Series 65 Unit 15 Checkpoint Exam

Using industry jargon, the tax on the last dollar of income is at A) the average rate. B) the final rate. C) the effective rate. D) the marginal rate.

D. the marginal rate.

The amount of federal income tax a U.S. citizen residing in the country will pay is dependent on all of these except A) gender. B) age. C) state of residence. D) filing status.

A. gender.

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend? A) Industrial revenue bond B) General obligation bond C) Treasury bond D) Corporate bond

B. General obligation bond Explanation Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the alternative minimum tax (AMT).

The alternative minimum tax (AMT) becomes a consideration when a taxpayer has so-called tax preference items. Included in that definition is A) interest from U.S. Treasury bonds. B) interest from private activity bonds. C) overtime pay from a job. D) tips received while working at a restaurant.

B. interest from private activity bonds.

Each of the following could cause an investor to be subject to the alternative minimum tax except A) excess intangible drilling costs. B) accelerated depreciation taken on certain property. C) interest received on school district GO bonds. D) interest received on private activity municipal bonds.

C. interest received on school district GO bonds.

You are working with a client who received her divorce earlier this year. She has two young children, ages four and seven, who both live with her. In general, it would be most advantageous for the client to file her federal income tax claiming what status? A) Married but separated B) Head of Household C) Single D) Joint

B. Head of Household

Many different investments offer the opportunity to reinvest income. If one were to compare the difference between interest-on-interest reinvestment plans and dividend and capital gain reinvestment plans, A) in the case of dividend and capital gains reinvestment plans, taxes are deferred until liquidation. B) in the case of interest-on-interest plans, taxes are deferred until liquidation. C) in both cases, all income is deferred until liquidation. D) in both plans, all income is taxable in the year received, whether reinvested or not.

D. in both plans, all income is taxable in the year received, whether reinvested or not.

A number of corporations offer dividend reinvestment plans (DRIPs) where the client's dividends are automatically reinvested in additional shares of the issuer. In the case of a company that pays dividends with some degree of regularity, if the market price per share has declined over the year and assuming no splits, an investor participating in one of these plans would find which of the following to be true? A) The value of the investor's account has gone up. B) There are more shares in the investor's account. C) There are fewer shares in the investor's account. D) The value of the investor's account has gone down.

B. There are more shares in the investor's account.

An investor has made the following purchases, all in the same calendar year: 100 ABC at $20 on January 15; 200 ABC at $25 on April 4; and 100 ABC at $30 on July 23. With ABC currently selling at $22, if this investor needed to sell 200 ABC, the best decision from a tax standpoint would probably be to A) use FIFO. B) hold the stock until the price reaches $25. C) use LIFO. D) use average cost.

C. use LIFO.

An investor purchases 100 shares of ABCE common stock at $70 per share. Thirteen months later, the stock is sold when the market price is $50 per share. Which of the following activities made 20 days after the sale of the stock at $50 per share would not violate the wash sale rule? A) Purchasing 100 shares of ABCE common stock B) Purchasing five ABCE convertible bonds with a conversion price of $50 C) Purchasing an ABCE call option D) Purchasing an ABCE put option

D. Purchasing an ABCE put option Explanation The wash sale rule applies when the same or substantially identical security as a stock sold at a loss is acquired within the 30-day period prior to and after the sale. Buying a put is not a problem because the put allows the holder only to sell the stock, not to buy it. Please note that a bond convertible at $50 is convertible into 20 shares, so five bonds will enable the investor to convert into 100 shares. LO 15.c

An example of an interest-on-interest reinvestment program is A) reinvesting the dividends distributed on a bond fund. B) reinvesting the earnings on a bond UIT. C) reinvesting the interest received on a bond. D) interest left to compound on a bank-insured certificate of deposit.

D. interest left to compound on a bank-insured certificate of deposit.

Many corporations make available dividend reinvestment plans (DRIPs) for their shareholders. Which of the following are among the benefits of using DRIPs? I. Allowing the investment to compound II. Discounts from the current market price III. Reduced taxation IV. The ability to accept the dividend in cash or in additional shares of stock A) I and III B) I and IV C) I and II D) II and IV

C. I and II