Module 1 Quiz

A client has $12,000 of capital gains and $15,000 of capital losses. How much unused loss is carried forward to the following tax year? A) $0 B) $3,000 C) $12,000 D) $15,000

A) The answer is $0. After netting capital gain and losses, the client has a net capital loss of $3,000. Because $3,000 of net losses can be deducted during any one tax year, there is no carryforward. LO 1.4.1

Nellie has accumulated $500,000 in a money market deposit account at ABC Bank and Trust. She is worried about the number of bank failures in the recent years and transfers $250,000 into a money market mutual fund paying a slightly higher return offered by her friend's investment firm. Determine the amount she has insured by the Federal Deposit Insurance Corporation (FDIC). A) $250,000 B) $500,000 C) $0 D) $200,000

A) The answer is $250,000. Nellie's FDIC insured funds remain at $250,000. The money market deposit account is insured up to $250,000, but the money market mutual fund is not FDIC insured. LO 1.3.1

On December 18, 20X1, John sells some stock for a loss at $15 a share that he originally purchased for $40 per share. On January 9, 20X2, John repurchases the shares for $22 per share. What is his cost basis on the repurchased shares? A) $47 B) $15 C) $40 D) $22

A) The answer is $47. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $40 - $15 = $25 disallowed loss, so $25 + 22 = $47 new basis. LO 1.4.1

Identify which of the following statements regarding money market deposit accounts (MMDAs) are NOT correct. They are FDIC insured. They offer unlimited check writing privileges. They are primarily offered by open-end investment companies. They require a minimum balance. A) II and III B) I and II C) I and IV D) III and IV

A) The answer is II and III. MMDAs provide limited check writing privileges and are offered by banks and savings and loans. MMDAs require a minimum balance. Unlike money market mutual funds, MMDAs are FDIC insured. LO 1.3.1

All of the following statements concerning the types of orders used to buy and sell securities are correct except A) a market order has the lowest priority and is subject to the fluctuations and timeliness of the market. B) a good-til-canceled (GTC) order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or canceled. C) a stop order is an order specifying a certain price at which a market order takes effect. D) a limit order is an order to buy or sell at a specified (or better) price.

A) The answer is a market order has the lowest priority and is subject to the fluctuations and timelines of the market. The market order, which is the most popular and has the highest priority, is subject to the fluctuations and timeliness of the market. LO 1.2.1

Grant calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.75 for his shares. Select the type of order that his broker should place to sell the stock. A) Stop limit order B) Limit order C) Good-til-canceled order D) Market order

A) The answer is stop limit order. The stop limit order turns into a limit order when triggered (both the stop order price and the limit order price are specified). However, this type of order will not guarantee execution if the stock leapfrogs past the $19.75 mark. LO 1.2.1

Carly purchased $80,000 of JEM stock for $40 per share utilizing her margin account. She used $40,000 in her money market fund plus she borrowed $40,000 from her broker. She acquired a total of 2,000 shares of JEM stock. JEM stock is currently trading at $39.65 per share. Calculate the stock price that Carly would receive a margin call from her broker. Assume a maintenance margin requirement of 35% and an initial margin requirement of 50%. A) $29.68 B) $30.77 C) $30.50 D) $30.23

B) The answer is $30.77. Carly would receive a margin call when the stock fell to $30.77 per share. Margin call = [(1 − initial margin percentage) ÷ (1 − maintenance margin)] × purchase price of the stock = [(1 - 0.50) ÷ (1 - 0.35)] × 40 = 30.7692, or $30.77. LO 1.2.1

Which of these is NOT correct when defining an accredited investor under Rule 501 of Regulation D? A) A director, executive officer, or general partner of the company selling the securities B) A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence. C) A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year D) A charitable organization, corporation, or partnership with assets exceeding $5 million

B) The answer is a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence. The $1 million net worth requirement excludes the equity in the investor's primary residence. LO 1.1.1

All of the following correctly describe disadvantages of cash and cash equivalents except A) the rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds. B) an investor may quickly convert a money market deposit account to cash to meet short-term needs. C) investments in money market mutual funds are not insured or guaranteed by the U.S. government. D) investors choosing to redeem their certificates of deposit (CDs) prior to maturity may be subject to a substantial penalty.

B) The answer is an investor may quickly convert a money market deposit account to cash to meet short-term needs. One of the advantages of money market deposit accounts is their liquidity. They may be used by investors as a source of funds to meet emergencies and other short-term obligations. LO 1.3.1

Income or dividends produced by which of the following securities is exempt from federal income tax? A) Common stock B) Municipal bonds C) U.S. Treasuries D) Corporate debt

B) The answer is municipal bonds. Income produced by municipal bonds is exempt from federal income tax. LO 1.3.1

Which of the following accurately describes the certificate of deposit investment strategy known as laddering? A) Purchasing certificates in progressively increasing deposit amounts B) Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity C) Immediately purchasing another certificate as one certificate matures D) Redeeming a certificate of deposit and reinvesting in a new certificate when interest rates increase

B) The answer is purchasing multiple certificates of deposit (CDs), rather than just one, with differing terms of maturity. Investors with relatively large amounts of money to invest should purchase multiple certificates with equally spaced terms to maturity, a strategy known as laddering. LO 1.3.1

Which of the following statements regarding cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is CORRECT? A) They decrease the cost basis of the shares whether or not taxes are paid B) They are fully taxable to the investor C) They are added to the tax basis of the shares once taxes on the distributions are paid D) They decrease the taxable gain or increase the loss on sale of the shares after taxes are paid

B) The answer is they are fully taxable to the investor. Ordinary and capital gain dividend distributions are taxable. If these distributions are reinvested, the individual receives an increased tax basis. If the distributions are made in cash, there is no increase in the tax basis of the underlying securities. LO 1.4.1

On December 27, 20X0, Jackie sells ABC stock for a loss at $12 a share that she originally purchased for $28 per share. On January 9, 20X1, she repurchases the shares for $15 per share. What is her cost basis on the repurchased shares? A) $16 B) $40 C) $31 D) $27

C) The answer is $31. This is a wash sale because the shares were repurchased within 30 days of their sale. The loss is then disallowed for tax purposes, and the disallowed loss is added to the repurchase price to determine the new cost basis. $28 - $12 = $16 disallowed loss, so $16 + $15 = $31 new basis. LO 1.4.1

Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55% and the maintenance margin is 40%. Calculate the market price at which Amanda will receive a margin call. A) $56.95 B) $33.00 C) $50.25 D) $21.54

C) The answer is $50.25. [(1 - initial margin percentage) / (1 - maintenance margin)] x purchase price of the stock. [(1 - 0.55) / (1 - 0.40)] x $67 [(0.45) / (0.6)] x $67 (0.75) x $67 = $50.25 LO 1.2.1

Brett bought 500 shares of WCA stock at $27 per share on margin (50% initial margin percentage) with an annual margin interest rate of 5.25%. After one year, he sold the shares for $44 per share. The stock did not pay dividends during his holding period. Calculate Brett's holding period rate of return using margin. A) 125.93% B) 57.42% C) 120.68% D) 60.00%

C) The answer is 120.68%. Brett's holding period rate of return using margin is 120.68% [($22,000 - $13,500 - $354.38) ÷ $6,750]. With a margin account, Brett's initial investment will be 50% of the total purchase price of $13,500. Margin interest for the year is $354.38 ($6,750 × 0.0525). LO 1.2.1

Limited partnerships are distinguished by which of the following? The general partner controls the business activities of the partnership. The limited partners participate in the business venture with limited liability. The general partner determines when distributions are made to the limited partners. The limited partners may have difficulty selling their interests. A) I and III B) II and IV C) I, II, III, and IV D) I, II, and III

C) The answer is I, II, III, and IV. Limited partnerships are characterized by a partnership entity that consists of a general partner and limited partners. LO 1.1.1

Which of the following statements regarding certificates of deposit (CDs) is CORRECT? CDs are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. Negotiable CDs are deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year. A) Neither I nor II B) I only C) Both I and II D) II only

C) The answer is both I and II. Both of these statements accurately describe CDs. LO 1.3.1

Which of the following statements regarding wash sales is CORRECT? A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company. A) Neither I nor II B) I only C) Both I and II D) II only

C) The answer is both I and II. Both of these statements describe characteristics of wash sales. LO 1.4.1

When considering the purchase of a limited partnership interest, an investor should be most concerned with A) short-term trading opportunities. B) potential tax shelter. C) economic viability. D) loss pass-through.

C) The answer is economic viability. Economic viability is the number one reason for the purchase of an interest in a limited partnership. Tax sheltering and loss pass-through are also considerations but should not be the primary motive to invest. Short-term trading opportunities do not exist. The investor should expect to hold the interest until the partnership is dissolved or liquidated. LO 1.1.1

A risk-averse client, living in Iowa, holds a high proportion of his investment portfolio in cash and cash equivalents in U.S. financial institutions in dollars. The advisor should point out to the client that the portfolio is most subject to which of the following risks? A) Market risk B) Reinvestment rate risk C) Purchasing power risk D) Exchange rate risk

C) The answer is purchasing power risk. Although these vehicles may assist in managing liquidity risk, they do have purchasing power risk because they have limited opportunity for capital appreciation. Exchange rate risk does not apply because this is a U.S. client with investments denominated in dollars. LO 1.3.1

All of the following are features of limited partnerships except A) the general partner controls the business activities of the partnership. B) the limited partners have limited liability. C) the limited partners may participate in the management of the partnership. D) the general partner determines when distributions are made to the limited partners.

C) The answer is the limited partners may participate in the management of the partnership. The disadvantages of limited partnerships include: (1) they are generally riskier than bonds or exchange-traded equities; (2) they are generally illiquid; (3) limited partners cannot participate in the management; and (4) the sale of partnership interest may be restricted. In addition, the general partner has unlimited liability. LO 1.1.1

Equity investments made for the launch, early development, or expansion of a business are known as A) mezzanine financing. B) leveraged buyouts. C) venture capital. D) distressed debt investing.

C) The answer is venture capital. Equity financing associated with the early development of a business is called venture capital. Mezzanine financing is provided for expansion and new products. Leveraged buyout financing is provided to allow management to buy all or part of a business; often used when a public company divests a division that it feels is no longer part of its long-term plans. Distressed debt is distressed debt investing in the debt of companies that are in trouble or failing. LO 1.1.1

Your client, Ralph, has $15,000 of capital gains and $20,000 of capital losses in the current tax year. How much unused loss may Ralph carry forward to the following tax year? A) $3,000 B) $0 C) $12,000 D) $2,000

D) The answer is $2,000. After netting capital gain and losses, the client has a net capital loss of $5,000. Because $3,000 of net losses can be deducted during any one tax year, the client will carry over the remaining $2,000 capital loss. LO 1.4.1

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Assuming the maintenance margin is 40%, what would the price of Aardvark be before Cosmo would receive a margin call? A) $24.00 B) $37.50 C) $16.00 D) $33.33

D) The answer is $33.33. Margin call = (50% × $40) ÷ (1 - 0.40) = $33.33. LO 1.2.1

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call. A) $50.76 B) $27.00 C) $31.43 D) $41.54

D) The answer is $41.54. The client will receive a margin call when the price of the stock drops below $41.54, calculated as follows: Margin call = ($60 × 0.45) ÷ (1 - 0.35) Margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54 LO 1.2.1

An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. Assuming the stock quickly falls to $40 per share, calculate the additional capital that the investor must provide to cover a margin call. A) $400 B) $800 C) $200 D) $600

D) The answer is $600. The current market value of the 100 shares is $4,000. The maintenance margin requires an equity of $4,000 × 0.40, or $1,600. The investor's equity in the account ($1,000) is the market value ($4,000) minus the loan amount ($3,000). A margin call for $600 ($1,600 - $1,000) will be ordered. LO 1.2.1

All of the following statements correctly describe a type of money market instrument except A) banker's acceptances are short-term drafts drawn on major banks to finance imports and exports. B) negotiable CDs are deposits of $100,000 or more and are traded in the open market. C) commercial paper is a short-term, unsecured promissory note issued by large firms and offers a nominally higher yield than T-bills. D) Eurodollars are Eurodollar-denominated deposits maintained at banks within the United States.

D) The answer is Eurodollars are Eurodollar-denominated deposits marinated at banks within the United States. Eurodollars are U.S. dollar-denominated deposits in banks outside the United States. The average deposit is in the millions and has a maturity of less than six months. LO 1.3.1

To be eligible for preferential dividend tax rates A) the stock must be held for more than 60 days during the 121-day period beginning 60 days AFTER the ex- dividend date. B) the taxpayer must make an election to waive tax deferral on the dividend. C) the stock must have paid dividends for four consecutive quarters. D) the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date.

D) The answer is the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date. Investors should take special note of the holding period requirement for a stock in order for the dividend to qualify for the preferential rates. The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. LO 1.4.1

What is the holding period requirement for a stock investor for the dividend to qualify for the preferential tax rates? A) The stock must have paid dividends for two consecutive quarters. B) The stock must be held for more than 30 days during the 61-day period beginning 10 days before the ex-dividend date. C) The taxpayer must make an election to reinvest any cash dividends. D) The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

D) The answer is the stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. LO 1.4.1

Identify the incorrect statement regarding savings accounts. A) Depositors are permitted to withdraw their savings at any time without penalty B) Accounts are established with a commercial bank or savings and loan C) They offer a relatively low interest rate D) They require a minimum balance of $500

D) The answer is they require a minimum balance of $500. Money market deposit accounts (MMDAs) would require a minimum balance. LO 1.3.1