Unit 15 Quiz 3

Four years ago, you declared a net capital loss of $23,000 on your tax return. You have had no further capital gains or losses since then. For that year and the following 2, you took the maximum allowable income deduction. How much may you deduct from your income this year, and how much loss will you have to carry forward? A) $3,000/$11,000. B) $3,000/$12,000. C) $2,000/$11,000. D) $2,000/$12,000.

A) $3,000/$11,000.

Regarding a bonds duration, which measures the time it takes for a bond to pay for itself which of the following statements is TRUE? A) A zero coupon bonds duration is equal to its maturity B) A zero coupon bonds duration is less than the bonds maturity C) Interest bearing bonds have no measurable bond duration D) For interest bearing bonds duration is greater than the bonds maturity

A) A zero coupon bonds duration is equal to its maturity

The risk that time value may erode the premium of an equity option even while the underlying issuer remains financially sound is an example of: A) capital risk. B) reinvestment risk. C) currency risk. D) interest rate risk.

A) capital risk.

For tax purposes, cash dividends are taxable to stockholders as of the: A) payable date. B) declaration date. C) ex-date. D) record date.

A) payable date.

KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year? A) $120,000. B) $820,000. C) $1.1 million. D) $300,000.

B) $820,000. The corporate exclusion is 70% of dividend income; therefore, KLP must pay taxes on all $700,000 of its interest income, but only 30% (or $120,000) of its dividend income, for a total of $820,000.

Several years ago, one of your customers bought an OID municipal bond at $960. The bond has now matured. For federal income tax purposes, the discount is: A) taxed as a long-term capital gain. B) tax free. C) taxed at maturity as ordinary income. D) taxed each year as ordinary income.

B) tax free.

If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) 100,000. B) $50,000. C) $0. D) $90,000.

C) $0.

Which of the following provides a measurement of the volatility of a particular stock or portfolio as compared to the volatility of the market as a whole? A) Duration. B) Delta. C) Beta. D) Alpha.

C) Beta.

Which of the following taxes is considered regressive? A) Inheritance. B) Estate. C) Sales. D) Income.

C) Sales.

A portfolio that invests in blue-chip stocks and growth stocks can best be described as: A) a balanced portfolio. B) an aggressive portfolio. C) a high-yield portfolio. D) a growth and income portfolio.

D) a growth and income portfolio.

The following dividends were received by a husband, his wife, and both of them jointly: husband-$160; wife-$160; joint-$100. Indicate the amount of dividends that would be subject to taxation if they filed a joint tax return. A) $0. B) $220. C) $420. D) $200.

C) $420. $160 + $160 + $100 = $420. This would all be taxable as ordinary income.

Changing any of the following characteristics of the stocks and bonds in an investor's portfolio would likely add diversification EXCEPT the: A) industries in which she is investing. B) issuer's geographic location. C) securities' relative prices. D) types of securities.

C) securities' relative prices.

If a customer purchases 5 newly issued municipal bonds for 101 and holds the bonds to maturity, the tax consequence is: A) $50 capital loss. B) not possible to calculate with the information provided. C) $50 capital gain. D) $0 gain or loss.

D) $0 gain or loss. If a new issue municipal bond is bought at a premium, the premium must be amortized over the life of the bond. At maturity, no capital gain or loss would occur because the premium would have been fully amortized.

A customer purchases $100,000 of original issue discount municipal bonds. How will this trade be considered for tax purposes when the bonds mature? A) Taxable as long-term gain. B) Taxable as short-term gain. C) Fully taxable on capital gain. D) No capital gain.

D) No capital gain.

If a customer, while out of town, receives a margin call for securities purchased a day earlier, which of the following actions would be appropriate? I. The customer overnights a personal check to cover the call. II. The broker servicing the account writes a personal check to cover the call. III. The brokerage firm transfers the position to its trading account until the customer returns. IV. The customer uses a wire transfer of funds to cover the call.

I and IV

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, IV

Which of the following statements about municipal original issue premium bonds are TRUE? I. The original issue premium must be amortized. II. If the bond is held to maturity, there will be no capital loss reportable. III. The cost basis of the bond is adjusted downward by the amortized amount.

I, II, and III

In recommending securities to customers, a FINRA member firm must do which of the following? I. Guarantee that future performance will match or exceed past performance. II. Have a suitable basis for recommendations. III. Disclose or offer to disclose supporting documentation. IV. Offer to reimburse execution costs associated with recommendations.

II and III

A customer buys 5 municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has a: A) $50 capital gain. B) $50 capital loss. C) $100 capital loss. D) $100 capital gain.

A) $50 capital gain. The premium on the municipal bonds must be amortized. The bonds were bought at 104 and therefore each bond has $40 in premiums (5 bonds X $40 = $200 premium to be amortized over 20 years). This means the cost basis of the bonds ($5,200) decreases by $10 a year ($200 / 20 years = $10). After 10 years amortization, $100 has been amortized (10 years × $10 per year), and the customer has an adjusted cost basis of $5,100. If the bonds are sold for 103 ($5,150), the customer has a $50 taxable capital gain.

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) General obligation bond. B) Corporate bond. C) Industrial revenue bond. D) Treasury bond.

A) General obligation bond. 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 AMT.

If a married couple establishes a JTWROS account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A) He pays federal and state taxes on the entire balance. B) He pays no estate tax. C) He pays federal and state taxes on $500,000. D) He pays federal taxes only on $500,000.

B) He pays no estate tax.

Regarding the topic of outside business activity for associated persons of a FINRA member firm, which of the following statements is NOT TRUE? A) An associated person cannot work for any business other than his member firm without his employing broker/dealer's knowledge. B) Member firms must grant permission in writing prior to any outside business activity on the part of the associated person. C) A passive investment such as the purchase of a limited partnership unit, is not considered an outside business activity. D) Prior written notice must be provided to the member before any outside business activity may occur.

B) Member firms must grant permission in writing prior to any outside business activity on the part of the associated person.

Which of the following are likely to have a low beta? A) Technology stocks. B) Public utility stocks. C) Software stocks. D) Aerospace stocks.

B) Public utility stocks.

A couple in a high tax bracket is interested in minimizing its tax liability while diversifying its portfolio. Which of the following best fits its investment objectives? A) Corporate convertible bonds. B) Tax-exempt unit trusts. C) Preferred stock. D) GNMAs.

B) Tax-exempt unit trusts. Municipal unit trusts provide tax-free income to unit holders. Unit holders have an undivided interest in the underlying portfolio of municipal bonds. The trust consists of a number of different issues, and therefore has an element of diversification.

An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A) As a $2,100 capital gain. B) The shares are not subject to taxation. C) As a $2,500 capital gain. D) As $2,500 ordinary income.

B) The shares are not subject to taxation.

A customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment? A) The holding period for the stock was wiped out. B) The tax loss is not allowed. C) By repurchasing the investment at the same price, he keeps the original cost basis. D) He has a capital loss.

B) The tax loss is not allowed.

A client who is a manager of a pension plan has recently liquidated approximately $1 million in securities and now has only cash and cash equivalents in the account. This client's outlook concerning the market is: A) unknown. B) bearish. C) neutral. D) bullish.

B) bearish. Since the investor has moved all assets into cash or cash equivalents, the investor must expect a bear market and is taking this action in an attempt to protect against incurring losses from the anticipated market decline.

All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules EXCEPT: A) excessive activity in the customer's account. B) granting of discretionary authority to a new registered representative. C) switching of Class A shares between fund families. D) short-term trading in mutual fund shares.

B) granting of discretionary authority to a new registered representative.

If an investor wants to do a tax swap, he could reasonably expect to pay more money if he buys bonds with a: A) lower coupon and similar rating. B) higher coupon and similar rating. C) higher coupon and lower rating. D) lower coupon and lower rating.

B) higher coupon and similar rating.

Your client's investment portfolio is 50% growth stocks, 10% foreign stocks and 40% blue chip stocks. If the client is interested in further diversification which mutual fund would best meet that goal? A) Aggressive growth fund. B) Emerging market fund. C) Bond fund. D) Global equity fund.

C) Bond fund.

If a municipal bond is purchased at a discount which of the following is TRUE? A) The discount is amortized and increases cost basis each year until maturity. B) The discount is amortized and decreases cost basis each year until maturity. C) The discount is accreted and increases cost basis each year until maturity. D) The discount is accreted and decreases cost basis each year until maturity.

C) The discount is accreted and increases cost basis each year until maturity.

Under the 1934 Securities Exchange Act, all of the following are likely to qualify under the SEC's safe harbor rule regarding soft dollar arrangements EXCEPT A) a broker/dealer providing software to assist in the analysis of securities in exchange for directing transactions to the broker/dealer B) a broker/dealer providing research reports to the advisor in exchange for directing transactions to the broker/dealer C) a broker/dealer providing office furniture and computers in exchange for commissionable trades being directed to the broker/dealer D) a broker/dealer providing seminars to assist in the analysis of securities in exchange for directing transactions to the broker/dealer

C) a broker/dealer providing office furniture and computers in exchange for commissionable trades being directed to the broker/dealer

XYZ Corp. owns 18% of the voting common stock of ABCD Enterprises. In the current tax year, XYZ receives $250,000 in dividend income from its investment in ABCD. If XYZ has a marginal tax rate of 34%, what is its tax liability on the dividend income received? A) $85,000. B) $42,500. C) $0. D) $25,500.

D) $25,500. Under the inter-corporate dividend exclusion rule, if a corporation owns stock in another corporation, 70% of the dividends received is excluded from taxation. Therefore, only 30% of the $250,000 received is subject to tax (30% × $250,000 = $75,000). Applying a tax rate of 34% to $75,000 results in a tax liability of $25,500.

In a rising market, which of the following is least volatile? A) A stock with a beta of 2.0. B) A stock with an alpha of 0.5. C) A stock with an alpha of 2.0. D) A stock with a beta of 0.5.

D) A stock with a beta of 0.5.

If a customer buys a Mt. Vernon Port Authority municipal bond in the secondary market at 109 and holds the bond to maturity what are the tax consequences? A) Capital loss of $9. B) Capital gain of $9. C) Capital loss of $90. D) No capital gain or loss.

D) No capital gain or loss.

Which of the following statements best describes the term "churning"? A) Manipulation of market prices by a firm. B) Purchasing the same security in more than one customer account at a time. C) Making false or misleading statements to a customer for the purpose of inducing the customer to purchase or sell a security. D) Trading in a customer's account considered excessive, and for which no discernible investment purpose is detected.

D) Trading in a customer's account considered excessive, and for which no discernible investment purpose is detected.

The income from all of the following securities is taxable on the federal, state, and local income tax levels EXCEPT: A) reinvested mutual fund dividends. B) GNMA certificates. C) corporate BBB bonds. D) Treasury bonds.

D) Treasury bonds.

A registered representative (RR) at a FINRA member broker/dealer has a brother who is a Certified Public Accountant (CPA), operating his own accounting firm. The 2 brothers decide that they will pay one another for business referrals in the form of a flat fee each time one of them refers a client to the other. For the FINRA member RR, this arrangement is A) prohibited because finder's fees are disallowed amongst financial firms under the anti-money laundering provisions of the Bank Secrecy Act B) allowed so long as the fee is agreed upon in writing before either of them refers a client to the other C) allowed because the fee is a flat one and, therefore, not connected to the amount of business the referred customer might do D) prohibited because FINRA rules do not allow cash or non-cash payment for customer referrals to anyone who is not a FINRA member

D) prohibited because FINRA rules do not allow cash or non-cash payment for customer referrals to anyone who is not a FINRA member

Which of the following statements are TRUE? I. Systematic risk can be diversified away. II. Systematic risk cannot be diversified away. III. Nonsystematic risk can be diversified away. IV. Nonsystematic risk cannot be diversified away.

II and III

Your client is interested in a direct participation program (DPP) limited partnership. Which of the following two are most likely to factor into a discussion on suitability of such an investment? I. Beta. II. Liquidity. III. Duration. IV. Age.

II and IV