PP2
Your customer feels overburdened with taxes and would like relief. After you discuss the ABC Municipal Bond Fund with her and advise her of the tax treatment of the distributions, which of the following statements would be the CORRECT advice? A)Dividends are federally tax exempt, but capital gains are subject to taxation. B)Dividends and capital gains are federally tax exempt but only the dividends may qualify for state exemption. C)Both dividends and capital gains are taxable at favorable capital gains rates. D)Dividends and capital gains are federally tax exempt and may even be state exempt if issues in the portfolio are issues in her state of residence.
A: Dividends from municipal bond funds are tax exempt because they represent tax-exempt interest paid to the portfolio; capital gains distributions are taxable.
Which of the following describe a securities exchange? I. Prices are set by negotiation between interested parties. II. The highest bid and the lowest offer prevail. III. Only listed securities can be traded. IV. Minimum prices are established at the beginning of the day. A)II and IV. B)II and III. C)I and IV. D)I and III.
B: An exchange is not a negotiated market but an auction market in which securities listed on that exchange are traded. No minimum price is set for securities. Rather, the highest bid and the lowest offer prevail
Which of the following statements are TRUE of mutual fund dividend distributions? I. The fund pays dividends from net investment income. II. An individual taxpayer may exclude $100 worth of dividend income from taxes annually. III. An investor is liable for taxes on distributions, whether taken in cash or reinvested in the fund. IV. An investor is not liable for taxes if he automatically reinvests distributions. A)III and IV. B)I and III. C)II and IV. D)I and II.
B: Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash
When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following? I. Commissions both when purchasing and liquidating shares. II. A price not set by supply and demand. III.The ability to avoid tax consequences. IV. The spread between the NAV and POP can be greater than 8.5% A)I and III B)II and IV C)I and IV D)II and III II and III
C: Because the shares of ETFs are traded like any other stock, commissions are paid both to buy and to sell, and the price is determined by supply and demand, not NAV.
When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed? A)As ordinary income based on LIFO accounting B)As capital gains based on LIFO accounting C)As ordinary income based on an exclusion ratio D)As capital gains based on an exclusion ratio
C: Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis and NOT subject to income taxes).
Which of the following would be appropriate recommendations for a customer looking for income? A)Income bond B)Long call option C)Utility fund D)Warrant
C: Many securities are purchased for income; these include stocks, bonds and mutual funds that pay consistent dividends such as a utility fund. The other answer choices are not purchased for income purposes: A long call option gives the right to buy stock at a designated price. An income bond is issued by a company coming out of bankruptcy and pays interest only if the corporation has enough income. A warrant is a certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued.
If a corporation's investment account received $100,000 in dividends and $20,000 in interest; how much of the $120,000 received would be subject to taxation? A)$90,000 B)$120,000 C)$20,000 D)$50,000
D: Corporations that receive dividends from investments have a 70% dividend exclusion. This means that out of the $100,000 received, only 30%, or $30,000 is subject to taxation. No such exclusion exists for interest received. Therefore, $30,000 plus $20,000 equals $50,000 subject to taxation.
The NAV of a mutual fund is $14.17 per share. The POP is $15.32 per share. To determine the sales charge of the fund: A)multiply the NAV by the POP. B)add the NAV to the POP. C)divide the NAV by the POP. D)subtract the NAV from the POP. subtract the NAV from the POP
D: The POP minus the NAV equals the mutual fund sales charge
The disclaimer stating that the SEC does not approve or disapprove of a securities issue must appear A)on all public communications distributed to prospective buyers B)anywhere within a prospectus, provided it is prominently displayed C)on all mutual fund tombstones, prospectuses, and advertising material D)on the cover of the prospectus
D: The SEC disclaimer which states that the SEC does not approve or disapprove an issue of securities must appear on the cover of a prospectus in bold print. This disclaimer is not required on public communications.
