CHAPTER 2 Asset Classes and Financial Instruments

Question 1

What is the equation to determine the tax exempt yield?

Answer 1

r taxable(1− t)=r muni

Question 2

is simply the tax-free rate divided by 1 − t.

Answer 2

the equivalent taxable yield

Question 3

SALT (State and Local Tax) deduction cap instituted by the Tax Cuts and Jobs Act of 2017, which limits the amount of state and local taxes that can be deducted to

Answer 3

10,000

Taxpayers can only deduct up to $10,000 of their state and local taxes from their federal taxable income. This includes state income taxes, local income taxes, and property taxes combined.

So, if your state and local tax is exceed $10,000. You can still only deduct $10,000. This cap particularly affects taxpayers and states with high state and local taxes.

Question 4

Unlike owners of __________ businesses, whose creditors can lay claim to the personal assets of the owner (house, car, furniture), ___________ may at worst have worthless stock.

Answer 4

Unlike owners of unincorporated businesses, whose creditors can lay claim to the personal assets of the owner (house, car, furniture), corporate shareholders may at worst have worthless stock.

Question 5

is issued in variations similar to those of corporate bonds. It may
be callable, in which case it is said to be redeemable.

Answer 5

Preferred Stock

Question 6

30 large, “blue-chip” corporations has been computed since 1896.

• the percentage change in the DJIA measures the return (excluding
  dividends) on a portfolio that invests one share in each of the 30 stocks in the index.

Answer 6

Dow Jones Industrial Average

Question 7

the value of shares that are freely tradable among investors

Answer 7

Free float.

Question 8

refers to the japanese index

Answer 8

Nikkei

Question 9

Pronounced footsie, represents the uk index.

Answer 9

FTSE

Question 10

refers to the germany Index.

Answer 10

DAX

Question 11

refers to the canadian

Answer 11

TSX

Question 12

Computes dozens of country indexes and several regional indexes.

Answer 12

Morgan Stanley Capital International. (MSCI)

Question 13

Merrill lynch, Barclay’s and the Citi Broad Investment Grade, all make up the most well-known ？

Answer 13

fixed income indexes in the united states

Question 14

these assets are also called contingent claims because their payoffs are contingent on the value of other values

Answer 14

Derivatives.

Question 15

True or false?

The cost at which to go long on a call decreases as the exercise price increases.

Answer 15

True.

the cost to go long a put goes up the higher the exercise price goes.

Question 16

What are the key differences between common stock, preferred stock, and corporate bonds?

Answer 16

Common Stock:
Ownership with voting rights.
Variable dividends, paid after preferred stock.
High risk and return, last claim in bankruptcy.

Preferred Stock:
Fixed dividends, paid before common stock.
Usually no voting rights.
Middle priority in bankruptcy, can be convertible.

Corporate Bonds:
Debt investment with fixed income via regular coupons.
Highest priority in bankruptcy, paid before shareholders.
No voting rights, prioritizes income stability.

Question 17

Short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after-tax yield if your tax bracket is

a. Zero
b. 10%
c. 20%
d. 30%

Answer 17

Question 18

The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is 8%. Both bonds sell at par. At what tax bracket (marginal tax rate) would an investor be indifferent between the
two bonds?

Answer 18