Deck 5: Taxes

Question 1

A change in the market value of a capital asset is not relevant for tax purposes until it is a _____ capital gain by sale or exchange.

A) depreciated
B) appreciated
C) unrealized
D) realized

Answer 1

D

Question 2

The _____ rate of interest is the rate at which the investor can trade current money for future money.

A) risk-adjusted
B) real
C) nominal
D) future spot

Answer 2

C

Question 3

A nonprofit foundation

A) does not need to distribute assets to escape taxes.
B) must pay a small tax rate on net investment income.
C) can only be for educational purposes.
D) has no federal tax liability on income.

Answer 3

B

Question 4

Using maximum federal income tax rates, Its tax liability would be

A) $34,000.
B) $48,000.
C) $52,000.
D) $ 6,800.

Question 5

Tax rates are based on an individual's taxable income found by first computing ____ income.

A) marginal
B) gross
C) adjusted gross
D) capital asset

Question 6

An amount that is subtracted directly from an individual's tax liability is

A) interest expense.
B) tax deduction.
C) capital gain.
D) tax credit.

Question 7

A tax-advantaged means by which people (usually self-employed) can set aside income on a before-tax basis is known to the IRS as a(n) ___ plan.

A) annuity
B) Keogh
C) IRA
D) tax-exempt pension

Question 8

Mutual funds

A) never have a federal income tax liability.
B) always have a federal income tax liability.
C) can retain dividend income with no federal tax liability.
D) pay out income and capital gains to eliminate a tax liability.

Question 9

____ bonds exist because the principle of federalism states that the federal government should not tax states and municipalities and income from their bonds.

A) Corporate
B) Treasury
C) Tax-exempt
D) Revenue neutral

Question 10

Income from dividends

A) is taxed only once.
B) may be 100% excluded from the individual's taxable income.
C) received by a corporation may be 80% excludable from its taxable income.
D) is usually tax-exempt to the corporation.

Question 11

When inflation is relatively high, there is ____ for stock returns to be either relatively high or low.

A) a strong record
B) a strong tendency
C) a slight tendency
D) no tendency

Question 12

Tax-exempt organizations such as non-profit religious, charitable, or educational foundations generally qualify for _____ status from federal income taxes.

A) fully-taxable
B) partly exempt
C) wholly exempt
D) partly or wholly exempt

Question 13

In general, the most important taxes for investment decision making are

A) personal and corporate income taxes.
B) personal income taxes.
C) personal income and excise taxes.
D) corporate income and sales taxes.

Question 14

According to the text, a corporation that receives $100,000 of dividends from another corporation would pay taxes on

A) $100,000.
B) $ 60,000.
C) $ 40,000.
D) $ 20,000.

Question 15

A corporation with large pre-tax earnings would have a marginal federal income tax rate of

A) 28%.
B) 42%.
C) 34%.
D) 48%.

Question 16

Corporate income taxes since 1993 have ____ basic rates.

A) many
B) eight
C) three
D) over 100

Question 17

The relationship of a corporation's average income tax rate to its marginal income tax rate is that the average rate is

A) unrelated to its marginal.
B) less than or equal to its marginal.
C) equal to its marginal.
D) sometimes greater, sometimes less than its marginal.

Question 18

The ____ tax rate is the tax rate that an individual would pay on additional dollars of taxable income.

A) marginal
B) average
C) flat
D) transitional

Question 19

A wash sale is the sale and subsequent purchase of a " _____" security solely for the purpose of generating a tax-deductible capital loss.

A) substantially identical
B) completely different
C) slightly different
D) slightly identical

Question 20

The fiduciary for a qualified pension plan

A) must pay taxes on capital gains.
B) must pay taxes on 20% of dividend income.
C) has no tax liability on income or capital gains.
D) invest mainly in real estate.

Question 21

During the present tax year, the value of a share you purchased for $30 rose to $45. You would

A) have no tax liability since it is a long-term capital gain.
B) pay a capital gains tax on $15 if you sold it.
C) have a tax liability on the full $45 value.
D) pay a capital gains tax on $15, even if you do not sell it.

Question 22

The marginal personal tax rate is the rate

A) calculated by total taxes divided by adjusted gross income.
B) paid on the last $500 of income.
C) a person would pay on the next dollar of income.
D) a person would pay if he had no investment income.

Question 23

If an investor has purchased a company's shares at various times and identified each group, when he sells them his capital gains will be calculated on

A) average cost basis.
B) highest cost first.
C) first in - first out basis.
D) lowest cost first.

Question 24

Given the average compound annual inflation rate of 4%, how much would $1,000 be worth in terms or purchasing power six years from today expressed in current dollars?

A) $750.00
B) $790.30
C) $821.90
D) $850.75

Question 25

To qualify as a short-term capital gain, the asset must have been owned for

A) one month.
B) six months or less.
C) one year or less.
D) five years or less.

Question 26

A tax sheltered plan available only to self-employed individuals is the

A) Keogh.
B) 403b..
C) IRA.
D) Glass-Steagall.

Question 27

When investors are concerned with returns, stock prices will be priced such that nominal returns will include

A) the expected rate of inflation
B) the historical rate of inflation
C) individual income tax rates
D) the current rate of inflation

Question 28

An investor can control when he will pay taxes on

A) corporate bond interest.
B) common stock dividend income.
C) tax exempt bond interest.
D) capital gains.

Question 29

Which of the following investments is the best choice for an investor in the 33% marginal tax bracket?

A) a municipal bond yielding 5%
B) a taxable bond yielding 8%
C) a municipal bond yielding 5.5%
D) a taxable bond yielding 7.75%

Question 30

The IRS does not allow a deduction for a capital loss if the stock is sold and repurchased within

A) 1 year.
B) 5 trading days.
C) 6 weeks.
D) 30 days.

Question 31

In making investment decisions, the most important tax rate is the

A) marginal.
B) average over the last $1,000 of income.
C) average over total income.
D) amount paid without deductions.

Question 32

One shortcoming of a cost-of-living index using a basket of goods to represent price levels is that

A) it does not adjust prices to a base year.
B) changes to the quality of the basket items are not measured.
C) the index may not measure inflation over a given period of time.
D) too many adjustments are made in the mix as relative prices change.

Question 33

Most tax shelters are formed as

A) partnerships.
B) subchapter S corporations.
C) limited partnerships.
D) corporations.

Question 34

After age 59-1/2, when a Keogh plan participant withdraws funds, they are

A) not taxable.
B) taxed as long-term capital gains.
C) taxed as ordinary income.
D) subject to a withdrawal penalty.

Question 35

In 1991, the U.S. capital gains tax rates were

A) the highest in the world.
B) lower than Japan's.
C) about average for industrialized countries.
D) lower than those on regular income.

Question 36

If you are in the 28% tax bracket and you consider a municipal bond yielding 5%. What is the equivalent before-tax interest rate that a taxable bond would have to yield to be equivalent to the municipal bond?

A) 5%
B) 6.51%
C) 7.46%
D) 6.94%

Question 37

Consider a tax-exempt municipal bond yielding 4%. To an investor in the 33% marginal tax bracket, what is the equivalent before-tax interest rate that a taxable bond would have to offer to be considered equivalent to the municipal bond?

A) 5.97%
B) 6.18%
C) 8%
D) 12.12%

Question 38

The maximum a married couple who both work could contribute per year to an IRA is

A) $0.
B) $2,000.
C) $4,000.
D) $6,000.

Question 39

Fixed-income securities incur an additional risk related to inflation known as ____ risk.

A) interest-rate
B) reinvestment
C) purchasing-power
D) exchange-rate

Question 40

An investor wishes to invest $2,000 for his future retirement. The $2,000 would not be taxable if he uses

A) any IRA plan.
B) tax-exempt bonds.
C) a direct investment.
D) Keogh plan.

Question 41

Which one of the following statements does NOT explain why some stocks of some companies are better hedges against inflation than others?

A) Their earnings are less-inflation sensitive.
B) Defense contractors are well-equipped to pass along price changes.
C) Electric utilities are very free to pass along cost increases despite the regulatory aspects of the business.
D) Electric utilities are constrained in their ability to pass along price changes due to the regulatory nature of the business..

Question 42

An individual in the 22% tax bracket purchases a 9% corporate bond. His after-tax yield is

A) 1.98%.
B) 4.76%.
C) 6.42%.
D) 7.02%.

Question 43

Which of the following statements represents a problem associated with fully inflation-indexed securities?

A) During periods of inflation, much of the interest payments represent real increases in purchasing power.
B) The government will tax only the inflation-adjusted payments.
C) After-tax returns to bondholders will be adversely affected by price changes.
D) The interest payments will be taxed by the government thereby reducing the return to bondholders.

Question 44

An investor can purchase an 8% tax exempt or a 10% corporate bond. His marginal tax rate to buy the tax exempt should be at least

A) 20%.
B) 18%.
C) 15%.
D) 24%.

Question 45

A 40 year old buys a residence home for $50,000, resells it for $60,000, and immediately buys a new home for $80,000. He

A)has no immediate tax liability.
B) can use his $125,000 exclusion on capital gains.
C) must pay capital gains taxes on $30,000.
D) must pay taxes now on a $10,000 capital gain.

Question 46

If net short-term capital gains less net long-term capital losses is positive, the net amount is

A) taxed as ordinary income.
B) not taxed.
C) tax deductible.
D) taxed at a maximum rate of 15%.

Question 47

An individual will have his lowest tax due if his capital gains are

A) all long-term.
B) either short or long-term.
C) achieved through real estate sales.
D) half long-term, half short-term.

Question 48

Which of the following statements does NOT explain why the returns on bonds are found to be negatively correlated with unexpected inflation?

A) Bonds offer a stream of nominal interest and principal payments that vary with respect to the inflation rate.
B) Unexpected inflation causes inflation expectations to rise causing required returns to increase as well.
C) To provide higher returns, bond prices must fall producing principal losses for current bondholders.
D) Bonds are non-indexed, fixed income securities that will not adjust the payment stream for price changes.

Question 49

Securities that have large price changes are traded most heavily

A) at the end of the year.
B) evenly over the year.
C) during July.
D) there is no standard pattern.

Question 50

An individual can purchase.a 5% tax exempt or a 7% corporate bond. His marginal tax rate to buy the tax exempt should be at least

A) 15%.
B) 29%.
C) 25%.
D) 27%.

Question 51

A person in the 28% tax bracket buys a 6% tax exempt bond. The taxable bond yield is

A) 1.68%.
B) 6.00%.
C) 21.43%.
D) 8.33%.

Question 52

A personal investor in the 28% tax bracket can purchase a 9% dividend yield stock or a 10% current yield corporate bond. He would

A) have no tax liability on the dividends.
B) have the same after-tax yield on both.
C) pay taxes on all of the interest but only 20% of the dividends.
D) have a higher after-tax yield from the bond.

Question 53

An individual can buy a 10% corporate or an 8% tax exempt bond. He would prefer

A) the corporate if in the 28% tax bracket.
B) the corporate if in the 15% tax bracket.
C) the tax exempt without regard to his tax bracket.
D) the municipal if in the 15% tax bracket.

Question 54

An investor’s portfolio earned a 10% average compound annual return over the last six years. The average compound annual inflation rate over this period was 3%. Her portfolio was worth $20,000 at the beginning of the period six years ago. How much is the portfolio worth now, expressed in beginning-of-period dollars?

A) $30,014
B) $31,821
C) $35,432
D) $29,674

Question 55

An individual in the 15% tax bracket purchases a 6% corporate bond. Her after-tax yield is

A) 6.9%.
B) 5.1%.
C) 6.0%.
D) .9%.

Question 56

An investor receives $1,000 of corporate bond interest. He is in the 28% federal income tax bracket and the 6% state income tax bracket. His tax liability is

A) $236.80.
B) $323.20.
C) $340.00.
D) $293.20.

Question 57

For an individual, if net long-term capital gains are greater than net short-term capital losses, the net amount is

A) not taxable.
B) taxed at 15%.
C) taxed at 31%.
D) taxed at a maximum of 28%.

Question 58

Investment returns can be indexed by tying security payments to

A) changes in the nominal rate of interest.
B) changes in the price level.
C) the Treasury bill rate of interest.
D) the change in purchasing power risk.

Question 59

A person buys rental property for $50,000, makes $20,000 in improvements, and depreciates it by $30,000. If he sells it for $80,000, his capital gain is

A) $80,000.
B) $20,000.
C) $60,000.
D) $40,000.

Question 60

Empirical studies have determined that over short periods of time, the average returns for stocks are

A) not correlated to either actual or expected rates of inflation.
B) directly correlated to the expected rate of inflation.
C) inversely correlated to both actual and expected inflation.
D) directly correlated to the historical rate of inflation.

Question 61

An investor receives $500 of dividend income. He's in the 22% federal and 8% state income tax brackets. His effective tax rate on the $500 is

A) 28.2%.
B) 25.8%.
C) 23.6%.
D) 29.4%.

Question 62

An investor receives $200 in corporate bond interest in a state that allows cross-deductibility. If he is in the 28% federal and 5% state income tax brackets, his effective tax rate is

A) 33%.
B) 31.6%.
C) 28.4%.
D) 30.6%.