SIE Unit 8

Your customer purchased BigCo common stock for $45 per share. After holding the position for a time, they sold the position for $35 per share. What is their gain or loss for this position? A) $10 per share loss B) $10 per share gain C) $5 per share loss

A) $10 per share loss The formula for capital gains is sales proceeds - cost basis = gain (or loss). For this problem $35-$45= -$10, a loss.

A customer purchased 100 shares of MNO common stock two years ago for $20 per share. They now sell the shares for $23 per share. Over the last two years, MNO has paid a $0.25 quarterly dividend. What is the result of this closing transaction? A) $300 long-term gain B) $500 short-term gain C) $500 long-term gain D) $300 short-term loss

A) $300 long-term gain This question only asks about capital gains. Formula is sales proceeds- cost basis= gain (or loss). $2,300- $2,000= $300

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 B) $5 gain C) No gain or loss D) $10 gain

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 purchases 100 shares of JIM, Inc., common stock at $75 per share on January 17, 2020. The customer sells the shares for $80 per share on February 2, 2021. The result of the sale is: A) $500 long-term capital gain B) $500 short-term capital gain C) $1,000 long-term capital gain D) $500 long-term capital loss

A) $500 long-term capital gain The formula for capital gains is sales proceeds - cost basis= gain (or loss). $8,000 - $7,500 = $500 gain. The position was held for more than one year so it is a long term gain.

XYZ Technology Corporation common stock currently trades at $60 per share and pays a $0.30 dividend. What is XYZ's current dividend yield? A) 2% B) 0.5% C) 1% D) 1.5%

A) 2% XYZ pays a $0.30 quarterly dividend. Current (dividend) yield is an annual figure. To calculate the current dividend yield you would multiply the quarterly dividend by four and then divide the result by the current market value. (0.30 × 4)/ = 1.2 1.2/60 = .02 (2%)

A customer purchased 500 shares of GMO, Inc., common stock at $40 per share. The customer held the position for two years before selling the position at $40 per share. During the time the customer held GMO stock, the company paid a steady quarterly dividend of $0.25. What was the customer's total return for this position? A) 5% B) 2.5% C) 1.25% D) 0%

A) 5% Total return is calculated over the holding period, two years in this example. The company paid a $0.25 quarterly dividend for two years for a total income of $2 over the period. The cost of the stock and the sale price are the same; the customer neither received capital gains nor incurred any capital loss. To calculate the total return, you would add any gains or subtract losses from any income received, then divide the result by the purchase price. In this example [(0.25 × 8)+(40 - 40)]/40 = (2+0)/40 = .05 (5%).

Which of the following would be considered earned income? A) Bonus received from employment B) The premium kept from an unexercised short put C) Dividends received from a stock investment D) Interest received from a bond investment

A) Bonus received from employment

Earned income would include all the following except: A) Dividends earned on mutual funds B) Tips C) Commission on sales for a real estate agent D) Year-end bonuses

A) Dividends earned on mutual funds Earned income includes wages, salary, tips, bonuses, and income from active participation in a trade or business.

Which of the following would be true with regard to capital gains? (2 answers) A) If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short term and is taxed at the same rate as the taxpayer's ordinary income B) If the asset is held for more than a year, the gain is considered to be long term and is taxed at a favorable rate C) Capital gains are usually associated with the distribution of dividends including stock splits C) Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams

A) If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short term and is taxed at the same rate as the taxpayer's ordinary income B) If the asset is held for more than a year, the gain is considered to be long term and is taxed at a favorable rate

When a bond is purchased at a premium, the current yield will be: A) Lower than the coupon rate B) The same as the nominal rate C) Higher than the fixed rate D) Higher than the stated rate

A) Lower than the coupon rate

Which of the following regarding income is true? A) Salary or bonuses are earned income; interest and dividends are investment income B) Salary, bonuses, interest, and dividends are all portfolio income C) Salary or bonuses are portfolio income; interest and dividends are investment income D) Salary, bonuses, interest, and dividends are all investment income

A) Salary or bonuses are earned income; interest and dividends are investment income

What is the formula for calculating total return?

(income + gains or - losses) / cost basis= total return

A customer sells short 100 shares of ABC common stock at $35 per share. ABC stock increases in value, and the customer covers the short for $45 per share. What is the result of this set of transaction? A) $5 per share loss B) $10 per share loss C) $10 per share gain D) $5 per share gain

B) $10 per share loss The formula for capital gains is sales proceeds- cost basis= gain (or loss). For this problem $35- $45= -$10 loss. Note that this is a short sale, so the sale was at $35 and the purchase at $45.

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: A) $2,000 long-term capital loss B) $2,000 short-term capital gain C) $2,000 short-term capital loss D) $2,000 long-term capital gain

B) $2,000 short-term capital gain 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.

Your customer sells an 8% corporate bond for 102. They purchased the bond at par one year ago. What is the total return of this position? A) 5% B) 10% C) 8% D) 12%

B) 10% The formula for calculating total return is (income + gains or - losses) / cost basis. For this question ($80 + $20) / 1000 = 100 / 1000 = 0.10 (10%).

On March 3, the board of directors of Seabird Airlines declares a $0.20 per share dividend payable to holders of record as of March 30. Seabird stock jumped from $35 per share to $40 per share on the news. The current yield of Seabird stock is: A) 0.50% B) 2.00% C) 5.00% D) 2.25%

B) 2.00% The formula is (quarterly dividend x 4) / current market value. (0.2 x 4) (.8) .80/ 40 = .02 (2%)

Shelby Bogden, your client, purchased a 6% corporate bond with a current yield of 5%. The bond was purchased at: A) A discount of $1,200 B) A premium of $200 C) Par D) A discount of $200

B) A premium of $200 A bond purchased at a premium will have a current yield below the coupon rate, so only one answer works. If you really want to do the math, take the annual interest ($60) and divide by the CY (0.05): 60/0.05 = $1,200 or a premium of $200.

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

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

An investor purchased and then sold a security eight months later for a gain. This gain is: A) Considered to be a long-term gain, and it will be taxed at a more favorable rate than short-term gains B) Considered to be a short-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income C) Considered to be a short-term gain, and it will be taxed at a more favorable rate than long-term gains D) Considered to be a long-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income

B) 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.

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

B) Gains on securities for a position held at least 12 months are not taxable This is false!

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

B) OMQ put options In order to avoid violating the wash sale rule, investors selling stock at a loss cannot purchase the 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.

An investor purchased 100 shares of LMN stock in 2013 at a price of $40 per share. Soon after, 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? (2 answers) A) The adjusted cost basis of the shares is $30 B) The adjusted cost basis of the shares is $32 C) There is a short-term capital gain on all the shares sold D) There is a long-term capital gain on all the shares sold

B) The adjusted cost basis of the shares is $32 D) 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 x 0.25= 25). The computation is the original total cost $4,000 (100 x $40) divided by the new # of shares 125 (100+25). $4,000/125 = $32

Skye purchased 100 shares of Moreno, Inc., for $20 a share. One year later, she sold the shares for $21 per share. 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) Cannot be determined from this information B) $2 in income C) $1 gain and $1 in income D) $2 total gain

C) $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.

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: A) $20 return of capital, $28 return on investment B) $28 capital gain C) $20 cost base, $8 capital gain D) $28 return on investment

C) $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 the return of capital.

In the last year, a customer made the following four transactions: -Purchased 1,000 shares of ABC stock for $67 per share -Purchased 500 shares of DEF stock for $45 per share -Sold 1000 shares of ABC stock for $50 per share -Sold 500 shares of DEF stock for $55 per share Which of these is the result of the year's transaction? A) $3,000 reduction in ordinary income and $12,000 in gains B) $12,000 reduction in ordinary income C) $3,000 reduction in ordinary income and $9,000 in carry-forward losses D) $12,000 in capital gains

C) $3,000 reduction in ordinary income and $9,000 in carry forward losses The customer realized a $17,000 loss on ABC and a $5,000 gain on DEF for a net loss of $12,000. The customer can use $3,000 to reduce ordinary income leaving $9,000 in losses to carry forward.

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 loss B) $6,000 gain C) $5,000 gain D) $6,000 loss

C) $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.

A customer purchased 100 shares of BOB common stock for a total of $3,000. After one year, they sell the position for $3,200. BOB paid $1 per share in dividends over the year. What is the total return? A) 15% B) 20% C) 10% D) 25%

C) 10% The formula for calculating total return is (income + gains or - losses) / cost basis. For this question ($100 + $200) / 3000 = 300 / 3000 = 0.10 (10%).

A customer purchases BigCo common stock at $30 per share. The stock pays a $0.30 quarterly dividend. After holding the position for one year, the customer sells the stock for $31.80 per share. What is the customer's total return? A) 6.5% B) 4% C) 10% D) 7%

C) 10% To calculate total return you would add the dividends collected over the period and any capital gains (or subtract capital losses). The customer collected $1.20 in dividends (0.3 × 4 quarters) and realized a gain of $1.80 ($1.20 = 1.80 = $3.00). Divide the result by the purchase price to determine the total return. $3/$30 = 0.10 (10%)

Drew purchased 100 shares of Moreno, Inc., for $20 a share. One year later, he sold the shares for $21 per share. Over the year, Moreno paid a $0.25 quarterly dividend. What is Drew's total return? A) 5% B) $1 C) 10% D) $2

C) 10% Total return includes any income the investment produces; it is also expressed as a percentage, not dollars. The formula is as follows: [(sales proceeds - cost basis) + income)] / cost basis. $1 (dividend) + $1 gain= $2 $2/ $20= .1 (10%)

A customer purchased 200 shares of ABC common stock for a total of $5,000. After one year, they sell the position for $5,400. ABC paid $0.50 per share in dividends over the year. What is the total return? A) 15% B) 20% C) 10% D) 25%

C) 10% The formula for calculating total return is (income + gains or - losses) / cost basis. For this question ($100 + $400) / 5000 = 500 / 5000 = 0.10 (10%).

A customer purchased 100 shares of GHI common stock for $20 per share. After a year, they sell the shares for $23 per share. Over the past two years, GHI has paid a $0.25 quarterly dividend. What is the total return? A) 25% B) 10% C) 20% D) 15%

C) 20% The formula for calculating total return is (income + gains or - losses) / cost basis. For this question ($1 + $3) / 20 = 4 / 20 = 0.20 (20%). Note that the position was held for only one year.

SmallTown 8% bonds are currently trading at 100. What is the current yield? A) 4% B) 16% C) 8% D) 6%

C) 8% The formula for current yield is annual income/market value. In this example, the bond is trading at par (100), so the current yield is equal to the nominal yield.

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

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

C) 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.

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

C) 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? A) Holding a stock and selling below its cost basis if held for over a year would be a short-term loss B) Holding a stock and selling it above its cost basis if held for one year would be a long-term gain C) Holding a stock and selling above its cost basis if over 12 months later would be a long-term gain D) Holding a stock and selling below its cost basis if held for one year would be a long-term loss

C) 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 the following best describes the calculation for gains or losses for tax purposes? A) Proceeds plus dividends, minus cost basis B) Proceeds minus dividend, plus cost basis C) Proceeds minus cost basis D) Proceeds plus cost basis

C) Proceeds minus cost basis Proceeds minus cost basis equals capital gains. The dividends are not part of the calculation for capital gains.

All of the following are investment income except A) Dividends from ADRs B) Interest from a bond C) Running a business D) Dividends from a mutual fund

C) Running a business Earnings from running a business is considered earned income.

A customer purchases 500 shares of LMN Corporation common stock for $72 per share. After holding the position for nine months, they sell the position for $75 per share. What is the result of these transactions? A) $300 short-term gain B) $300 long-term gain C) $1,500 long term gain D) $1,500 short-term gain

D) $1,500 short-term gain The customer realized a $3 per share gain. The 500 shares results in a $1,500 gain. The position was held for less than one year, so it is a short term gain.

A customer purchased 300 shares of DEF Corporation at $33 per share. After holding the position for 14 months, they sell the position for $35 per share. What is the result of these transactions? A) $200 short-term capital gain B) $600 short-term capital gain C) $200 long-term capital gain D) $600 long-term capital gain

D) $600 long-term capital gain

XYZ Corp pays a quarterly dividend of $1. The common stock is currently valued at $160 per share. What is XYZ common stock's dividend yield? A) 1.0% B) 5.0% C) 7.5% D) 2.5%

D) 2.5% The formula for dividend yield (or current yield) is annual income / current market value. In this example you need to multiply the quarterly dividend by 4 to find the annual number (which is 4). 4/ 160= 0.025 (2.5%)

Your customer sells 100 shares of Small Co., Inc., common stock at $50 per share. After six months, they close the short position at $40 per share. Small Co. does not pay a dividend. What is the total return? A) 20% B) 10% C) 15% D) 25%

D) 25% The formula for calculating total return is (income + gains or - losses) / cost basis. For this question ($0 + $10) / 40 = 0.25 (25%).

A customer purchased 100 shares of MNO common stock two years ago for $20 per share. They now sell the shares for $23 per share. Over the last two years MNO has paid a $0.25 quarterly dividend. What is the total return? A) 20% B) 15% C) 10% D) 25%

D) 25% The formula for calculating total return is (income + gains or - losses) / cost basis. For this question ($2 (the dividend paid over the last 2 years)+ $3) / 20 = 5 / 20 = 0.25 (25%). Note that the question does not ask for annualized return.

BigCo corporation common stock currently trades at $30 per share and pays a $0.30 dividend. What is BigCo's dividend yield? A) 1% B) 3% C) 2% D) 4%

D) 4% BigCo pays a $0.30 quarterly dividend. Dividend yield is an annual figure. To calculate the current dividend yield, multiply the quarterly dividend by 4, and then divide by current market value. 0.30x 4= 1.2 1.2/ 30= .04 (4%)

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

D) 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%.

A customer purchases LMNO common stock at $60 per share. The stock pays a $0.45 quarterly dividend. After holding the position for one year, the customer sells the stock for $61.20 per share. What is the customer's total return? A) 2% B) 3% C) 4% D) 5%

D) 5% To calculate total return you would add the dividends collected over the period and any capital gains (or subtract capital losses). The customer collected $1.80 in dividends (0.45 × 4 quarters) and realized a gain of $1.20 ($1.20 = 1.80 = $3.00). Divide the result by the purchase price to determine the total return. $3/$60 = 0.05 (5%)

An investor notices that a bond purchased several years ago at 95 is now priced at 90. The investor sells the bond for 90, then immediately repurchases it for 90. This action is known as: A) Matched orders B) Pegging C) Marking the close D) A wash sale

D) A wash sale The investor's intent with this wash sale is to declare a $50 capital loss without changing positions on the bond. Immediate repurchase is not illegal, but it precludes declaring the loss for tax purposes. The investor must wait at least 30 days before buying the bond back, or the loss will be disallowed.

Your client, Soren Aland, buys a 4% XYZ corporate bond. If his current yield is 5%, he bought the bond: A) Above par B) At a premium C) At par D) At a discount

D) At a discount

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

D) 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.

When a bond is purchased at a discount the current yield will be: A) Lower that the stated rate B) Lower than the fixed rate C) The same as the nominal rate D) Higher than the coupon rate

D) Higher than the coupon rate

When a bond is purchased at a discount the current yield will be: A) Lower that the stated rate B) Lower than the fixed rate C) The same as the nominal rate D) Higher than the coupon rate

D) 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.

In order for a gain to be taxed as a long-term capital gain, the position must be held for how long? A) More than two years B) One year C) One year or more D) More than one year

D) More than one year The rule is "more than one year." If the test has calendar dates in the question, it will be clearly more than one year.

For tax purposes, investment income is: A) Always taxed at the capital gains tax rate B) Never taxable at ordinary income tax rates C) Always taxed at the highest ordinary income tax rate D) Normally taxed as ordinary income

D) Normally taxed as ordinary income Investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and short term capital gains derived from the sale of securities. Investment income is included in ordinary income for tax purposes. Long-term capital gains are taxed at the capital gains tax rate.

Regarding capital gains, which of the following is true? A) Long-term gains are those realized on positions held for 2 years or more B) Long-term gains are those realized on positions held for 10 years or more C) Short-term gains are those realized on positions held for 9 months or less D) Short-term gains are those realized on positions held for 12 months or less

D) Short-term gains are those realized on positions held for 12 months or less This is the only true statement.

What is the formula for calculating current yield?

annual income/ current market value= CY

What is the formula for calculating capital gains or losses?

sales proceeds- adjusted cost basis= gains (or losses if number is negative)