Unit 20 QBank
Earned income includes which of the following?
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 OMQ stock. After selling the stock at a loss, the investor could purchase which of the following and not violate the wash sale rule?
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?
Proceeds minus cost basis Proceeds minus cost basis equals capital gains. The dividends are not part of the calculation for capital gains
Regarding capital gains, which of the following is true?
Short-term gains are those realized on positions held for 12 months or less Profits on positions held 12 months or less are considered short-term gains. For those positions held longer than 12 months, the gains are considered long term and taxed at a more favorable rate
Which of the following is a benchmark for large cap stocks?
Standard and Poor's 500 Index The Standard and Poor's 500 Index is an index of 500 large companies
Your client, Soren Aland, buys a 4% XYZ corporate bond. If his current yield is 5%, he bought the bond at
a discount A bond purchased at a discount will have a current yield above the coupon rate
Shelby Bogden, your client, purchased a 6% corporate bond with a current yield of 5%. The bond was purchased at
a premium A bond purchased at a premium will have a current yield below the coupon rate
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 Quickly repurchasing a security that was just sold for a loss is recognized as having the intention to take advantage of the loss for tax purposes but not lose the income or potential for future gains from the security. This is known as a wash sale and taking the loss is prohibited. For the loss to be allowed, the investor must wait at least 30 days before repurchase. Matched orders, pegging, and supporting are all prohibited activities meant to manipulate stock prices
Earned income would include all the following except
dividends earned on mutual funds Earned income includes wages, salary, tips, bonuses, and income from active participation in a trade or business
When a bond is purchased at a discount the current yield will be
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
An investor purchased and then sold a security eight months later for a gain. This gain
is 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
When a bond is purchased at a premium, the current yield will be
lower 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 premium bond the coupon rate is always higher than the current yield
For tax purposes, investment income is
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 income tax purposes. Long-term capital gains are taxed at the capital gains tax rate
All of the following are investment income except
running a business Earnings from running a business is considered earned income
All of the following are taxable to the investor except
stock dividends A stock dividend is payment of additional shares of the issuer to the stockholder rather than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable
Current yield equals
the annual income divided by the market price Current yield equals the coupon rate (annual income) divided by the current market price. This is a very common formula on the test
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
$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 return of capital
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% An investor's total return is made up of any income received, such as dividends on stock or interest on bonds, plus any gain (or loss) over the holding period. That makes the formula for total return in this question: dividends plus capital gains divided by amount invested. The math looks like this: two years of dividends at $0.50 per year equals $1.00. The stock was purchased for $10 and sold for $11 resulting in a gain of $1.00. Add the $1.00 of income to the $1.00 of gains and then divide the resulting $2.00 by the cost basis of $10.00. This results in a total return of 20% (2/10 = 0.2). Please note that when a question refers to the amount of a dividend paid on stock, unless specified otherwise, it is a quarterly payment. This question specifies the annual amount is $0.50, so do not multiply that times 4 assuming the dividend is quarterly. If you did that, you probably answered 50%
Betsy Bingham asks you what her current yield will be if she buys a 6% corporate bond at $1,200. The answer is
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
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%
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 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
Which of the following would be considered earned income?
Bonus received from employment Earned income is received as the result of participating in trade or business, the generation and/or sale of goods and/or services—in other words, from work. The other choices are earnings from investments and are known as portfolio income
What are the two basic types of return on an investment?
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
The MSCI-EAFE Index tracks which of the following?
Foreign equities Maintained by MSCI Inc., the Europe, Australasia, and Far East (EAFE) Index is designed to track equity markets of developed economies, excluding the United States and Canada
Which of the following would not be considered ordinary income for tax purposes?
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?
Holding a stock and selling above its cost basis if over 12 months later would be a long-term gain Holding a stock and selling below its cost basis if For the holding period to be long term it must be more than one year
Which of the following would be true with regard to capital gains? - 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 - 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 - Capital gains are usually associated with the distribution of dividends including stock splits - Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams
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 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 Capital gains are associated with the sale or exchange of property including securities. The category of capital gain taxation is broken down into long and short-term capital gains. 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. Therefore, for short-term capital gains, the tax rates are the same as the taxpayer's ordinary income. However, if the asset is held for more than one year, the gain is considered to be a long-term and is taxed at a favorable rate
Which of the following is a benchmark for small cap stocks?
Russell 2000® Index The Russell tracks 2,000 small company stocks
Which of the following regarding income is true?
Salary or bonuses are earned income; interest and dividends are investment income While someone's salary or bonus would be earned income, investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities
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
The adjusted cost basis of the shares is $32 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 × 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
An investor purchased an MJS Corporation 6% 20-year bond at issue for $950. Two years later, the investor sold the bond for $925. This investor experienced
a $25 capital loss If a security is sold for less than the original purchase price, the difference is called a capital loss. This would apply to both equity and debt securities
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 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
Regarding the taxation of gains on securities, all of the following are true except
gains on securities for a position held at least 12 months are not taxable Investment income, which includes capital gains realized on securities positons, is taxable. Depending on how long a security was held, the gains might be taxable at the investor's ordinary income tax rate (for short-term gains) or at a more favorable long-term rate if the position was held for longer than 12 months
All of the following are true regarding market indexes except
they track single stocks rather than hypothetical portfolios Indexes such as the DJIA or the S&P 500 are hypothetical portfolios, not single stocks. While there's no single standard or benchmark, an index can be used as a performance standard one can monitor and therefore judge the performance of a portfolio or investment against. When we refer to the stock market's performance in general, we are most likely referring to the performance of an index or average that tracks stocks or bonds. These benchmarks can serve as an indicator of the overall direction of the market as a whole, or the direction of individual market sectors
