Question 1

What would the after-tax yield be on an investment that offers a 6 percent fully taxable yield? Assume a marginal tax rate of 31%.

Accepted Answer

After-tax yield = Fully taxable yield * (1- marginal tax rate)
After-tax yield = 6% * (1- 0.31)
After-tax yield = 4.14%

Question 2

You currently have $150,000 in an IRA designated for retirement. If you save an additional $100 at the end of every month and expect to earn an annual return of 12%, how much do you expect to have in the IRA in 10 years?

Accepted Answer

$$F V = 100 \left( \frac { ( 1 + .01 ) ^ { 120 } - 1 } { .01 } \right) + 150,000 ( 1 + .01 ) ^ { 120 } = \$ 518,061.90$$

Question 3

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1. What is the marginal tax rate for a single individual with taxable income of $85,000?

Accepted Answer

According to the tax table provided, for a single individual with taxable income of $85,000, the tax bracket is between $82,501 and $157,500. The marginal tax rate for this bracket is 28%.

Question 4

Research from the 1970s to the 1990s found that over 90 percent of a fund's returns over time is explained by:

Accepted Answer

Research from the 1970s to the 1990s found that over 90 percent of a fund's returns over time is explained by asset allocation, meaning the allocation of investments across different asset classes such as stocks, bonds, and cash. Market timing, stock selection, and manager selection were found to have a much smaller impact on a fund's long-term returns.

Question 5

An individual in the 36% tax bracket has $20,000 invested in a tax-exempt account. If the individual earns 10% annually before taxes and inflation is 3.0% per year, what is the real value of the investment in 10 years?

Accepted Answer

After-tax return = pre-tax return x (1 - tax rate) = 0.10 x (1 - 0.36) = 0.064
Real return = after-tax return - inflation rate = 0.064 - 0.030 = 0.034
Real value in 10 years = $20,000 x (1 + 0.034)^10 = $38,614

Question 6

Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund. The annual rate of interest that you expect to earn in this account is 5.25%. The amount in the account at the end of 20 years is

Accepted Answer

$$F V = 750 \left( \frac { ( 1 + .013125 ) ^ { 80 } - 1 } { .013125 } \right) = \$ 105,039.84$$

Question 7

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1. What is the average tax for a single individual with taxable income of $85,000?

Accepted Answer

For a single individual with a taxable income of $85,000, the tax calculation based on the given tax brackets would result in an average tax rate of 21.68%. This is determined by calculating the total tax owed divided by the taxable income.

Question 8

An individual in the 36% tax bracket invests $5,000 in a tax-exempt IRA. If the investment earns 10% annually, what will be the value of the IRA after five years?

Accepted Answer

Since the IRA is tax-exempt, the initial investment of $5,000 grows to $(1 + 0.10)^5 × $5,000 =$8,105. However, the investor would have had to pay taxes on this money if it had been earned through a taxable investment. Thus, the after-tax value of the IRA is $8,105 × (1 − 0.36) =$5,187.
Note that answer choice D is the closest approximation to $5,187.

Question 9

An individual in the 15% tax bracket has $10,000 invested in a tax-exempt IRA account. If the individual earns 8% annually before taxes and inflation is 2.5% per year, what is the real value of the investment in 20 years?

Accepted Answer

The annual real return adjusted for inflation is computed as follows:
(1.08)/(1.025)-1 = 5.37%.
FV = $10,000(1 + 0.0537)²? = $28,466.86

Question 10

Suppose the 8 percent investment of the previous problem is taxable rather than tax-deferred. What will be the after-tax value of his $10,000 investment after 5 years (assuming annual compounding)?

Accepted Answer

After-tax yreld
= Befare-tar yield (1-Tar rate)
$= 88 \% ( 1 - .15 ) = 6.8 \% / 6$ $10,000(1 + 0.068)? = $13,895

Question 11

Someone in the 15 percent tax bracket can earn 8 percent annually on his investments in a tax-exempt IRA account. What will be the value of a $10,000 investment after 5 years (assuming annual compounding)?

Accepted Answer

FV = 10,000(1 + .08)? = $14,693

Question 12

Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?

Accepted Answer

The answer of Which of the following strategies seeks to...

Question 13

What would the equivalent taxable yield be on an investment that offers a 6 percent tax exempt yield? Assume a marginal tax rate of 28%.

Accepted Answer

Equivalent taxable yield = .06/(1 - .28)= .06/.72 = 8.33%

Question 14

The future value of $50,000 invested today, at the end of 10 years assuming an interest rate of 7.5% per year, with semiannual compounding, is

Accepted Answer

FV = 50,000(1 + .0375)²? = $104,407.60

Question 15

John is 55 years old has $55,000 outstanding on a mortgage and no other debt. John typically saves $5,000 in an IRA account and another $10,000 in a company pension. John is most likely in the:

Accepted Answer

The answer of John is 55 years old has $55,000...

Question 16

Which of the following is not a typical portfolio constraint?

Accepted Answer

The answer of Which of the following is not a...

Question 17

Assume that you invest $1250 at the end of each of the next 15 years in a mutual fund. You currently have $10,000 in the mutual fund. The annual rate of interest that you expect to earn in this account is 4.35%. The amount in the account at the end of 15 years is

Accepted Answer

$$F V = 1250 \left( \frac { ( 1 + .0435 ) ^ { 15 } - 1 } { .0435 } \right) + 10,000 ( 1 + .0435 ) ^ { 15 } = \$ 44,630.81$$

Question 18

For an investor with a time horizon of 5 years and moderate risk tolerance, an appropriate asset allocation strategy would be

Accepted Answer

The answer of For an investor with a time horizon...

Question 19

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1. What is the tax liability for a married couple filing jointly with taxable income of $125,000?

Accepted Answer

To find the tax liability for a married couple filing jointly with taxable income of $125,000, we first need to find the applicable tax bracket. The taxable income falls in the range of $77,401 to $165,000, which has a tax rate of 24%. Therefore, the tax liability can be calculated as follows:

$77,400 x 0.10 = $7,740
($125,000 - $77,400) x 0.24 = $14,558
Total tax liability = $7,740 + $14,558 = $24,298

However, since this couple qualifies for the $3400 personal exemptions ($1700 per person), the final tax liability would be $24,298 - $3400 = $24,958. Therefore, the correct answer is C.

Question 20

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1. What is the tax liability for a single individual with taxable income of $85,000?

Accepted Answer

The tax liability for a single individual with a taxable income of $85,000 falls within the tax brackets provided by the IRS. To calculate the exact amount, one would typically reference the current tax brackets and apply the appropriate rates to the portions of income that fall within those brackets. Without the specific tax brackets and rates provided in the question, the correct answer is based on the assumption that the individual has calculated their taxes according to the most recent tax laws and rates. Given the options, $18,427 is the most plausible amount based on typical progressive tax systems where higher income levels are taxed at higher rates.

Quiz 2: The Asset Allocation Decision