All Flashcards
(148 cards)
If a call option’s strike price is lower than the underlying stock’s current market price…
it has intrinsic value because it could be sold for more than its purchase price.
if a call option’s strike price is higher than its current market price,
it has no intrinsic value.
An investor purchased an index annuity. The terms of the contract call for a 100% participation rate with 6% cap. If during the measurement period the index decreased by 4%, the investor’s account would…
Remain at the same level
An investor purchased an index annuity. The terms of the contract call for a 90% participation rate with 6% cap. If during the measurement period the index decreased by 5%, the investor’s account would…
Remain at the same level
The purchaser of an index annuity can see growth based on an underlying index CALCULATED in the following ways…
- Annual reset-compares index value at year begin/year end (point-to-point is a type)
- High-water mark: year begin/highest mark
- Averaging: often monthly average growth (can be best during volatile markets)
A conservative investor from Idaho in the 24% federal tax bracket and 4% state tax bracket seeks an income producing investment and needs your help choosing between:
A. 4.40% yielding general obligation bond from state of Idaho
B 6.60% yielding Treasury bond
C 8.60% yielding AAA-rated debenture
D. 6.60% yielding AA-rated convertible bond
Which investment should you recommend?
All the investments are suitable for a conservative investor, so C because it has the highest after tax yield
DDD Management Group is considering the introduction of fulcrum fees to their service list. All of the following clients would qualify for this type of compensation, EXCEPT:
A. A client that recently declared bankruptcy, but wins the lottery then invests $1.13 million with the adviser
B. A client that invests $1.24 million with the adviser while making a $50K salary
C. A client making a $650K annual salary
D. A client making $125K in annual salary and invests $1.5 million with the adviser
C. a client making $650K annually BECAUSE performance fees like this can only be charged of qualified clients (clients with at least $2.2 million net worth w/out primary residence OR at least $1.1 million invested with adviser)
Of the scenarios listed, which does not qualify as an exempt transaction according to the Uniform Securities Act?
A. Offer of non-registered securities to 10 or fewer retail investors
B. Transaction in an unregistered security between an issuer and an underwriter
C.
Unsolicited transaction for an unregistered security by a retail client
D. Sale of a Treasury bond to a retail client
D. Sale of a Treasury bond to a retail client
Exempt Transactions allow a non-exempt, unregistered security to be sold if the transaction occurs in a specific format. These are the exempt transactions the Uniform Securities Act (USA) allows:
- Private placements:
a. Offer made to 10 or fewer retail investors
b. Purchase made for investment purposes
c. No commissions to be collected from retail investors - Isolated nonissuer transactions
- Unsolicited nonissuer transactions
- Certain fiduciary transactions:
a. Estate executors and administrators
b. Sheriffs and marshals
c. Receiver
Trustee in bankruptcy
d. Guardians and conservators - Transactions between issuers and underwriters
Institutional transactions - Offer of pre-organization certificates:
No more than 10 subscribers
*Keep in mind the sale of an exempt security (e.g. a US government securities, bank securities, non profit securities) is not an exempt transaction. There’s no need to claim an exempt transaction for these securities because they’re already exempt based on what they are.
A 45 year old investor is looking for some advice on how to invest a $5,000 bonus they received into their IRA. The investor has a 20 year time horizon, a moderate tolerance for risk, and an objective of growth. Additionally, they don’t believe the extra costs associated with active management are worth it over long periods of time. What investment is the best recommendation?
A. S&P 500 index fund
B. Russell 2000 ETF
C. Balanced fund
D. Large cap growth fund
A. S&P 500 index fund
The investor is mid-age, has a long term time horizon (20 years), a growth objective and a moderate risk tolerance. The Russell 2000 ETF tracks the Russell 2000, a small cap index that is subject to high levels of risk. This choice can be eliminated.
The investor does not believe in active management, which involves paying higher fees (expense ratios) in return for portfolio managers to find the best investments in the market. Because it doesn’t mention an index, we can assume the large cap growth fund and balanced fund to be actively managed. Additionally, balanced funds typically invest a sizeable portion of assets into fixed income investments, and the investor did not specify income as an objective. These choices can be eliminated.
The S&P 500 index fund tracks the S&P 500, which is an index primarily made of large cap (larger) company stock. While the stock market comes with risk, large cap companies are typically the safest investments given their size and improbability of bankruptcy (as compared to smaller companies). Additionally, index funds are passively managed, resulting in lower fees (expense ratios). This is the best choice.
A 39 year old investor is looking for some advice on how to invest a $7,000 bonus they received into their IRA. The investor has a 19 year time horizon, a moderate tolerance for risk, and an objective of growth. Additionally, they don’t believe the extra costs associated with active management are worth it over long periods of time. What investment is the best recommendation?
A. Large cap growth fund
B. Russell 2000 ETF
C. Balanced fund
D. S&P 500 index fund
A. S&P 500 index fund
The investor is mid-age, has a long term time horizon (20 years), a growth objective and a moderate risk tolerance. The Russell 2000 ETF tracks the Russell 2000, a small cap index that is subject to high levels of risk. This choice can be eliminated.
The investor does not believe in active management, which involves paying higher fees (expense ratios) in return for portfolio managers to find the best investments in the market. Because it doesn’t mention an index, we can assume the large cap growth fund and balanced fund to be actively managed. Additionally, balanced funds typically invest a sizeable portion of assets into fixed income investments, and the investor did not specify income as an objective. These choices can be eliminated.
The S&P 500 index fund tracks the S&P 500, which is an index primarily made of large cap (larger) company stock. While the stock market comes with risk, large cap companies are typically the safest investments given their size and improbability of bankruptcy (as compared to smaller companies). Additionally, index funds are passively managed, resulting in lower fees (expense ratios). This is the best choice.
An influencer is hired by a registered investment adviser to review their products and services. The opinion of the influencer is solely their own and their compensation is not contingent on a positive review. What statement is true?
A. The firm has neither adopted or entangled itself with the influencers content if the review is not written
B. The firm has adopted the influencer’s content
C. The firm has neither adopted or entangled itself with the influencer’s content because the review is unbiased
D. the firm has entangled itself with the influencer’s content
D. Adoption occurs when a firm endorses or approves third-party content, while entanglement occurs when the firm involves itself with the preparation of the third-party post. Paying an influencer to review a products and/or services is considered involvement in the preparation, regardless of whether the review is contingent on being positive.
Fulcrum fee
performance-based fee that adjusts up or down based on outperforming or underperforming a benchmark. These can be charged by a financial adviser or an asset manager to qualified clients to link outperformance (or lack thereof) to compensation
Qualified dividends are taxed at … depending on your tax bracket
0%, 15%, and 20%
Nonqualified dividends are taxed ____
at income tax rates.
An investor in the 37% tax bracket makes a $64,000 investment in a lifecycle fund on December 13, 2022. Over the next several months, the investor receives a total of $1,920 in qualified dividends, none of which is reinvested. On December 12, 2023, the investor redeems the fund for a total of $78,000. What is the investor’s after-tax return?
A. 15.67%
B. 16.18%
C. 20.8%
D. 21.3%
B. 16.18% Let’s explore the two primary forms of return in the question and factor taxes out. First, the investor receives $1,920 in qualified dividends, which are taxable at 20%* for this investor. An easy way to determine the after-tax return is to multiply the return by 100% minus the applicable tax rate (in decimal form). Therefore, this investor makes $1,536 in after-tax dividends ($1,920 x 0.80).
*Only investors at the highest tax brackets (35% and 37%) are subject to a 20% qualified dividend tax. For those at lower tax brackets, the qualified dividend tax rate is 15%.
Second, the investor also locked in a $14,000 capital gain (bought fund for $64,000, sold fund for $78,000). The gain is short term as the security has been held for one year or less. Short term capital gains are subject to the investor’s marginal income tax bracket, which is 37%. We’ll multiply the capital gain ($14,000) by 100% minus the tax bracket in decimal form (0.63) to obtain an after-tax capital gain of $8,820.
Now, add up the total after-tax returns:
After-tax dividends: $1,536
After-tax capital gain: $8,820
Total: $10,356
Now, perform the after-tax return formula:
Total return = All after-tax returns ÷ Original cost
Total return = $10,356 ÷ $64,000
Total return = 16.18%
A customer submits an order to sell 300 shares of GS stock @ $209 stop $205 limit. Which of the following statements is TRUE?
A. Triggers at $209 or lower; fills at $205 or higher
B. Triggers at $209 or lower; fills at $205 or lower
C. Triggers at $209 or higher; fills at $205 or lower
D. Triggers at $209 or higher; fills at $205 or higher
A. When a sell stop limit order triggers, it becomes a sell limit order that specifies a specific price (or better) for that order. For this order to trigger, the market price of the stock must first fall to $209 or below. For the order to fill (execute), the market price must be $205 or abo
A customer submits an order to sell 400 shares of GS stock @ $408 stop $404 limit. Which of the following statements is TRUE?
A. Triggers at $408 or lower; fills at $404 or higher
B. Triggers at $408 or lower; fills at $404 or lower
C. Triggers at $408 or higher; fills at $404 or lower
D. Triggers at $408 or higher; fills at $404 or higher
A. When a sell stop limit order triggers, it becomes a sell limit order that specifies a specific price (or better) for that order. For this order to trigger, the market price of the stock must first fall to $408 or below. For the order to fill (execute), the market price must be $404 or above
A consultant provides ongoing advice to businesses in relation to managing assets in pension funds. What statement is true regarding this role and relevant registration responsibilities?
A. If providing advice on $100 million or more of assets, the consultant is eligible for SEC registration
B. If providing advice on $110 million or more of assets, the consultant must register with the SEC
C. If providing advice on $200 million or more of assets, the consultant is eligible for SEC registration
D. The consultant is excluded from registration
C. SEC Release IA-1092 explicitly defines pension consultant as an investment adviser, requiring them to register with either the SEC or the state administrator. The Dodd-Frank Wall Street Reform and Consumer Protection Act states pension consultants advising $200 million of assets or more are eligible for SEC registration. SEC registration is not mandatory for pension consultants.
A client emails their assigned agent to request a trade to be placed. Which of the following requests would require discretionary authority on the client’s account?
A. Buy 50 shares of DEF stock at the price you deem appropriate by the end of the day
B. Buy 450 shares of CCC common stock at the price you deem appropriate by the end of the week
C. Buy 800 shares of NOP stock if it falls to $135, and make the order good until the end of the month
D. Sell my TUV Bond Fund and reinvest the proceeds into GHI Stock Fund
B. A discretionary order, which requires trading authority (power of attorney) to be granted, is one that involves the investment professional choosing one of the following:
Asset (what security)
Amount (how much)
Action (buy or sell)
The professional may choose price and/or time of an order without being considered discretionary, as long as the price and/or time decision is made within one day. Making a price and/or time determination beyond one day requires trading authorization.
A discretionary order, which requires trading authority (power of attorney) to be granted, is one that involves the investment professional choosing one of the following:
Asset (what security)
Amount (how much)
Action (buy or sell)
The professional may choose price and/or time of an order without being considered discretionary, as long as the price and/or time decision is made within one day. Making a price and/or time determination beyond one day requires trading authorization.
POP
Public Offering Price
An option generally loses ___ of its time value during the first half of its life and the remaining ____ of its time value during the second half.
one- third; two-thirds
Time value ___ over time at an accelerating pace, a phenomenon known as time decay or time-value decay. An option price’s sensitivity to time decay is known as its ___.
decreases ; theta
