Tax and Yields

Question 1

___ is a measurement of the amount of income an investor will receive as a percentage of the cost of the investment.

Answer 1

Yield

Question 2

______ may apply to both stocks and bonds. If the income is from a stock dividend, it is also called _____.

Answer 2

current yield (CY)
dividend yield

Question 3

the formula for CY:

Answer 3

annual income (in dollars) / current market value = CY

Question 4

CY is an a ____ figure. You will need to get to the annual amount of the dividend before you divide.

Answer 4

annual

Question 4

when a customer buys a security and holds it, it is an ____ position. The position is ____ by selling the security.

Answer 4

open
closed

Question 5

In a short sale, the customer opens the position by _____ and closes the position by _____.

Answer 5

selling
buying

Question 6

_____ are generated from closing an open position at a profit. If you close an open position for a loss, you have capital losses.

Answer 6

capital gains

Question 7

The formula for capital gains:

Answer 7

sales proceeds - adjusted cost basis = (capital gains if a positive number, capital losses if a negative number)

Question 8

______ is the amount paid for a position modified by any adjustments.

Answer 8

Adjusted cost basis
Adjustments to cost basis most often come from a stock split or a stock dividend.

Question 9

______ is a measure of the return an investor receives from an investment that includes
both income and any gain or loss realized. This is expressed as a percentage of the cost basis of the investment.

Answer 9

Total return

Question 10

the formula for calculating total return is as follows:

Answer 10

total return = (income + gains or - losses) / cost basis (from the original investment price)

Question 11

A total return calculation may use realized capital gains or losses for _____ positions.
A total return calculation may also use unrealized capital gains or losses for ____ positions.

Answer 11

closed
open

Question 12

Total Return is expressed as a ____

Answer 12

%

Question 13

Ordinary income consists of several different types of income that are combined:

Answer 13

earned income, investment income, and passive income.

Question 14

It is ordinary income that is used to determine the _____ that an investor will pay.

Answer 14

income tax rate

Question 15

_____ income includes salary, wages, bonuses, tips, and otherincome that is derived from active participation in a trade or business.

Answer 15

Earned

Question 16

Investment income is that which is earned from one’s investments and includes ____ and ____ payments.

Answer 16

dividends and interest

Question 17

____income is a type of investment income that is derived from certain investments, primarily direct participation programs such as limited partnerships and many real estate investments.

Answer 17

Passive

Question 18

____ income is income derived from an asset the investor holds.

Answer 18

Investment

Question 19

______ are generated from the buying and selling of a security. Gains and losses are generated when an investment position is closed and the investor no longer holds the
asset.

Answer 19

Capital Gains and Capital Losses

Question 20

_____ gains are taxed separately from ordinary income. _____ gains are included in ordinary income.

Answer 20

Long-term
Short-term

Question 21

In order to receive long-term capital gains treatment, a position must have been held for ____.

Answer 21

more than one year

Question 22

Long-term capital gains are taxed at an ____ rate. The actual rate is not tested because
the rate changes regularly.

Answer 22

advantaged

Question 23

The long-term rate is (under current law) ____ than the investor’s ordinary income tax rate.

Answer 23

lower

Question 24

Capital losses may be used to ____ capital gains on a dollar-for-dollar basis.

Answer 24

offset

Question 25

If an investor has losses that exceed gains in a given year, she may use up to $3,000 of those losses to reduce _____. If an investor still has losses in excess of gains and the $3,000, she may carry those losses into the next tax year.

Answer 25

ordinary income

Question 25

Unrealized gains and losses are found on ______ positions.

Answer 25

open

Question 26

unrealized gains and losses have no _____.

Answer 26

tax impact

Question 27

A _____ is an attempt to create a loss for tax purposes (sell at a loss) when one’s intent is to still maintain ownership of the securities.

Answer 27

wash sale

Question 28

A wash sale is not illegal. Attempting to use the losses from the wash sale in order to _____ is illegal

Answer 28

reduce taxes

Question 29

Wash Sale Components

Answer 29

RE-Establish position 30 days before or after loss
In the same or substantially similar security
May not use for tax purposes

Question 30

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?

Answer 30

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.

Question 31

A bond purchased at a _____ will have a current yield below the coupon rate.

Answer 31

premium

Question 32

Your customer sells 100 shares of Small Co., Inc., common stock at $50 per share. After six months, they close the short position at $40 per share. Small Co. does not pay a dividend. What is the total return?

Answer 32

The formula for calculating total return is (income + gains or – losses) / cost basis. For this question ($0 + $10) / 40 = 10 / 40 = 0.25 (25%).

Question 33

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?

Answer 33

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.

Question 34

On March 3, the board of directors of Seabird Airlines declares a $0.20 per share dividend payable to holders of record as of March 30. Seabird stock jumped from $35 per share to $40 per share on the news. The current yield of Seabird stock is

Answer 34

The formula is (quarterly dividend x 4) / current market value. (0.2 x 4) / 40 = (.8) / 40 = .02 (2%)

Question 35

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?

Answer 35

With a nonqualified annuity, all distributions more than the cost basis will be taxed as ordinary income.

Question 36

An investor purchased 100 shares of LMN stock in 2013 at a price of $40 per share. Soon after, 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?

Answer 36

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.

Question 37

a short-term gain, and it will be taxed at the same rate as the taxpayer’s other ____

Answer 37

ordinary income