SIE Unit 20

Investment income

which includes capital gains realized on securities positons, is taxable.

An investor notices that a bond purchased several years ago at 95 is now priced at 90. The investor sells the bond for 90, then immediately repurchases it for 90. This action is known as

a wash sale.

Your client, Dana McCann, just purchased a 20-year City of Salt Lake School District bond for $800. The bond has a stated rate of 4%. The current yield is

-5% The formula for current yield is the stated rate (coupon rate) divided by the current market price: $40 divided by $800, which in this case equals 5%.

Benjamin Jackson bought 100 shares of XYZ two years ago at $10 per share. The stock paid a $0.50 dividend each year and he sold the stock for $11. What percent was his total return?

20% **The formula for total return is dividends plus capital gains divided by amount invested.

An investor has been putting aside funds for retirement in a nonqualified variable annuity for over five years. She is now age 66 and takes a lump-sum distribution. How are the earnings taxed?

As ordinary income

Which of the following would be considered earned income?

Bonus received from employment

What are the two basic types of return on an investment?

Capital gains and income

The MSCI-EAFE Index tracks which of the following?

Foreign equities

Which of the following is a benchmark for small cap stocks?

Russell 2000® Index **The Russell tracks 2,000 small company stocks.

An investor purchased 100 shares of LMN in 2013 at a price of $40 per share. Soon after, the LMN declared a 25% stock dividend. Three years after the shares were purchased, they were sold at $50. Which of the following statements are correct?

The adjusted cost basis of the shares is $32. There is a long-term capital gain on all the shares sold. **When a company declares a stock dividend, the cost basis per share is always reduced.

Shelby Bogden, your client, purchased a 6% corporate bond with a current yield of 5%. The bond was purchased at

a premium **A bond purchased at a premium will have a current yield below the coupon rate.

All of the following are taxable to the investor:

capital gains distributions. semiannual interest payments. cash dividends.

When a bond is purchased at a discount the current yield will be

higher than the coupon rate.

Regarding the taxation of gains on securities, all of the following are true

short-term gains are taxed at less favorable ordinary income tax rates. capital gains are associated with the sale of securities and other real assets. long-term gains are taxed at more favorable long-term rates.

Which of the following would be true with regard to capital gains?

If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer's ordinary income. If the asset is held for more than a year, the gain is considered to be long term and is taxed at a favorable rate. ***Capital gains are associated with the sale or exchange of property including securities. The category of capital gain taxation is broken down into long and short-term capital gains.

An investor has a long position in OMQ stock. After selling the stock at a loss, the investor could purchase which of the following and not violate the wash sale rule?

OMQ put options **In order to avoid violating the wash sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period before or after the sale incurring the loss.

An investor notices that a bond originally bought at 95 some years ago is now trading at a price of 88. The investor sells the bond, then buys it back the next day for 88.5 with the intention of declaring a loss from the original purchase and sale on this year's tax return. This would be known as

a wash sale, and taking the loss is prohibited. Quickly repurchasing a security that was just sold for a loss is recognized as having the intention to take advantage of the loss for tax purposes but not lose the income or potential for future gains from the security. This is known as a wash sale and taking the loss is prohibited.

For tax purposes, investment income is

normally taxed as ordinary income. **Investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and short term capital gains derived from the sale of securities. Investment income is included in ordinary income for income tax purposes. Long-term capital gains are taxed at the capital gains tax rate.

Two years ago Lisa Smith sold short 100 shares at $50 per share and two years later bought them back for $55 per share. The stock paid a $2.50 dividend each year. How much did Smith gain or lose per share for tax purposes?

A $5 loss

capital gains

Gains gotten from the sale of securities

Which of the following are true of long-term or short-term gains or losses?

Holding a stock and selling above its cost basis if over 12 months later would be a long-term gain.

Betsy Bingham asks you what her current yield will be if she buys a 6% corporate bond at $1,200. The answer is

The formula for current yield is the stated rate (coupon rate) divided by the current market price. $60 divided by $1,200 equals 5%.

Salary or bonuses are earned income; interest and dividends are investment income.

While someone's salary or bonus would be earned income, investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities.

Your client, Soren Aland, buys a 4% XYZ corporate bond. If his current yield is 5%, he bought the bond at

a discount **A bond purchased at a discount will have a current yield above the coupon rate.

All of the following are true regarding market indexes

they can demonstrate the overall direction of the market. they are performance standards investors can monitor. they can be used to compare against the performance of one's portfolio.

Earned income would include all the following:

year-end bonuses. tips. commission on sales for a real estate agent.