Job Function 3

Question 1

An investor has the following tax picture in 2021:

• Tax loss carryover from 2021: $9,000
• Capital gains realized in 2022: $15,000
• Capital losses realized in 2022: $2,000

What is the investor’s reportable gain or loss for 2022?

Answer 1

Rememeber, the $3,000 limitation is against income. In determining an investor’s capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other.

In this situation, all of the prior year’s loss carryover of $9,000 is added to the current year’s loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000, for a net capital gain of $4,000.

Question 2

What are capital losses?

Answer 2

Capital losses are losses incurred from the sale of capital assets.

Question 3

How do capital losses affect tax liability?

Answer 3

Capital losses reduce tax liability by being deducted from ordinary income.

Question 4

What is the maximum amount that individuals or married couples can deduct for capital losses annually?

Answer 4

$3,000 annually.

Question 5

What happens if a long-term capital loss exceeds the $3,000 deduction limit?

Answer 5

The excess is carried forward to future years until the loss is exhausted.

Question 6

Under current IRS regulations, how much does $1 in losses result in deductions?

Answer 6

$1 in losses results in $1 in deductions.

Question 7

Fill in the blank: Capital losses are deducted from _______.

Answer 7

ordinary income

Question 8

True or False: Married couples can deduct more than $3,000 in capital losses annually.

Answer 8

False

Question 9

What is the easy way to handle questions about stock splits?

Answer 9

Turn the split into a fraction

Question 10

What happens to the market price per share after a stock split?

Answer 10

It will be reduced

Question 11

In a 5-for-4 stock split, what should the new price be approximately in relation to the old price?

Answer 11

About four-fifths of the old price

Question 12

What does a one-fifth change in stock price represent in percentage terms?

Answer 12

20%

Question 13

How do you calculate the percentage change represented by a one-fifth change?

Answer 13

100% ÷ 5 = 20%

Question 14

Aenical Corporation issued $100 million of $100 par value preferred stock a number of years ago. The stock pays quarterly dividends of $1.25. Recent issues of comparable preferred stock carry a dividend yield of 4%. One could expect the market price of the Aenical preferred stock to be closest to

Answer 14

$125;

This stock is paying an annual dividend of $5 ($1.25 per quarter times four). Investors purchasing this stock expect their return to be approximately 4%, the current rate being paid in the market.

The math here needs to first answer “$5 is 4% of what number?” Divide $5 by 4% and the answer is $125. At $125 per share, Aenical stock paying a $5 annual dividend is offering a 4% return on investment.

Question 15

What are US Treasury Bills?

Answer 15

Short-term government securities that mature in one year or less.

Question 16

True or False: Commercial paper is a long-term financing option for corporations.

Answer 16

False

Question 17

Fill in the blank: US Treasury Bills are sold at a discount and do not pay ______.

Answer 17

interest

Question 18

What is the typical maturity range for commercial paper?

Answer 18

Usually between 1 and 270 days.

Question 19

Multiple Choice: Which of the following is a feature of negotiable CDs?
A) Non-transferable
B) High liquidity
C) Long-term maturity
D) Backed by government

Answer 19

B) High liquidity

Question 20

What is the primary purpose of US Treasury Bills?

Answer 20

To finance the national debt and manage short-term cash needs.

Question 21

True or False: Jumbo CDs are typically issued in amounts of $100,000 or more.

Answer 21

True

Question 22

What is a key characteristic of commercial paper?

Answer 22

It is an unsecured, short-term debt instrument.

Question 23

Fill in the blank: Negotiable CDs can be sold in the secondary market, making them ______.

Answer 23

negotiable

Question 24

Short Answer: What is the main difference between a negotiable CD and a regular CD?

Answer 24

A negotiable CD can be sold to other investors, while a regular CD cannot.

Question 25

What does FDIC stand for?

Answer 25

Federal Deposit Insurance Corporation

Question 26

True or False: Negotiable CDs are insured by the FDIC.

Answer 26

True, as long as they are issued by an FDIC-insured bank.

Question 27

Fill in the blank: Brokered CDs are typically sold through ______.

Answer 27

brokerage firms

Question 28

What is a banker's acceptance (BA)?

Answer 28

A banker's acceptance is a short-term debt instrument issued by a company that is guaranteed by a bank.

Question 29

Which type of CD generally has a higher interest rate: Negotiable CDs or traditional CDs?

Answer 29

Negotiable CDs

Question 30

What is a repurchase agreement (repo)?

Answer 30

A repurchase agreement (repo) is a financial transaction in which one party sells an asset to another party and agrees to repurchase it at a later date for a higher price.

Question 31

True or False: In a reverse repurchase agreement, the party that initially sells the asset agrees to buy it back later.

Answer 31

True

Question 32

Fill in the blank: A repo is commonly used to provide _____ for short-term borrowing.

Answer 32

liquidity

Question 33

Which of the following is typically used as collateral in a repo transaction? A) Cash B) Government securities C) Stocks

Answer 33

B) Government securities

Question 34

What is the primary purpose of engaging in a reverse repurchase agreement?

Answer 34

The primary purpose is to temporarily invest excess cash while earning interest.

Question 35

What is a eurobond?

Answer 35

A eurobond is a bond issued in a currency not native to the country where it is issued.

Question 36

True or False: Eurodollar bonds are issued in U.S. dollars and are typically issued outside the United States.

Answer 36

True

Question 37

Fill in the blank: Eurobonds are typically issued by ________ to raise capital in international markets.

Answer 37

governments or corporations

Question 38

Which of the following is NOT a characteristic of eurodollar bonds? A) Issued in U.S. dollars B) Issued outside the U.S. C) Subject to U.S. regulations

Answer 38

C) Subject to U.S. regulations

Question 39

What is one major advantage of eurobonds for issuers?

Answer 39

They can attract a wider range of investors in international markets.

Question 40

Eurodollar bonds pay interest in

Answer 40

US dollars

Question 41

Eurobonds pay interest in

Answer 41

foreign currency

Question 42

True or False) Eurobonds and Eurodollar bonds must be issued outside of the United States.

Answer 42

True

Question 43

- sometimes referred to as the deed of trust - represents issuers obligation to pay back bond on specific date - explains rate of interest for use of funds and/or any collateral pledged as a security

Answer 43

indenture

Question 44

- long term debt financing - money borrowed for a minimum of fiver years - most frequently refers to 20-30 year maturities

Answer 44

debt capital

Question 45

What is the formula for current yield (CY)?

Answer 45

Annual interest in dollars divided by the current market price ## Footnote Current yield is also referred to as current return.

Question 46

What happens when an investor buys a security at a discount?

Answer 46

There will be a profit in addition to the annual interest

Question 47

What happens when an investor buys a security at a premium?

Answer 47

There will be a loss if held to maturity

Question 48

Fill in the blank: If you pay more, you get ______.

Answer 48

less

Question 49

Fill in the blank: If you pay less, you get ______.

Answer 49

more

Question 50

If a bond has a 5% coupon and is currently yielding 6%, is it selling at a discount or premium?

Answer 50

Selling at a discount

Question 51

If a bond has a 5% coupon and the current return is 4%, is it selling at a discount or premium?

Answer 51

Selling at a premium

Question 52

True or False: A bond yielding higher than its coupon rate indicates it is sold at a premium.

Answer 52

False

Question 53

True or False: A bond yielding lower than its coupon rate indicates it is sold at a discount.

Answer 53

False

Question 54

What is the relationship between coupon rate and bond duration?

Answer 54

The lower the coupon rate, the longer a bond's duration; the higher the coupon rate, the shorter the duration.

Question 55

How does bond maturity affect its duration?

Answer 55

The longer a bond's maturity, the longer the bond's duration.

Question 56

For coupon bonds, how does duration compare to maturity?

Answer 56

Duration is always less than the bond's maturity.

Question 57

What is the duration of a zero-coupon bond?

Answer 57

The duration for a zero-coupon bond is always equal to its maturity.

Question 58

What does a narrowing yield between US Treasury bonds and AAA-rated corporate bonds indicate?

Answer 58

An improving economy ## Footnote This suggests that market sentiment is becoming more favorable.

Question 59

What is the relationship between bond risk and yield?

Answer 59

The greater the risk, the higher the yield on the bond.

Question 60

What do analysts compare to gauge market sentiment regarding bonds? ## Footnote Debt Securities

Answer 60

The difference between yields on bonds with the same maturity but different quality (rating).

Question 61

What is the term for the difference in yields between Treasuries and corporate bonds? ## Footnote Debt Securities

Answer 61

Yield or credit spread.

Question 62

When does the yield or credit spread tend to widen? ## Footnote Debt Securities

Answer 62

When economic conditions sour.

Question 63

When does the yield or credit spread tend to narrow? ## Footnote Debt Securities

Answer 63

When economic conditions improve.

Question 64

Is it likely for the yield on a corporate bond to be lower than a Treasury bond with a similar maturity? ## Footnote Debt Securities

Answer 64

Highly unlikely.

Question 65

What is a common synonym for yield to maturity? ## Footnote Debt Securities

Answer 65

Basis ## Footnote Particularly relevant for municipal bonds

Question 66

For any bonds trading at a premium, how does the nominal yield compare to the basis? ## Footnote Debt Securities

Answer 66

The nominal yield is higher than the basis (YTM) ## Footnote This indicates that the bond's coupon rate exceeds the yield to maturity

Question 67

List the yields from lowest to highest for bonds at a premium. ## Footnote Corporate Bonds

Answer 67

* Yield to call * Yield to maturity * Current yield * Nominal yield ## Footnote This ranking helps investors understand the potential returns on premium bonds

Question 68

Fill in the blank: For bonds purchased at a discount, YTM calculations include Annual interest + (discount ÷ number of years to maturity) ÷ (Current market price + par) ÷ _______. ## Footnote Corporate Bonds

Answer 68

2 ## Footnote This formula helps determine the yield to maturity for discounted bonds

Question 69

a bond's basis is its ## Footnote Corporate Bonds

Answer 69

yield to maturity (YTM)

Question 70

annual interest - (premium/years to maturity)/average price of the bond | Corporate Bonds ## Footnote bond's average price is the price paid plus the amount received at maturity (par) divided by two

Answer 70

Determining a bond's YTM if purchased at a premium

Question 71

True or False) Commercial paper is quoted on a discount yield basis. ## Footnote Corporate Bonds

Answer 71

**False**: Commercial paper is short-term, unsecured corporate debt. It is issued and traded at a discount of face value and does not pay periodic interest. Like all zeroes, it is quoted on a discounted yield basis.

Question 72

Which of the following callable municipal bonds trading on a 7% basis is most likely to be called? A) 7.5% coupon, callable at 100 in 2030 B) 6.5% coupon, callable at 100 in 2030 ## Footnote Corporate Bonds

Answer 72

**A)** An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first. | A) 7.5% coupon, callable at 100 in 2030

Question 73

True or False) Treasury bills, zero-coupons issues, and BA's trade with accrued interest. ## Footnote Corporate Bonds

Answer 73

**False**: All of the listed debt instruments are issued at a discount and return the face value at maturity. To trade with accrued interest, the security must pay interest. . ## Footnote *An appropraite selection would have been negotiable (jumbo) CDs*

Question 74

What is the current yield of 6% $50 par callable preferred stock trading at $75? ## Footnote Corporate Bonds

Answer 74

Current yield on any security, stock or bond, is the annual income (dividend on stock, interest on bond) divided by the current market price per share (or per bond). The math in this question is the dividend of $3 (a 6% $50 par preferred stock is paying an annual dividend of 6% of $50, or $3 per share) divided by the current market price of the preferred stock ($75). The quotient is **0.04 or 4%**.

Question 75

# Municipal Securities What are revenue bonds primarily used for?

Answer 75

To finance facilities and pay principal and interest from generated revenue ## Footnote Revenue bonds are secured by the revenue produced by the financed facility.

Question 76

# Municipal Securities What is the flow of funds in the context of revenue bonds?

Answer 76

The specific order in which the issuer pledges to pay expenses ## Footnote This order dictates how the generated revenue is allocated.

Question 77

# Municipal Securities What is a net revenue pledge?

Answer 77

A commitment where total receipts from operating a facility are deposited into a revenue fund and disbursed in a specific order ## Footnote This ensures that operating expenses are paid before debt service.

Question 78

# Municipal Securities What is the first use of funds in the net revenue pledge?

Answer 78

Operations and maintenance ## Footnote This covers current operating and maintenance expenses.

Question 79

# Municipal Securities What are net revenues?

Answer 79

Remaining funds after operations and maintenance expenses are paid ## Footnote These funds are available for further allocation.

Question 80

# Municipal Securities What is the purpose of the debt service account?

Answer 80

To pay interest and principal maturing in the current year and serve as a sinking fund for term issues ## Footnote This ensures timely payments on debt obligations.

Question 81

# Municipal Securities What does the debt service reserve fund hold?

Answer 81

Enough money to pay one year's debt service ## Footnote This fund acts as a financial cushion for debt payments.

Question 82

# Municipal Securities What is the role of the reserve maintenance fund?

Answer 82

To supplement the general maintenance fund ## Footnote This ensures adequate funds for ongoing maintenance needs.

Question 83

# Municipal Securities What is the purpose of the renewal and replacement fund?

Answer 83

To create reserve funds for major renewal projects and equipment replacements ## Footnote This fund is essential for long-term facility sustainability.

Question 84

# Municipal Securities What can the surplus (sinking) fund be used for?

Answer 84

Redeeming bonds or paying for improvements ## Footnote This fund provides flexibility in managing surplus revenues.

Question 85

# Municipal Securities What is a net revenue pledge?

Answer 85

A net revenue pledge is when operating and maintenance expenses are paid first, and remaining funds are used for debt service and other obligations. ## Footnote This is the more common type of pledge in financial agreements.

Question 86

# Municipal Securities What expenses are prioritized in a gross revenue pledge?

Answer 86

In a gross revenue pledge, debt service is the priority expense, meaning it is paid before operating and maintenance expenses. ## Footnote This type of pledge is less common than net revenue pledges.

Question 87

# Municipal Securities What does debt service include?

Answer 87

Debt service includes current principal and interest due plus any sinking fund obligations. ## Footnote Sinking funds are set aside for future debt repayment.

Question 88

# Municipal Securities What happens if revenues exceed operating and other obligations?

Answer 88

If revenues exceed operating and other obligations, the excess money is usually placed into a surplus fund. ## Footnote Surplus funds can be utilized for various purposes, including future investments or debt reduction.

Question 89

# Municipal Securities In a net revenue pledge, how is debt service paid?

Answer 89

In a net revenue pledge, debt service is paid from the net revenues after operating and maintenance costs are covered. ## Footnote This ensures that essential operational costs are prioritized.

Question 90

# Municipal Securities True or False: A net revenue pledge is less common than a gross revenue pledge.

Answer 90

False ## Footnote A net revenue pledge is the more common type of pledge.

Question 91

# Municipal Securities _ is the ratio of revenues available annually to pay the debt service divided by the annual debt service requirement. The higher the ratio is, the better.

Answer 91

Debt coverage ratio ## Footnote When analyzing revenue bonds, one should look at the debt coverage ratio.

Question 92

# Municipal Securities How do analyst determine the debt coverage ratio for revenue bonds?

Answer 92

annual revenues/debt service requirement = coverage

Question 93

# Municipal Securities total debt **minus** self-supporting debt **minus** sinking fund accumulations **plus overlapping debt**

Answer 93

The **net total debt of a municipality** is the net overall debt (total debt minus self-supporting debt minus sinking fund accumulations) plus overlapping debt (shared with other municipalities). States cannot have overlapping debt; it is their municipalities that can.