Customer Accounts, Taxation & Economics Flashcards
Proceeds from the redemption of mutual fund shares by a customer are:
a. Taxable only as long-term capital gains
b. Considered a sale for income tax purposes
c. Not reportable for tax purposes in the year sold
d. Considered a tax-free exchange if used to purchase other mutual funds
b. Considered a sale for income tax purposes
It is important to distinguish the difference between the sale of a mutual fund by a customer and a distribution of a dividend or capital gain to the customer from the fund. When a fund distributes a dividend or a short-term capital gain to a customer, the customer must pay ordinary income taxes on the dividend in the year received. When the fund distributes a long-term capital gain to a customer, the customer pays a long-term capital gains tax in the year received. However, in this example, the customer redeemed the fund shares. This is considered a sale for income tax purposes, which means taxes may or may not have to be paid. It would depend on whether the shares were sold for a profit or a loss. The tax liability would be similar to the sale of any security. Exchanges for other mutual funds are also considered to
be a sale of a security for tax purposes.
Whose Social Security number must appear on an account under the Uniform Gifts to Minors Act?
a. Only the custodian’s
b. Only the minor’s
c. Both the custodian’s and the minor’s
d. A Social Security number is not required for this type of account
b. Only the minor’s
Since the minor is responsible for all taxes owed on income generated in an UGMA account, the minor’s Social Security number must appear on the account.
The portfolio managers for a number of international bond funds have noticed that interest rates in Europe have risen relative to those in the U.S. There has been a significant increase in investments by shareholders in these funds and the portfolio managers have been buying European bonds as a result. Which of the following statements is TRUE regarding this activity?
a. An increase in purchases of European bonds by U.S. investors would cause European currencies to strengthen and the dollar to weaken.
b. An increase in purchases of European bonds by U.S. investors would cause the dollar to strengthen and European currencies to weaken.
c. An increase in investments in international bond funds would cause their NAVs to rise.
d. An increase in investments in international bond funds would cause their NAVs to fall.
a. An increase in purchases of European bonds by U.S. investors would cause European currencies to strengthen and the dollar to weaken.
When U.S. investors, such as mutual funds, buy foreign securities, they sell U.S. dollars and buy foreign currencies. This causes the value of the dollar to fall (weaken) and the value of foreign currencies to rise (strengthen). By itself, an increase in money coming into a mutual fund does not affect the fund’s NAV, since cash is added to the fund in proportion to the number of new shares sold. The NAV of a mutual fund is affected mainly by changes in the values of the securities held in the portfolio.
Capital gain distributions are made by a mutual fund:
a. Weekly b. Quarterly c. Semiannually d. Annually
d. Annually
Capital gain distributions from a mutual fund are made to shareholders annually.
A father is acting as a custodian for his son under the Uniform Gifts to Minors Act. Which of the following statements is TRUE?
a. The father has title to any stocks in the trust.
b. Any income tax on the dividends will be deferred until the child reaches majority.
c. Any tax on income earned in the account is taxable to the child.
d. The father is permitted to use the stocks as collateral when taking a loan for himself.
c. Any tax on income earned in the account is taxable to the child.
Gifts of cash or securities may be made to minors under the Uniform Gifts to Minors Act. Since minors do not have any contractual capacity under common law, an adult must be named as a custodian for the minor. While the securities will be registered in care of the custodian for the minor, the minor is considered the owner of the securities, has legal title to the securities, and is responsible for any taxes due.
An account is opened for an employee of another member firm. Which of the following must be done?
I. Notify the person’s employer
II. Send the employerduplicate confirmations and statements if requested
III. Notify FINRA
IV. Complete Form U-7
a. I and II only b. I and III only c. I, II, and IV only d. I, II, III, and IV
a. I and II only
If a member firm intends to open an account for an employee of another member firm, the employer of the person opening the account must be notified and duplicate statements and confirmations regarding transactions must be sent upon request. FINRA need not be notified. However, the employee must be notified that the employer will be contacted regarding the opening of the account.
At the end of the year, an investor receives a 1099-DIV from a mutual fund containing the following information:
Incomedividends $44.50
Short-term capital gains $12.50
Long-term capital gains $225.30
How are these distributions reported for tax purposes on the investor’s return if the distributions were reinvested in additional shares of the fund?
a. $57.00 is reported as ordinary income; $225.30 is reported as a long-term capital gain.
b. $44.50 is reported as ordinary income; $12.50 is reported as a short-term capital gain; $225.30 is reported as a long-term capital gain.
c. $44.50 is reported as ordinary income; both the short-term and long-term capital gains are not reported since taxes on them are deferred if the distributions are reinvested.
d. None of the distributions are reported since taxes on them are deferred because they were reinvested.
a. $57.00 is reported as ordinary income; $225.30 is reported as a long-term capital gain.
Both income dividends and short-term capital gains distributions are reported and taxed as ordinary income. Short-term capital gains received from a mutual fund may not offset short-term capital losses and are therefore included in ordinary income. Long-term capital gains distributions are reported and taxed as long-term capital gains, regardless of how long the investor has owned shares of the fund. There is no deferral of taxation of reinvested dividends or distributions except in a tax-deferred account, such as an IRA.
Which of the following would be classified as a joint account?
I. An account established under UGMA
II. An individual account with third-party trading authority granted to the person’s spouse
III. A corporate account with two persons authorized by the corporate resolution to engage in transactions
IV. An account shared between two brothers
a. IV only b. III and IV only c. I and III only d. I, II, III, and IV
a. IV only
Of the choices given, only the account shared by the two brothers would be considered a joint account.
In reviewing and analyzing a customer’s financial status, which of the following are important considerations?
I. Discretionary income available for investment
II. Insurance needs or policies in place
III. Participation in retirement plans
IV. Anticipated expenditures
a. I and II only b. II and III only c. II, III, and IV only d. I, II, III, and IV
d. I, II, III, and IV
All of the information presented should be considered before suggesting or implementing an investment plan for a customer.
Which of the following actions might the Federal Reserve Board take to increase the money supply?
a. Buy Treasury securities in the open market
b. Raise the discount rate
c. Increase federal spending on road construction
d. Lower federal income tax rates
a. Buy Treasury securities in the open market
By paying primary dealers for Treasury securities, the Fed would increase the money supply. Raising the discount rate would have the opposite effect. Choices (c) and (d) are fiscal policy changes, which are implemented by Congress and the President, not the Fed.
John and Mary White recently retired. They plan to spend much of their time traveling. They would like their daughter, Emily, to make investment decisions regarding their mutual fund accounts while they are gone. They would also like Emily to be able to transfer funds from their mutual fund accounts to their bank accounts. Which of the following forms would be necessary to permit this arrangement?
a. Limited discretionary authorization
b. Full discretionary authorization
c. Guardianship appointment
d. New account card for Emily
b. Full discretionary authorization
Full discretionary authorization permits the authorized third party to make investment decisions for the account and to withdraw money and securities from the account. A limited authorization permits the third party to make investment decisions, but not to withdraw money or securities from the account.
Emma purchased 100 shares of the Landslide Growth Fund on April 1 at $30 per share. On July 5, believing a bear market was starting, she redeemed her investment at $28 per share. Two weeks later, she changed her mind when the market began to move up and repurchased 100 shares of Landslide for $32 each. Which of the following statements is TRUE regarding the tax consequences of these transactions?
a. The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $32 each.
b. The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $34 each.
c. The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $30 each.
d. The loss from the sale on July 5 may be taken in that tax year since the holding period was short-term at the time of the sale. The new transaction is not affected by the sale.
b. The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $34 each.
Because Emma sold her shares at a loss and repurchased the same security within 30 days of the sale, she triggered the IRS’ wash sale rule. The loss on the shares sold may not be taken (it is disallowed). Instead, Emma must add the loss to the cost basis of the shares she reacquired, giving them a basis of $34 each ($32 purchase price + $2 disallowed loss). Emma could have avoided the wash sale rule by repurchasing another fund with similar investment objectives.
The document(s) needed to open a cash account is/are:
I. A new account form
II. A loan agreement
III. A power of attorney
a. I only b. I and II only c. II and III only d. I, II, and III
a. I only
The only document that is needed to open a cash account is a new account form. A loan consent agreement is used when opening a margin account and a power of attorney is required for a discretionary account.
A customer is considering the purchase of a fixed-income investment paying interest at the rate of 8% per year. The rate of inflation is currently 5%. What is the real rate of return on this investment?
a. 3% b. 5% c. 8% d. 13%
a. 3%
Real return is the amount that an investment produces after inflation is taken into consideration. In this case, the real return would be
8% - 5% = 3%.
When watching for signs of inflation, which of the following is one of the most relevant statistics?
a. The Standard & Poor’s 500 Index
b. The balance of payments
c. The Consumer Price Index
d. The federal budget deficit
c. The Consumer Price Index
The Consumer Price Index (CPI) measures the price of a basket of goods and services available in the U.S. When it is increasing, it is considered a sign of inflation, which is a general rise in the level of prices
