Chapter 15: Ethics, Recommendations, and Taxation

Question #73 of 223Question ID: 607225 If a customer buys $28,000 of ABC stock in April of 1999 and at year end, the stock is worth $23,000, how much may the customer deduct on his 1999 tax return? A)$5,000. B)$0. C)$2,000. D)$3,000.

Until the customer realizes the loss by selling, there is no tax deduction. Reference: 15.5.6 in the License Exam

Question #10 of 223Question ID: 607194 Institutional managers are moving to increase their cash position. This action would be viewed as: A)bearish. B)neutral. C)neutral bull. D)bullish.

When investment managers liquidate securities to increase their cash positions, stock prices are likely to fall. Reference: 15.4.2 in the License Exam

Question #31 of 223Question ID: 607242 A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and NOT have the sale classified as a wash sale? A)20 days. B)5 days. C)30 days. D)There is no waiting period.

According to the wash sale rule, a customer who sells a security at a loss cannot buy back a substantially identical security 30 days prior to or 30 days after the sale that established the loss. Reference: 15.5.6.3 in the License Exam

Question #25 of 223Question ID: 607233 Your client owns stock in the TXR Corporation and has received dividends of $950 this year. The client has taken $450 of this and used it to purchase additional shares of TXR. For tax purposes, your client must report: A)$1,400. B)$950. C)$500. D)$450.

All of the dividends received must be reported. Reinvesting any or all of the money in TXR stock does not reduce the client's tax liability on dividends received. Reference: 15.5.4.2 in the License Exam

Question #28 of 223Question ID: 607297 Tax preference items are used for the purpose of computing the alternative minimum tax. They include: excess intangible drilling costs (wages, fuel, repairs). accelerated depreciation. percentage depletion in excess of basis. A)II and III. B)I, II and III. C)I and III. D)I and II.

All of these. are tax preference items. Note that straight line depreciation is not a tax preference item. Reference: 15.5.10.1 in the License Exam

Question #68 of 223Question ID: 607269 The term for the annual reduction of a municipal bond's cost basis purchased at a premium is: A)straight line amortization. B)straight line accretion. C)compound amortization. D)compound accretion.

Amortization is the process by which the cost basis of a bond bought at a premium is decreased during the holding period. Because the cost basis is reduced by equal amounts every year, amortization is done on a straight line basis. At maturity, the cost basis has been reduced to par. Reference: 15.5.7.1 in the License Exam

Question #92 of 223Question ID: 607197 What is a basic assumption in an active management investment style? A)Some securities are mispriced and value can be captured through security selection. B)Asset allocation makes no difference. C)There is no opportunity cost to investing. D)The market is efficiently priced and that will make an active management style effective.

An investment manager using an active management investment style believes that by using investment expertise he can select securities that are undervalued to achieve superior returns over time. Reference: 15.4.3 in the License Exam

Question #100 of 223Question ID: 607295 A customer has realized a capital gain from the sale of a municipal bond. To reduce his tax liability, the capital gain can be offset against a capital loss in which of the following investments? GOs Equity securities. Corporate bonds. Collateralized mortgage obligation. A)I and III. B)I, II, III and IV. C)II and III. D)I and II.

Any capital loss will offset a capital gain. Reference: 15.5.6.1.3 in the License Exam

Question #40 of 223Question ID: 607310 For dividends to be taxed as qualified dividends, the dividend paying investment must be held for A)more than 60 days B)at least 30 days C)at least 45 days D)more than 120 days

In order to be taxed as qualified dividends, the investment must have been held for more than 60 days (at least 61 days). Reference: 15.5.4.2 in the License Exam

Question #93 of 223Question ID: 607179 A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of his securities, he will immediately face: A)credit risk. B)market risk. C)marketability risk. D)interest rate risk.

It is difficult to sell a large block of securities in a thinly traded stock without a substantial discount to market price. This is known as liquidity or marketability risk. Reference: 15.3.2.9 in the License Exam

Question #63 of 223Question ID: 607129 An associated person of a broker dealer who wishes to accept an outside employment opportunity must notify the A)SEC in writing B)FINRA in writing C)member firm in writing D)customers of the broker dealers in writing

Notification must be made to the member firm in writing. Reference: 15.1.2.2 in the License Exam

Question #87 of 223Question ID: 607176 Which of the following are likely to have a low beta? A)Technology stocks. B)Aerospace stocks. C)Software stocks. D)Public utility stocks.

Public utility stocks tend to have low betas as do other defensive stocks. Technology, aerospace, and software stocks tend to have high betas. Reference: 15.3.3.1 in the License Exam

Question #7 of 223Question ID: 607150 Which of the following provides a measurement of the volatility of a particular stock or portfolio as compared to the volatility of the market as a whole? A)Beta. B)Alpha. C)Delta. D)Duration.

The beta value is an index that measures the volatility of a stock's or portfolio's movement as compared to the movement of the market as a whole. By definition, the beta of the market is equal to 1.0. Reference: 15.3.3.1 in the License Exam

Question #15 of 223Question ID: 607230 Four years ago, you declared a net capital loss of $23,000 on your tax return. You have had no further capital gains or losses since then. For that year and the following 2, you took the maximum allowable income deduction. How much may you deduct from your income this year, and how much loss will you have to carry forward? A)$3,000/$11,000. B)$3,000/$12,000. C)$2,000/$12,000. D)$2,000/$11,000.

The maximum allowable deduction against income is $3,000. You will have taken 4 such deductions against $23,000, which leaves you with $11,000 to carry forward ($23,000 - $12,000). Reference: 15.5.6.1.3 in the License Exam

Question #17 of 223Question ID: 607172 Most rating services rate which of the following? A)Durability. B)Quality. C)Marketability. D)Reinvestment risk.

The rating services are concerned with quality, which is defined as the ability of the issuer or guarantor to pay (default risk). Reference: 15.3.2.8 in the License Exam

Question #69 of 223Question ID: 607307 Broker/dealers must report cost basis and sales proceeds A)to customers and the IRS annually B)never C)to the IRS only, on a monthly basis D)to customers and the IRS each time a transaction occurs separately

Broker/dealers (BDs) are required to report both cost basis and sales proceeds to both their customers and the IRS annually. Reference: 15.5.6.2 in the License Exam

Question #8 of 223Question ID: 607212 If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A)$90,000. B)$0. C)$50,000. D)100,000.

Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes. Reference: 15.5.9.2.2 in the License Exam

Question #22 of 223Question ID: 607276 A couple in a high tax bracket is interested in minimizing its tax liability while diversifying its portfolio. Which of the following best fits its investment objectives? A)Corporate convertible bonds. B)Preferred stock. C)GNMAs. D)Tax-exempt unit trusts.

Municipal unit trusts provide tax-free income to unit holders. Unit holders have an undivided interest in the underlying portfolio of municipal bonds. The trust consists of a number of different issues, and therefore has an element of diversification. Reference: 15.5.4.1.2 in the License Exam

Question #48 of 223Question ID: 607177 Which of the following statements regarding nonsystematic risk are TRUE? It is the risk that an individual stock will not perform well. It is the same as market risk. Diversification reduces it. Diversification does not reduce it. A)II and III. B)I and IV. C)II and IV. D)I and III.

Nonsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks. Reference: 15.3.2.7 in the License Exam

Question #78 of 223Question ID: 607209 Income from which of the following investments is passive income? Real estate DPP. Vacation cottage rentals. REITs. CMOs. A)II and III. B)II and IV. C)I and II. D)I and III.

Passive income results from DPPs and personal real estate rentals. REITs and CMOs are securities; income from securities is considered portfolio income. Reference: 15.5.3.2 in the License Exam

Question #30 of 223Question ID: 803451 Which of the following carries the least market risk? A)Treasury bills B)Treasury bonds C)Common stock D)Savings accounts

Savings accounts carry no market risk, which, by definition, is the risk that an investor will experience losses due to day-to-day fluctuations in the prices of securities bought and sold in the market. Reference: 15.3.2.7 in the License Exam

Question #80 of 223Question ID: 607186 A client who is a manager of a pension plan has recently liquidated approximately $1 million in securities and now has only cash and cash equivalents in the account. This client's outlook concerning the market is: A)bullish. B)bearish. C)neutral. D)unknown.

Since the investor has moved all assets into cash or cash equivalents, the investor must expect a bear market and is taking this action in an attempt to protect against incurring losses from the anticipated market decline. Reference: 15.4.2 in the License Exam

Question #70 of 223Question ID: 607165 An investor's portfolio has a beta coefficient of .85. If the overall market declined by 10% over the course of a year, the portfolio's value has likely: A)increased by 10.85%. B)increased by 8.5%. C)decreased by 8.5%. D)decreased by 11.76%.

A beta coefficient of .85 means that the portfolio is considered to be .85 times as volatile as the overall market. Therefore, if the market declines by 10%, the portfolio with a beta of .85 is likely to decline by only 8.5% (.10 × .85). Reference: 15.3.3.1 in the License Exam

Question #89 of 223Question ID: 607189 If an investor practices value investing, which of the following stock types is he least likely to purchase? A)A stock that is presently selling for two-thirds of net current assets. B)A stock that has exhibited a high dividend yield in the past. C)A stock with a low price-to-earnings ratio. D)A stock with an above-average price-to-earnings ratio.

A growth investor looks for stocks with above-average price-to-earnings ratios. Conversely, a value investor focuses on stocks with low PE ratios, a low price-to-book value, and historically high dividend yields. Reference: 15.4.3.2 in the License Exam

Question #54 of 223Question ID: 607134 A change in which of the following should be indicated in a customer's file? Name. Educational degrees held. Investment objectives. Professional society memberships. A)I and III. B)III and IV. C)II and IV. D)I and II.

All primary information, such as name, address, and Social Security number, and all information that could affect recommendations or a customer's financial situation must be noted immediately in the file. Educational degrees and society memberships do not affect investment recommendations. Reference: 15.2.1 in the License Exam

Question #50 of 223Question ID: 607207 Interest income from all of the following are exempt from state and local taxation EXCEPT: A)FNMA mortgage-backed issues. B)Series EE savings bonds. C)Treasury bills. D)Treasury bonds.

As a general rule, the interest income from U.S. government and agency securities is subject to federal taxation only; it is generally exempt from state and local taxation. However, the interest income from mortgage-backed securities is fully taxable. Reference: 15.5.4.1.1 in the License Exam

Question #67 of 223Question ID: 607160 The risk that time value may erode the premium of an equity option even while the underlying issuer remains financially sound is an example of: A)currency risk. B)capital risk. C)reinvestment risk. D)interest rate risk.

Capital risk is generally associated with equity instruments, such as common stock, and equity-related derivatives, such as options. It is the risk that invested dollars can be lost as the result of circumstances unrelated to an issuer's financial strength. Reference: 15.3.2.2 in the License Exam

Question #9 of 223Question ID: 607119 Which of the following statements best describes the term "churning"? A)Manipulation of market prices by a firm. B)Making false or misleading statements to a customer for the purpose of inducing the customer to purchase or sell a security. C)Purchasing the same security in more than one customer account at a time. D)Trading in a customer's account considered excessive, and for which no discernible investment purpose is detected.

Churning is excessive trading for a particular customer's circumstances or exceeding what would normally be considered suitable. This is equally true for both discretionary and nondiscretionary accounts. Reference: 15.1.3.1 in the License Exam

Question #86 of 223Question ID: 909497 A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 50% of income earned on investments in A)government and agency securities B)corporate common and preferred stock C)municipal bonds from the same state in which the corporation is located D)industrial development bonds

Corporate ownership of another company's stock allows the investor to exclude 50% of the dividends from taxation. Reference: 15.5.11.1 in the License Exam

Question #59 of 223Question ID: 607262 If a married couple establishes a JTWROS account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A)He pays federal and state taxes on $500,000. B)He pays no estate tax. C)He pays federal taxes only on $500,000. D)He pays federal and state taxes on the entire balance.

Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction. Reference: 15.5.9.2.4 in the License Exam

Question #94 of 223Question ID: 607208 If a customer has $9,000 of capital losses and $2,000 of capital gains in a tax year, that year's consequences are a: A)$9,000 loss deduction. B)$7,000 loss deduction with no carry forward. C)$3,000 loss deduction with $4,000 carry forward. D)$3,000 loss deduction with no carry forward.

For tax purposes, the customer can net gains with losses. In this case, the customer's net losses are $7,000. However, there is an annual capital loss deduction limit of $3,000. Therefore, the investor can deduct $3,000 this year and carry forward $4,000 to the following tax year. Reference: 15.5.6.1.3 in the License Exam

Question #77 of 223Question ID: 607190 Which of the following best describes a growth investment? A)Investment appreciation is tax-deferred. B)Both principal and accumulating interest and dividends increase over time. C)Value of the investment increases over time. D)Only interest and dividends are reinvested.

Growth refers to an increase in an investment's value over time. Interest and dividends are income. Reference: 15.4.3.1 in the License Exam

Question #36 of 223Question ID: 607220 If a customer wants a year-end tax swap, he can expect to pay more money for the swap if the bonds purchased have a: lower coupon. higher coupon. lower rating. higher rating. A)II and IV. B)I and IV. C)I and III. D)II and III.

Higher coupon rates and higher ratings make bonds more valuable. Reference: 15.5.6.3 in the License Exam

Question #60 of 223Question ID: 607211 If a customer buys a new issue municipal bond at a discount in the primary market, which of the following statements are TRUE? The discount must be accreted. The discount may not be accreted. At maturity, there is a capital gain. At maturity, there is no capital gain. A)I and III. B)II and IV. C)II and III. D)I and IV.

If a new issue municipal bond is bought at a discount in the primary market, the discount must be accreted. The accretion is considered interest income, and therefore is not taxable. Reference: 15.5.7.2 in the License Exam

Question #39 of 223Question ID: 607228 If a customer owns a $10,000 8% U.S. Treasury Bond and she is in the 28% federal tax bracket and a 2-½% state tax bracket, what amount of tax will she pay on the income received from the bond? A)$80. B)$224. C)$20. D)$100.

Interest on U.S. Treasury bonds is taxable at the federal level only; $800 of interest taxed at 28% = $224. Reference: 15.5.4.1.1 in the License Exam

Question #90 of 223Question ID: 607173 The risk of a bond decreasing in value during periods of inflation is known as: A)credit risk. B)interest rate risk. C)reinvestment risk. D)marketability risk.

Interest rate risk is the possibility that interest rates might rise, causing bond prices to fall. Periods of inflation are accompanied by rising interest rates. Reference: 15.3.2.4 in the License Exam

Question #27 of 223Question ID: 721489 An investor has purchased a number of securities including municipal bonds on margin. The margin interest paid to borrow the funds to purchase the municipal bonds is A)only deductible if the investor has investment income B)not deductible C)partially deductible D)fully deductible

Interest received from municipal bonds is tax exempt and therefore the government does not allow margin interest paid to purchase them to be used as a deduction on one's income tax return. Reference: 15.5.9.3 in the License Exam

Question #24 of 223Question ID: 607141 When making recommendations to an advisory client, which of the following carry the most weight? The client's risk tolerance. Past performance of the adviser representative's recommendations. The client's investment needs and objectives. The client's previous investment experience with other advisers. A)II and IV. B)I and III. C)II and III. D)I and IV.

Investment objectives and risk tolerance should determine recommendations to an individual advisory client. Reference: 15.2.1.2 in the License Exam

Question #29 of 223Question ID: 607282 A customer sells short 100 shares of GHI on February 26, 2000, at $40 per share. He covers his short on March 10, 2002, at $32 per share. For tax purposes, the $800 will be treated as A)a capital gain in 2002 B)a capital loss in 2000 C)a capital gain in 2000 D)ordinary income in 2002

Investors profit on short positions when the market value of the stock falls. In this situation, the market value of the stock has fallen from 40 to 32 for a profit of $8 per share. This gain of $800 (100 shares) is reportable when the shares are delivered to cover the short position. Uncovered short sales are reported as short-term gains and losses no matter how long the holding period. Reference: 15.5.6.1.1 in the License Exam

Question #88 of 223Question ID: 721482 In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations? Your customer's tolerance of various forms of risk. Your customer's dependents and their ages. Your customer's liquid net worth. Your customer's monthly credit card payments. A)II and IV. B)III and IV. C)I and II. D)I and III.

Liquid net worth and expenses such as credit card payments involve concrete sums of money and cash flow and thus, are financial. Number of dependents and risk tolerance should be considered regarding suitability and making appropriate recommendations but they are nonfinancial considerations. Reference: 15.2.1 in the License Exam

Question #41 of 223Question ID: 607183 Your customer's portfolio consists of 40% long-term government bonds, 20% preferred stock, and 40% common shares of utility companies. Which of the following may have the single largest impact on the entire portfolio? A)Interest rate movements B)Corporate earnings C)Foreign currency fluctuations D)Oil and gas price movements

Of the four answer choices, interest rate movement is the most likely to impact each of the portfolio components. Interest rates and bond prices have an inverse relationship, and their movement often determines whether investors might seek out investment alternatives with higher returns, such as dividend paying utilities and fixed dividend preferred shares. Reference: 15.3.2.4 in the License Exam

Question #44 of 223Question ID: 901863 If an employee of an NYSE member wants to take a second job, which of the following statements is TRUE? A)Prior written notice to the member firm is required B)Prior permission of the NYSE is required C)Prior written notice to the member firm and prior written permission to the employee is required D)Prior notice to the NYSE is required

Prior written notice to the member firm from the employee is required. While no prior written permission of the firm is required, the member firm does have the right to reject or restrict any outside affiliations if they feel a conflict of interest exists. Reference: 15.1.2.2 in the License Exam

Question #21 of 223Question ID: 607192 A customer pursuing income using a defensive investment strategy while avoiding volatility would be most interested in: A)limited partnerships. B)growth stocks. C)short-term government bonds. D)high yield corporate debt.

Remember to take all investor characteristics into account. Short-term government bonds will produce for the customer safe income with little price volatility. Reference: 15.4 in the License Exam

Question #75 of 223Question ID: 607255 Which of the following taxes is considered regressive? A)Estate. B)Sales. C)Income. D)Inheritance.

Sales tax is considered regressive because the rate remains constant irrespective of the amount being taxed. Income taxes, for example, take more from a person with a high income than from a person with a low income. Reference: 15.5.1 in the License Exam

Question #2 of 223Question ID: 786032 An investor has accumulated 3000 shares of XYZ common stock over several years via several separate purchases. If the investor sells 1000 shares and chooses to identify the specific shares sold for tax purposes, he must A)notify the broker dealer who handled the sell transaction within 2 business days of the trade date B)identify the specific shares to be sold prior to the transaction C)notify FINRA on the trade date D)notify the IRS no later than the last business day of the month the trade occurred in

The IRS mandates that when an investor wishes to identify the specific shares sold for tax purposes the broker dealer who handled the sell transaction must be notified within 2 business days of the sale. For stock transactions this means by the settlement date. Reference: 15.5.6.2 in the License Exam

Question #26 of 223Question ID: 607287 To calculate a capital gain or loss on the sale of an original issue discount municipal bond, the discount must be: A)depleted. B)accreted. C)depreciated. D)amortized.

The IRS term for adjusting the cost basis of a discount bond upward is "accretion". Amortization is the means of adjusting a premium bond's cost basis. Reference: 15.5.7.2 in the License Exam

Question #46 of 223Question ID: 607246 If an investor swaps identical issues of stock to establish a loss that is disallowed, the transaction is known as: A)a stock swap. B)a wash sale. C)a reverse stock split. D)a stock cross.

The wash sale rule disallows claiming a tax loss on the sale of stock if the investor purchases a substantially identical security within 30 days either before or after the date of such sale. Reference: 15.5.6.3 in the License Exam

Question #66 of 223Question ID: 607187 A formula timing plan that consists of periodic purchases of a fixed dollar amount of stock regardless of price is known as: A)constant dollar plan. B)constant ratio plan. C)dollar cost averaging. D)share averaging.

There is no such thing as share averaging. Constant dollar and constant ratio plans do not involve periodic purchase of securities. They involve buying and selling equity and debt securities to keep either a constant dollar or constant ratio between the two. Dollar cost averaging calls for the investor to make regular purchases over a long period. Reference: 15.4.1.2 in the License Exam

Question #57 of 223Question ID: 607226 A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE? For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000. A)I and III. B)II and IV. C)II and III. D)I and IV.

When making a gift of securities, the market value at date of gift is used to determine if any gift taxes are due. However, when making a noncharitable gift of securities, the donor's cost basis is passed to the recipient. Reference: 15.5.9.1.2 in the License Exam

Question #4 of 223Question ID: 694429 An investor purchases a municipal bond at par for $10,000 on February 15, 1997. On August 15, 1997, if the investor sells the bond for $10,500, for tax purposes the $500 profit is recognized as A)a short-term capital gain B)a tax-free capital gain C)a long-term capital gain D)interest income

When municipal bonds are purchased at par and subsequently sold at a higher price, the resulting profit is taxed as a capital gain. Only interest income from municipal bonds is exempt from taxation. This gain is not classified as long-term because the investor did not hold the bond for more than 1 year. Reference: 15.5.6 in the License Exam

Question #20 of 223Question ID: 607185 A customer has the following municipal bonds in his portfolio: A-rated, New York State GO 6½, 6-1-12 Baa-rated, M.T.A. (NY) 7½, 7-1-16 Aaa-rated, Buffalo, NY 5%, 2-1-20 The portfolio is diversified in all of the following EXCEPT by: A)issuer. B)rating. C)purpose. D)geography.

While the issuers, ratings, coupons, and purposes are different for all three bonds, they were all issued within the same state. Reference: 15.4.1.1 in the License Exam

Question #47 of 223Question ID: 607277 Most taxes in the U.S. fit into one of two categories. They are either progressive or regressive. Which of the following taxes are known as progressive taxes? Sales. Cigarette. Income. Estate. A)II and IV. B)I and III. C)III and IV. D)I and II.

With a progressive tax, the percentage amount increases as the taxable amount increases such as income and estate taxes. Sales and cigarette taxes are regressive because all persons pay the same percentage tax regardless of their income. Reference: 15.5.2 in the License Exam

Question #58 of 223Question ID: 607114 Your next-door neighbor approaches you with a proposed security offering, knowing that you are a registered representative with a large, affluent client base. If he asks you to present this investment opportunity to your clients, you must tell him that: A)you must first show the offering to your broker/dealer and receive permission to proceed with it. B)you will present the offering to your clients only after you have established that it is either registered or exempt from registration requirements. C)you may make recommendations on the offering only after you have done a due diligence determination. D)you will present the offering only to those clients whose investment objectives make it a suitable purchase for them.

You must receive permission from your broker/dealer before you sell or offer for sale any security to your clients. To avoid a charge of selling away, you must also see to it that any sales that result are carried on your broker/dealer's books. Reference: 15.1.2.3 in the License Exam

Question #6 of 223Question ID: 607184 Which of the following best describes the investment characteristics of a high-quality long-term municipal bond? A)High inflation risk; low default risk. B)Low inflation risk; high market risk. C)High inflation risk; high market risk. D)Low inflation risk; low default risk.

A longer-term bond will be subject to more inflation risk. Since the quality of the bond is high, the level of default risk should be low. Reference: 15.3.2.1 in the License Exam

Question #55 of 223Question ID: 607169 Which type of risk is a mortgage-backed security most likely to experience? A)Market risk. B)Reinvestment rate risk. C)Exchange rate risk. D)Business or corporate risk.

A mortgage-backed security, such as a collateralized mortgage obligation (CMO), is most likely to experience reinvestment rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower yielding securities. This is the practical effect of prepayment risk. Reference: 15.3.2.5 in the License Exam

Question #62 of 223Question ID: 607195 Which of the following is the best example of a passive investment management style? A)Use of index funds in conjunction with selecting specific securities in the index to overweight certain sectors. B)Investment in small capitalization technology securities. C)Exclusive use of index funds. D)Value investing.

A passive investment style uses index funds because the manager does not believe that returns above the averages can be sustained for any length of time because the market is priced efficiently. Use of index funds in conjunction with specific securities in order to overweight sectors is an active style. Investment in small capitalization technology securities involves actively selecting securities that the manager believes will perform well or better than the market. Value investing involves the active search for securities that are undervalued by the market. Reference: 15.4.3 in the License Exam

Question #98 of 223Question ID: 607170 The ABCD Corporation has a beta coefficient of 1.25. Your client's portfolio contains $20,000 of ABCD. After a rise in the overall market of 10%, we would expect the value of this client's ABCD to: A)decrease by 25%. B)increase by $5,000. C)increase by $2,000. D)increase by $2,500.

A stock with a beta coefficient of 1.25 could be expected to rise in value at a rate 25% greater than the overall market. Since the market has increased by 10%, this stock should increase by 12.5% or $2,500 (10% × 1.25 × $20,000 = $2,500). Reference: 15.3.3.1 in the License Exam

Question #37 of 223Question ID: 721487 Which of the following statements is TRUE? A)A measure of a stock or portfolio's volatility is BETA and a measure of its performance is ALPHA. B)Both ALPHA and BETA each use different measures of overall performance expectations but cannot be used to measure volatility. C)Both ALPHA and BETA are measures of volatility only and neither measures performance. D)A measure of a stock or portfolio's volatility is ALPHA and a measure of its performance is BETA.

A stock's BETA is a measure of its volatility in relation to the overall market. While ALPHA is a measure of performance that adjusts for risk, relative to a known benchmark. Reference: 15.3.3.1 in the License Exam

Question #52 of 223Question ID: 607133 If a client is moderately risk-averse and has an investment objective of capital preservation, what types and allocation of investments would you recommend for this customer? A)A mix of investment-grade bonds and cash/cash equivalents. B)A preponderance of speculative stocks and high-yield bonds. C)A preponderance of growth stocks and limited partnership vehicles. D)A mix of high yield bonds and cash/cash equivalents.

An individual with an investment objective of capital preservation should be investing in a mix of investment grade bonds and cash/cash equivalents. Lower risk capital appreciation vehicles, such as large-cap common stock, should also be considered. The other choices noted are too risky for a risk-averse investor. Reference: 15.2.2.1 in the License Exam

Question #95 of 223Question ID: 607302 A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports a: A)reduction in the investor's ordinary income. B)tax credit on the investor's U.S. tax return. C)tax credit on the investor's Canadian tax return. D)non-recoverable loss on the investor's U.S. tax return.

An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability. Reference: 15.5.4.3 in the License Exam

Question #14 of 223Question ID: 607243 A New Jersey client in the highest tax bracket wants to minimize his tax burden. The interest on which of the following securities is exempt from federal, state, and local taxes? A)Bonds issued by the Commonwealth of Puerto Rico. B)City of New York general obligation bonds. C)GNMA pass-through certificates. D)Treasury bills.

Bond issues by protectorates of the United States (Guam, Puerto Rico, and the U.S. Virgin Islands) are triple tax exempt: federal, state, and local. Interest income from municipal bonds is federal tax exempt, but is not state tax exempt unless the bondholder is a resident of the state where the bonds are issued. Interest from Treasury bills and most other government and agency securities is state tax exempt, but is subject to federal taxes. Exceptions are GNMA and FNMA securities, which are taxed on all levels. Reference: 15.5.4.1.2 in the License Exam

Question #74 of 223Question ID: 607201 The capital asset pricing model assumes A)that those who participate in smaller transactions are generally wrong in regards to timing purchases and sales B)that no type of risk can be diversified away C)investors are averse to risk and expect to be rewarded for taking risk D)that prices are influenced by supply and demand only

CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it and, therefore, the pricing of an asset must reflect that. Reference: 15.4.1 in the License Exam

Question #79 of 223Question ID: 607283 If your client has a $21,000 net capital loss this year and he plans to apply the maximum deduction toward his ordinary income for the year, after this year he may: A)carry the loss forward indefinitely and offset capital gains only. B)carry $3,000 of the loss forward. C)deduct a maximum of $3,000 per year and carry the remaining loss forward indefinitely. D)not carry the loss forward.

Capital losses may be used to offset capital gains. Once all capital gains have been offset, $3,000 of net capital losses may be used to offset ordinary income annually. Remaining losses may be carried forward in future years until the loss is exhausted. Reference: 15.5.6.1.3 in the License Exam

Question #51 of 223Question ID: 607313 Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with A)capital losses B)losses on options positions C)gains associated with variable annuity portfolios D)tax preference items

Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private-purpose municipal revenue bonds. These types of items are known as tax preference items. For investors who are subject to the alternative minimum tax (AMT), the benefits normally associated with tax preference items are lost, because these items must be added back into the investor's taxable income. Reference: 15.5.10.1 in the License Exam

Question #85 of 223Question ID: 607253 The effect of using the FIFO method for a sale of some of the securities that were purchased separately during a period of rising prices will be: A)an increase in the taxable profits of the investor. B)a decrease in the tax liabilities of the investor. C)a decrease in the profits of the investor. D)an increase in the cost basis of the securities.

FIFO (first in, first out) is an inventory accounting term used to standardize the determination of which items are sold first. In this case, if different purchases are made of the same stock, and the per-share price is higher each time, then if a portion (but not the entire inventory) is sold at one price, the taxable gain will be maximized. If LIFO (last in, first out) were used, the taxable gain would be minimized, and the lower cost basis securities would remain in the portfolio. Reference: 15.5.6.2 in the License Exam

Question #23 of 223Question ID: 607108 Under FINRA rules, a registered representative is permitted to borrow money from a customer: A)if written notification is given to the firm. B)if written notification is given to the firm and the representative receives written approval. C)under no circumstances. D)without restriction.

Firms are not required to permit lending arrangements between registered representatives and their customers. If they do, they must have procedures in place to monitor such arrangements. If permitted by the firm, the arrangement must fall into one of five permissible categories: the customer is a member of the representative's immediate family; the customer is in the business of lending money; the customer and the representative are both registered with the same firm; the arrangement is based on a personal relationship outside of the customer/representative relationship; or the arrangement is based on a business relationship outside of the customer/representative relationship. If permitted by the firm, the representative must advise the firm in writing of the proposed borrowing, and receive written permission. Reference: 15.1.3.4 in the License Exam

Question #18 of 223Question ID: 607202 While reviewing a new customer's investment profile, you determine that the customer is willing to tolerate a high degree of risk and does not anticipate utilizing the invested funds for at least 15 years. What would be a suitable recommendation regarding asset allocation for the customer's portfolio given the customer's risk tolerance and time horizon criteria? A)65% debt and 35% equities B)70% equities, 20% debt, and 10% money-market instruments C)45% debt, 45% equities, and 10% money-market instruments D)25% debt, 25% equities, 25% money market instruments, and 25% real estate

For an investor who has a long-term investment time horizon and is willing to tolerate higher levels of risk, a recommendation having a higher percentage of the portfolio in equities would be suitable. Of the asset mixes presented only one has a majority percentage in equities. The remaining choices with higher percentages in debt securities are too conservative. Reference: 15.4.2 in the License Exam

Question #35 of 223Question ID: 910327 A new client, age 26, has begun to search for her first home. She's been told that finding the right home within her budget might take 4 to 6 months depending on the availability of homes in the area she is targeting. With $45,000 currently in a checking account to use for the down payment, which of the following would represent the most suitable recommendation for those funds until the right home is found? A)Savings account (cash), money market account, short-term T-bills (1-3 months) B)U.S. government T-bonds, U.S. government T-notes, mutual fund A shares C)IRA, variable annuity D)U.S. government T-notes, GNMA, real estate direct participation program

For short-term liquidity, savings or checking accounts are always options; money market funds would generally allow for a slightly better return as would short-term T-bills. In light of the time horizon and liquidity needs, nothing long term (T-notes or bonds), illiquid (VAs, DPPs), or instruments not intended for short-term trading (mutual funds, particularly front load A shares) would be appropriate. Reference: 15.2.2.6 in the License Exam

Question #38 of 223Question ID: 607145 If a customer is in a low federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A)U.S. government bond. B)Zero-coupon bond. C)Investment-grade corporate bond. D)City of Milwaukee GO bond.

If an investor is in a low-tax bracket any benefit from receiving tax-free municipal bond interest is diminished, making municipal bonds a less suitable investment. Zero-coupon bonds pay no interest until maturity and therefore are not suitable for someone seeking current income. To maximize income, the best recommendation of the choices listed is the corporate bond which offers a higher yield than a government bond with a similar maturity. Reference: 15.2.2.2 in the License Exam

Question #64 of 223Question ID: 607250 If a customer has sold 1,000 shares of XYZ at a loss, a wash sale will result within 30 days of the date of sale if your customer: A)buys 10 XYZ at the money calls. B)buys 10 XYZ at the money puts. C)writes 10 XYZ at the money puts. D)writes 10 XYZ at the money calls.

If, within 30 days of the date of sale, the customer buys back the security or the right to buy it back (a call option), the loss is disallowed. It will also be disallowed if the customer writes deep in-the-money puts on the security sold within 30 days. A deep in-the-money put will likely be exercised, forcing the customer to buy stock. Reference: 15.5.6.3 in the License Exam

Question #97 of 223Question ID: 681950 A customer purchases a 6% municipal bond in the secondary market on a 7% basis. The effective after-tax yield is A)6 to 7% B)greater than 7% C)0.06 D)0.07

In every case but one, the yield to maturity is the effective after-tax yield to a municipal-bond buyer. The one exception is a bond bought at a discount in the secondary market. In this case, the annual accretion is taxed as ordinary income. The discount, which is included in the stated yield to maturity, is taxable, reducing the effective after-tax yield to somewhere between the coupon of 6% and the yield to maturity of 7%. Reference: 15.5.7.2 in the License Exam

Question #76 of 223Question ID: 901867 A married couple both hoping to retire within the next 5 to 7 years have expressed having a low risk tolerance regarding the stock market. They have a combined income of $350,000. Given this information which of the following portfolio mixes would be most suitable? A)Treasury bills, common stock, options B)Treasury notes, municipal bonds, GNMAs C)Treasury bills, corporate bonds, preferred stock D)Direct participation programs, real estate investment trusts, preferred stock

In light of their low risk tolerance, U.S. government securities would certainly be suitable and the time frame noted for retirement allows for middle term T-notes to be useful. Given their higher income level, tax-free municipals bonds could also have a place in the portfolio. Longer term GNMAs would accommodate monthly income should that be desirable upon retirement. The remaining product suggestions are either illiquid (DPPs) or do not align with their risk aversion (common, preferred, options, and REITs). Reference: 15.2.2.1 in the License Exam

Question #1 of 223Question ID: 607239 An investor has losses on the sale of municipal bonds. Which of the following is TRUE for tax purposes? A)The losses can be applied against the gains on the sale of any other security. B)The losses can be applied only against gains on the sale of other municipal bonds. C)The losses can be applied only against gains on the sale of other debt instruments (bonds). D)No losses on municipal bonds can be applied against gains on sales of any securities.

Losses on the sale of one investment can generally be deducted against gains on the sale of any other investment. Reference: 15.5.6.1.3 in the License Exam

Question #34 of 223Question ID: 901865 A customer, age 62, wants to retire at age 64 and has accumulated investments in an IRA currently valued at $500,000. The IRA portfolio consisting of all mutual funds is allocated as follows: 70% growth funds, 10% corporate bond funds, and 20% sector funds. Still wanting to utilize mutual funds, which might be the most suitable reallocation of the portfolio as this customer nears retirement? A)30% Municipal bond funds, 30% corporate bond funds, 40% growth funds B)60% U.S. government bond funds, 30% index funds, 10% growth funds C)70% Municipal bond funds, 30% index funds, 10% sector funds D)80% index funds, 10% corporate bond funds, 10% U.S. government bond funds

Moving toward retirement, the reallocation should move the portfolio away from equities and sector funds toward fixed income funds. U.S. government securities funds accommodate that and the U.S. government securities within the fund are considered safe with no default risk. Coupling the U.S. government bond funds with smaller percentages in index and growth funds that mirror the market can help the portfolio keep pace with inflation. Remember that utilizing municipal securities in a tax-favored account such as an IRA would be considered unsuitable because the interest paid by municipal bonds is already tax-free. Reference: 15.2.2.4 in the License Exam

Question #33 of 223Question ID: 901868 A high net worth couple in their 40s earning a combined $480,000 annually have $100,000 they would like to conservatively invest. Given their income bracket, they stress reducing tax exposure and also note that having access to the funds is important. Which of the following would be the most suitable investment? A)Municipal bond ETF B)Special situation mutual fund C)Direct participation program D)GNMA fund

Municipal bonds and GNMAs are the 2 choices considered conservative offered here. However, distributions of interest from the GNMA fund will be taxed at the federal, state, and local level. Income distributions from the municipal bond ETF will be tax-exempt at federal level, reducing tax exposure at their income level and is the better choice. DPPs are not conservative or liquid and special situation mutual funds offer no reduced tax exposure. Reference: 15.2.2.7 in the License Exam

Question #99 of 223Question ID: 607110 All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules EXCEPT: A)granting of discretionary authority to a new registered representative. B)switching of Class A shares between fund families. C)excessive activity in the customer's account. D)short-term trading in mutual fund shares.

Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer's account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative. Reference: 15.1.3.1 in the License Exam

Question #83 of 223Question ID: 607214 Which of the following statements about municipal original issue premium bonds are TRUE? The original issue premium must be amortized. If the bond is held to maturity, there will be no capital loss reportable. The cost basis of the bond is adjusted downward by the amortized amount. A)I and III. B)II only. C)I, II and III. D)I and II.

Original issue premium municipal bonds (as well as those purchased in the secondary market) must be amortized by an amount each year so that, if held to maturity, there is no reported capital loss. Reference: 15.5.7.1 in the License Exam

Question #3 of 223Question ID: 607271 The IRS requires a bondholder to use straight-line amortization for the purpose of determining the annual: A)increase to a premium bond's cost basis. B)increase to a discount bond's cost basis. C)decrease to a discount bond's cost basis. D)decrease to a premium bond's cost basis.

Premiums are amortized; discounts are accreted. For municipal bonds bought at a premium, the bondholder must adjust cost basis annually in such an amount that, if held to maturity, there is no reported capital gain or loss. The amortization is straight line, or the same amount must be amortized each year. Reference: 15.5.7.1 in the License Exam

Question #11 of 223Question ID: 607116 A registered representative's recommendations to a customer: A)are not covered by FINRA rules. B)must be reviewed by a principal whether or not they result in a trade. C)must match the customer's risk tolerance and investment objectives. D)must be approved in advance by a principal.

Recommendations made to a customer must be suitable for that customer. Individual recommendations do not require advance approval or review by a principal, though the resulting trade, if one occurs, must be reviewed by a principal. Reference: 15.1.2.4 in the License Exam

Question #53 of 223Question ID: 607112 If a registered representative owns a vacation home and wants to rent it out during the summer, which of the following statements is TRUE? A)No notification is required, provided the vacation home is located in the state where the member firm has its principal office. B)Prior notification must be made to the member firm under the rules on outside affiliations. C)No notification is required. D)Prior notification must be made to the member firm under the rules on private securities transactions.

Rental income is passive income. Passive investments are excluded from the notification requirements of the outside affiliations rule. Similarly, renting a vacation home is not a private securities transaction. Reference: 15.1.2.3 in the License Exam

Question #49 of 223Question ID: 607308 Your customer owns shares of LMN stock that have gone up in value. He does not wish to sell the shares now because he does not want to realize the capital gain. To lock in the gain without selling those shares, he sells shares of LMN stock short, holding both the long and short positions simultaneously. You recognize this tax strategy as A)advance or pre-refunding B)a wash sale C)commingling D)selling or shorting against the box

Selling or shorting against the box is a tax strategy used to defer capital gains into the next tax year. Selling shares short of a company when you are already long effectively locks in any gain you have on the long position. For every dollar gained in the long position, you lose one in the short position, and vice versa. Ultimately, in the next tax year, the long shares are used to replace the borrowed shares for the short position, which effectively closes both positions, and any gain would then be taxable. The IRS mandates that certain other criteria be met to utilize this tax strategy. Reference: 15.5.9.4 in the License Exam

Question #91 of 223Question ID: 607235 Short against the box is a strategy associated with: A)designating one tax ID number on a joint account for tax purposes. B)avoiding the locate requirement when selling stock short. C)hedging short stock positions with options. D)deferring capital gains.

Selling short against the box is a strategy that is used to lock in a capital gain that will be deferred into a later tax period. For the deferral to be allowed, the IRS requires certain criteria to be met. Reference: 15.5.9.4 in the License Exam

Question #45 of 223Question ID: 607309 For the purpose of reporting sales to the IRS, which method available to investors by the IRS offers the most flexibility in anticipation of the investor's year-end tax needs? A)None offer any flexibility in anticipation of year-end tax needs B)Share identification C)First in, first out (FIFO) D)Average cost basis

Share identification is the most flexible of the three methods. The investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs. For investors, the idea is to minimize tax liability if able by limiting gains or maximizing loses in anticipation of what one's year-end tax liability might be. Reference: 15.5.6.2 in the License Exam

Question #13 of 223Question ID: 607292 An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A)As a $2,100 capital gain. B)As a $2,500 capital gain. C)The shares are not subject to taxation. D)As $2,500 ordinary income.

Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received. Reference: 15.5.6.1 in the License Exam

Question #5 of 223Question ID: 607241 On January 18, your customer sold 500 shares of MNO for a loss of $5 per share. If on March 1 he bought 3 MNO calls, how much of the loss could he declare for tax purposes? A)$2,500. B)$1,000. C)$1,500. D)He may not declare any loss.

Since the purchase of the calls took place more than 30 days after the sale, the transaction is not a wash sale. He may therefore declare the entire $2,500 as a loss. Reference: 15.5.6.3 in the License Exam

Question #82 of 223Question ID: 607260 A customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment? A)The tax loss is not allowed. B)He has a capital loss. C)The holding period for the stock was wiped out. D)By repurchasing the investment at the same price, he keeps the original cost basis.

Since the security was repurchased in less than 30 days, the IRS will not allow the loss due to the wash sale rule. It would have been allowed had the customer bought back the security after 30 days. Reference: 15.5.6.3 in the License Exam

Question #56 of 223Question ID: 607305 If a book author receives royalty payments from a publisher, the payments will be taxable as which of the following types of income? A)Earned income. B)Portfolio income. C)The payments are not taxable. D)Passive income.

The author received royalties as a result of an active trade or business, therefore the payments are considered earned income. Reference: 15.5.3.1 in the License Exam

Question #81 of 223Question ID: 607238 At year's end, your client reports $12,000 in capital gains and $20,000 in capital losses. The net effect of this on his taxes would be: A)a $3,000 deduction from ordinary income with a $5,000 loss carry-forward. B)an $8,000 deduction from ordinary income. C)a $4,000 deduction from ordinary income with a $4,000 loss carry-forward. D)a $3,000 deduction from ordinary income with a $2,500 loss carry-forward.

The customer may offset all of the gains with the losses. This leaves a new loss of $8,000. Since the maximum net capital loss that may be deducted against ordinary income is $3,000 per year, we take off the $3,000 and have a carry-forward of the balance ($5,000). Reference: 15.5.6.1.3 in the License Exam

Question #32 of 223Question ID: 721484 A convertible corporate bond with an 8% coupon yielding 7.1% is available, but may be called sometime this year. Which feature of this bond would probably be least attractive to your client? A)Near-term call. B)Coupon yield. C)Current yield. D)Convertibility.

The near-term call would mean that no matter how attractive the bond's other features, the client may not have very long to enjoy them. Reference: 15.3.2.6 in the License Exam

Question #84 of 223Question ID: 607285 A customer buys 5 municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has a: A)$100 capital gain. B)$50 capital loss. C)$100 capital loss. D)$50 capital gain.

The premium on the municipal bonds must be amortized. The bonds were bought at 104 and therefore each bond has $40 in premiums (5 bonds X $40 = $200 premium to be amortized over 20 years). This means the cost basis of the bonds ($5,200) decreases by $10 a year ($200 / 20 years = $10). After 10 years amortization, $100 has been amortized (10 years × $10 per year), and the customer has an adjusted cost basis of $5,100. If the bonds are sold for 103 ($5,150), the customer has a $50 taxable capital gain. Reference: 15.5.7.1 in the License Exam

Question #96 of 223Question ID: 607118 When comparing investment alternatives, all of the following must be considered EXCEPT: A)differences in risk exposure between the two companies. B)state of incorporation of the companies. C)relative time period of returns on investment. D)relative after-tax returns, when appropriate.

The state of incorporation is generally not a relevant factor when comparing investments. Reference: 15.1.3 in the License Exam

Question #12 of 223Question ID: 607288 If a municipal bond maturing in 10 years is bought for 110, its cost basis at the end of the sixth year is: A)104. B)100. C)106. D)101-½.

To establish the new cost basis, determine the amount of the premium to be amortized yearly. For this bond, the $100 premium is amortized over 10 years: $100 ÷ 10 = $10. Then, multiply the annual amortization amount by the number of years the bond is held ($10 × 6 = $60). Finally, subtract the amount of the amortized premium from the original cost of the bond ($1,100 − $60 = $1,040, or 104). Reference: 15.5.7.1 in the License Exam

Question #72 of 223Question ID: 909496 XYZ Corp. owns 18% of the voting common stock of ABCD Enterprises. In the current tax year, XYZ receives $250,000 in dividend income from its investment in ABCD. If XYZ has a marginal tax rate of 34%, what is its tax liability on the dividend income received? A)$0 B)$85,000 C)$25,500 D)$42,500

Under the inter-corporate dividend exclusion rule, if a corporation owns stock in another corporation, 50% of the dividends received is excluded from taxation. Therefore, only 50% of the $250,000 received is subject to tax (50% × $250,000 = $125,000). Applying a tax rate of 34% to $125,000 results in a tax liability of $42,500. Reference: 15.5.11.1 in the License Exam

Question #43 of 223Question ID: 607121 The term "churning" refers to: A)repeatedly purchasing stock in order to keep the price up. B)entering more transactions than necessary, solely for the purpose of generating commissions. C)repeatedly selling a stock short in order to prevent a price rise. D)purchasing calls on a particular stock for your own account before entering a large customer order for the stock.

Unnecessary transactions entered into for the purpose of generating commissions constitute churning. A charge of churning can result from both excessive number and excessive size of transactions. Reference: 15.1.3.1 in the License Exam

Question #61 of 223Question ID: 607299 A customer purchases a municipal bond in the secondary market at 84 and he holds the bond to maturity. Since the customer must accrete the discount, what are the tax consequences at maturity? A)Capital gain of $16. B)Capital loss of $16. C)Capital gain of $160. D)No capital gain or loss.

When a municipal bond is purchased in the secondary market at a discount, the discount must be accreted for cost-basis purposes. Note that the accretion on a discount municipal purchased in the secondary market is taxable as ordinary income. At maturity, the customer's cost basis has been accreted to par. Therefore, there is no reported gain or loss on redemption. Reference: 15.5.7.2 in the License Exam

Question #42 of 223Question ID: 607291 A customer bought 100 ABC at 60 in January of 1998. In February 2000, the stock is worth $100 per share and the customer donated it to charity. The consequences are: a $6,000 deduction. a $10,000 deduction. no tax is due on appreciation. tax is due on appreciation. A)I and III. B)II and IV. C)II and III. D)I and IV.

When an investor donates appreciated securities to charity, the investor will receive a tax deduction based on their value as of the donation date. There will be no tax due on the amount of appreciation as long as the stock was held long-term as of the date of the charitable donation. Reference: 15.5.9.1.1 in the License Exam

Question #19 of 223Question ID: 607247 Several years ago, one of your customers bought an OID municipal bond at $960. The bond has now matured. For federal income tax purposes, the discount is: A)taxed each year as ordinary income. B)taxed as a long-term capital gain. C)tax free. D)taxed at maturity as ordinary income.

When buying an original issue discount (OID) municipal bond, the discount must be accreted each year and treated as interest income. Because interest income from a municipal bond is tax free at the federal level, the discount is not taxed if the bond is held to maturity. If the customer had purchased a discount in the secondary market, the discount would have been accreted and taxed as ordinary income. Reference: 15.5.7.2 in the License Exam

Question #65 of 223Question ID: 607122 If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer's portfolio? A)High-yield bond fund. B)Growth stocks. C)T-bills. D)Blue-chip equity fund.

While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bills make the most sense. Reference: 15.1.2 in the License Exam

Question #16 of 223Question ID: 607289 A customer purchases a corporate bond at 102, paying accrued interest of $50. If he elects not to amortize the premium, his cost basis for tax purposes is: A)107. B)97. C)102. D)100.

While most investors elect to amortize premiums, they are not required to do so. Here, the cost basis remains at the original purchase price: 102. Reference: 15.5.8 in the License Exam

Question #71 of 223Question ID: 607303 An investor purchases a corporate bond at 105 with a 10-year stated maturity and pays $30 of accrued interest. If he elects not to amortize the premium and holds the bond to maturity, what is his cost basis for tax purposes? A)1050. B)1020. C)1000. D)1080.

While most taxpayers do elect to amortize the premium paid for a corporate bond, it is not mandatory. The investor chooses not to amortize, thus his cost basis at maturity is simply what he originally paid for the bond. Accrued interest paid does not affect cost basis. Reference: 15.5.7.1 in the License Exam