TOOLS & TECHNIQUES OF FINANCIAL PLANNING
6th Edition
Curriculum Guide
Chapters 36-40
Chapter 36: Put and Call Stock Options
True or False:
1. In order to purchase a put or call option, the investor must own the underlying stock.
2. An investor who exercises a call option at a price lower than the market price of the stock realizes a capital gain on the date the option is exercised.
3. A shorter term option is more volatile, and thus riskier than a longer term option.
Answers:
1-F p. 465
2-F p. 467
3-F p. 468
Multiple Choice:
1. Bob Smith believes that the major airlines will be experiencing a decline in business in the near future, due to projected increases in fuel costs, and that a company called American Shipyard, Inc. will increase in value as a result. Bob purchases a call option for 100 shares of American Shipyard, Inc. at a price of $25.00 per share. The current market price of American Shipyard is $22.00 per share. If the market price of American Shipyard were to jump to $30.00 per share, what would be the value of the contract to Bob? (Exclude consideration of the premium paid for the call contract.)
a. $200.00
b. $300.00
c. $500.00
d. $800.00
Correct Answer: C
Page 465
2. Which of the following is true about the way a call option works?
a. The price at which the call option may be exercised is never constant.
b. The holder of the call option may exercise the option and purchase stock at a predetermined price.
c. The holder of the call option may exercise the option and purchase stock at its current market price.
d. The holder of the call option may exercise the option and sell stock at its current market price.
Correct Answer: B
Page 465
Discussion Questions:
1. Explain some of the most common reasons for trading in options, and what a put or call investor typically believes about the underlying stock. (See pp. 465-466)
2. Describe the effects, both positive and negative, of leverage in the context of option investing. (See p. 466)
Chapter 37: Qualified Pension and Profit Sharing Plans
True or False:
1. One of the key features of a defined contribution plans is an individual account for each participant.
2. An employer is not obligated to make contributions to a profit sharing plan every year.
3. With a defined benefit plan, benefit levels within specified limits are guaranteed by the Pension Benefit Guaranty Corporation.
Answers:
1-T p. 471
2-T p. 472
3-T p. 474
Multiple Choice:
1. Which of the following is an accurate statement about the qualification requirements applicable to pension and profit-sharing plans?
a. A plan may impose minimum waiting period and age requirements as long as the requirements do not exceed three years of service and attainment of age 25.
b. A plan must pass all three minimum coverage tests in order to be qualified
c. A plan with a benefit or contribution formula that results in a higher benefit for highly compensated employees may violate the nondiscrimination requirement.
d. For the plan to be qualified, participants must be 100% vested after completing 3 years of service.
Correct Answer: C
Page 471-473
2. All of the following are advantages of a defined benefit plan over a defined contribution plan, except:
a. a defined benefit plan shifts the risk of investment performance from the employee to the employer
b. a defined benefit plan permits the employer to provide extra benefits to key employees
c. a defined benefit plan is more likely to provide adequate benefits for participants who enter the plan at a later age
d. a defined benefit plan tends to allow the maximum amount of tax-deferred retirement savings in the case of older, highly-compensated employees
Correct Answer: B
Page 472-473
3. Which of the following is an accurate statement about contributions to a pension or profit sharing plan?
a. An employer does not have to make contributions to a profit sharing plan in a year in which it has no profits.
b. All else being equal, contributions to a defined benefit plan will typically diminish as an employee nears retirement age.
c. A plan that is or becomes top-heavy will cease to be qualified until certain corrections are made.
d. The amount an employer may contribute to a qualified plan is based on the number of employees participating in the plan, and their years of service.
Correct Answer: A
Page 472
Discussion Questions:
1. Explain the basic difference between a defined benefit plan and a defined contribution plan, and describe some advantages of each. (See p. 471-474)
2. Why is it important for a small business owner to be familiar with the “top heavy” rules? How do they affect a small business owner? (See p. 477)
Chapter 38: Real Estate as an Investment
True or False:
1. Real estate is a tangible investment that has historically tended to provide a hedge against inflation.
2. One of the most important features of real estate investing is the investor’s ability to take deductions for depreciation of the land.
3. Most real estate purchases are financed by mortgages from financial institutions.
Answers:
1-T p. 480
2-F p. 482
3-T p. 488-489
Multiple Choice:
1. Which of the following items is NOT deductible currently by real estate investors?
a. mortgage interest expenses
b. maintenance and repair expenses
c. depreciation of structures (but not land)
d. expenses incurred to improve the property
Correct Answer: D
Page 481
2. Which of the following techniques will NOT help a real estate investor defer tax on the sale of real estate?
a. installment sale
b. like-kind exchange
c. depreciation of structures
d. involuntary conversion
Correct Answer: C
Page 483
3. An individual who owns real estate outright:
a. is insulated from personal liability resulting from incidents involving the property
b. is not permitted to delegate management responsibilities such as rental collection and maintenance of the property
c. can convey the title to the property at any time without restriction
d. can avoid debts or commitments relating to the property by forming a partnership
Correct Answer: C
Page 484
Discussion Questions:
1. Describe some of the most significant advantages and disadvantages of real estate investing. What kinds of financial market conditions would make real estate seem the most favorable as an investment? (See pp. 479-481)
2. There are numerous tax implications to investing in real estate. Summarize those that come into play during a disposition of a real estate investment (i.e., upon purchase or sale). (See pp. 481-483)
Chapter 39: REITs (Real Estate Investment Trusts)
True or False:
1. One of the advantages of REITs is that investors with smaller amounts to invest can purchase shares of a broadly diversified portfolio of real estate properties.
2. Like other real estate investments, mortgage REITs that invest in loans with fixed interest rates are a good hedge against inflation.
3. Dividends paid from a REIT’s earnings are passed through as capital gain to the investor.
Answers:
1-T p. 491
2-F p. 492
3-F p. 493
Multiple Choice:
1. Which of the following is NOT a type of real estate investment trust (REIT)?
a. Leverage REIT
b. Equity REIT
c. Mortgage REIT
d. Hybrid REIT
Correct Answer: A
Page 491
2. Real Estate Investment Trusts (REITs) are not subject to tax at the corporate level if, among other things, they:
a. distribute at least 90% of their net annual earnings to shareholders
b. distribute at least 51% of their net annual earnings to shareholders
c. withhold distributions from shareholders for the entire tax year
d. withhold distributions from shareholders who are corporate entities
Correct Answer: A
Page 491
Discussion Questions:
1. Compare and contrast the features of mortgage REITs with those of equity REITs. (See pp. 491-493)
2. Describe some differences between Real Estate Investment Trusts and Real Estate Limited Partnerships. (See pp. 493, 501)
Chapter 40: REMICs (Real Estate Mortgage Investment Conduits)
True or False:
1. REMICs offer greater predictability with respect to prepayment than do other mortgage-backed securities, such as collateralized mortgage obligations.
2. The entity used for a REMIC must be a trust.
3. Although one class of REMIC interests may mature sooner than another, none can be subordinate to another.
Answers:
1-T p. 504
2-F p. 506
3-F p. 516
Multiple Choice:
1. Which of the following is NOT true with respect to real estate mortgage investment conduits (REMICs)?
a. REMICs may offer a redemption feature on their securities to make the offering more attractive.
b. REMICs may issue multiple classes of residual interests.
c. REMICs may issue multiple classes of regular interests.
d. REMICs may issue only two types of securities.
Correct Answer: B
Page 503
2. Assuming they qualify as regular or residual interests, REMIC interests are treated for tax purposes:
a. as debt, like bonds
b. as equity, like stocks
c. as a trust interest or stock, depending on whether the REMIC is established as a trust or a corporation
d. according to the laws governing the state in which the investor resides
Correct Answer: A
Page 504
3. In reporting income on their bonds, holders of real estate mortgage investment conduit (REMIC) interests must:
a. use the cash basis method of accounting to report income whether they are cash basis taxpayers or accrual basis taxpayers
b. use the cash basis method of accounting to report income if they are normally accrual basis taxpayers
c. use the accrual basis method of accounting to report income only if they are accrual basis taxpayers
d. use the accrual basis method of accounting to report income even if they are cash basis taxpayers
Correct Answer: D
Page 506, 508
Discussion Questions:
1. Compare and contrast the features of regular interests in a REMIC with those of residual interests. (See pp. 503, 506-509)
2. Explain what a full accrual bond is, and what the most important tax implications are of owning this type of investment. (See p. 516)