Series 7 Chp 4

True or False: Treasury stock has no voting rights and receives no dividends

True

A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.

A sale for a loss would trigger the wash sale rule if the same security is repurchased within 30 days of the sale.

What happens to losses that remain after offsetting gains and also taking $3,000 against ordinary income?

They are carried forward to subsequent years.

When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?

Lower, due to the added opportunity

If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.

If an investor does not use Specific Identification when selling securities, the IRS assumes FIFO (first-in, first-out)

True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.

True. However, it does not guarantee them representation on the board.

For a gain to be considered long-term, the asset must be held for ______________________.

For a gain to be considered long-term, the asset must be held for more than one year.

Does the receipt of a stock dividend create a taxable event?

No, not until the stock is actually sold.

The corporate dividend exclusion rule applies to dividends paid on both ____________ and ____________ stock.

The corporate dividend exclusion rule applies to dividends paid on both common and preferred stock.

True or False: Common stockholders have the right to vote for the payment of dividends.

False. Dividend payments are determined by the board of directors.

Cash dividends received by individuals are generally taxed at a maximum rate of ____%.

Cash dividends received by individuals are generally taxed at a maximum rate of 20%.

Issued stock - Treasury stock = ____________________

Issued stock - Treasury stock = Outstanding stock

If there are losses remaining after offsetting gains, what amount may be used against ordinary income?

A maximum of $3,000.

Joe owns 100 shares of MNO at $20 (total cost $2,000). If MNO declares a 10% stock dividend, what is Joe's new basis?

Original cost ÷ new total number of shares ($2,000 ÷ 110 shares = $18.18)

What is the longest duration for a warrant?

Perpetual

True or False: A stockholder is able to vote for a director, but not an officer.

True

What is the advantage existing stockholders receive through rights offerings?

The ability to maintain their percentage of ownership and buy additional shares at a discount.

For wash sale purposes, what would cause the loss on the sale of a municipal bond to be disallowed by the IRS?

Purchasing a substantially identical bond at any point within the wash sale period

What are the capital gains tax rates?

Short-term gains are taxed at ordinary income rates, and long-term gains are taxed at a maximum of 20%.

True or False: Corporations receiving dividends from other corporations qualify for the dividend exclusion rule.

True

Who are considered the owners of a corporation?

Common and preferred stockholders

Existing stockholders receive ______ right for every one share owned.

Existing stockholders receive one right for every one share owned.

What is a derivative?

A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages

True or False: Convertible preferred stock may be converted into a bond.

False. Convertible securities are convertible into common stock.

What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?

The amount of the foreign tax can be claimed as a credit or deduction on her U.S. return.

What is the tax consequence for an investor who receives a stock dividend?

Her cost basis must be adjusted.

Currently, long-term capital gains are taxed at a maximum rate of ____%.

Currently, long-term capital gains are taxed at a maximum rate of 20%.

Name two issues on which common stockholders may vote.

Board of Directors elections and stock splits

How can an even split be identified?

Any split to 1 (e.g., 2:1, 3:1, 4:1, 5:1)

The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)

What is the first use of capital losses?

They are first used as deductions against capital gains.

To determine whether a wash sale violation has occurred, what is the total time period used?

61 days; which includes the trade date and 30 days both before and after the trade date.

What voting method permits one vote for each share owned to be voted for each director?

Statutory

True or False: A wash sale is triggered if the only difference in a bond sold and then repurchased is accrued interest.

True. To not trigger the wash sale rule, the bond's issuer, coupon, or maturity must be changed.

Does interest that is paid by one corporation to another corporation qualify for the corporate dividend exclusion?

No. The rule only applies to dividends.

Warrants are a ______-term right to buy stock at a preset price.

Warrants are a long-term right to buy stock at a preset price.

A client selling shares would like to determine the specific shares being sold, he should use ________________________.

A client selling shares would like to determine the specific shares being sold, he should use Specific Identification.

Ken covers a short position at a loss and re-shorts the same position within 30 days. Is the wash sale rule triggered?

Yes

What are some examples of odd splits?

3:2, 5:4, 12:5

At what rate are long-term capital gains on option positions taxed?

At the investor's tax bracket up to a maximum of 20%

May a warrant be detached and traded separately?

Yes

Describe cumulative preferred stock.

Stock that requires payment of any missing dividends before common stockholders are paid

True or False: Both common and preferred stockholders are offered preemptive rights.

False. Preemptive rights are only offered to common stockholders.

True or False: Warrants are generally attached to the delivery of another security (stock or bond).

True

What voting method permits common shareholders to vote in any manner in which they choose?

Cumulative voting

What is the method to calculate the number of shares that can be purchased through a rights offering?

# of rights received ÷ # of rights needed to buy each additional share

If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?

No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.

True or False: All owners have the right to vote.

False. Only common stockholders have the right to vote.

If an asset was held for one year or less prior to its sale, any gain or loss would be ____________.

If an asset was held for one year or less prior to its sale, any gain or loss would be short-term.

What instruments are used to facilitate trading of foreign securities in the U.S.?

American Depositary Receipts (ADRs)

According to the wash sale rule, what securities are considered substantially the same?

Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option

Name two priorities that preferred stock has over common stock.

Order of liquidation and dividends

$______ is normally the par value for preferred stock.

$100 is normally the par value for preferred stock.

What are some of the special standards that firms follow in regard to soliciting sales of penny stocks?

Determine suitability, principal approval, send risk disclosure, client's written authorization for the first 3 trades

____________ stock is stock that was issued and repurchased by the issuing corporation.

Treasury stock is stock that was issued and repurchased by the issuing corporation.

Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.

Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.

If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?

FIFO (first-in, first-out)

Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe's cost basis is:

$40 + 5 point loss = $45 (The disallowed loss is added to the new purchase.)

What generates a capital gain or loss?

The sale of an asset at a price that exceeds its basis (gain) or at a price lower than its basis (loss)