Series 7 Exam Question 261: Answer and Explanation

Question: 261

You have a new client who is in a high tax bracket and is looking for investments with a tax advantage. Which of the following securities would you LEAST likely recommend?

• A. Municipal bonds
• B. Collateralized mortgage obligations
• C. Retirement plans
• D. Direct participation programs

Correct Answer: B

Explanation:

B. CMOs (collateralized mortgage obligations) offer no tax advantages to buyers. However, the interest received on municipal bonds is federally tax-free and sometimes state-tax-free. In addition, retirement plans allow investors to deposit money tax-free (in most cases) and the money grows on a tax-deferred basis. DPPs (direct participation programs) allow for additional write-offs, such as depreciation and depletion, which provide for a cash flow that's greater than the net income.