SIE Unit 20 Qbank

Earned income includes which of the following? A) Dividends earned on a mutual fund B) Child support paid to a divorced spouse C) Interest income earned on a bond D) A year-end bonus

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 A) ABCCC put options. B) ABCCC convertible bonds. C) ABCCC call options. D) ABCCC warrants.

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.

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? A) $1 gain and $1 in income B) Cannot be determined from this information C) $2 in income D) $2 total gain

$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? A) $12.50 gain per share B) $17.50 loss per share C) $20 loss D) $10 gain

$10 gain 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.

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? A) 5.00%. B) $2.00. C) 10.00%. D) $1.00

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 A) 2.25%. B) 5.00%. C) 2.00%. D) 0.50%.

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? A) 10% B) 5% C) 15% D) 20%

20%

Your Client Dana McCann just purchased a 20-year City of Salt Lake School district bond for $800. If the bond has a stated rate of 4%, the current yield (CY) is A) 5%. B) 2%. C) 3%. D) 6%.

5%. The formula for CY is the stated rate (coupon rate) divided by the current market price $40 divided by $800 equals 5%. 600/20= 40 40/800= 5%

Betsy Bingham asks you what her current yield will be if she buys a 6% corporate bond at $1,200. The answer is A) 2%. B) 3%. C) 6%. D) 5%.

5%. The formula for current yield is the stated rate (coupon rate) divided by the current market price. $60 divided by $1,200 equals 5%.

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 A) 3%. B) 5%. C) 2%. D) 6%.

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%.

An investor has been putting aside funds for retirement in a nonqualified variable annuity for over five years. She is now age 66 and takes a lump-sum distribution. How are the earnings taxed? A) As tax free B) As ordinary income C) As long-term capital gain, except for any portion contributed in the previous 12 months D) As long-term gain

As ordinary income With a nonqualified annuity, all distributions more than the cost basis will be taxed as ordinary income.

Which of the following is a bench mark of several bond indices A) Wilshire 5000 B) Barclay capital US aggregate index C) Russell 2000 D) Dow Jones 30

Barclay capital US aggregate index

What are the two basic types of return on an investment? A) Capital gains and income B) Short term and long term C) Interest and principal D) Dividends and interest

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.

Which of the following is a bench mark for large companies A) Wilshire 5000 B) Standard and Poor's 500 C) Russell 2000 D) Dow Jones 30

Dow Jones 30

Which of the following would not be considered ordinary income for tax purposes? A) Salary and commissions B) Dividends on common stock C) Rents from income properties D) Gains gotten from the sale of securities

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.

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.

II and IV 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.

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

IV, II, III, I 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.

Which of the following is a bench mark for foreign markets A) MSCI EAFE Index B) Barclay capital US aggregate index C) Russell 2000 D) Dow Jones 30

MSCI EAFE Index

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? A) OMQ convertible bonds B) OMQ warrants C) OMQ call options D) OMQ put options

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? A) Proceeds minus cost basis B) Proceeds minus dividend plus cost basis C) Proceeds plus cost basis D) Proceeds plus dividends minus cost basis

Proceeds minus cost basis

Which of the following is a bench mark for small cap stocks? A) Wilshire 5000 B) Standard and Poor's 500 C) Russell 2000 D) Dow Jones 30

Russell 2000

Your client Soren buys a 4% XYZ Corporate bond. If his current yield is 5% he bought the bond at A) above par. B) a discount. C) par. D) a premium.

a discount.

Current yield (CY) equals A) the market priced divided by the annual income. B) par value divide the stated rate. C) the stated rate divided by par value. D) annual income divided by the market price.

annual income divided by the market price. CY equals the coupon rate (annual income) divided by the current market price. This is a very common formula on the test.

Earned income would include all the following except A) dividends earned on mutual funds. B) commission on sales for a real estate agent. C) year-end bonus. D) tips.

dividends earned on mutual funds.

Regarding the taxation of gains on securities, all of the following are true except A) long-term gains are taxed at more favorable long-term rates. B) capital gains are associated with the sale of securities and other real assets. C) gains on securities for a position held at least 12 months are not taxable. D) short-term gains are taxed at less favorable ordinary income tax rates.

gains on securities for a position held at least 12 months are not taxable.

When a bond is purchased at a premium, the current yield will be A) lower than the coupon rate. B) higher than the fixed rate. C) the same as the nominal rate. D) higher than the stated rate.

lower than the coupon rate.

All of the following are investment income except A) running a business. B) dividends from an American depository receipt (ADR). C) interest from a bond. D) dividends from a mutual fund.

running a business.

For tax purposes, investment income is A) always taxed at an investor's ordinary income tax rate. B) never taxable at ordinary income tax rates. C) taxed at either ordinary income tax or capital gains tax rates. D) always taxed at the capital gains tax rate.

taxed at either ordinary income tax or capital gains tax rates.