Unit 15 Quiz

A customer buys a municipal bond in the secondary market at 96 that has 4 years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are: A) 2 points of ordinary income and 1 point of capital gain. B) 2 points of capital gain and 1 point of ordinary income. C) 3 points of ordinary income. D) 3 points of capital gain.

A) 2 points of ordinary income and 1 point of capital gain.

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

A) interest rate risk.

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 loss of $16. B) No capital gain or loss. C) Capital gain of $16. D) Capital gain of $160.

B) No capital gain or loss.

All of the following statements about the taxation of municipal and corporate bonds are true EXCEPT: A) corporate bondholders must accrete original issue discount bonds annually. B) corporate bondholders must amortize premium bonds annually. C) municipal bondholders must amortize premium bonds annually. D) municipal bondholders must accrete original issue discount bonds annually.

B) corporate bondholders must amortize premium bonds annually.

Your new client lists income as the primary investment objective for an account with your broker dealer. Which of the following investments would NOT be suitable? A) Corporate debt securities B) GinnieMae (GNMA) government securities C) Zero coupon bonds D) Corporate preferred shares

C) Zero coupon bonds

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) 5 days. B) There is no waiting period. C) 20 days. D) 30 days.

D) 30 days.

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? I. For gift-tax purposes, the value of the gift is $3,000. II. For gift-tax purposes, the value of the gift is $7,000. III. The son's cost basis on the stock is $3,000. IV. The son's cost basis on the stock is $7,000.

II and III

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

A) dollar cost averaging.

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

A) to customers and the IRS annually

A security you purchased several years ago has appreciated substantially in value. You have decided to donate the investment to your favorite charity. What will the cost basis be to the charity that receives your gift? A) Zero since you gave the position to the charity as a contribution, having paid taxes on the gain while you held it. B) The value of the securities at the time the charitable donation is made. C) Your cost basis plus any capital gains taxes that you have paid on the security. D) Your cost basis, created at the initial purchase of the security.

B) The value of the securities at the time the charitable donation is made.

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

B) accreted.

If a customer attempts to place an order for municipal securities that the registered representative deems completely unsuitable for the customer, the registered representative: A) may execute the order on a not-held basis. B) may execute the order and mark the order ticket as "unsolicited". C) must refuse to execute the order. D) must obtain the permission of a municipal securities principal before executing the order.

B) may execute the order and mark the order ticket as "unsolicited".

For dividends to be taxed as qualified dividends, the dividend paying investment must be held for A) at least 30 days B) more than 60 days C) at least 45 days D) more than 120 days

B) more than 60 days

A municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000 and the bond has 10 years to maturity. If the bond is sold for 97 after 5 years, what is the taxable gain? A) $700. B) Capital gains are not taxable on municipal issues. C) $300. D) $200.

D) $200. When a municipal bond is bought at a discount in the secondary market, the discount is accreted and taxable as ordinary income. Accretion increases cost basis. Therefore, 5 years later, the bond's cost basis is 95. At that point, the customer has a 2-point capital gain. Had the bond been bought as an OID, the annual accretion is considered interest income and is not taxable.

Which of the following activities are a registered representative's responsibilities? I. Determining the suitability of various investments for individual customers. II. Describing the characteristics and benefits of various securities products. III. Offering tax advice and assisting customers in completing tax returns. IV. Personally holding a customer's securities for a future transaction.

I and II

Tax preference items are used for the purpose of computing the alternative minimum tax. They include: I. excess intangible drilling costs (wages, fuel, repairs). II. accelerated depreciation. III. percentage depletion in excess of basis.

I, II, and III

Which of the following statements regarding stock dividends are TRUE? I. They are taxable as ordinary income on receipt. II. They are not taxable on receipt. III. Cost basis per share is reduced. IV. Cost basis per share remains the same.

II and III

Rank the following from the safest to the most risky. I. AAA-rated corporate bonds. II. Blue-chip stocks. III. U.S. government securities. IV. Tech stocks.

III, I, II, IV

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

B) must match the customer's risk tolerance and investment objectives.

By which government is the income from eurodollar bonds always taxed? A) Government of the country in whose currency the bonds are denominated. B) Government of the country that issued the bonds. C) Government of the country in which the investor pays taxes. D) No tax is levied.

C) Government of the country in which the investor pays taxes.

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

C) High inflation risk; low default risk.

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, the $500 profit is taxed as: A) a long-term capital gain. B) ordinary income. C) a short-term capital gain. D) a tax-free capital gain.

C) a short-term capital gain.

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

C) deferring capital gains.

All of the following statements regarding dollar-cost averaging are correct EXCEPT: A) an employee stock purchase plan (ESPP) is one way to use dollar-cost averaging. B) dollar-cost averaging is the investment of a fixed amount of money each period. C) dollar-cost averaging decreases the risk of loss. D) dollar-cost averaging is a passive investment strategy.

C) dollar-cost averaging decreases the risk of loss.

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 prices are influenced by supply and demand only C) investors are averse to risk and expect to be rewarded for taking risk D) that no type of risk can be diversified away

C) investors are averse to risk and expect to be rewarded for taking risk

Credit risk involves: A) fluctuations in overall interest rates. B) inflationary risks. C) possibility of issuer default. D) danger of not being able to sell the investment at a fair market price.

C) possibility of issuer default.

A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as: A) tactical. B) growth. C) value. D) passive.

C) value.

All of the following require prior notification by a registered representative to his broker/dealer EXCEPT A) when he assists in the private distribution of securities for a non-profit organization B) when he is invited to sit on the board of directors of a local business C) when he volunteers on the telephones for a fund-raising campaign for the local college D) when he takes a part-time job during the holiday season to earn extra money

C) when he volunteers on the telephones for a fund-raising campaign for the local college

If your customer bought an original-issue discount bond from the Mt. Vernon Port Authority, how is the discount on this bond taxed? A) As ordinary income. B) Amortized during the life of the bond and not taxed. C) As capital gains. D) Accreted during the life of the bond and not taxed.

D) Accreted during the life of the bond and not taxed.

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 private securities transactions. C) Prior notification must be made to the member firm under the rules on outside affiliations. D) No notification is required.

D) No notification is required.

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

D) Reinvestment rate risk.

Which of the following types of risk CANNOT be eliminated through diversification under the modern portfolio theory? A) Interest rate risk. B) Liquidity risk. C) Business risk. D) Systemic risk.

D) Systemic risk.

A registered representative employed by a broker dealer must notify the employer in writing and be permitted by the employer to do all of the following EXCEPT A) own an interest in any other organization engaged in the securities business B) take an evening job as a bartender C) serve as an officer of another business organization D) own a small financial interest in a publicly traded retail company

D) own a small financial interest in a publicly traded retail company

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

D) state of incorporation of the companies.

An investor purchases 100 shares of XYZ common stock for $70 and sells it one year later for $50. Which of the following activities would violate the wash sale rule? I. Purchasing an XYZ call option 20 days after the sale. II. Purchasing an XYZ put option 20 days after the sale. III. Purchasing 100 shares of XYZ common stock 20 days after the sale. IV. Selling short 100 shares of XYZ common stock 20 days after the sale.

I and III

If a customer buys a corporate bond at a discount in the secondary market, which of the following statements are TRUE if the bond is held to maturity? I. The discount is taxable as ordinary income. II. The discount is taxable as a long-term capital gain. III. The interest income is taxable as ordinary income. IV. The interest income is not taxable.

I and III

Regarding the taxation of dividends received from corporate securities, which of the following are TRUE? I. Nonqualified dividends are taxed at the rate the investor's ordinary income will be taxed. II. Nonqualified dividends are not taxed. III. Qualified dividends are taxed at a maximum rate specified by the IRS and will depend on the investor's income tax bracket. IV. Qualified dividends are taxed at the rate the investor's ordinary income will be taxed.

I and III

When making recommendations to an advisory client, which of the following carry the most weight? I. The client's risk tolerance. II. Past performance of the adviser representative's recommendations. III. The client's investment needs and objectives. IV. The client's previous investment experience with other advisers.

I and III

Which of the following statements regarding nonsystematic risk are TRUE? I. It is the risk that an individual stock will not perform well. II. It is the same as market risk. III. Diversification reduces it. IV. Diversification does not reduce it.

I and III

Progressive taxes would include: I. personal income tax. II. gift taxes. III. estate taxes. IV. excise taxes.

I, II, and III