Risk and Tax Considerations

Question 1

Degree of uncertainty that an instrument will earn its expected rate of return.

Answer 1

Risk

Question 2

Bond holders are most susceptible to this risk.

Answer 2

Inflationary

Question 3

Risk that one may lose some or all of their investment.

Answer 3

Capital Risk

Question 4

Can apply to almost any investment at purchase or sale.

Answer 4

Timing risk.

Question 5

Specific to bond holders and traders and will impact the bond prices when the rates fluctuate.

Answer 5

Interest rate risk

Question 6

Risk embedded in financial markets that cannot be diversified away, only mitigated.

Answer 6

Systemic/market risk

Question 7

Risk that a companies financial difficulties may impede its ability to satisfy its obligations, causing the yield on its fixed income obligations to rise.

Answer 7

Credit risk

Question 8

Applicable to thinly traded domestic securities, private investments that avoid the public market, private equity, hedge funds, real estate, and credit derivatives. Impedes the ability to readily dispose of an investment at current market price.

Answer 8

Liquidity risk

Question 9

Transaction in which buyers and sellers of a product act independently of each other and have no relationship.

Answer 9

Arms length transaction

Question 10

Shares in a company whose earnings are expected to grow at an above average rate.

Answer 10

Growth Stock

Question 11

High risk, high reward, low share price stocks that carry the risk of losing it all.

Answer 11

Speculative stock

Question 12

Stock that provides constant dividend and stable earnings, regardless of overall state of the market.

Answer 12

Defensive stock

Question 13

Three types of income recognized by federal authorities.

Answer 13

1. Earned income
2. Investment income
3. Passive income

Question 14

Buying of a security such as stock, commodity or currency with the expectation that the asset will rise in value

Answer 14

Buying long/long position

Question 15

How are dividends taxed?

Answer 15

As ordinary income.

Question 16

How is interest income from T-notes, bills, and bonds taxed?

Answer 16

Subject to federal tax but exempt from state.

Question 17

How is municipal bond interest taxed?

Answer 17

Tax exempt

Question 18

How are retirement plan distributions taxed?

Answer 18

As ordinary income

Question 19

How are annuities taxed?

Answer 19

As ordinary income

Question 20

Name the three items that are taxed as ordinary income.

Answer 20

Dividends, retirement plan distributions, and annuities.

Question 21

How are securities inherited from deceased taxed?

Answer 21

Step up basis; according to value at death, not purchase price

Question 22

How are securities received as gifts taxed?

Answer 22

They are tax free up to $13,000.

Question 23

What are the exceptions to the securities gift tax?

Answer 23

Gifts to spouse, charity, political organization, or education expenses paid directly to the university.

Question 24

For foreign capital gains, where are they taxed?

Answer 24

In the country where the investor resides.

Question 25

Where can foreign dividends be taxed?

Answer 25

In home, foreign, or sometimes both countries.

Question 26

Type of consumption tax placed on a product whenever value is added at a stage of production and at the final sale. This is common in the EU.

Answer 26

Value Added Tax

Question 27

IRS rule prohibiting taxpayers from claiming a loss on the sale or trade of a security in a wash sale.

Answer 27

Wash sale rule

Question 28

When a security is sold at a loss and within 30 days before or after, a “substantially identical” stock is bought, outright or with an option or contract

Answer 28

Wash sale

Question 29

What is included in investment income?

Answer 29

Capital gains, cash dividends, and stock dividends