2nd Set Of Missed Test Questions Flashcards
When an economy is coming out of a recession, what happens to cyclical stocks, unemployment rate, interest rates, personal income?
Cyclical stocks move up in price
Unemployment rate will decline
Interest rates will fall
Personal income will grow
What is the tax equivalent yield of a Municipal bond with a 3.25% rate?
Investors marginal rate is 24%
State income tax is 6%
3.25% / 1- (.24+.06) = 4.64%
If you are considering purchasing shares in XYZ stock that has a 20% probability of experiencing a -10% return, 40% probability of experiencing an 8% return, had a 40% probability of experiencing a 12% return. If you have a required rate return of 6.5% should you invest in this stock?
No
(.20 x -.10) + (.40 x .08) + (.40 x .12) = .06 or 6%
Standard deviation measures what?
Total risk, systematic and unsystematic, and therefore is always the appropriate measure of risk
You Purchase a 30 year bond for $977.36 with a stated coupon rate of 8.5%. What is the yield to maturity for this investment if you receive semi annual coupon payments and expect to hold the bond to maturity
8.71%
PV = -977.36
N = 60 (30 x 2) Semi annual pmts
PMT = 42.50 (85 / 2) Semi annual pmts
FV = 1000 (face amount of the bond)
Solve for I/YR = 4.357 x 2 = 8.72%
Remember you have to multiply the final number by the number of payments in a year to get the right number
Are US treasury STRIPS subject to reinvestment rate risk?
No, they do not have coupon payments reinvestment rate risk is voided, but it’s price is more volatile than coupon paying bonds with similar maturities and ratings
Interest income is taxable to the holder annually and is considered ordinary income
If interest rates are expected to rise in the near future, should you hold or sell your long-term bonds?
Sell your long-term bonds and reinvest the proceeds at a higher coupon rate once interest rates actually rise
How are assets valued with expected returns that lie above the security market line (SML)?
Undervalued because they’re expected returns are higher than they required return represented by the SML
In general, how do rising interest rates affect stocks and bond prices?
Stock prices will go down
Bond prices will go down
To receive Worker’s Compensation benefits, what two eligibility requirements must be met?
The disabled person must work in a covered occupation and the worker must have a job related accident or disease
Remember these are Worker’s Compensation benefits not insurance
General business liability is the legal liability arising out of business activities, except what?
Auto, motorized vehicle, aircraft, and employee or workers compensation injuries
Negligence per se is a situation in which….
The injured party is relieved of the burden of approving negligence because the attic self constitutes negligence. The injured party does not have to prove negligence.
The act itself constitutes negligence
When the foreign currency appreciates, each foreign currency denominated, cash flow buys more domestic currency units what does this do for a foreign investment?
This increases the domestic currency return from the investment, the appreciation of the foreign asset benefits, the investor as well
What regulation established the securities investor protection corporation (SIPC)?
Securities investor protection act of 1970
If you give a church a charitable gift that is a collection of lets say baseball cards or coins etc, some collectible that is not use related to the church…what is the allowable deduction?
Since this unrelated property, the allowable deduction is limited to his basis.
Year 1 James sold stock to his son with a cost of $7000 to his son for $5,000 (FMV). A year later the son sells the stock in a transaction to another non related individual for $6,000. What is the proper tax treatment of these transactions?
James sale to his son is a related party transaction, So James cannot recognize the loss ($5,000 - $7,000 = $2,000)
When the son sells it for $6,000 he has a realized gain of $1,000, However he will not recognize this gain because he can utilize a $1,000 of his father’s unrecognized loss. The remaining $1,000 is gone forever
What is the negligence penalty by the IRA?
20% of the amount applied of the negligence
What is the 7 pay test that can turn a whole life insurance policy into a MEC?
The 7 pay test requires that the total premiums paid never exceed the amount of the level annual premiums paid if the policy had been charged a level amount that would pay the policy up after 7 years.
Example if the level premium in the 1st year is $3,000 then the prem paid cannot exceed $3,000 in the 1st year. In the second year told Pence paid cannot exceed $6000. If at any time, the total premiums paid exceed the net level premium that would have been paid up to the time and question the policy is considered a modified endowment contract and tax treatment changes.
How loans from a retirement plan treated
Loans are never assessed a 10% penalty, regardless of the participants age when the loan is issued
However, the outstanding balance on a retirement plan loan becomes subject to income tax and the early withdrawal penalty if the loan is defaulted
From qualified plans to sole proprietors, greater than 10% partners, and greater than 5% shareholders in an S corporation are permitted
Generally loans are limited to 1/2 the vested account balance and cannot exceed $50,000
Account balances are less than $20,000 however loans up to the lesser of $10,000 or the vest of the account balance are available
And determining whether the gain is long-term or short term, capital gains holding period is determined by either the day of disposition or the day of acquisition, which is it?
Day of disposition is included in the holding. The day of acquisition is not.
Is tax exempt income from a municipal revenue bond a preference for AMT adjustment?
No, it is not a preference
American opportunity tax credit
What is the maximum credit that can be taken and what is the breakdown of the credit?
Maximum of $2500 for the tax year
Predator is 100% of the first $2000 of qualified expenses +25% of the next $2000
Phase out range is $160,000-$180,000 MFJ
$80,000-$90,000 single
What is the phase out range for the American opportunity, tax and lifetime learning credits?
$160,000 - $180,000 MFJ
$80,000 - $90,000 Single
Is a state tax refund an offset against the state income tax itemized deduction?
No, it is not
