Series 7 Unit 6 Review

Your client lives in a state with a very high state income tax; there is also a city tax. The client wishes to invest in a debt security that will avoid those taxes. You might suggest A) a U.S. Treasury bond. B) a municipal bond issued by another state. C) an FHLMC bond. D) a GNMA pass-through.

A) U.S. Treasury bond. L.O 6.c

Other than the 52-week bills, the U.S. Treasury conducts auctions for Treasury bills A) weekly. B) bimonthly. C) monthly. D) only when the U.S. Treasury Department deems it necessary

A) weekly. LO 6.a

All of the following statements regarding the Federal National Mortgage Association (FNMA) are true except A)FNMA is owned by the U.S. government. B)FNMA pass-through certificates are not guaranteed by the U.S. government. C)FNMA is a publicly held corporation. D)interest on FNMA certificates is taxable at all levels.

A)FNMA is owned by the U.S. government. L.O 6.b

Which of the following statements regarding the Government National Mortgage Association (GNMA) is true? A)Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors. B)GNMA originates loans to home buyers and sells the mortgage-backed securities to private lending institutions. C)GNMA approves residential mortgages for home buyers. D)Lending institutions apply to GNMA for funds to lend to residential home buyers.

A)Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors. L.O 6.b

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

A)Treasury bonds. L.O 6.c

If a customer believes interest rates have peaked, and therefore, wants to buy long-term, fixed-income securities providing semiannual interest payments, you would recommend A) Treasury STRIPS. B) bonds that do not have a call feature. C) premium bonds with low call premiums. D) puttable bonds.

B) bonds that do not have a call feature. L.O 6.a

An investor purchases $10,000 worth of Treasury bills on November 27 and holds them until they mature on March 30 of the following year. For purposes of taxation, the interest from those Treasury bills is treated as A) a short-term gain. B) ordinary income subject to federal income tax. C) tax-free income. D) partially ordinary income and partially capital gain.

B) ordinary income subject to federal income tax. L.O 6.c

client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They are all auctioned on a monthly basis. B)They have a maximum maturity of 365 days. C) They are quoted with a bid higher than the ask. D) They are generally callable after the first 6 months.

C) They are quoted with a bid higher than the ask. L.O 6.a

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that A) agency issues are taxable on the federal level, while Treasury issues are not. B) agency issues are more likely to be issued in larger amounts. C) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. D) agency issues frequently trade on the NYSE, while Treasuries never do.

C) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. L.O 6.c

A customer owns 10M of 7% U.S. Treasury bonds. He is in the 28% federal tax bracket and the 10% state tax bracket. What is his annual tax liability on these bonds? A)$266 B)$98 C)$70 D)$196

D) $196 M = 1000 10M = $10,000 $1,000 x 7% = $70 (annual interest per bond) $70 x 10 = $700 (annual interest) $700 x 28% = $196 (tax liability) LO 6.c