Section 1 Flashcards
(18 cards)
How do you calculate the current yield of a stock, and what is the current yield if a company pays a $0.50 quarterly dividend and the market price is $40?
Step 1: Multiply the quarterly dividend by 4 to get the annual dividend:
$0.50 × 4 = $2.00
Step 2: Divide the annual dividend by the market price:
$2 ÷ $40 = 5.00%
🔑 Current yield = Annual Dividend / Market Price
⚠️Don’t confuse current yield with earnings — earnings are not used in this formula.
Which fees must be disclosed by broker-dealers as part of a fee disclosure doc:
I. Stock certificate issuance
II. Commission on exchange trades
III. Interest on margin loans
IV. Advisory fees to HNW clients?
✅ Disclose: I and III
Commissions & advisory fees are not part of the template disclosure.
Fee disclosures cover things like margin interest & service charges.
⚠️ Advisory fees are covered under RIA disclosures, not BD.
Which of these is NOT a document that describes a bond’s terms and repayment obligations:
A) Bond contract
B) Debenture
C) Indenture
D) Deed of trust
✅ B) Debenture
A debenture is a type of bond, not a contract/document.
Indenture, deed of trust, and bond contract describe the bond terms.
A pension consultant in D.C. advises only 1 client: a government pension plan with $4B AUM. What are their SEC registration options?
✅ May choose SEC or state (DC) registration
Dodd-Frank allows SEC reg for pension consultants advising $200M+ in plan assets
Even with just 1 client, SEC registration is optional, not required
DC = a “state” under the law.
A 5.5% coupon bond sells at 105. What’s the current yield?
Price = $1,050
Interest = $55
$55 ÷ $1,050 = ~5.24%
✅ Current yield = Annual interest ÷ Market price
⚠️ Yield drops if bond trades at premium
Which powers does a state Administrator have when a violation occurs under the USA?
Issue cease & desist
Seek injunction
Seek restitution to investors
Appoint a receiver for assets
Which advisory firm is exempt from SEC registration regardless of AUM?
✅ Advisers to venture capital funds
All other exemptions (banks, insurance, small advisers, private funds) have AUM limits.
⚠️ Venture capital = no AUM restriction under Dodd-Frank
Your customer in the 24% federal income tax bracket would probably pay the most tax on a $5,000 investment into
A)
interest received on U.S. Treasury bonds.
B)
dividends received on domestic common stock.
C)
dividends received on domestic preferred stock.
D)
interest received on municipal bonds.
The answer is A: interest received on U.S. Treasury bonds.
Because:
Interest received on Treasuries will be fully taxable on a federal basis. That means 24% to this customer. Unless stated to the contrary, you can assume that dividends paid on stock (common and preferred) issued by domestic corporations are qualified. That means the tax rate will be 15%. Interest received on municipal bonds will be tax free.
A taxpayer has realized short-term capital gains of $50,000 and long-term capital gains of $75,000 during the taxable year. Over the same period, the individual realized short-term capital losses of $40,000 and long-term capital losses of $100,000. The tax consequences of these transactions are
A)
a net short-term capital gain of $10,000 and a net long-term capital loss of $25,000.
B)
a $3,000 deduction from income and a long-term capital loss carryover of $3,000.
C)
a net long-term capital loss of $15,000 and no gain carryover.
D)
a $3,000 deduction from income and a long-term capital loss carryover of $12,000.
D)
a $3,000 deduction from income and a long-term capital loss carryover of $12,000.
Explanation
This investor has a $10,000 short-term capital gain ($50,000 minus $40,000) and a $25,000 long-term capital loss ($75,000 minus $100,000). Why isn’t that choice the correct answer? Because the exam will always want the choice that most completely answers the question. In this case, the net of the gain and the loss is a $15,000 long-term capital loss. Why isn’t that correct? Same reason—it is not the most complete answer: $3,000 of that $15,000 loss is deductible against earned income and the balance of $12,000 is a carryover to the next year. This is a very common type of question on the actual exam, where you must select the choice that covers all of the details. By the way, there is no such thing as a carryover of a gain; all net gains are taxed.
Which of the following is considered a tax preference item for the purposes of calculating the alternative minimum tax?
A)
Tax-exempt interest on general purpose municipal bonds issued after August 7, 1986
B)
Depreciation on property placed in service after 1986
C)
Intangible drilling costs to a limited partnership program
D)
Incentive stock options (ISOs) to the extent that the fair market value of the employer’s stock is in excess of the strike price of the option
D)
Incentive stock options (ISOs) to the extent that the fair market value of the employer’s stock is in excess of the strike price of the option
Explanation
The excess of the fair market value of the strike price of an ISO, known as the bargain element, is included as a tax preference item for the AMT. It is accelerated depreciation, excess intangible drilling costs, and interest on private purpose municipal bonds that are all tax preference items.
If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend?
A)
General obligation bond
B)
Industrial revenue bond
C)
Corporate bond
D)
Treasury bond
A)
General obligation bond
Explanation
Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the alternative minimum tax (AMT).
An investor purchases 100 shares of ABCE common stock at $70 per share. Thirteen months later, the stock is sold when the market price is $50 per share. Which of the following activities made 20 days after the sale of the stock at $50 per share would not violate the wash sale rule?
A)
Purchasing an ABCE put option
B)
Purchasing 100 shares of ABCE common stock
C)
Purchasing five ABCE convertible bonds with a conversion price of $50
D)
Purchasing an ABCE call option
A)
Purchasing an ABCE put option
Explanation
The wash sale rule applies when the same or substantially identical security as a stock sold at a loss is acquired within the 30-day period prior to and after the sale. Buying a put is not a problem because the put allows the holder only to sell the stock, not to buy it. Please note that a bond convertible at $50 is convertible into 20 shares, so five bonds will enable the investor to convert into 100 shares.
Each of the following could cause an investor to be subject to the alternative minimum tax except
A)
accelerated depreciation taken on certain property.
B)
interest received on school district GO bonds.
C)
excess intangible drilling costs.
D)
interest received on private activity municipal bonds.
B)
interest received on school district GO bonds.
Explanation
General obligation (GO) bonds are not subject to the alternative minimum tax (AMT).
Many different investments offer the opportunity to reinvest income. If one were to compare the difference between interest-on-interest reinvestment plans and dividend and capital gain reinvestment plans,
A)
in the case of interest-on-interest plans, taxes are deferred until liquidation.
B)
in the case of dividend and capital gains reinvestment plans, taxes are deferred until liquidation.
C)
in both plans, all income is taxable in the year received, whether reinvested or not.
D)
in both cases, all income is deferred until liquidation.
C)
in both plans, all income is taxable in the year received, whether reinvested or not.
Explanation
Regardless of the type of plan, any income, whether reinvested or not, is always taxed in the current year. Think of an interest-on-interest plan as a passbook savings account where the interest is credited and compounded. Whether taken out or not, the earnings are reported on an annual basis. On the exam, the question may ask for a difference as we have here; as you can see, though, there is no difference.
Definition: undivided interest
In a joint account, all owners have an undivided interest in the account. What does that mean, especially when we see that a TIC can have unequal shares? Simply stated, an undivided interest means that no tenant has a designated interest in any specific asset in the account. Even when the shares are unequal, one tenant doesn’t get stock A and the other stock B. Using our 60/40 example with the TIC account, one owner would have 60% of each of the holdings and the other 40% of each—the assets themselves are not divided between the owners.
When an agent with a broker-dealer opens a new options account for a client, in which order must the following actions take place?
Obtain approval from a qualified supervisor.
Obtain essential facts from the customer.
Obtain a signed options agreement.
Enter the initial order.
A. I, II, III, IV
B. I, II, IV, III
C. II, I, IV, III
D. II, I, III, IV
Answer: C. The steps in opening an options account occur in the following order: obtain essential facts about the customer; give the customer an options disclosure document; have the manager approve the account; enter the initial order; and have the customer sign and return the options agreement within 15 days.
What tax forms are used by different business entities:
Sole proprietorship
LLC members / S-corp shareholders
C corporations?
Sole proprietorship: Reports income on Schedule C (on personal 1040)
LLC members / S-corp shareholders: Receive Schedule K-1
C corporations: File taxes on Form 1120
Which of the following is not a money market instrument — and why?
A) Newly issued Treasury notes
B) Commercial paper
C) Banker’s acceptances
D) Treasury bills
✅ A) Newly issued Treasury notes
Money market instruments must have maturities of 1 year or less
Treasury notes have maturities of 2 to 10 years, so they are not money market instruments
✔️ Money market examples:
Commercial paper
Treasury bills (T-bills)
Banker’s acceptances
Repurchase agreements
Certificates of deposit (CDs, under $100K)
💡 Tip:
If it’s short-term debt (≤ 1 year), it probably belongs to the money market.
If it’s longer-term, like a Treasury note or bond, it’s not.
