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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
Q

Calculating the sales charge %

A

(POP - NAV) / POP

26
Q

Industry rules prohibit assessing charges in excess of ____ of the POP

A

8.5%

27
Q

12b-1 Fees

A

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
Q

Letter of Intent (LOI)

A

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
Q

Amount that decreases the longer shares are held

A

Contingent deferred sales charge

30
Q

Retroactive reduction in sales charge

A

Letter of Intent

31
Q

Sales charge is reduced when a breakpoint is reached

A

Rights of Accumulation

32
Q

Redeeming Mutual Fund Shares

A

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
Q

Redemption Fees

A

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
Q

Mutual Fund Distributions

A

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
Q

Subchapter M

A

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
Q

Net Investment Income Formual

A

(Dividends + Interest) - (Expenses and Mgmt. Fees)

37
Q

3 Ways to be taxed on a Mutual Fund

A
  1. ) Income Distribution
  2. ) Capital Gains Distribution
  3. ) When you sell your shares
38
Q

Unit Investment Trust Company

A

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
Q

A customer purchased an investment company and paid a commission, what type of company would it be?

A

Closed-End Fund

An open-end would be a sales charge

40
Q

Exchange-Traded Fund (ETF) vs. Index Fund

A
  • 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
Q

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?

A

Inverse ETF

  • Similar to short selling without unlimited risk
42
Q

Inverse ETF

A

Designed to perform in a manner that is inverse to the index it is tracking

  • Similar to short selling without unlimited risk
43
Q

Leveraged ETF

A

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
Q

Moving assets from one fund family to another family is referred to as _______ and is a ________ event

A

Switching, Taxable

45
Q

A ___________ serves as a pipeline for income distributions to be taxed to the shareholder

A

Regulated Investment Company

46
Q

An investment company that can issue preferred stock and bonds is considered a ________

A

Closed-end fund

47
Q

Mutual funds make __________ distributions only once per year

A

Capital gains

48
Q

Taxation of REITs

A

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
Q

What is the purpose of a DPP?

A

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
Q

Advantages of Limited Partnerships

A

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
Q

Disadvantages of Limited Partnerships

A
  • 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
Q

Liquidation order for Limited Partnerships

A
  1. ) Secured Lender
  2. ) General Creditor
  3. ) Limited
  4. ) General
53
Q

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?

A

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
Q

Real Estate Programs

A
  • 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
Q

When you invest in real estate, what is the main tax benefit?

A

Depreciation, you can deduct from your income

56
Q

When you invest in Oil and Gas programs, what are the main tax benefits?

A
  1. ) Depreciation of the equipment
  2. ) Depletion
  3. ) In some cases, start up or intangible drilling costs
57
Q

Advantages & Disadvantages of Equipment Leasing Programs

A

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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