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Series 7 Progressive Notecards > Additional Questions > Flashcards

Additional Questions Flashcards

1
Q

The rate charged to generate property taxes

A

Millage Rate

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2
Q

Bond supported from both taxes and revenues

A

Double-Barreled

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3
Q

Document that provides insight into the tax exempt status of the issuer

A

Legal Opinion

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4
Q

The covenant stating that the fees charges will be sufficient to cover expenses

A

Rate Covenant

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5
Q

A call that may be used to retire debt due to the destruction of a facility

A

Catastrophe Call

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6
Q

The priority used for the payment of debt service on revenue bonds

A

Flow of Funds

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7
Q

MIG 1 - MIG 3

A

Ratings for Municipal Notes: MIG 1 through MIG 3 are all investment grade. SG is speculative

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8
Q

Local Government Investment Pools

A

Not available to the public

Government entities purchase interest in the trust (LGIP)

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9
Q

Prepaid tuition plans

A

A type of college savings plan
Purchaser buys college tuition credits
- Locks in tuition costs at current levels
- Protects against future cost increases
Not self directed

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10
Q

529 ABLE Plans

A

Available to individuals who are disabled and are receiving Social Security disability, Medicaid, or private insurance payments
- Maximum contribution is $15,000 per year (no front-
loading)
- Disability payments continue if account value does
exceed $100,000
- Distributions are tax-free if used to pay qualified
expenses

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11
Q

Tax Considerations: Municipal bond interest:

A

Interest received is exempt from federal tax; however, it may be subject to state and local tax if purchased from a state that is not the bondholder’s resident state

Interest paid on bonds issued by U.S. territories and possessions is triple tax exempt

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12
Q

Bank-Qualified (BQ) bonds

A

Issued by “qualified small issuers” that issue no more than $10 million per year. BQ bonds allow banks to deduct 80% of the interest cost paid to the depositors on the funds that are used to purchase these bonds.

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13
Q

Who is most suitable to purchase municipal debt?

A

Investors in higher tax brackets benefit more from the tax-exempt nature of municipal debt; however, municipals are generally unsuitable for investors who are in lower tax brackets or as an investment in retirement accounts

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14
Q

An OID is purchased at $800 with 10 years to maturity. Five years later, the bond is sold for $880. What is the result for tax purposes?

A

$1,000 par - $700 cost = $300 discount.
- $30 is accreted each year, but not taxable

After 5 years, the basis is $850. The $150 is treated as tax exempt interest income.

If sold at $880, the $30 difference is treated as a capital gain

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15
Q

A bond was issued at par, later purchased for $900 with 10 years left to maturity. Five years later, the bond is sold at $980. What is the result for tax purposes?

A

$1,000 par - $900 cost = $100 discount
$100 discount / 10 years = $10/YR

After five years, the difference between the cost ($900) and the proceeds ($980) is $80

  • $50 of the difference is treated as ordinary income
  • $30 is treated as a capital gain
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16
Q

T/F: A VRDO contains a PUT provision

A

True: A variable rate demand obligation contains a put provision

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17
Q

TIPS

A

Treasury Inflation-Protection Securities

  • Offer a stated coupon with interest paid semi-annually
  • Adjust principal for inflation and deflation, based on
    CPI

At maturity, you will always get at least par value.

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18
Q

T-STRIPS

A

Created in the secondary market

B/D or Bank takes a treasury, let’s say note in this case.
- Rather than selling and marketing the 10 year treasury
note, they want to sell each individual payment as a
separate security

Zero-coupon treasury

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19
Q

How are the T-Bills, T-Notes, and T-Bonds issued

A

By auction:

What are auctions?
- The government sells Treasuries through auctions conducted by the U.S. Treasury

Competitive bids:

  • Placed by large financial institutions
  • Indicate both quantity and price
Non-Competitive bids:
- Placed by the public 
- Indicate quantity only
- Are filled first 
- Bidder agrees to pay the lowest price (highest yield) 
  of the accepted competitive bids

T-Bills
- Settle on the Thursday following the auction

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20
Q

Agency Securities

A

Federal Farm Credit Bank (FFCB)

  • Provides agricultural loans to farmers
  • Subject to federal tax, but exempt from state and local taxes

Mortgage-backed securities:

The most common security issued by government agencies is a mortgage-backed pass-through certificate. Pass-throughs provide excellent credit quality and a slightly higher yield than Treasuries; they are often used to supplement retirement income

Mortgage-backed securities represent an interest in a pool of mortgages:

  • Monthly payments consist of interest and principal
  • Interest portion is fully taxable (fed, state, local)
  • Subject to prepayment risk
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21
Q

Collateralized Mortgage Obligations (CMOs)

A

Mortgage-backed bonds created by dividing mortgage pools (GNMA, FNMA, and FHLMC) into various bond classes (tranches)

Done primarily to distribute the impact of prepayment risk to different tranches
Interest is generally paid monthly (fully taxable), with principal paid sequentially
Issued in $1,000 denominations
Subject to the act of 1933 & trust indenture act of 1939

Private label CMOs

  • Pools include non-U.S. agency mortgage securities
  • Subject to the credit risk of the issuer
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22
Q

Planned Amortization Class (PAC Bond) CMO

A

Provides the most predictable cash flow and maturity

Designed for more risk-adverse investors

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23
Q

Formula to calculate NAV

A

Calculating NAV per share:

(Total Assets - Total Liabilities) / number of shares outstanding

24
Q

Calculating the sales charge

A

Difference between the NAV and POP is the sales charge

25
Calculating the sales charge %
(POP - NAV) / POP
26
Industry rules prohibit assessing charges in excess of ____ of the POP
8.5%
27
12b-1 Fees
Annual fee levied against the fund's assets - Allows distribution costs to be borne by the fund, rather than from front-end charges Used to finance promotion, advertising, and commissions - Note: commission in 12b-1 relates to payment to the brokers, NOT sales charge
28
Letter of Intent (LOI)
Optional provision that allows investors to qualify for a break-point without initially depositing the entire amount required - 13 months time period - May be back dated 90 days - If backdated, the fund will re-compute the sales charges on previous purchases - Non-binding on customer; a portion of shares held in escrow in case of non-performance
29
Amount that decreases the longer shares are held
Contingent deferred sales charge
30
Retroactive reduction in sales charge
Letter of Intent
31
Sales charge is reduced when a breakpoint is reached
Rights of Accumulation
32
Redeeming Mutual Fund Shares
A mutual fund investor may redeem (sell) shares and receive the share's next calculated net asset value (minus any applicable contingent deferred sales charges or redemption fees) Funds are required to send investors the payment for their shares within seven calendar days of receiving the redemption notice
33
Redemption Fees
Assessed against investors who redeem their shares after holding them for a short period (often one year or less) NOT a sales charge; it is returned to the fund's portfolio
34
Mutual Fund Distributions
Earnings from a fund are distributed to shareholders and are reported on IRS form 1099-DIV - Investment Income - Capital Gains *Both distributions are taxed in the year received whether taken or reinvested*
35
Subchapter M
Relieves a fund's burden of paying taxes on income as the distributions pass through to the mutual fund shareholders (conduit or pipeline theory) - To qualify as a Regulated Investment Company, a fund must distribute at least 90% of net investment income to its investors If it qualifies, the fund is only taxed on the undistributed portion Burden for paying taxes ultimately falls on shareholders
36
Net Investment Income Formual
(Dividends + Interest) - (Expenses and Mgmt. Fees)
37
3 Ways to be taxed on a Mutual Fund
1. ) Income Distribution 2. ) Capital Gains Distribution 3. ) When you sell your shares
38
Unit Investment Trust Company
Supervised, not managed (no management fee) Portfolio generally remains fixed for the life of the trust Ownership usually referred to as shares of beneficial interest (SBI)
39
A customer purchased an investment company and paid a commission, what type of company would it be?
Closed-End Fund An open-end would be a sales charge
40
Exchange-Traded Fund (ETF) vs. Index Fund
- Both consist of a basket of securities which mirror an index (low expenses) ETF: - Shares trade in the secondary market; may be sold short Index Fund: - Shares are redeemed by the fund; cannot be sold short ETF: - Commission is paid on trade Index Fund: - Usually have no sales load ETF: - Intra-day pricing Index Fund: - Forward priced; once daily ETF: - Leveraged and inverse ETFs exist Index Fund: - Do not allow leverage
41
If a client thinks that the S&P is going to decline but doesn't want to open a margin account, what would be the most suitable recommendation?
Inverse ETF - Similar to short selling without unlimited risk
42
Inverse ETF
Designed to perform in a manner that is inverse to the index it is tracking - Similar to short selling without unlimited risk
43
Leveraged ETF
Constructed to deliver 2* or 3* the index it is tracking - May be leveraged inverse ETF - If the index rises by 1.5%, a 2* long ETF should rise by approximately 3%
44
Moving assets from one fund family to another family is referred to as _______ and is a ________ event
Switching, Taxable
45
A ___________ serves as a pipeline for income distributions to be taxed to the shareholder
Regulated Investment Company
46
An investment company that can issue preferred stock and bonds is considered a ________
Closed-end fund
47
Mutual funds make __________ distributions only once per year
Capital gains
48
Taxation of REITs
No taxation on income if 90% of it is distributed - Doesn't pass through losses (unlike limited partnerships - 20% of distributed income is tax-deductible Not eligible for dividend exclusion rule
49
What is the purpose of a DPP?
A Direct Participation Program is a business venture that's designed to pass through both income and losses to investors Examples include: - S Corporations - Joint Ventures - General Partnerships - Limited Partnerships
50
Advantages of Limited Partnerships
A limited partnership is a business venture that's designed to pass through both income and losses to investors - Flow-through of income (no double taxation) and expenses ^ Income flows through as passive income ^ A portion is taxed as ordinary income (20% deductible) - Limited Liability ^ Limited partners are only liable for the amount invested and any loans assumed (i.e., the amount they have at risk)
51
Disadvantages of Limited Partnerships
- Illiquid ^ Typically not publicly traded ^ General partner's approval may be required to sell - Lack of Control ^ Limited partners have limited voting power and no managerial authority - Effects of Tax Law Changes & Increased Tax Complexity - Calls to Contribute Additional Funds
52
Liquidation order for Limited Partnerships
1. ) Secured Lender 2. ) General Creditor 3. ) Limited 4. ) General
53
You are a limited partner, you are asked to contribute additional funds. You do, then the partnership goes bust. Where do you fall in the order of liquidation?
For any loans that you provided the partnership, you would receive them at the same priority of a general creditor. 1. ) Secured Lender 2. ) General Creditor 3. ) Limited 4. ) General For the funds that you contributed for investment purposes, you would receive them as a Limited partner.
54
Real Estate Programs
- Raw Land ^ Speculation on land appreciation; no positive cash flow or depreciation - New Construction ^ Risks of overbuilding, cost overruns, etc. - Existing ^ Existing cash flow, but potential problematic tenant issues - Low Income (Govt. Assisted) ^ Beneficial potential tax credits; little chance of appreciation; high maintenance costs
55
When you invest in real estate, what is the main tax benefit?
Depreciation, you can deduct from your income
56
When you invest in Oil and Gas programs, what are the main tax benefits?
1. ) Depreciation of the equipment 2. ) Depletion 3. ) In some cases, start up or intangible drilling costs
57
Advantages & Disadvantages of Equipment Leasing Programs
Advantages: ^ Investors receive consistent income as well as depreciation tax benefits Disadvantages: ^ No appreciation of underlying assets

Series 7 Progressive Notecards (4 decks)

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