Series 7 - Unit 15
Which of the following statements regarding stock dividends are TRUE? I. They are taxable as ordinary income on receipt. II. They are not taxable on receipt. III. Cost basis per share is reduced. IV. Cost basis per share remains the same.
II and III. Stock dividends are not taxed; rather, the basis in each share of stock owned is adjusted downward proportionately.
Your customer, a new investor, 24 years of age, earns $35,000 per year and has saved $10,000 to invest. She would like to purchase her first home in approximately 5 years. Which of the following would be the least suitable recommendation given her objective?
Tax-free municipal bonds This new investor is not yet at an income level where the tax-free benefits of municipal bonds would be of great benefit. In addition, municipal bonds would have lower yields than other debt securities and would not be as likely to add to the growth needed to achieve her goal. Given her investment objective, each of the other choices would be more suitable regarding potential growth.
If a registered representative wishes to open a joint account with his brother, who is a client of his, which of the following rules would NOT apply?
The sharing in profits and losses in the account must be proportional to each party's investment in the account. If a registered representative is opening a joint account with an immediate family member, the sharing of profits and losses need not be proportional to each party's investment in the account.
An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs:
a capital gain. Yields fall as bond prices rise. Because the yield to maturity has dropped, the bond is trading at a higher price than when it was purchased. The consequence of the sale is a capital gain, because the investor sold at a premium the bond that was purchased for par.
A portfolio that invests in blue-chip stocks and growth stocks can best be described as:
a growth and income portfolio. growth and income portfolio typically combines conservative blue-chip securities for their stability and capital preservation with growth stocks for their appreciation potential. An aggressive portfolio contains securities of smaller companies that have the potential for significant capital appreciation. A balanced portfolio invests in both stocks and bonds.
If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is the:
market value at date of death.
An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year?
$3,000. The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year.
A customer purchases a 6% municipal bond in the secondary market on a 7% basis. The effective after-tax yield is
6 to 7% In every case but one, the yield to maturity is the effective after-tax yield to a municipal-bond buyer. The one exception is a bond bought at a discount in the secondary market. In this case, the annual accretion is taxed as ordinary income. The discount, which is included in the stated yield to maturity, is taxable, reducing the effective after-tax yield to somewhere between the coupon of 6% and the yield to maturity of 7%.
A single investor, age 26, wants to begin a long-term saving plan for retirement by opening an IRA with your broker/dealer. Comfortable with mutual funds, an appropriate asset allocation/mix would be
80% equity funds, 20% bond funds Long-term investors, such as those saving for retirement, would seek growth of capital as an objective over the safety associated with debt securities. An investor age 26 is far enough away from retirement to accommodate a growth objective and the greater risk associated with equities over debt. It would be suitable to initially allocate a high percentage of the portfolio to equities.
Which of the following statement(s) regarding gift taxes are TRUE? I.Gifts per person per year up to an IRS specified dollar limit can be given without a tax liability. II.Gifts per person per year in excess of the IRS specified dollar limit for that year may be subject to tax. III.The donor, not the recipient, is responsible for any tax liability. IV.The tax rate increases with the size of the gift.
I, II, III and IV In accordance with gift tax regulations as mandated by the IRS, an individual may give a gift of up to a specified dollar limit per person in one year with no gift tax liability. If the gift exceeds the IRS specified dollar limit it is the donor who is responsible for any tax. The gift tax is a progressive tax, which means that as the size of the gift increases, the percentage of applicable tax will also increase. The IRS specified gift tax limit is subject to change from year to year.
A registered representative wishes to lend money to a customer. Under which of the following circumstances would written notice to the broker/dealer be required? I.The customer is the RRs' spouse II.The RR and the customer have been close friends since high school III.The customer is the RRs' mother IV.He and the customer have a business relationship outside the firm that necessitates occasional lending between them
II and IV Written notice to the broker/dealer would be required for a loan from the RR to a friend or someone with whom he has a business relationship. It is not required for loans to immediate family members such as spouses or parents.
When interest rates are changing, an investor might expect which of the following to be the most volatile?
Treasury STRIPS with 20 years to maturity When interest rates are changing, bonds with more years remaining to maturity will have greater volatility. Because zero-coupon bonds, such as treasury receipts and STRIPS, do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds.
