Ethics & Taxation

Question 1

A customer owns 10M of 7% U.S. Treasury bonds. He is in the 28% federal tax bracket and the 10% state tax bracket. What is his annual tax liability on these bonds?

Answer 1

$196.

Question 2

A customer buys a municipal bond at 106 with 8 years to maturity. What is the amount of unamortized premium at the end of 4 years?

Answer 2

$30.

Question 3

A married couple who files jointly has a $5,000 long-term capital loss with no offsetting capital gains. Regarding the tax treatment of this loss, all of the following statements are true EXCEPT:

Answer 3

capital losses can be used to offset capital gains only.

Question 4

XYZ Corp. owns 18% of the voting common stock of ABCD Enterprises. In the current tax year, XYZ receives $250,000 in dividend income from its investment in ABCD. If XYZ has a marginal tax rate of 34%, what is its tax liability on the dividend income received?

Answer 4

$25,500.

Question 5

A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as:

Answer 5

value.

Question 6

A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as:

Answer 6

$0.

Question 7

At year’s end, your client reports $12,000 in capital gains and $20,000 in capital losses. The net effect of this on his taxes would be:

Answer 7

a $3,000 deduction from ordinary income with a $5,000 loss carry-forward.

Question 8

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend?

Answer 8

General obligation bond.

Question 9

If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer’s portfolio?

Answer 9

T-bills.

Question 10

A municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000 and the bond has 10 years to maturity. If the bond is sold for 97 after 5 years, what is the taxable gain?

Answer 10

$200.

Question 11

Diversification helps protect against which of the following types of risk?

Answer 11

Nonsystematic.

Question 12

Your customer’s portfolio consists of 40% long-term government bonds, 20% preferred stock, and 40% common shares of utility companies. Which of the following may have the single largest impact on the entire portfolio?

Answer 12

Interest rate movements

Question 13

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?

Answer 13

$75.

Question 14

Your client owns stock in the TXR Corporation and has received dividends of $950 this year. The client has taken $450 of this and used it to purchase additional shares of TXR. For tax purposes, your client must report:

Answer 14

$950.

Question 15

A municipal bond is purchased in the secondary market at 102½. The bond has 5 years to maturity. Two years later, the bond is sold for 102. The tax consequence to the investor is:

Answer 15

a capital gain of $5 per bond.

Question 16

The effect of using the FIFO method for a sale of some of the securities that were purchased separately during a period of rising prices will be:

Answer 16

an increase in the taxable profits of the investor.

Question 17

Which of the following bonds is most affected by interest rate risk?

Answer 17

7.6s of ‘31 yielding 7.2%.

Question 18

If a customer buys a municipal bond at 110, maturing in 8 years, but sells the bond 6 years later at 103½, the customer will have a:

Answer 18

$10 per bond gain.

Question 19

Regarding the taxation of dividends received from corporate securities, which of the following are TRUE?

Answer 19

I. Nonqualified dividends are taxed at the rate the investor’s ordinary income will be taxed.
II. Qualified dividends are taxed at a maximum rate specified by the IRS and will depend on the investor’s income tax bracket.

Question 20

Which of the following statements regarding stock dividends are TRUE?

Answer 20

II. They are not taxable on receipt.

III. Cost basis per share is reduced.

Question 21

Short against the box is a strategy associated with:

Answer 21

deferring capital gains.

Question 22

For tax-reporting purposes, qualified dividends are considered to be what type of income?

Answer 22

Portfolio.

Question 23

An investor purchases 100 shares of XYZ common stock for $70 and sells it one year later for $50. Which of the following activities would violate the wash sale rule?

Answer 23

I. Purchasing an XYZ call option 20 days after the sale.

II. Purchasing 100 shares of XYZ common stock 20 days after the sale.

Question 24

Market timing is normally associated with which of the following portfolio management styles?

Answer 24

Tactical asset allocation.

Question 25

Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year?

Answer 25

$2,500.

Question 26

Reinvestment risk is the chance that, after purchasing a bond, interest rates:

Answer 26

fall.

Question 27

For dividends to be taxed as qualified dividends, the dividend paying investment must be held for

Answer 27

more than 60 days

Question 28

If a registered representative wishes to open a joint account with his brother, who is a client of his, which of the following rules would NOT apply?

Answer 28

The sharing in profits and losses in the account must be proportional to each party’s investment in the account.

Question 29

If a municipal bond with 10 years to maturity is purchased from the issuer for 110, and after 2 years it is sold for 110, the bondholder must report:

Answer 29

capital gain of 2 points.

Question 30

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC?

Answer 30

30%.

Question 31

Your client’s investment portfolio is 50% growth stocks, 10% foreign stocks and 40% blue chip stocks. If the client is interested in further diversification which mutual fund would best meet that goal?

Answer 31

Bond fund.

Question 32

All of the following statements about the taxation of municipal and corporate bonds are true EXCEPT:

Answer 32

corporate bondholders must amortize premium bonds annually.

Question 33

In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations?

Answer 33

III. Your customer’s liquid net worth.

IV. Your customer’s monthly credit card payments.

Question 34

When determining whether a tax swap of municipal bonds will result in a wash sale, each of the following are considered EXCEPT:

Answer 34

principal amount.

Question 35

A customer has $12,000 of capital gains, $15,000 of capital losses, and $50,000 adjusted gross income. How much unused loss is carried forward to the following tax year?

Answer 35

$0.

Question 36

Which of the following are likely to have a low beta?

Answer 36

Public utility stocks.

Question 37

If an employee of an NYSE member wants to take a second job, which of the following statements is TRUE?

Answer 37

Prior written notice to the member firm is required

Question 38

A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 70% of income earned on investments in:

Answer 38

corporate common and preferred stock.

Question 39

A customer buys a new issue municipal bond at a discount. If held to maturity, the amount of the discount is:

Answer 39

accreted and is not taxed.

Question 40

KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year?

Answer 40

$820,000.

Question 41

An investor has losses on the sale of municipal bonds. Which of the following is TRUE for tax purposes?

Answer 41

The losses can be applied against the gains on the sale of any other security.

Question 42

If a customer wants a year-end tax swap, he can expect to pay more money for the swap if the bonds purchased have a:

Answer 42

I. higher coupon.

II. higher rating.

Question 43

A registered representative wishes to lend money to a customer. Under which of the following circumstances would written notice to the broker/dealer be required?

Answer 43

I. The RR and the customer have been close friends since high school.
II. He and the customer have a business relationship outside the firm that necessitates occasional lending between them.

Question 44

An investor purchases 100 shares of CDE on December 20, 2000, for $2,000. On the same day, he purchases 100 shares of QRS for $2,000. On January 3, 2001, he sells the CDE stock for $1,700 and the QRS stock for $2,200. On January 24, 2001, he purchases 200 shares of CDE for $3,000. What capital gains or losses did he realize from these transactions?

Answer 44

$200 gain in QRS.

Question 45

If an investor wants to do a tax swap, he could reasonably expect to pay more money if he buys bonds with a:

Answer 45

higher coupon and similar rating.

Question 46

If a customer buys a corporate bond at a discount in the secondary market, which of the following statements are TRUE if the bond is held to maturity?

Answer 46

I. The discount is taxable as ordinary income.

II. The interest income is taxable as ordinary income.

Question 47

A customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment?

Answer 47

The tax loss is not allowed.

Question 48

If a book author receives royalty payments from a publisher, the payments will be taxable as which of the following types of income?

Answer 48

Earned income.

Question 49

Regarding the topic of outside business activity for associated persons of a FINRA member firm, which of the following statements is NOT TRUE?

Answer 49

Member firms must grant permission in writing prior to any outside business activity on the part of the associated person.

Question 50

Which of the following is the best example of a passive investment management style?

Answer 50

Exclusive use of index funds.

Question 51

Which of the following best describes the investment characteristics of a high-quality long-term municipal bond?

Answer 51

High inflation risk; low default risk.

Question 52

Amortization of a municipal bond premium does which of the following?

Answer 52

I. Decreases cost basis.

II. Decreases reported interest income.

Question 53

For the purpose of reporting sales to the IRS, which method available to investors by the IRS offers the most flexibility in anticipation of the investor’s year-end tax needs?

Answer 53

Share identification

Question 54

A married couple in their early 40s is willing to accept some risk and wants to keep pace with inflation. Which of the following investment choices would be most suitable for them?

Answer 54

A diversified common stock portfolio

Question 55

Your broker/dealer provides occasional research reports to an institutional trading desk in exchange for that institution doing executions for its various fund portfolios through your broker. This is known as

Answer 55

soft dollar arrangement

Question 56

An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed?

Answer 56

The shares are not subject to taxation.

Question 57

An investor’s portfolio has a beta coefficient of .85. If the overall market declined by 10% over the course of a year, the portfolio’s value has likely:

Answer 57

decreased by 8.5%.

Question 58

A customer buys $10,000 worth of new issue municipal bonds at a price of 104 and the bonds have 10 years to maturity. Four years after purchasing the bonds, she sells them at 99. What is the tax loss on these bonds?

Answer 58

340.

Question 59

Several years ago, one of your customers bought an OID municipal bond at $960. The bond has now matured. For federal income tax purposes, the discount is:

Answer 59

tax free.

Question 60

By which government is the income from eurodollar bonds always taxed?

Answer 60

Government of the country in which the investor pays taxes.

Question 61

A mother makes a gift of appreciated securities to her 10-year-old son. The son’s cost basis in the stock is the:

Answer 61

original cost of the securities to the mother.

Question 62

The following dividends were received by a husband, his wife, and both of them jointly: husband-$160; wife-$160; joint-$100. Indicate the amount of dividends that would be subject to taxation if they filed a joint tax return.

Answer 62

$420.

Question 63

A 27-year-old client is in the lowest tax bracket and seeks an aggressive long-term growth investment. If his investment adviser representative recommends a high-rated general obligation municipal bond, the IAR has:

Answer 63

made an unsuitable recommendation based on the client’s needs and objectives.

Question 64

The risk that time value may erode the premium of an equity option even while the underlying issuer remains financially sound is an example of:

Answer 64

capital risk.

Question 65

When comparing investment alternatives, all of the following must be considered EXCEPT:

Answer 65

state of incorporation of the companies.

Question 66

A customer buys 5 municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has a:

Answer 66

$50 capital gain.

Question 67

Alternative minimum tax (AMT):

Answer 67

is assessed against high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income.

Question 68

If a registered representative owns a vacation home and wants to rent it out during the summer, which of the following statements is TRUE?

Answer 68

No notification is required.

Question 69

A customer purchases an XYZ municipal bond at 108. It is scheduled to mature in 16 years. After owning the bond for 10 years, he sells the bond at 102. What capital gain or loss must he report for tax purposes at the time of the sale?

Answer 69

$10 loss.

Question 70

A customer buys a municipal bond in the secondary market at 96 that has 4 years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are:

Answer 70

2 points of ordinary income and 1 point of capital gain.

Question 71

An investor purchases a municipal bond at par for $10,000 on February 15, 1997. On August 15, 1997, if the investor sells the bond for $10,500, the $500 profit is taxed as:

Answer 71

a short-term capital gain.