Chapter 11: Analysis Flashcards
______ looks at company specifics, balance sheet and income statement, and is concerned with alpha, financial, or bankruptcy risk. It is economics based, monetarism driven, and Federal Reserve Board directed.
Fundamental Analysis
If the Fed buys, the money supply ______, interest rates ______, yield curves become ______, prices ______ … prosperity is nearing.
- Grows
- Decline
- Normal
- Rise
If the Fed sells, the money supply ______, interest rates ______, yield curves become ______, short-term rates become ______ than bond yields … a recession is coming.
- Shrinks
- Rise
- Inverted
- Higher
______ is concerned with four major issues:
- Monetary policies as implemented by the Federal Reserve Board (FRB) through its open market committee.
- Fiscal vs. Monetary policy
- Economic indicators: leading, lagging, and coincident.
- Specific company information: balance sheet and income statement.
Fundamental Analysis
______ is our total national output of goods and services.
Gross Domestic Product (GDP)
The ______ gauges inflation by measuring costs in constant dollars.
Consumer Price Index (CPI)
______ is defined as too many dollars chasing too few goods and services.
Inflation
The economic cycle starts with the ______ phase.
Expansion
______ is a common symptom of the expansion phase.
Inflation
The expansion phase culminates at the ______.
Peak
If the cycle lingers too long at the peak, we sometimes experience ______, which is a period of rising prices with no economic growth.
Stagflation
______ is a slowing of the economy over a prolonged period of time.
Stagnation
______ follows the peak, and is sometimes accompanied by ______.
- Decline
2. Deflation
______ is a period of falling prices; too few dollars chasing too many goods and services.
Deflation
A recession is defined as ______ (______ months) of a decline in GDP.
- 2 Consecutive Quarters
2. 6 Months
A depression is defined as ______ (______ months) of a decline in GDP.
- 8 Consecutive Quarters
2. 24 Months
The decline phase ends when the economy bottoms out, which is called the ______.
Trough
After the ______, the economy begins to expand again, and the cycle starts over.
Trough
______ involves the president and Congress passing bills and appropriations that influence economic activity. ______ and ______ are its primary tools.
- Fiscal Policy
- Federal Taxation
- Spending
Congress can ______ to increase economic activity or ______ to decrease economic activity.
- Lower Taxes
2. Raise Taxes
The federal government can increase spending on ______ (i.e., roads and bridges), ______, and/or ______ to stimulate the economy. It can also increase ______, such as social security or tax rebate programs.
- Capital Projects
- Military
- Social Programs
- Transfer Payments
Congress not only has the ability to spend money, but, if needed, can authorize ______ to stimulate the economy.
Borrowing Funds
______ is the economic theory that advocated using fiscal policy to jump-start the economy to “full employment”.
Keynesian
______ is the use of government spending and taxation to influence the economy.
Fiscal Policy
______ believes that the economy runs at an “equilibrium” level that is determined by income and spending, and aggregate demand. In other words, if people are out of work, they do not consume or spend money
Keynesian Theory
______ believes that is the government’s responsibility to stimulate the economy to “full employment” by increasing spending.
Keynesian Theory
______ doctrine says that as long as the government does not meddle with the economy, business will take care of itself.
Supply Side Economics
______ states that stable interest rates, money supply, and low inflation achieved through ______ will enable business to drive the economy to full employment.
- Supply Side Economics
2. Monetary Policy
In ______, growth is promoted through tax cuts and deregulation.
Supply Side Economics
Monetary policy is controlled by the ______ or “______”.
- Federal Reserve Board (FRB)
2. The Fed
The main ______ is in New York, and it controls a system of member banks in major cities across the U.S.
Federal Reserve Bank
The ______ is the Federal Reserve System’s top monetary policy-making body.
Federal Open Market Committee (FOMC)
______ refers to actions taken to influence the money supply and credit in the economy, which in turn affects interest rates.
Monetary Policy
By raising or lower short-term interest rates, it indirectly controls ______ and ______.
- Inflation
2. Employment
The primary focus of ______ is to promote price stability and full employment.
Monetary Policy
If the FRB believes that the economy is growing too quickly (which might cause ______), it will ______ the money supply to slow the economy, which makes money scarcer and causes interest rates to ______.
- Inflation
- Tight
- Rise
If the FRB wishes to stimulate the economy, it will ______ the money supply, which causes interest rates to ______, and speeds economic growth.
- Ease
2. Drop
The most powerful tool the FRB has is the ______, which is an overnight cash reserve that each Federal Reserve member bank must maintain each night.
Reserve Requirement
The FRB will raise the reserve requirement to ______ the money supply and lower it to ______ the money supply.
- Tighten
2. Increase
The reserve requirement is the most powerful tool which the FRB has, because it has a(n) ______ throughout the economy.
Multiplier Effect
Each night, every member bank calculates its ______. If the member is short, it must borrow cash from another member bank or from the main Federal Reserve Bank in New York.
Reserve Requirement
The fed also sets the ______, which is the rate the main Federal Reserve Bank charges member banks for loans to meet their overnight loan requirement.
Discount Rate
When a member bank borrows from the main Federal Reserve Bank at the ______, the member is said to borrow at the ______. This is an indication that the borrower is experiencing financial trouble, because the main Federal Reserve Bank is considered the lender of last resort.
- Discount Rate
2. Discount Window
If a member bank is short funds to satisfy its reserve requirement, it will first attempt to borrow from another ______.
Member Bank
When member banks lend to each other, the interest rate they assess is called the ______. This rate is not set by the ______; it is the average of all interest rates charged by member banks for these overnight loans.
- Fed Funds Rate / Federal Funds Rate
2. Federal Reserve Board
The ______ charged by member banks for overnight loans is extremely volatile because it can literally change overnight.
Fed Funds Rate
The most often used FRB tool is the ______, which is where the ______ buys or sells treasuries in the secondary market to slow or stimulate the economy.
- Federal Open Market Operations
2. Federal Open Market Committee (FOMC)
If the Fed is ______ treasuries, they are putting money into the economy. This ______ the money supply and ______ the economy.
- Buying
- Increases
- Stimulates
If the Fed is ______ treasuries, they are pulling money out of the economy. This ______ the money supply and ______ the economy.
- Selling
- Shrinks
- Slows
The FOMC operation has the greatest effect on ______, which is a measure of the money supply.
M1
______ equals cash and demand deposits such as checking accounts. ______ equals the previous plus savings accounts and some money market funds. ______ equals the previous plus institutional investors and money markets.
- M1
- M2
- M3
On a global level is the ______, which is an international, decentralized unregulated, market. Consequently, the ______ is a high risk market.
Interbank System
The major participants in the ______ are central banks and large multi-national corporations.
Interbank Market
In the ______, foreign currencies are traded in large blocks. Generally, these are blocks of ______.
- Interbank Market
2. $1 to $5 Million
When the U.S. dollar is ______, foreign currencies are ______. This makes foreign goods ______, so U.S. imports ______ and dollars flow out of the U.S., creating a(n) ______ trade balance. This outflow also ______ the dollar.
- Strong
- Weaker
- Cheap
- Increase
- Deficit
- Weakens
As U.S. dollar ______, foreign currencies by comparison are ______. This makes American products ______ abroad, and U.S. exports ______. As money flows into the U.S. due to exports, the dollar grows ______.
- Weakens
- Stronger
- Cheaper
- Increase
- Stronger
The balance of trade is ______. In other words, when the dollar is strong, imports go ______, causing the dollar to get _____. When the dollar is weak, exports ______, causing the dollar to get ______.
- Cyclical
- Up
- Weaker
- Increase
- Stronger
If interest rates rise,
- Bond and yields ______.
- The U.S. dollar is ______ as the FRB is attacking ______.
- Imports ______ because of the ______ dollar’s purchasing power.
- Exports ______ because the ______ U.S. dollar means ______ foreign currencies.
- Rise
- Strengthened, Inflation
- Rise, Strong
- Rise, Stronger, Weaker
______ interest rates cause the FRB to pursue a tight money policy by ______ government securities to banks and broker/dealers. This sometimes causes a(n) ______, with short-term rates rising above bond yields.
- Raising
- Selling
- Inverted Yield Curve
An inverted yield curve often leads to ______, which is large-scale investor movement into long term debt instruments. This causes long-term yields to drop as greater demand drives long-term bond prices up.
Disintermediation
Inverted Yield Curve = Tight Money Policy
Rates: \_\_\_\_\_\_ Yields: \_\_\_\_\_\_ Imports: \_\_\_\_\_\_ US $: \_\_\_\_\_\_ Stock/Bond Prices: \_\_\_\_\_\_ Exports/For $: \_\_\_\_\_\_
Rates: RISE Yields: RISE Imports: RISE US $: RISE Stock/Bond Prices: FALL Exports/For $: FALL
Normal Yield Curve = Loose Money Policy
Rates: \_\_\_\_\_\_ Yields: \_\_\_\_\_\_ Imports: \_\_\_\_\_\_ US $: \_\_\_\_\_\_ Stock/Bond Prices: \_\_\_\_\_\_ Exports/For $: \_\_\_\_\_\_
Rates: FALL Yields: FALL Imports: FALL US $: FALL Stock/Bond Prices: RISE Exports/For $: RISE
FRB through its Open Market Committee (OMC) is SELLING Government/Agencies. Money is removed from the Money Supply. The discount rate ______, then is followed by ______ in the Fed Funds rate, then T-Bill rate, then Repo and CD rates, then Prime rate, Broker Call Loan Rate (Bank charging B/Ds), then Margin Loan Rate (B/Ds charging customers).
- Rises
2. Increases
Inverted Yields means ______ rates are higher than ______ yields.
- Short-Term
2. Long-Term
When the FRB sells securities, it ______ money from the money supply, which causes rates to ______. As rates start ______, yield curves turn from normal, positive, and upward sloping to inverted and negative. This means that ______ rates rise higher than ______ debt yields.
- Removes
- Rise
- Rising
- Short-Term
- Long-Term
A(n) ______ money supply draws investors from equities and bonds to money market. Soon, a(n) ______ provides the cure for inflation.
- Inverted
2. Recession
Rates begin to ______ during prosperity, and ______ becomes a real problem during expansion.
- Rise
2. Inflation
During recovery we can have a period (hopefully brief) of ______, no growth with inflation still present and high interest rates.
Stagflation
The ______ rate is the lowest, and is set by the FRB to be charged to any member bank for borrowing.
Discount
The ______ rate is slightly higher than discount for overnight borrowing between Federal Reserve member banks. Obviously ______, the most sensitive money market indicator, are the first rates to be affected by changes in the discount rate.
Fed Funds
______ are bank-to-bank loans, so they are not money market securities.
Fed Funds
______ have nothing to do with the FRB (the FED) directly. They are overnight loans banks make to other banks with funds they access by dipping into their excess Federal Reserve monies.
Fed Funds
______ rates are usually slightly higher than fed funds. The banks earn ______ rates when they invest short-term.
Money Market
______ rates include the repo rate (especially the overnight rep rate), commercial paper, bankers’ acceptance, and CD rates.
Money Market
______ are created when a bank dealer sells collateralized securities with a promise to buy them back.
Repurchase Agreements / Repos / Buy Backs / Matched Sales
Other money market instruments are ______, which is unsecured corporate notes with maturities ranging from 30 to 270 days, and ______, which are import/export paper.
- Commercial Paper
2. Bankers’ Acceptances
______ (for this test) are the jumbos, requiring a minimum investment of $100,000.
Certificates of Deposit (CDs)
Higher than money market rates that banks earn are the ______ rate and ______ rates, which banks charge. The ______ rates are charged to their best customers, and ______ rates are charged to broker/dealers for customer margin purchases.
- Prime
- Broker Call Loan
- Prime
- Broker Call Loan
Of the call loan, discount, fed funds, money market, and prime rates, ______ has the lowest rate and ______ has the highest.
- Discount
2. Call Loan
______ estimate future economic activity in a business cycle.
Leading Indicators
______ Indicator: Average weekly hours, manufacturing.
Leading
______ Indicator: Average weekly initial claims for unemployment insurance.
Leading
______ Indicator: Manufacturers’ new orders, consumer goods and materials.
Leading
______ Indicator: Institute for Supply Management (ISM) new order index.
Leading
______ Indicator: Manufacturers’ new orders, nondefense capital goods excluding aircraft.
Leading
______ Indicator: Building permits, new private housing units.
Leading
______ Indicator: Standard & Poor’s 500 stock index.
Leading
______ Indicator: Leading Credit Index.
Leading
______ Indicator: Interest rate spread, 10-year Treasury bonds less federal funds.
Leading
______ Indicator: Average consumer expectations for business and economic conditions.
Leading
______ are current indices (show the current phase of the cycle), and the more current the index, the more ______.
- Coincident Indicators
2. Coincident
______ Indicator: Payroll employment (excluding agriculture).
Coincident
______ Indicator: Personal income (excluding Social Security).
Coincident
______ Indicator: Industrial production (GDP).
Coincident
______ Indicator: Manufacturing and trade sales.
Coincident
______ reflect historical data. They indicate the status of the economy in the past few months.
Lagging Indicators
______ Indicator: Average length of unemployment (in weeks).
Lagging
______ Indicator: Inventories to sales ratio (manufacturing and trade).
Lagging
______ Indicator: Labor cost per unit of output (manufacturing).
Lagging
______ Indicator: Average prime rate.
Lagging
______ Indicator: Commercial and industrial loans.
Lagging
______ Indicator: Consumer installment credit to personal income ratio.
Lagging
______ Indicator: Consumer price index (CPI).
Lagging
The CPI, a measure of ______, is a(n) ______ indicator.
- Inflation
2. Lagging
Consumer Price Index (CPI) is a(n) ______ indicator.
Lagging
Industrial production (GDP) is a(n) ______ indicator.
Coincident
Initial claims for unemployment insurance is a(n) ______ indicator.
Leading
Average length of unemployment is a(n) ______ indicator.
Lagging
S&P 500 is a(n) ______ indicator.
Leading
Building permits (private housing) are a(n) ______ indicator.
Leading
Prime rate is a(n) ______ indicator.
Lagging
Personal income is a(n) ______ indicator.
Coincident
Manufacturers’ new orders are a(n) ______ indicator.
Leading
Commercial and industrial loans are a(n) ______ indicator.
Lagging
NYSE market indicators include the following:
- ______ is the oldest and most widely quoted market indicator.
- ______ is the most widely quoted index.
- ______ is a broader measure of NYSE activity.
- ______ is the broadest, most accurate measure of NYSE activity.
- Dow Jones Average
- Dow Jones Industrial Average (DJIA)
- Standard and Poor’s 500 (S&P 500)
- NYSE Composite Index
______ is the oldest and most widely quoted NYSE market indicator. It consists of 65 stocks (30 industrial, 20 Transports, and 15 Utilities).
Dow Jones Average
______ is the most widely quoted index, and averages the movement of 30 widely held stocks (i.e. IBM, GE, American Express, etc.). However, it is a very narrow measure of NYSE activity because there are more than 3,000 issues listed on the exchange.
Dow Jones Industrial Average (DJIA)
______ is a broader measure of NYSE activity and is comprised of the 500 largest market capitalization stocks in the U.S.
Standard and Poor’s 500 (S&P 500)
______ is the broadest, most accurate measure of NYSE activity because it includes all common issues traded on the exchange (approximately 3,000 issues).
NYSE Composite Index
The ______ is the broadest measure of NASDAQ activity, covering more than 6,500 stocks. The ______ covers only the largest 100 stocks.
- NASDAQ Composite Index
2. NASDAQ 100 Stock Index
______ consists of the market value o more than 7,000 NYSE, AMEX, NASDAQ, and OTC issues headquartered in the U.S. It is the broadest market indicator.
Wilshire Index
______ have regular, pronounced cycles of growth and contraction. Stocks of companies in this industry perform nicely in a rising market, but suffer badly in a falling market.
Cyclical Industries
______ companies produce durable goods, which sell well in healthy economic environments but do poorly during weak phases. Examples are large appliances and automobiles, heavy equipment, and airplanes.
Cyclical Companies
______ prosper during economic declines and underperform when the economy is growing strongly.
Countercyclical Industries
Examples of ______ include the pawn shop and asset repossession industries. By adding stocks from these industries, a portfolio has a greater possibility of positive performance through a down market.
Countercyclical Industries
______ have less pronounced cyclical variation. Stocks in ______ do not experience dramatic growth swings in up markets or declines in weak markets. They tend to have relatively stead performance through all economic phases.
Defensive Industries
______ produce basic consumer goods, also known as consumer staples, such as food, alcohol, tobacco, pharmaceuticals, cosmetics. Demand for these basic consumer goods tends to be steady through up and down markets.
Defensive Corporations
______ are characterized by rapid development. They are typically fueled by new technological advances. Investing in these industries involves greater risk, but offers higher potential rewards.
Growth Industries
______, in the early stages, are expanding quickly and are not necessarily closely tied to the business cycle. However, more established companies generally perform better during the expansionary phase.
Growth Industries
______ is used to evaluate and rate corporations, their debit, their credit, and their strength. It is also employed to examine and evaluate our economy, its current position, and its future direction.
Fundamental Analysis
______ is used by market makers and traders, particularly day-traders and option players; its usefulness is the determination of price and time.
Technical Analysis
______ or ______ are used primarily for stock selection. The ______ knows the corporate financial statements and can select strong, growth companies. The ______, on the other hand, knows market movements, support lines for purchasing stock, and resistance lines for selling stock.
- Fundamentalists
- Economists / Technician
- Fundamentalist
- Economist / Technician
______ assist in recommending the companies to consider, whereas ______ tell you when to buy and sell.
- Fundamentalists
2. Economists / Technicians
______ is market-driven, charts and graphs centered, focused on advance/decline lines and moving averages. Among its chief concerns are beta risk, systematic risk, and market risk.
Technical Analysis
______ consists of tracking stock performance and charting advances and declines. It emphasizes trends and trend reversals.
Technical Analysis
Stocks tend to trade within a price range; the line of ______ reflects the price lows and ______ is price highs.
- Support
2. Resistance
Technical analysis values the following market indicators for pointing the direction of stock prices:
- ______
- ______
- ______
- ______
- ______
- 200 Day Moving Average
- Advance/Decline Line Charting
- Volume Analysis
- Put/Call Ratio
- Short Interest Theory
______: Every day analysts chart moving average price over the last 200 days, adding previous day’s price to the average and eliminating the price from 200 days ago.
200 Day Moving Average
______: Each day the number of stocks advanced is added and number of stocks declined is subtracted starting at zero. On these charts, a rising line indicates that cumulative advances outnumber the declines (bullish) and a falling line indicates the opposite: cumulative declines outnumber advances (bearish).
Advance/Decline Line Charting
______: Volume is the number of trades traded in a company’s stock or in the market over a specified period, usually a day. An increase in volume may occur when a company makes an announcement, such as an acquisition or spinoff. Earnings reports, positive or negative, may result in increased volume. Technicians also use volume to assess the health of a trend.
Volume Analysis
If, in the ratio of puts to calls, puts increase dramatically, the market is poised to ______. If the ratio shows a large increase in calls, however, then the ratio becomes ______.
- Decline
2. Bullish
Short interest (short sales) rising sharply is actually a(n) ______ indicator because the need to cover short sales will bring buyers in to the market when the market begins rising.
Bullish
A(n) ______ indicates that a stock’s price has reached its low and that the downward trend has come to an end.
Saucer Formation
A(n) ______ indicates that a stock’s price has reached its high, ending the uptrend.
Inverted Saucer Formation
Other terminology related to technical analysis includes:
- ______: stock price moves through a support or resistance level.
- ______: stock price moves within a trading range and there is no clear trend.
- ______: stock price has risen too far and too quickly and is susceptible to downward pressure.
- ______: stock price has dropped significantly and is likely to rebound.
- Breakout
- Consolidation
- Overbought
- Oversold
______ is a measure of volatility in relation to the overall market, usually the S&P 500, or a benchmark that is appropriate for a specific portfolio.
Beta
A stock or portfolio with a beta greater than ______ is more volatile than the market. For example, if a stock has a beta of ______, its price fluctuates 25% more than the market. This security is suitable for an investor with a(n) ______ investment profile.
- 1
- 1.25
- More Aggressive
If a stock has a beta of ______, its volatility matches the overall market. During an upturn or downturn in the market, it will perform about the same as the market.
1
A stock with a beta of ______ is 25% less volatile and its price will not move as much as the market.
0.75
______ measures the reaction of a particular security in relation to the movements of the market as a whole. The higher the ______ on a security, the more potential there is a volatility.
Beta
______ is a measure of risk-adjusted performance. It is the excess return of an investment relative to the market or its benchmark.
Alpha
In simple terms, ______ is the difference between a security’s actual return and its beta.
Alpha
The point of reference for alpha is beta; therefore, a(n) ______ alpha indicates underperformance while a(n) ______ one represents a better than expected return.
- Negative
2. Positive
The ______ is used to determine the value of a security. The model uses the security’s beta, a theoretical risk-free rate of return, and the time value of money.
Capital Asset Pricing Model (CAPM)
The ______ addresses the return that the security should yield given its risk level. That yield is equal to the risk-free rate of return plus a premium for assuming the risk of the investment.
Capital Asset Pricing Model (CAPM)
______ is an indication of how investors feel about the market, whether they expect it to go up or down, and is reflected in movements in the market.
Market Sentiment
______ is an actual acceleration in the price movement of the market.
Market Momemtum
Positive ______ will drive stock prices higher, contributing to ______.
- Market Sentiment
2. Market Momentum
If market sentiment is negative and investors are nervous about the market, they may hold ______ rather than invest. When market sentiment turns positive and they decide to put the ______ to use by investing, the large inflow into the market can drive market momentum, moving stock prices higher.
Cash
A portfolio is measured against a(n) ______ that reflects the composition of the portfolio. A(n) ______ is simply a standard that can be used to analyze performance.
Benchmark
The benchmark for a large-cap growth portfolio might be the ______.
S&P 500
The ______ would be a more appropriate benchmark for a small-cap fund.
Russell 2000
______ are typically indices, either a single index or an index construct.
Benchmarks
A net long-term gain is taxed at a maximum ______ rate.
20%
Short-term gains are taxed as ______, but because of the netting with capital losses, it is still better to have short-term gains than ______.
Ordinary Income
All investments are ______, EXCEPT money markets, insurance, including both annuities and life insurance, and retirement plans and accounts.
Capital Assets
Short-term capital gains are taxed as ______. Long-term capital gains are taxed at ______ rates, capped at a maximum of ______.
- Ordinary Income
- Capital Gain
- 20%
Capital losses are first used to offset any ______. Any remaining net capital losses are allowed as a deduction against ______ on a dollar-for-dollar basis (referred to as an above-the-line deduction).
- Capital Gains
2. Ordinary Income
The maximum allowable net capital loss is ______ per year, per return. Any losses in excess of the allowable limit may be carried over into subsequent years.
$3,000
The federal gift and estate taxes are integrated in one tax system, called the ______.
Unified Estate and Gift Tax
The ______ is a tax on a person’s right to transfer property at death. It includes everything that a person owns or has certain interests in at the date of death.
Estate Tax
A(n) ______ must be filed if the gross estate of the decedent is valued at more than the threshold for the year of the decedent’s death. This is called the ______.
- Estate Tax Return
2. Estate and Gift Tax Exclusion
As of 2021, the person’s entire estate after the first ______ would be taxable on a graduated scale up to a maximum tax rate. Any assets left to a spouse or left to charity are not subject to ______ until the spouse also dies.
- $11.7 Million
2. Estate Tax
The ______ (or ______) tax applies to values in excess of a stated amount.
- Inheritance
2. Estate
All assets not passed onto a spouse are subject to ______. This includes IRAs, annuities, Roth IRAs, and municipal bonds.
Estate Taxes
Currently, the taxpayer may give ______ per year per recipient gift tax free. Any gift equal to a dollar amount above ______ annually per recipient is taxable to the donor.
$15,000
The lifetime ______ exclusion or exemption and the ______ exclusion are expressed as a total amount. This basic exclusion is called the ______, which used against a person’s ______ in one year reduces the amount that can be used against the ______ in a later year.
- Gift Tax
- Estate Tax
- Unified Credit
- Gift Tax
- Gift Tax
If the market value is higher than the donor’s basis at time of gift, the recipient’s cost basis is equal to the donor’s ______ of the security.
Original Purchase Price
If the market value is lower than the donor’s cost basis, the recipient’s basis is equal to the ______ at the time of the gift.
Market Value of the Securities
In the gift of securities, a(n) ______ is paid by the donor if the value exceeds ______.
- Gift Tax
2. $15,000
The gift tax paid increases the gift’s ______. If the recipient sells the securities later, the recipient pays ______ taxes on the gains above the cost basis.
- Cost Basis
2. Capital Gains
Charitable donations are not subject to ______.
Gift Tax
When a security is donated to charity, the ______ at the time of the donation is deductible on the donor’s tax return, as long as the investor held the security for more than ______.
- Value of the Security
2. 1 Year
When a security is donated to charity, the donor is not required to pay ______ on the appreciated value of the security.
Capital Gains Tax
An investor purchased 100 shares of stock for $4,500. Two years later, the stock has appreciated to $7,000 and the investor donates the stock to charity.
- What is the investor’s tax deduction?
- How much will the investor pay in capital gains?
- $7,000 (the current value of the security)
2. $0 (no capital gains on charitable donations)
The appreciated value at the time of security donation becomes the recipient’s cost basis and is referred to as the “______”.
Stepped-Up Basis
If a security is ______, the beneficiary gets a(n) ______, that is, the cost basis to the beneficiary is “stepped-up” (or “stepped-down” if the value has declined) to the ______ of the securities on the day of the deceased’s death.
- Inherited
- Stepped-Up Basis
- Fair Market Value
The holding period is always considered ______ regardless of the deceased’s actual holding period.
Long-Term
When a beneficiary inherits a mutual fund, the cost basis is the ______ of the shares on the day of the owner’s death.
Net Asset Value (NAV)
When an investor sells securities that were acquired through several purchases, the investor may choose ______ and select specific shares, which requires supporting documentation.
Specific Identification
When an investor sells securities that were acquired through several purchases, the investor may choose the ______ method. Under ______, the first shares purchased are the first shares sold.
- First-In, First-Out
2. FIFO
In a rising market, ______ method is the worst option for the investor, because it typically results in the highest reported capital gain tax.
First-In, First-Out (FIFO)
If the securities are mutual fund shares, the investor may choose the ______ method. Under this method, the investor calculates an average cost per share, which is used as the sale price.
Weighted Average
The investor must disclose to the IRS which sell option was selected. If the investor fails to do this, the IRS chooses ______. This is usually the best option for the IRS, and the worst for the investor.
First-In, First-Out (FIFO)
If the investor repurchases essentially the same security within ______ of the sale, this is known as a(n) ______, and the loss is disallowed by the IRS.
- 30 Days
2. Wash Sale
If the investor wishes to take a capital loss resulting from a stock sale, the investor must not purchase the stock within a(n) ______ window: ______ before the sale, trade date, and ______ after the sale.
- 61-Day
- 30 Days
- 30 Days
During the wash sale window, the investor may not purchase the stock or any security which is substantially identical, including:
- ______ bonds or preferred stock which ______ into the stock.
- A(n) ______ on the stock.
- A(n) ______ on the stock.
- The stock itself.
- Convertible / Convert
- Long Call Option
- Short Put
The two least effective for the four repurchases are ______ (this gives you your maximum gain or premium while attempting to deduct a loss) and ______.
- Selling Put Options
2. Buying the Stock
If the investor violates the ______ rule, the investor may not claim the capital loss on the stock sale.
Wash Sale
When a U.S. corporation owns common or preferred stock of another ______ and receives a dividend, the owning corporation may exclude ______ of the dividend from its taxation.
- Domestic Corporation
2. 50%
If one domestic corporation owns stock in another one and receives a $10,000 dividend, the investing corporation is taxed on ______ of the dividend.
$5,000
In accordance with Section 1035 of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur as ______.
Nontaxable Exchanges
A(n) ______ allows a policyholder to roll the cost basis from one product into another, thereby deferring recognition and tax on any capital gain realized in the exchange.
1035 Exchange
The following are allowable exchanges when effected directly between trustees:
- A life insurance policy for a(n) ______, a(n) ______, or a(n) ______.
- An endowment contract for another ______ or a(n) ______.
- An annuity contract for a(n) ______.
1a. Life Insurance Policy
1b. Endowment Contract
1c. Annuity Contract
2a. Endowment Contract
2b. Annuity Contract
3. Annuity Contract
There will be no income tax on allowable 1035 exchanges, as long as the policies or annuities exchanged are on the same ______.
Life
Although they enjoy special tax deferral privileges, 1035 exchanges raise ______ concerns which should be reviewed by a(n) ______.
- Suitability
2. Principal
1035 exchange suitability concerns include possible ______ on the old policy, the initiation of a new ______ on the new policy, and ______ assessed on the new product.
- Surrender Charges
- Surrender Period
- Sales Charges
Fiscal policy is set by ______. Monetary policy is governed by ______.
- Congress
2. the Federal Reserve Board
