preceding four weeks

133
Q

Securities owned by directors, officers, or persons who own or control 10% or more of an issuer’s voting stock

A

Control stock

134
Q

When Rule 144 volume limits no longer apply to unaffiliated investors

A

After 6 months

135
Q

Type of restriction that applies to sellers of control stock under Rule 144

A

Volume limits

136
Q

Provision of Act of 1933 and 1934 Securities Acts that applies to all securities, including those that are exempt from registration

A

Antifraud

137
Q

Eligible for purchase of nonregistered foreign and domestic securities under Rule 144A

A

Qualified Institutional Buyers (QIBs)

138
Q

When securities registered under Rule 147 may be sold to a non-state resident

A

After 6 months

139
Q

Purpose of a Schedule 13D

A

A 13D is filed when an investor becomes a 5% beneficial shareholder

140
Q

Filing deadline for a Schedule 13D

A

Within 10 business days of the acquisition with the issuer, exchange and the SEC.

141
Q

Purpose of a Schedule 13G

A

A 13G is filed when an investor becomes a 5% beneficial shareholder on a passive basis.

142
Q

Filing deadline for a Schedule 13G

A

Within 45 days of calendar year end.

143
Q

Purpose of a Schedule 13F

A

A 13F is a quarterly filing by Institutional Investment Managers to disclose long equity positions

144
Q

Filing deadline for a Schedule 13F

A

Within 45 days of quarter end.

145
Q

Subchapter C Corporation

A

Does not pass through gains and loses, can have an unlimited number of shareholders (including institutions).

146
Q

Subchapter S Corporation

A

Passes through all gains and losses to investors, can have a maximum of 100 shareholders (no institutional shareholders).

147
Q

Total return

A

(Income + Dividends + Capital Appreciation) / (Initial purchase price)

148
Q

Inflation-Adjusted Return (AKA Real Return)

A

Nominal return - inflation rate

149
Q

After-Tax Return

A

Investment return x (1 - tax bracket)

150
Q

Future value

A

What funds invested today at a given rate will be worth at some point in the future.

151
Q

Present value

A

The value today of a future cash flow discounted at a specified interest rate.

152
Q

Beta

A

A measure of a stock’s or portfolio’s volatility in relation to the overall market. A beta of greater than 1 indicates a stock or portfolio will be more volatile the overall market, a beta of less than one will be less volatile.

153
Q

Monte Carlo simulation

A

A statistical method to determine the return profile of a portfolio.

154
Q

R-squared

A

A statistical measure indicating what percentage of a portfolio’s performance can be tied to a standard benchmark (e.g. S&P 500).

155
Q

Sharpe ratio

A

A measure of a portfolio’s risk in comparison to its expected return. It is the portfolio’s average return in excess of the risk-free rate divided by the standard deviation of the portfolio. The higher this ratio, the more attractive the investment.

156
Q

Systematic risk

A

The risk of an investment that is associated with macroeconomic factors that affect all assets.

157
Q

Unsystematic risk

A

The risk associated with a specific investment, this can be diversified away.

158
Q

Modern portfolio theory

A

An approach to investing that evaluated the total portfolio’s risk and reward profile as opposed to those of individual securities. This approach identifies diversification as the best way to achieve risk-adjusted returns.

159
Q

Alpha

A

The risk-adjusted returns in a portfolio in excess of the returns expected by the capital asset pricing model (CAPM).

160
Q

Capital needs analysis

A

A technique used to determine how much life insurance an individual needs. It considers; mortgages and other debts, continuing income for survivors, college tuition, and potentially estate taxes

161
Q

Alimony

A

Payments to an ex-spouse. This is non-deductible to the payer and is not treated as income to the recipient. This is a recent change under the 2017 Tax Cuts and Jobs Act.

162
Q

Child support

A

Payments to support a child following a divorce. This is not deductible to the payer and is not treated as income to the recipient guardian.

163
Q

If two securities typically move up and down by the same amount, what is their correlation coefficient?

A

1

164
Q

An efficient portfolio is one that offers

A

The most return for a given amount of risk

165
Q

Given that the risk premium on the market is 14%, and the beta on an asset is 0, the risk premium on the asset would be

A

0%

A beta of 0 on the asset signifies that it has no systematic risk. A riskless asset will not have a risk premium.

166
Q

In a perfectly efficient market what type of investment strategy would be most efficient?

A

Passive strategy

167
Q

If an investor includes investments with a negative correlation in their portfolio, what impact would this have on diversification?

A

Increase

168
Q

What type of risk can an investor not avoid by having a diverse portfolio?

A

systematic risk

169
Q

The correlation coefficient has values between

A

-1 and 1

170
Q

Beta is a standardized measure of:

A

systematic risk

171
Q

If a portfolio is below the efficient frontier, that indicates

A

it is taking on too much risk for too little return

172
Q

Individuals with near-term, high-priority goals should select:

A

low risk, short-term investments

173
Q

The efficient frontier represents

A

the set of portfolios that has the maximum rate of return for every given risk level, and the minimum risk for every level of return.

174
Q

A higher Sharpe ratio implies:

A

Greater Risk-Adjusted Performance

175
Q

The weak form efficient market hypothesis (EMH) implies that:

A

security prices reflect all currently available market data

176
Q

The assumption that stock prices fully reflect all information, including public and private information, describes which market theory?

A

strong-form efficient market hypothesis (EMH)

177
Q

The semi-strong form of the efficient market hypothesis (EMH) assumes that

A

security prices fully reflect all publicly available information

178
Q

A higher standard deviation for an investment indicates

A

greater volatility of returns compared to the expected average return

179
Q

Two securities whose price movements are completely unrelated to each other would have a correlation coefficient of

A

0

+1 = Perfect positive correlation
-1 = Perfect negative correlation
0 = Statistically uncorrelated

180
Q

Assuming an investment of $10,000 and 5% interest, how long will it take for the money to double?

A

72/5 = 14.4 years

181
Q

For an investment to be acceptable, how would its internal rate of return compare to its cost of capital?

A

exceed

182
Q

When NPV is positive, a project’s return is expected to be

A

positive

183
Q

When NPV is negative, a project’s return is expected to be

A

negative

184
Q

The difference between an investment’s present value and its cost is

A

Net present value (NPV)

185
Q

If a hedge fund’s return exceeds that implied by beta relationship, it is attributed to the value added by the hedge fund manager. This excess value is also known as

A

Alpha

186
Q

An investment manager’s portfolio returned 13% over the past year. The market returned 7% and the portfolios beta is 1.3. What alpha did the fund produce?

A

3.9

13% - (1.3 x 7%) = 3.9

187
Q

What are the three components of the Sharpe ratio?

A

Standard deviation, risk-free rate, actual return

188
Q

What metric is used to measure the risk-adjusted performance of a fund, taking into account the volatility of the returns generated?

A

Sharpe ratio

189
Q

A portfolio manager purchased $1,000,000 of TIPS at auction, which pay an annual coupon of 5%. Assuming that the semi-annual CPI is 2%. What is the first semi-annual coupon payment?

A

$25,500

New principal after 6 months = $1,000,000 x (1 +2%) = $1,020,000
1st semi-annual coupon = 2.5% of $1,020,000 = $25,500