Unit 20 SIE Exam Prep Investment Returns

Which of the following would be true with regard to capital gains? 1. 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. 2. 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. 3. Capital gains are usually associated with the distribution of dividends including stock splits. 4. Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams.

1 AND 2

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? 1. The adjusted cost basis of the shares is $30. 2. The adjusted cost basis of the shares is $32. 3. There is a short-term capital gain on all the shares sold. 4. There is a long-term capital gain on all the shares sold.

2 AND 4

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

A

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 long-term gain, and it will be taxed at a more favorable rate than short-term gains. D) is considered to be a short-term gain, and it will be taxed at a more favorable rate than long-term gains.

A

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

A

Regarding capital gains, which of the following is true? A) Short-term gains are those realized on positions held for 12 months or less. B) Short-term gains are those realized on positions held for 9 months or less. C) Long-term gains are those realized on positions held for 2 years or more. D) Long-term gains are those realized on positions held for 10 years or more.

A

Shelby Bogden, your client, purchased a 6% corporate bond with a current yield of 5%. The bond was purchased at A) a premium. B) a discount. C) below par. D) par.

A

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

A

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

A

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

A

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

A

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

A

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

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) a $25 interest loss. B) a $25 capital loss. C) a $925 return on investment. D) a $25 return on investment.

B

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? A) 5% B) 20% C) 10% D) 50%

B

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

B

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

B

Which of the following best describes the calculation for gains or losses for tax purposes? A) Proceeds plus cost basis B) Proceeds minus cost basis C) Proceeds plus dividends, minus cost basis D) Proceeds minus dividend, plus cost basis

B

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

B

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 A) 2%. B) 5%. C) 6%. D) 3%.

B

Your client, Soren Aland, buys a 4% XYZ corporate bond. If his current yield is 5%, he bought the bond at A) above par. B) a discount. C) par. D) a premium.

B

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) supporting, and taking the loss is allowed. B) matched orders, and taking the loss is prohibited. C) a wash sale, and taking the loss is prohibited. D) pegging and is taking the loss allowed.

C

Betsy Bingham asks you what her current yield will be if she buys a 6% corporate bond at $1,200. The answer is A) 3%. B) 2%. C) 5%. D) 6%.

C

Current yield equals A) the market priced divided by the annual income. B) the par value divided by the stated rate. C) the annual income divided by the market price. D) the stated rate divided by the par value.

C

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) A $5 gain B) No gain or loss C) A $5 loss D) A $10 gain

C

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

C

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

D

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

D

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? A) OMQ call options B) OMQ convertible bonds C) OMQ warrants D) OMQ put options

D

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) marking the close. B) matched orders. C) pegging. D) a wash sale.

D

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 A) $20 return of capital, $28 return on investment. B) $28 capital gain. C) $28 return on investment. D) $20 cost base, $8 capital gain.

D

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

D

For tax purposes, investment income is A) always taxed at the highest ordinary income tax rate. B) never taxable at ordinary income tax rates. C) always taxed at the capital gains tax rate. D) normally taxed as ordinary income.

D

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 below its cost basis if held for over a year would be a short-term loss. 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 above its cost basis if over 12 months later would be a long-term gain.

D