BigDaddy U | SIE Module 7 Test Bank

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1. Which of the following statements is correct regarding state-run Section 529 prepaid college tuition plans?

A. They are most attractive to aggressive investors since their return typically exceeds that of equity securities.

B. They can be used for private schools, as well as out-of-state schools.

C. They guarantee admission to a state college.

D. The plan balance will be forfeited if the student chooses not to go to college.

2. Which of the following statements is correct regarding a Section 529 savings plan?

A. Contributions to the plan are deductible for federal income tax purposes.

B. Contributions are allowed regardless of the amount of the contributor’s income.

C. Plan participation is usually limited to residents of the sponsoring state.

D. The rate of return on investments inside the plan is tied to the tuition inflation rate at a particular college.

3. Which one of the following represents an advantage of a Section 529 plan?

A. The account owner can withdraw amounts tax-free for any reason upon attaining age 55.

B. The beneficiary can be changed to the account owner’s brother without resulting in a gift for gift tax purposes.

C. The account holder can invest the Section 529 plan funds in publicly traded stocks.

D. Contributions made to the plan are deductible for federal income tax purposes.

4. Which of the following education planning vehicles is permitted for taxpayers who are in high income tax brackets?

A. Coverdell Education Savings Account.

B. Tax-exempt Series EE savings bond.

C. Section 529 plan.

D. Federal Perkins Loan.

5. Which of the following statements is correct regarding a Section 529 college savings plan?

A. Contributions to the plan are capped at $10,000 per student, per year.

B. The owner of the plan can only change the beneficiary once every three years.

C. Contributions to the plan are deductible for federal income tax purposes.

D. Investment gains withdrawn from the plan may be subject to income tax and a 10% penalty.

6. Dietmar is the trustee of a Uniform Transfers to Minor Account (UTMA) established for his five-year-old daughter, Melinda. The UTMA has a current balance of $73,000, and Dietmar contributes $11,000 to the account each year. Earnings in the UTMA are large enough to result in kiddie tax. Dietmar’s mother, Doris, would also like to begin helping Dietmar save for his daughter’s education. Doris has a significant net worth. Which of the following represents the best tax strategy for Dietmar and Doris with respect to Melinda’s education?

A. Purchase Series EE savings bonds and transfer them into Melinda’s name.

B. Establish and fund a Section 529 plan for Melinda.

C. Make annual exclusion gifts to a brokerage account in Melinda’s name, and purchase value stocks in the account.

D. Double the existing contribution to the UTMA account for Melanie.

7. Which one of the following statements is correct regarding risk?

A. Credit risk is the risk of the loss of purchasing power.

B. Interest rate risk is the risk that the interest rate on a margin loan will exceed the rate of return on the investment.

C. Liquidity risk is the risk that a security cannot be sold quickly at the current market value.

D. Systematic risk is risk that can be reduced through diversification.

8. Which one of the following bonds has the lowest reinvestment rate risk?

A. $1,000 State of Louisiana 3% coupon municipal bond, maturing in 4 years, currently selling for $1,025.

B. $1,000 ABC Company zero-coupon bond, maturing in 12 years, currently selling for $788.

C. $10,000 U.S. Treasury bond with a 4% coupon, maturing in 15 years, currently selling for $9,367.

D. $5,000 Eurobond with a 6% coupon, maturing in 5 years, currently selling for $4,111.

9. An investor owns the following bonds:
• Bond A - ABC Corporation Bond, 7% Coupon, 12-Year maturity
• Bond B - NY Muni Bond, Zero-Coupon, 12-Year maturity
• Bond C - U.S. Govt Security, 6% Coupon, 12-Year maturity
Which of the following statements is correct regarding these bonds?

A. Bond A has the highest duration.

B. Bond A has the highest reinvestment rate risk.

C. Bond B has the lowest interest rate risk.

D. Bond C has the highest default risk.

10. Which one of the following statements is correct regarding risk?

A. Financial risk is the risk of the loss of purchasing power.

B. Interest rate risk is the risk that the interest rate on a margin loan will exceed the rate of return on the investment.

C. Liquidity risk is the risk that a security cannot be sold quickly at the current market value.

D. Systematic risk is risk that can be reduced through diversification.

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11. All of the following statements concerning risk are correct EXCEPT:

A. Political risk is the risk from events that come from operating in a foreign country.

B. Additional commitment risk is the risk that one might have to put additional monies into an existing investment.

C. Interest rate risk is the risk that the interest rate on a margin loan will exceed the rate of return on the investment.

D. Tax risk is the risk of loss due to changes in the tax code.

12. Which one of the following statements is correct regarding Section 529 plans?

A. Every state sponsors and operates at least one Section 529 savings account or prepaid tuition plan.

B. High income taxpayers cannot contribute to these plans due to AGI phase-outs.

C. Amounts held within the plan must be fully distributed by the time the beneficiary attains age 35.

D. Contributions are deductible for federal income tax purposes.

13. Which one of the following types of risk can be reduced through diversification?

A. Purchasing power risk.

B. Market risk.

C. Credit risk.

D. Interest rate risk.

14. Which one of the following statements is correct regarding classifications of risk?

A. Interest rate risk is the risk that the interest rate on a margin loan will exceed the rate of return on the investment.

B. Pure risk involves the possibility of loss or gain.

C. Liquidity risk is a type of unsystematic risk.

D. Systematic risk can be reduced or eliminated through diversification.

15. An investor with a diversified portfolio would be most concerned with which one of the following types of risk?

A. Market risk.

B. Liquidity risk.

C. Credit risk.

D. Business risk.

16. Super Company issued a series of floating rate bonds last year when interest rates were low. What is the company’s major risk if interest rates rise in the future?

A. Recapture risk.

B. Interest rate risk.

C. Liquidity risk.

D. Reinvestment rate risk.

17. A manufacturing company announced that it was laying off 5,000 workers because of a fire that occurred in its main production facility. The company’s common stock price immediately declined by 10% per share. The decline in share price is an example of:

A. Purchasing power risk.

B. Business risk.

C. Credit risk.

D. Reinvestment rate risk.

18. Which one of the following statements is correct regarding different types of risk?

A. The risk that poor management decisions can cause a company to declare bankruptcy is an example of credit risk.

B. A state announcing a tax on soft drinks that adversely affects soft drink manufacturers is an example of purchasing power risk.

C. The risk that a company cannot satisfy its current interest payments on its outstanding bonds is an example of liquidity risk.

D. A rise in interest rates causing bond prices to decline is an example of reinvestment rate risk.

19. Joey has been tracking interest rates and believes they will dramatically increase this year. What type of bond portfolio would be most subject to price risk in this environment?

A. Short-duration bullet portfolio.

B. Barbell portfolio.

C. Coupon-paying laddered portfolio.

D. Diversified moderate-duration portfolio.

20. Which one of the following would be considered a municipal fund security?

A. Limited partnership interest.

B. Uniform Transfers to Minors Act (UTMA) account.

C. Traditional IRA.

D. Section 529 savings plan.

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21. Which one of the following would be considered a municipal fund security?

A. Section 529 prepaid tuition plan.

B. Uniform Gifts to Minors Act (UGMA) account.

C. Achieving a Better Life Experience (ABLE) Act account.

D. Roth IRA.

22. A correct statement regarding a municipal fund security is that it:

A. Is a mutual fund consisting entirely of municipal bonds.

B. Does not have to register with the SEC.

C. Is governed by the Investment Company Act of 1940.

D. Must determine and post its net asset value on a daily basis.

23. Which one of the following would be considered an eligible investor in a local government investment pool (LGIP)?

A. School district.

B. Retail investor.

C. Accredited investor.

D. Manufacturing corporation.

24. Which one of the following statements is correct regarding local government investment pools (LGIPs)?

A. They are authorized by federal law.

B. They are regulated by the Investment Company Act of 1940.

C. They often invest in short-term securities to avoid market price risk.

D. Their investments are guaranteed by the state.

25. The primary objective of local government investment pools (LGIPs) is to:

A. Offer a hedging opportunity to accredited investors.

B. Maximize the rate of return earned by institutional investors.

C. Outperform the S&P 500 index.

D. Encourage the efficient management of the cash reserves of government entities.

26. Which one of the following statements is correct regarding characteristics of ABLE accounts?

A. Each family member can set up a separate account for a special needs individual.

B. Investment options may be changed on a quarterly basis.

C. Contributions to the account are deductible for federal income tax purposes.

D. Withdrawals from the account are tax-free if used to pay for disability expenses.

27. Which one of the following statements is correct regarding characteristics of ABLE accounts?

A. Contributions to the account are tax deductible if the beneficiary is eligible to receive SSI benefits.

B. Withdrawals from the account will be income tax free if they are used for personal support services for the beneficiary.

C. Amounts contributed to the account by someone other than the beneficiary are not eligible for the gift tax annual exclusion.

D. If the account balance exceeds $200,000, the beneficiary will be disqualified from receiving Medicaid benefits.

28. Which of the following statements is correct regarding characteristics of ABLE accounts?

A. Account owners are permitted to change the investment choices up to twice per year.

B. An individual must be receiving SSI to be eligible for an ABLE account.

C. The contribution amount permitted each year is a flat amount not indexed for inflation.

D. Distributions from the account used to pay housing expenses are not considered “qualified disability expenses” and are therefore taxable.

29. Which of the following statements is correct regarding the characteristics of an ABLE account?

A. Although an ABLE account can provide income tax advantages, it is less flexible and more expensive to maintain than a special-needs trust.

B. In order to qualify for an ABLE account, an individual must have incurred a significant disability prior to attaining age 26.

C. To be eligible for favorable income tax treatment, an ABLE account must be established by a disabled individual prior to attaining age 30.

D. If the funds in the ABLE account exceed $5,000, eligibility for SSI benefits is suspended and the individual ceases to receive monthly SSI income.

30. The risk of the potential of loss of some or all of an investment is referred to as:

A. Purchasing power risk.

B. Capital risk.

C. Reinvestment rate risk.

D. Currency risk.

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31. Which one of the following represents a risk that is applicable to callable bonds but is not applicable to non-callable bonds?

A. Default risk.

B. Interest rate risk.

C. Prepayment risk.

D. Purchasing power risk.

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