6 - Securities Analysis, Taxation & Federal Law Flashcards
This deck focuses on tax implications for investing and gifting, federal regulations, as well as quantitative analysis and investment risks.
1
Q
Tax rate increases as income increases
A
Progressive tax
2
Q
Taxes that are levied equally regardless of income
A
Regressive taxes
3
Q
Three examples of regressive taxes
A
Sales, excise, property
4
Q
Two examples of progressive taxes
A
Income, estate
5
Q
Three types of income subject to taxation
A
Earned, passive, portfolio
6
Q
Two sources of passive income
A
Limited partnerships, rental property
7
Q
Three taxable forms of portfolio income
A
Interest, dividends and capital gains
8
Q
Minimum holding period for lower long-term capital gains tax rate
A
1 year and 1 day
9
Q
Short-term holding period for capital gains tax computation
A
1 year or less
10
Q
Maximum amount of capital loss that can be used to offset current income each year
A
$3,000
11
Q
Maximum tax rate applicable to long-term capital gains
A
20%
12
Q
Period of time for which capital losses can be carried forward
A
Indefinitely
13
Q
Transaction which disqualifies capital loss because substantially similar securities are repurchased within 30 days
A
Wash sale
14
Q
Number of days before or after a sale for a loss for which a purchase of substantially similar securities must be avoided
A
Thirty days
15
Q
Under the wash sale rule, purchases of any of these four securities of the same issuer are considered substantially identical to purchases of the issuer’s stock
A
Long calls, rights, warrants and convertible bonds
16
Q
Three accounting methods available for determining which shares to liquidate
A
FIFO, share identification, average basis
17
Q
Method of share identification assigned by the IRS if no other method is chosen
A
FIFO
18
Q
Maximum tax rate that applies to qualified dividends
A
20%
19
Q
Cash dividends that are eligible for taxation at the same rate as long-term capital gains
A
Qualified
20
Q
Minimum holding period of stock for dividends to be classified as qualified
A
Sixty-one days
21
Q
Tax implication of stock splits and stock dividends
A
Reduction to cost basis; no current taxation
22
Q
The amount of investment in property; used to determine the gain or loss at time of sale
A
Cost basis
23
Q
The accounting method that allows an investor to select which shares to liquidate for tax purposes
A
Share identification
24
Q
Shares that would be liquidated first to result in the lowest possible capital gain
A
Shares with highest cost basis
25
The process of adjusting the cost basis of a bond purchased at a discount
Accretion
26
The process of adjusting the cost basis of a bond purchased at a premium
Amortization
27
A change of two of these three municipal bond characteristics avoids the wash sale rule
Issuer, coupon, maturity
28
The cost basis at maturity of a municipal bond purchased at a price of 108 with 8 years to maturity
Cost basis = par
29
The date which determines the amount of the tax deduction for charitable donations of appreciated property
Date the donation is made
30
The amount of tax deduction available for gifts of securities made to family members or others
None
31
The recipient's cost basis for gifts of securities from family members or others
Original cost basis of the donor
32
The cost basis of securities that are left to an heir
Market value of the securities on the date of the death of the owner
33
The current annual gift tax exclusion amount
$16,000
34
The tax provision that allows married persons to transfer their entire estate to the surviving spouse at death without taxation
Unlimited marital deduction
35
The person responsible for payment of gift taxes due
Donor
36
Amount of dividends that may be excluded from taxation by U.S. corporations
50%
37
Tax calculation performed to ensure that deductions that have been claimed do not reduce tax liability beyond a certain minimum level
Alternative minimum tax computation
38
Interest on bonds of these two issuers is taxable at the federal, state and certain local levels
Corporate and agencies
39
Interest on bonds of this issuer is taxable at state and certain local levels, but is exempt from taxation at the federal level
Municipal
40
Interest on bonds of this issuer is taxable at the federal level but exempt from taxation at the state and local level
U.S. Government
41
Two investments that generate passive income
DPPs and real estate
42
Amount of gift tax that applies to gifts between married couples
No gift tax regardless of amount
43
A short-term economic contraction
Recession
44
The four phases of the economic cycle
Expansion, peak, trough, and contraction
45
Longer term, severe economic contraction
Depression
46
A nation's annual output of all goods and services
Gross Domestic Product (GDP)
47
Measures the general rate of increase or decrease in prices paid for certain standard goods
Consumer Price Index
48
General increase in the level of prices
Inflation
49
Two economic conditions that generally accompany deflation
Severe recession, rising unemployment
50
The three types of economic indicators
Leading, lagging and coincident
51
Type of indicator that predicts a trend in the economy
Leading
52
Leading, lagging or coincident indicator? The money supply
Leading
53
Leading, lagging or coincident indicator? Employment levels
Coincident
54
Leading, lagging or coincident indicator? Corporate profits
Lagging
55
Leading, lagging or coincident indicator? Industrial production
Coincident
56
Leading, lagging or coincident indicator? Average duration of unemployment
Lagging
57
Leading, lagging or coincident indicator? New orders for consumer goods
Leading
58
Leading, lagging or coincident indicator? Stock prices
Leading
59
Leading, lagging or coincident indicator? Personal income
Coincident
60
Leading, lagging or coincident indicator? GDP
Coincident
61
Leading, lagging or coincident indicator? Manufacturing and trade sales
Coincident
62
Leading, lagging or coincident indicator? Ratio of inventories to sales
Lagging
63
Economist who theorized that aggregate demand controls employment and prices
John Maynard Keynes
64
The originator of monetarist theory
Milton Friedman
65
The economist associated with supply side economic theory
Arthur Laffer
66
Three tools used by monetarist theory to regulate the economy
Reserve requirement, discount rate, federal open market operations
67
Believes market forces should determine prices of all goods; federal government should reduce spending and taxes
Supply side economics
68
Two critical fiscal policy tools used to impact economic performance
Level of taxation and government spending
69
Economic theory that promotes strong government involvement in economic policy
Keynesian economics
70
Economic theory that promotes less government spending and lower taxes
Supply side economics
71
Most readily available type of money
M1
72
Acts as agent of the US Treasury
Federal Reserve Board
73
Regulates the U.S. money supply
Federal Reserve Board
74
Conducts the U.S. government's open-market operations
Federal Open Market Committee (FOMC)
75
Impact on the money supply of FOMC purchase of securities
Increases
76
Impact on interest rates of FOMC purchase of securities
Decreases
77
Interest rate charged between banks for loans of excess reserves
Federal funds rate
78
Minimum amount of customer deposits that commercial banks must deposit with the Federal Reserve
Reserve requirement
79
The Interest rate charged by the Fed to member banks for short-term loans
Discount rate
80
Economic policy that centers on federal spending, taxation and federal budgets
Fiscal policy
81
Impact of tight monetary policy on interest rates
Interest rates rise
82
The flow of money from low-yielding investments to higher yielding investments
Disintermediation
83
Impact of a weak dollar on U.S. exports
Exports will rise
84
Impact of a weak dollar on U.S. imports
Imports will fall
85
Impact on balance of payments when U.S. exports exceed U.S. imports
Surplus in the balance of payments
86
Impact on balance of payments when foreign interest rates are higher than U.S. interest rates
Deficit in the balance of payments
87
Uses charts and historic trading patterns to determine when to move in to and out of the markets
Technical analysis
88
Bases investment decisions on broad-based market trends, and analysis of financial firm financial reports
Fundamental analysis
89
Defensive, Cyclical or Growth Industry? Food
Defensive
90
Defensive, Cyclical or Growth Industry? Utilities
Defensive
91
Defensive, Cyclical or Growth Industry? Steel
Cyclical
92
Defensive, Cyclical or Growth Industry? Automobile
Cyclical
93
Defensive, Cyclical or Growth Industry? Technology
Growth
94
Basic balance sheet equation
Assets - Liabilities = Net Worth
95
Financial statement that summarizes revenues and expenses
Income statement
96
Features charting and market timing
Technical analysis
97
Predicts company performance based on financial statements and overall economic health
Fundamental analysis
98
Characterized by falling stock markets, rising inventories, declining GDP
Contraction
99
Characterized by low unemployment , increased business activities
Expansion
100
Requires registration of new issues; regulates primary market activity
Securities Act of 1933
101
Regulates secondary market activity; requires registration of broker-dealers
Securities Exchange Act of 1934
102
Created the SEC
Securities Exchange Act of 1934
103
Requires corporate bond issuers to appoint trustees to protect the interests of bondholders
Trust Indenture Act of 1939
104
Amends the Act of 1934 and specifies penalties for the use of non-public material information
Insider Trading and Fraud Enforcement Act of 1988
105
Defines registration of securities at state levels
Uniform Securities Act
106
Authorizes the regulation of credit to the Federal Reserve Board
Securities Act of 1934
107
Prohibited the use of inside information in trading activity
Securities Act of 1934
108
Regulates the exchanges and over-the-counter market
Securities Act of 1934
109
Exempts U.S. government securities from registration requirements
Securities Act of 1933
110
Requires the delivery of prospectuses for full and fair disclosure
Securities Act of 1933
111
Prohibits fraudulent activity in underwriting and distributing new securities
Securities Act of 1933
112
Three characteristics of bonds subject to provisions of Trust Indenture Act of 1939
Issued by corporations, size over $5 million in a 12 month period, maturity of 9 months or more
113
The barrier that must be established between departments to prevent a free flow of sensitive information
Firewall (Information barrier, Chinese Wall)
114
Civil penalties for violation of the Insider Trading and Securities Fraud Enforcement Act of 1988
300% of profits made or losses avoided
115
Minimum length of the cooling off period during the registration process
20 days
116
Disclosure document used to gather indications of interest during the cooling off period
Preliminary prospectus (red herring)
117
The day that the SEC releases a new issue for sale
Effective date
118
Securities that are exempt from the filing requirements of the Act of 1933
U.S. government, municipal bonds, fixed insurance products, national and state bank securities, non-profit securities, commercial paper and bankers acceptances with maturity of less than 270 days
119
Exemption from registration requirements for corporate offerings of less than $5 million in a 12 month period
Regulation A
120
Also known as a private placement exemption
Regulation D
121
Exemption from registration requirements for securities that are sold only within a state
Rule 147 (Intrastate offering)
122
The disclosure document that must be provided to investors in a Reg A offering
Offering circular
123
The maximum number of accredited investors that can participate in a Reg D offering
Unlimited
124
The maximum number of nonaccredited investors that can participate in a Reg D offering
35
125
The net worth and income criteria for an accredited investor under Regulation D
Net worth of $1,000,000 (exclusive of residence) and annual income of $200,000 or more ($300,000 jointly with spouse) in each of the two most recent years
126
Regulates the sale of control and restricted securities
Rule 144
127
Addresses the sale of nonregistered foreign and domestic securities to institutional investors
Rule 144A
128
Holding period required before restricted securities can be sold
6 months
129
Length of time a Form 144 filing covers
90 days
130
When a Form 144 must be filed
Concurrent with the sale
131
Addresses reclassifications, mergers or consolidations, and transfers of company assets
Rule 145
132
The amount of control securities that can be sold in a 90-day period under Rule 144
Greater of 1% of the total outstanding shares, or the average weekly trading volume of the preceding four weeks
133
Securities owned by directors, officers, or persons who own or control 10% or more of an issuer's voting stock
Control stock
134
When Rule 144 volume limits no longer apply to unaffiliated investors
After 6 months
135
Type of restriction that applies to sellers of control stock under Rule 144
Volume limits
136
Provision of Act of 1933 and 1934 Securities Acts that applies to all securities, including those that are exempt from registration
Antifraud
137
Eligible for purchase of nonregistered foreign and domestic securities under Rule 144A
Qualified Institutional Buyers (QIBs)
138
When securities registered under Rule 147 may be sold to a non-state resident
After 6 months
139
Purpose of a Schedule 13D
A 13D is filed when an investor becomes a 5% beneficial shareholder
140
Filing deadline for a Schedule 13D
Within 10 business days of the acquisition with the issuer, exchange and the SEC.
141
Purpose of a Schedule 13G
A 13G is filed when an investor becomes a 5% beneficial shareholder on a passive basis.
142
Filing deadline for a Schedule 13G
Within 45 days of calendar year end.
143
Purpose of a Schedule 13F
A 13F is a quarterly filing by Institutional Investment Managers to disclose long equity positions
144
Filing deadline for a Schedule 13F
Within 45 days of quarter end.
145
Subchapter C Corporation
Does not pass through gains and loses, can have an unlimited number of shareholders (including institutions).
146
Subchapter S Corporation
Passes through all gains and losses to investors, can have a maximum of 100 shareholders (no institutional shareholders).
147
Total return
(Income + Dividends + Capital Appreciation) / (Initial purchase price)
148
Inflation-Adjusted Return (AKA Real Return)
Nominal return - inflation rate
149
After-Tax Return
Investment return x (1 - tax bracket)
150
Future value
What funds invested today at a given rate will be worth at some point in the future.
151
Present value
The value today of a future cash flow discounted at a specified interest rate.
152
Beta
A measure of a stock's or portfolio's volatility in relation to the overall market. A beta of greater than 1 indicates a stock or portfolio will be more volatile the overall market, a beta of less than one will be less volatile.
153
Monte Carlo simulation
A statistical method to determine the return profile of a portfolio.
154
R-squared
A statistical measure indicating what percentage of a portfolio's performance can be tied to a standard benchmark (e.g. S&P 500).
155
Sharpe ratio
A measure of a portfolio's risk in comparison to its expected return. It is the portfolio's average return in excess of the risk-free rate divided by the standard deviation of the portfolio. The higher this ratio, the more attractive the investment.
156
Systematic risk
The risk of an investment that is associated with macroeconomic factors that affect all assets.
157
Unsystematic risk
The risk associated with a specific investment, this can be diversified away.
158
Modern portfolio theory
An approach to investing that evaluated the total portfolio's risk and reward profile as opposed to those of individual securities. This approach identifies diversification as the best way to achieve risk-adjusted returns.
159
Alpha
The risk-adjusted returns in a portfolio in excess of the returns expected by the capital asset pricing model (CAPM).
160
Capital needs analysis
A technique used to determine how much life insurance an individual needs. It considers; mortgages and other debts, continuing income for survivors, college tuition, and potentially estate taxes
161
Alimony
Payments to an ex-spouse. This is non-deductible to the payer and is not treated as income to the recipient. This is a recent change under the 2017 Tax Cuts and Jobs Act.
162
Child support
Payments to support a child following a divorce. This is not deductible to the payer and is not treated as income to the recipient guardian.
163
If two securities typically move up and down by the same amount, what is their correlation coefficient?
1
164
An efficient portfolio is one that offers
The most return for a given amount of risk
165
Given that the risk premium on the market is 14%, and the beta on an asset is 0, the risk premium on the asset would be
0%
## Footnote
A beta of 0 on the asset signifies that it has no systematic risk. A riskless asset will not have a risk premium.
166
In a perfectly efficient market what type of investment strategy would be most efficient?
Passive strategy
167
If an investor includes investments with a negative correlation in their portfolio, what impact would this have on diversification?
Increase
168
What type of risk can an investor not avoid by having a diverse portfolio?
systematic risk
169
The correlation coefficient has values between
-1 and 1
170
Beta is a standardized measure of:
systematic risk
171
If a portfolio is below the efficient frontier, that indicates
it is taking on too much risk for too little return
172
Individuals with near-term, high-priority goals should select:
low risk, short-term investments
173
The efficient frontier represents
the set of portfolios that has the maximum rate of return for every given risk level, and the minimum risk for every level of return.
174
A higher **Sharpe ratio** implies:
Greater Risk-Adjusted Performance
175
The weak form efficient market hypothesis (EMH) implies that:
security prices reflect all currently available market data
176
The assumption that stock prices fully reflect all information, including public and private information, describes which market theory?
strong-form efficient market hypothesis (EMH)
177
The semi-strong form of the efficient market hypothesis (EMH) assumes that
security prices fully reflect all publicly available information
178
A higher standard deviation for an investment indicates
greater volatility of returns compared to the expected average return
179
Two securities whose price movements are completely unrelated to each other would have a correlation coefficient of
0
## Footnote
+1 = Perfect positive correlation
-1 = Perfect negative correlation
0 = Statistically uncorrelated
180
Assuming an investment of $10,000 and 5% interest, how long will it take for the money to double?
72/5 = **14.4 years**
181
For an investment to be acceptable, how would its internal rate of return compare to its cost of capital?
exceed
182
When NPV is positive, a project's return is expected to be
positive
183
When NPV is negative, a project's return is expected to be
negative
184
The difference between an investment's present value and its cost is
Net present value (NPV)
185
If a hedge fund's return exceeds that implied by beta relationship, it is attributed to the value added by the hedge fund manager. This excess value is also known as
Alpha
186
An investment manager's portfolio returned 13% over the past year. The market returned 7% and the portfolios beta is 1.3. What alpha did the fund produce?
3.9
## Footnote
13% - (1.3 x 7%) = 3.9
187
What are the three components of the Sharpe ratio?
Standard deviation, risk-free rate, actual return
188
What metric is used to measure the **risk-adjusted performance** of a fund, taking into account the volatility of the returns generated?
Sharpe ratio
189
A portfolio manager purchased $1,000,000 of TIPS at auction, which pay an annual coupon of 5%. Assuming that the semi-annual CPI is 2%. What is the first semi-annual coupon payment?
$25,500
## Footnote
New principal after 6 months = $1,000,000 x (1 +2%) = $1,020,000
1st semi-annual coupon = 2.5% of $1,020,000 = $25,500
