unit 20 Investment Returns
mutual funds
A pool of money used by a company to purchase a variety of stocks, bonds or money market instruments. Provides diversification and professional management for investors. can be settled that day; they become owners of record on the day the buy takes place the declaration date; (record and payable date) - is ex-dividend date
Earned income includes which of the following?
A year-end bonus Earned income includes wages, salary, tips, bonuses, and income from active participation in a trade or business.
An investor has a long position in ABC Chemical Corp. (ABCCC), with a substantial unrealized loss. Wishing to use that loss to offset realized gains, the investor sells the stock. In reinvesting the proceeds of the sale, the investor could avoid violating the wash-sale rule by purchasing
ABCCC put options. In order to avoid violations of the wash-sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period prior to or following the sale incurring the loss. Substantially identical would include anything that is exercisable or convertible into the same shares of stock; rights, warrants, call options, or a convertible bond. Note that when put options are exercised, the owner now has the right to sell the stock, not purchase it. Therefore buying puts in no way violates the wash-sale rule.
Wilshire 5000
An index that includes stock prices from 5,000 companies. That's nearly every company traded in the United States
Skye purchased 100 shares of Moreno, Inc., for $20 a share. One year later, she sold the shares for $21 dollars. Over the year, Moreno paid a $0.25 quarterly dividend. What was Skye's gain or loss and how much investment income did she earn?
$1 gain and $1 in income Gains are derived from opening and closing trades buy and sell in this example). She bought at $20 and sold for $21, so there is $1 in gain. She collected four quarterly dividends for $0.25 each, so a total in $1 in investment income.
Two years ago Joshua Ryan bought 100 shares of XYZ at $60 per share. While he held the stock, it paid dividends of $1 the first year and $1.50 the second year. Joshua sold the shares at $40 per share after a 2:1 stock split. How much gain or loss did he incur per share for tax purposes?
$10 gain per share The formula to calculate a gain or loss for tax purposes is the proceeds minus the cost basis. He bought the shares for $60, and then there was a 2:1 split so the cost basis was adjusted to $30 per share. He sold at $40 so he had a $10 gain. Dividends are not part of the calculation for gain or loss.
An investor purchased 100 shares of Acme Shoelace stock for $20 per share. Four years later, the investor sold the stock for $28 per share. This investor would report these transactions, on a per share basis, as
$20 cost base, $8 capital gain. The price paid for a security is known as the cost base for the transaction. If the security is later sold for more than the cost base, the difference is a capital gain; if for less, it is a capital loss. This investor paid $20 per share, the cost base. Later, selling the stock for $28, the investor made an $8 capital gain per share. Of the total $28 price of the security, upon sale, $20 could also be called return of capital.
two rules about wash sales
1. the rule applies to re-creating long positions 2. the rule applies for attempts to recreate the same position using not only the position in XYZ stock is closed with sale for a loss
Drew purchased 100 shares of Moreno, Inc., for $20 a share. One year later, he sold the shares for $21 dollars. Over the year, Moreno paid a $0.25 quarterly dividend. What is Drew's total return?
10.00%. Total return includes any income the investment return produces; it is also expressed as a percentage, not dollars. The formula is as follows: ((sales proceeds - cost basis) + income) / cost basis. Using the formula here, the calculation is as follows: ((21 - 20) + (4 × .25)) / 20 = (1 + 1) / 20 = 2 / 20 = .1 (or 10%).
On March 3, the board of directors of Seabird Airlines declares a $0.20 a share dividend payable to holders of record, as of March 30. Seabird stock jumps on the news from $35 a share to $40 a share on the news. The current yield of Seabird stock is
2.00%. The formula is (quarterly dividend x 4) / current market value. (0.2 x 4) / 40 = (.8) / 40 = .02 (2%)
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.
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%.
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 The formula to calculate a gain or loss for tax purposes is the proceeds minus the cost basis. Smith bought the shares at $55 and sold at $50. The dividends are not included in the calculation of gain or loss for tax purposes.
Your customer has performed the following trades Bought 200 shares of ABC at $40 Bought 400 shares of ABC at 50 Sold 600 shares of ABC at 55 What is the result of these trades?
A $5,000 gain They bought 200 at 40 for $8,000; then 400 at 50 for $20,000; then sold 600 at 55 for $33,000. $33k - $28k = profit of $5,000.
Which of the following would be considered earned income? Interest received from a bond investment Dividends received from a stock investment Bonus received from employment The premium kept from an unexercised short put
Bonus received from employment Earned income is received as the result of participating in trade or business, the generation and/or sale of goods and/or services—in other words, from work. The other choices are earnings from investments and are known as portfolio income.
What are the two basic types of return on an investment?
Capital gains and income Upon the purchase of a security, the investors may receive dividends or interest, which are forms of income, or they may sell the security for a different price than was paid for it, which represents a capital gain or loss.
Long-term gains
Early intervention is effective if it is sufficiently intense with effective teachers. the position must be held for more than one year; this means that if any position was held for one year or less is short term
Which of the following would not be considered ordinary income for tax purposes?
Gains gotten from the sale of securities Gains gotten from the sale of securities is an example of capital gains for tax purposes. All the others are considered ordinary income.
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. For the holding period to be long term it must be more than one year.
Which of these is correct regarding the ex-date for a common stock? It is set by the board of directors. It is set by FINRA or the exchange. It is the first date an investor can purchase a security and not be entitled to the dividend. It is the date the seller reimburses the buyer for the amount of the dividend paid.
It is set by FINRA or the exchange. It is the first date an investor can purchase a security and not be entitled to the dividend. Ex-dates, for securities that trade in the secondary markets, are set by the market center where the trade occurs. It represents the day the new owner of a security will no longer receive the dividend if the trade settles regular way.
earned income
Money earned from working for pay includes: salary, wages, bonuses, tips, and other income that is derived from active participation in a trade or business majority of taxable income is derived from earned income
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. Substantially identical would include anything that is exercisable or convertible into the same shares of stock, such as rights, warrants, call options, or a convertible bond. Purchasing the put options would not violate the wash sale rule because these can be exercised to sell the stock, not purchase it.
Which of the following best describes the calculation for gains or losses for tax purposes?
Proceeds minus cost basis Proceeds minus cost basis equals capital gains. The dividends are not part of the calculation for capital gains.
short term capital gains
Profits received from the sale of capital assets that were held for less than a year. These gains are taxed at the individual's marginal tax rate. made from assets held for a period of one year or less and are taxed as ordinary income
Which of the following is a benchmark for small cap stocks?
Russell 2000® Index The Russell tracks 2,000 small company stocks.
The Windmill Growth Fund is composed of many stocks from a variety of large companies. It has a stated objective of capital appreciation from holding the stock of the large companies. If you wanted to compare the performance of the fund to the market, which of these indices would be the best?
S&P 500 The S&P 500 is the standard benchmark for large cap stocks. The S&P 400 is for midcap stocks. The Wilshire 5000 is a broad-based-U.S. equity index that includes large, mid, and small cap stocks. The EAFE is an index for international equities.
wash sale
Selling a security at a loss for tax purposes and, within 30 days before or after, purchasing the same or a substantially identical security. The IRS disallows the claimed loss. attempt to create a loss for a tax purpose when one's intent is to still maintain ownership of the securities it is not illegal; attempting to use the losses from the wash sale in order to reduce taxes is
Which of the following is a benchmark for large cap stocks?
Standard and Poor's 500 Index The Standard and Poor's 500 Index is an index of 500 large companies.
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 $30. The adjusted cost basis of the shares is $32. There is a short-term capital gain on all the shares sold. There is a long-term capital gain on all the shares sold.
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. The customer will receive 25 new shares (100 shares × 0.25 = 25). The computation is the original total cost $4,000 (100 × $40) divided by the new number of shares 125 (100 + 25). Four-thousand dollars divided by 125 shares equals a new cost basis per share of $32. The holding period for capital gain or loss (short or long term) is always from the original purchase date. In this case, because the shares were sold three years later at 50, the gains are long term.
Capital Gains
The positive difference between the purchase price of a stock and its sale price. equation for capital gains: sales proceeds - adjusted cost basis = (capital gains if a positive number, capital gains losses if a negative number)
Your customer purchased 1,000 shares of SmallCo Stock at $10 a share. SmallCo pays no dividends. Exactly one year later, the customer sold the shares for $12 a share. They realized a
They bought the shares for $10, and sold for $12, so a $2,000 gain. To be a long-term gain the position must be held for more than one year.
MSCI EAFE Index
This index is designed to measure the equity market performance of developed markets outside of United States and Canada The Europe, Australia, and Far East Index, a value-weighted index of the equity performance of major foreign markets
Standard and Poor's 500 Index
Tracks stock market activity for 500 stocks; large companies; most professional
unrealized gains
When related to trading securities, they increase net income.
Four of the best-known indices and averages are listed as follows. How do they rank from most to fewest issues in the index? Dow Jones Industrial Average NYSE Composite Index Standard & Poor's 500 Wilshire 5000
Wilshire 5000, NYSE Composite Index, Standard & Poor's 500, Dow Jones Industrial Average The Wilshire actually had about 3,800 stocks, but still the most on this list. The NYSE composite is around 1,900. The S&P 500 is actually about 500, and the Dow Jones industrials in 30.
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.
Dow Jones Industrial Average
a measure based on the prices of the stocks of 30 large companies, widely used as a barometer of the stock market's health
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.
Barclays Capital U.S. Aggregate Bond Index
composite index that combines several bond indexes to give a picture of the entire bond market
cash dividends
distribution from earnings paid in the form of cash
Earned income would include all the following except
dividends earned on mutual funds. Earned income includes wages, salary, tips, bonuses, and income from active participation in a trade or business.
investment income
earnings from dividends, interest, and rent income earned from one's investments; sometimes called; assets the investor holds
long-term capital gains
gains from the sale of stocks you have held for more than one year taxed at an advantages rate; the actual rate is not tested because the rate changes regularly
When a bond is purchased at a discount the current yield will be
higher than the coupon rate. The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a discount bond the current yield is always higher than the coupon rate.
ordinary income
income earned through the sale of a firm's goods or services consists of several different types of income that are added together to determine ordinary income it is used to determine the income tax rate that an investor will pay; the three primary components of ordinary income are earned: earned income investment income passive income
An investor purchased and then sold a security eight months later for a gain. This gain
is considered to be a short-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income. Positions closed within 12 months or less are considered short term. When a gain is realized, it will be taxed at the same rate as the taxpayer's other ordinary income. By contrast, a long-term capital gain is taxed at a favorable long-term rate.
When a bond is purchased at a premium, the current yield will be
lower than the coupon rate. The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a premium bond the coupon rate is always higher than the current yield.
total return
measure on the return an investor receives from an investment that includes both income and any gain or loss realized formula: (income received + gains (or - losses) ) / cost basis =total return total return calculation may use realized capital gains or losses for closed positions, but it may also be used for open positions using unrealized capital gains or losses
All of the following are investment income except
running a business. Earnings from running a business is considered earned income.
stocks
shares of ownership in a company
Russell 2000 Index
specialty index that uses 2,000 stocks to measure the performance of the smallest U.S. companies
All of the following are taxable to the investor except stock dividends. cash dividends. semiannual interest payments. capital gains distributions.
stock dividends. A stock dividend is payment of additional shares of the issuer to the stockholder rather than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable.
For tax purposes, investment income is
taxed at either ordinary income tax or capital gains tax rates. 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. For tax purposes, investment income will generally be taxed at one of two rates: ordinary income tax rate or capital gains tax rate
Current Yield
the annual rate of return on a bond if the bond were held to maturity; the measurement of the amount on income an investor will receive as a percentage of the cost of the investment. current yield may apply to both stocks and bonds the formula: annual income / current market value = current yield
Long- and short term capital losses
the difference in how long-and short term capital losses are handled for taxes is not a testable point used to offset capital gains on a dollar-for-dollar basis
All of these dates are set by the board of directors of a corporation except
the ex-dividend date. The ex-date is set by the market center (i.e., an exchange), or is set by FINRA if it is an over-the-counter traded security.
Capital gains and capital losses
these gains and losses are generated from the buying and selling of a security. Gains and losses are generated when an investment position is closed and the investor no longer holds the asset
All of the following are true regarding market indexes except they track single stocks rather than hypothetical portfolios. they can demonstrate the overall direction of the market. they can be used to compare against the performance of one's portfolio. they are performance standards investors can monitor.
they track single stocks rather than hypothetical portfolios. Indexes such as the DJIA or the S&P 500 are hypothetical portfolios, not single stocks. While there's no single standard or benchmark, an index can be used as a performance standard one can monitor and therefore judge the performance of a portfolio or investment against. When we refer to the stock market's performance in general, we are most likely referring to the performance of an index or average that tracks stocks or bonds. These benchmarks can serve as an indicator of the overall direction of the market as a whole, or the direction of individual market sectors.
passive income
type of investment that is derived from certain investments primarily direct participation programs such as limited partnerships and many real estate investments may only be used to offset passive income; it can't offset any other type of income
