Characteristics, Uses And Taxation Of Investment Vehicles Flashcards
What are cash and cash equivalents investments
Treasury bills
Commercial paper
CDs
Money market deposit accounts
Repurchase Agreements (Repos)
Reverse Repurchase Agreements (Reverse Repo)
Bankers acceptance
What are the maturity weeks for treasury bills?
4, 13, 26, and 52 weeks
13 week T-Bills used as a proxy for the risk, free rate of return and various asset, pricing models and asset having the lowest level of risk among available assets
How is interest income taxed on treasury bills
Difference between face value paid at maturity, and purchase price
Taxed at ordinary federal income tax rates
Not subject to state or local income tax
Not taxable until maturity
What is commercial paper and how is it taxed?
Publicly traded short term, unsecured promissory notes, issued by companies to raise cash to finance accounts receivable and inventories. Maturity range from one to 270 days average 30 days
Interest income tax at ordinary income, tax rates in your earned
Gain is taxed or ordinary income (short term Capital loss)
Loss is short term Loss
How was the interest on CD taxed?
Ordinary income
What are Repurchase Agreements (Repos)?
Used by banks and security dealers to finance large inventory of marketable securities tax similar to CDs
What is a zero coupon bond? How are they taxed?
Do not pay periodic interest payments
Issued in trade at discount to par
Pay par value at maturity
Not subject to reinvestment rate risk
Duration equals time to maturity
Taxation - interest accrued taxable, issues with terms longer than one year are tax in the year earned even though the interest is not actually received until maturity, taxable zero-coupon bonds and tax deferred arrangements shld be in an IRA
What are the issue terms of treasury notes?
2, 3, 5, 7, and 10 years
What are the issue terms of treasury bonds?
30 years
What are the appropriate uses of treasury notes and treasury bonds?
High-quality investment is desired
Investor needs an investment that can be used as collateral for a loan
Certain of income is required
Investor designers a marketable investment
Portfolio diversification
How are treasury notes and treasury bonds taxed?
Interest payments - tax in the year received at ordinary rates for federal income tax purposes exempt from state and local income taxes
Sales proceeds - capital gain or loss for federal and state income tax holding period determines either short term or long-term.
What are Treasury Inflation - Protected Securities (TIPS)
Marketable securities, whose principle is adjusted by changes in the consumer price index (CPI)
Issued in terms of 5, 10, and 30 years.
Protest against purchasing power risk
How are Treasury Inflation Protected Securities (TIPS) Taxed?
Taxable income exempt from state and local income taxes
Principal increases tax at ordinary income tax rates in year occurred, increases tax basis
Principle decreases may be deducted against interest income for federal income tax purposes and reduces tax basis
Sales proceeds capital gain or loss for federal and state income holding period determines either short term or long-term.
What are Treasury STRIPS?
Separate Trading of Registered Interest and Principle
What type of US savings bonds are available?
Series EE
Series HH (No longer issued)
Series I
What are Series EE Bonds?
Low risk government back savings vehicle
Maybe used for funding, education cost, and gifting
Has a fixed interest rate
Must be held for at least 12 months three month interest penalty for bonds redeemed within five years of issue
How are series EE bonds Taxed?
Interest tax deferred until maturity or redemption, not subject to state income tax
Excluded from gross income when use for higher education cost
What are Series I Bonds and how are they taxed?
Low risk, inflation, index, savings vehicle
Semi annual inflation rate based on changes in the consumer price index for all urban consumers CPI-U
Taxation - similar to EE bonds
