Question 1

The difference between a cash account and a margin account is:

Accepted Answer

A margin account allows the investor to borrow a percentage of the purchase price from the brokerage firm, whereas a cash account requires the investor to pay for the entire purchase upfront with their own funds. The other options mentioned are not accurate descriptions of the differences between cash and margin accounts.

Question 2

When an investor establishes a position in a security:

Accepted Answer

An investor is "long" when they purchase a security, and "short" when they sell a security they do not own.

Question 3

The tax rate that is simply the amount of taxes paid divided by taxable income is

Accepted Answer

The definition given matches with the average tax rate, which is simply the total taxes paid divided by the taxable income. The marginal tax rate refers to the tax rate on the additional income earned and can vary based on the income tax bracket. Short-term and long-term capital gains tax rates are specific tax rates applicable to gains earned from the sale of assets held for short-term (less than a year) and long-term (more than a year), respectively.

Question 4

You buy 100 shares of stock at $40 per share on margin of 40 percent.If the price of the stock rises to $60 per share what is your percentage gain in equity? Disregard interest costs.

Accepted Answer

The answer of You buy 100 shares of stock at...

Question 5

The following are all value-weighted indexes,except:

Accepted Answer

The Dow Jones Industrial Average is a price-weighted index, not a value-weighted index like the others listed.

Question 6

Performance in the bond market is usually gauged by

Accepted Answer

Performance in the bond market is usually gauged by both interest rate movements and yield curve changes, as well as by indexes and averages that track the prices and yields of different types of bonds. Therefore, the best choice is D, which includes both B and C.

Question 7

Assume the following five companies are used in computing an index

Accepted Answer

The answer of Assume the following five companies are used...

Question 8

Long-term capital gains treatment serves as encouragement for investors to buy

Accepted Answer

Long-term capital gains treatment provides a tax incentive for investors to hold onto their investments for a longer period of time. Growth stocks, which have the potential for high returns over the long-term, would be a good choice for investors looking to take advantage of this tax benefit. Municipal bonds and U.S. government bonds are not subject to capital gains taxes, so the tax treatment is not relevant to these investments. High yield stocks may also be a good choice for some investors, but the long-term capital gains treatment alone is not sufficient to identify them as the best choice.

Question 9

A type of index that weighs each company by its total market value as a percentage of the total market value for all firms is:

Accepted Answer

A value-weighted index is a type of index that assesses and weighs each company based on its total market value as a percentage of the total market value of all companies included in the index. This means that companies with higher market values will have a greater impact on the overall performance of the index. This approach makes sense as larger companies tend to have a greater impact on the economy and the markets as a whole.

Question 10

Margin accounts are mostly used by:

Accepted Answer

Margin accounts are used by traders, speculators, and investors who believe their returns will exceed the cost of borrowing, as they all aim to leverage their positions for potentially higher returns.

Question 11

You buy 100 shares of stock at $50 per share on margin of 40 percent.If the price of the stock declines to $35,what is your percentage loss?

Accepted Answer

The answer of You buy 100 shares of stock at...

Question 12

The tax rate that specifically applies to each new dollar of income is the:

Accepted Answer

The marginal tax rate specifically applies to each new dollar of income earned. It is important to understand because it helps individuals and companies determine the tax consequences of taking on additional income or making changes to their financial situation. The average tax rate, on the other hand, is the total tax liability divided by total income and represents the overall tax burden. Short-term and long-term capital gains tax rates apply specifically to gains from the sale of assets held for less than and more than one year, respectively, and are not relevant to all sources of income.

Question 13

The amount of taxes paid divided by taxable income is called

Accepted Answer

The amount of taxes paid divided by taxable income gives us the average tax rate. The marginal tax rate refers to the rate at which the last dollar of taxable income is taxed, while the implied tax rate is not a commonly used term in taxation. Therefore, the correct answer is B - the average tax rate.

Question 14

Lipper Analytical Services is a leading publisher of indexes related to

Accepted Answer

Lipper Analytical Services is best known for publishing indexes related to mutual funds, including rankings and performance data.

Question 15

The Nikkei 225 average relates to stock movements in what market?

Accepted Answer

The Nikkei 225 average is a stock market index for the Tokyo Stock Exchange in Japan.

Question 16

Using the excerpt from Table 3-1,assume a single person has a taxable income of $40,000
Excerpt for Table 3-5

Accepted Answer

The answer of Using the excerpt from Table 3-1,assume a...

Question 17

The minimum holding period to qualify for the long-term capital gains treatment is

Accepted Answer

The minimum holding period to qualify for the long-term capital gains treatment is 12 months. This means that if an investor holds an asset, such as a stock, for more than 12 months before selling it, they can receive favorable tax treatment on the profit they make. If the holding period is less than 12 months, the investor will be subject to short-term capital gains tax rates, which are typically higher than long-term rates.

Question 18

You sell 100 shares of PGD short at a price of $50 per share.How much is your initial margin given margin requirements of 40%? If the stock declines to $30 per share what is your percentage gain or loss on the initial equity?

Accepted Answer

The answer of You sell 100 shares of PGD short...

Question 19

If an investor is in a 34 percent tax bracket and has held a stock for two years,the applicable tax rate that will apply to dividends is

Accepted Answer

If an investor has held a stock for at least two years, they qualify for the long-term capital gains tax rate on dividends. For someone in the 34 percent tax bracket, the long-term capital gains tax rate on dividends is 15 percent. Therefore, choice A is the correct answer.

Question 20

An example of an equal weighted index or average is the

Accepted Answer

The Value Line Average is an equal weighted index, meaning that each company in the index is given equal weight regardless of its market capitalization. The other options listed are either market cap weighted or price weighted indexes.

Quiz 3: Participating in the Market