Unit 20

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

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

A) lower than the coupon rate.

Which of the following would be true with regard to capital gains? I. If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer's ordinary income. II. 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. III. Capital gains are usually associated with the distribution of dividends including stock splits. IV. Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams.

I and II

Shelby Bogden, your client, purchased a 6% corporate bond with a current yield of 5%. The bond was purchased at

a premium.

For tax purposes, investment income is

normally taxed as ordinary income.

Current yield equals

the annual income(coupon rate) divided by the market price.

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

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

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

A) higher than the coupon rate.

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

A) is considered to be a short-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income.

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

5%

Which of the following are true of long-term or short-term gains or losses? A) Holding a stock and selling it above its cost basis if held for one year would be a long-term gain. B) Holding a stock and selling above its cost basis if over 12 months later would be a long-term gain. C) Holding a stock and selling below its cost basis if held for one year would be a long-term loss. D) 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 above its cost basis if over 12 months later would be a long-term gain.

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

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

All of the following are taxable to the investor except A) capital gains distributions. B) semiannual interest payments. C) cash dividends. D) stock dividends.

D) stock dividends.

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?

20% The formula for total return is dividends plus capital gains divided by amount invested.

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

A) A year-end bonus

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

A) Gains gotten from the sale of securities

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

A) Proceeds minus cost basis

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

A) dividends earned on mutual funds.

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?

As ordinary income

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

B) Bonus received from employment

Which of the following is a benchmark for small cap stocks? A) Wilshire 5000 B) Russell 2000® Index C) Dow Jones Industrial Average D) Standard and Poor's 500 Index

B) Russell 2000® Index

Which of the following is a benchmark for large cap stocks? A) Dow Jones Utilities Index B) Standard and Poor's 500 Index C) Wilshire 5000 D) Russell 2000® Index

B) Standard and Poor's 500 Index

All of the following are investment income except A) dividends from ADRs. B) running a business. C) dividends from a mutual fund. D) interest from a bond.

B) running a business.

All of the following are true regarding market indexes except A) they can demonstrate the overall direction of the market. B) they track single stocks rather than hypothetical portfolios. C) they can be used to compare against the performance of one's portfolio. D) they are performance standards investors can monitor.

B) they track single stocks rather than hypothetical portfolios.

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

C) Short-term gains are those realized on positions held for 12 months or less.

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

D) Capital gains and income

The MSCI-EAFE Index tracks which of the following? A) Municipal bonds B) Mid-cap stocks C) Corporate bonds D) Foreign equities

D) Foreign equities

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? I. The adjusted cost basis of the shares is $30. II. The adjusted cost basis of the shares is $32. III. There is a short-term capital gain on all the shares sold. IV. 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.

Your client, Soren Aland, buys a 4% XYZ corporate bond. If his current yield is 5%, he bought the bond at

a discount.

An investor notices that a bond originally bought at 95 some years ago is now trading at a price of 88. The investor sells the bond, then buys it back the next day for 88.5 with the intention of declaring a loss from the original purchase and sale on this year's tax return. This would be known as

a wash sale, and taking the loss is prohibited.