CFA Level III Reading 11

Question 1

wealth based taxes

Answer 1

taxes on real estate and transfers of wealth

Question 2

progressive taxes

Answer 2

means that you are taxed on the dollars which fall into each bracket at that tax rate and then the following dollars at the higher rate

Question 3

marginal tax rate

Answer 3

the rate at which the next dollar of income would be taxed

Question 4

common progressive tax regime

Answer 4

progressive tax on income. favorable tax on interest dividends and capital gains.

Question 5

heavy dividend regime

Answer 5

progressive for income. favorable for interest and cap gains. bad for dividends

Question 6

heavy interst tax regime

Answer 6

tax progressive, interst and dividends favorabel. cap gains at marginal rate.

Question 7

light capital gains

Answer 7

progressive tax system for ordinary income, favorable treatment of capital gains. normal of interest and dividends. second most common type founds.

Question 8

flat and light

Answer 8

flat tax and treats everything generally quite favorably

Question 9

flat and heavy

Answer 9

heavy flat tax on ordinary income, dividends and cap gains but light on interest income

Question 10

future value of investment subject to tax annually

Answer 10

FVST = [1 + r(1-t)]^n

Question 11

how do annual taxes effect growth of invesment

Answer 11

stronger than the state tax rate; negative effects increase over time; tax drag increases as investment return increases

Question 12

equation for return subject to tax at selling point. Normal cap gainst tax

Answer 12

(1+r)^n(1-t)+t=return ; where: t = tax rate r = return

Question 13

equation for including capital gains and cost basis

Answer 13

return in dollars= (1+r)^n(1-tcg)+tcgB where: B=cost basis; tcg= tax on capital gains

Question 14

wealth tax equation and what is it

Answer 14

tax on a certain level of wealth; return=(1+r)*(1-tw)^n

Question 15

formula for retuns including taxes on interst dividends and cap gains

Answer 15

return after tax= pre tax return(1-piti-Pdtd-pcgtcg) where:Pd= return div, pch= return cap gain pi=return interst. t’s are respective tax rates.

Question 16

fut value of investment formula with defered cap gains

Answer 16

(1+r)^n(1-T)+T-(1-b)tcg where: B=proportion of investment and tax basis. IE buy 100 dollar bond with 80 dollar tax basis B=.8

Question 17

accrual equivalent retun

Answer 17

the return needed to generate the same amount of wealth if there were no taxes.

Question 18

what is equiation for finding accrual equiv return

Answer 18

r*(1-T) = Rae IE: return rate pre tax * (1-tax rate)= return equivalent rate

Question 19

tax deffered vs tax exempt accounts

Answer 19

tax deffered: (1+r)^n*(1-Tn) where: Tn are taxes at time n. Obvi no taxes or tax exempt account you can remove 1-t protion

Question 20

Do example 10 on page 238

Answer 20

its a good exercise

Question 21

compare pre tax account and tax defferd account

Answer 21

only comparision is tax rate today vs tax rate before. They are the same if its taxed now or later only change in retun is the rate of tax.

Question 22

how do taxes help with investment risk.

Answer 22

They absorb some of the pretax investment risk as you ahve a tax sheild on teh downside that has value.

Question 23

tax alpha

Answer 23

the excess return generated by proper tax management strategies

Question 24

generally where should bonds and equities be in terms of taxable and non taxable accounts

Answer 24

bonds should be held in tax exempt accounts and equities in tax paying accounts

Question 25

how would tax rate on active investor vs passive investor differ

Answer 25

active would basically pay taxes annually because they trade in and out of positions during the year. Passive investor gets bennefit of Def tax cost because they hold their positions for over 1 year

Question 26

tax loss harvesting

Answer 26

selling a loser to offset a gain

Question 27

what is the cash flow benefit of realizing a loss earlier in the process

Answer 27

basically you have better net of tax cash flow and you have more money available for reinvestment

Question 28

HIFO Tax basis

Answer 28

highest in first out. Means you can sell your equity lots with teh highest cost basis first and then use that deffered tax gain to yoru advantage