Category: Study Question

Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.

Question

Relevant to the Series 6, Series 7, Series 62, Series 65,  Series 66, and Series 82.

What does a value investor look for?

A. Increased P/E

B. Small-cap stocks

C. Trading above intrinsic value

D. Higher dividend yield

Answer: D. Value investing places primary emphasis on getting a bargain. Using fundamental analysis, a value investor looks for stocks that are trading below their “intrinsic” value. Value investors like growth as much as growth investors do, but value investors are wary of overpaying for that growth. Value investing’s bargain-hunting approach means value investors pay as much attention to the balance sheet as they do to the income statement, searching for gold that the market might have overlooked. Value stocks then, by definition, on average, have lower P/E ratios, lower price-to-book and price-to-sales ratios, and higher dividend yields.

Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.

Question

Relevant to the Series 6, Series 7, Series 65, and  Series 66.

Bill is in a serious pinch and would like to take a loan against the value of his annuity. He is still in the accumulation period. Which of the following is true?

A. It is strictly prohibited by the IRS.

B. Many insurance companies allow it, but he will be subject to a 10% early withdrawal penalty.

C. Many insurance companies allow it, but it will be considered a distribution and therefore is taxable. A penalty may also apply.

D. Many insurance companies, allow it and there will be no tax or penalty implications provided it is repaid during the accumulation period.

Answer: C. Unlike a loan against a life insurance policy, a loan against an annuity is considered a distribution and will therefore be taxable. Interest charges are generally handled by reducing the number of accumulation units and if the owner pays back the loan, the number of units will increase. In cases where the customer is under 59 1/2, a 10% federal tax penalty may also apply.

Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.

Question

Relevant to the Series 7, Series 6, and Series 52.

The “tax equivalent yield” tells an investor:

A. How much lower a yield he can accept from a corporate bond.

B. The impact of his Federal tax bracket on a municipal bond he purchases.

C. The risk-adjusted difference in par value of a corporate bond versus an insured municipal bond.

D. What the yield on a corporate bond would need to be to be equivalent to the yield of a municipal bond.

Answer: D. Given the fact that municipal bonds are exempt from federal tax, an investor can afford to accept a lower yield on a municipal than on a comparable corporate bond. For a taxpayer in the 30% tax bracket, a corporate bond yielding 5% offers the same after-tax return as a tax-free bond yielding 3.5%. The “tax equivalent yield” of the corporate bond is calculated by taking the yield of the municipal and dividing by 1 minus the tax rate. 3.5%/(1 – .30) = 5%. We can look at it from the corporate bond’s yield as well. The taxpayer pays 30% of the interest earned on a corporate bond in taxes, leaving him with 70% of the original interest. 70% of 5% equals 3.5%.

Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.

Congratulations to Jason W., this month’s Study Question of the Month winner!

Question

Relevant to the SIE, Series 6, Series 7, Series 52, Series 62, Series 65, Series 66,  Series 79, and Series 82.

Juan has a bond with a YTM of 6.3%. He bought the bond for $1050. Which of the following is true?

I.  His current yield will be greater than his YTM

II.  His current yield will be less than his YTM

III.  His nominal yield will be greater than his YTM

IV.  His nominal yield will be less than his YTM

A.  I and III

B.  I and IV

C.  II and III

D.  II and IV

Answer: A.

For bonds that are purchased at a premium and held to maturity, the order of the yields from highest to lowest is nominal yield, current yield, YTM and YTC.. For bonds that are purchased at a discount, the opposite order is true (YTC > YTM > current yield > nominal yield).