Question 1

Using the Table below, assume a single person has a taxable income of $40,000.
 $$\begin{array}{l}
\underline{\text { Taxable Income }} \quad\underline{ \text { Tax Rate}}\
\begin{array} { l l } 
0 - \$ 7,300 & 10 \% \
\$ 7,300 - \$ 29,700 & 15 \% \
\$ 29,700 - \$ 40,000 & 25 \%
\end{array}
\end{array}$$ (a) How much tax will be owed? (You will need to refer to the Table plus make your own calculations).
(b) What is the person's average tax rate?
(c) What is the person's marginal tax rate?

Accepted Answer

The answer of Using the Table below, assume a single...

Question 2

When an investor establishes a position in a security,

Accepted Answer

When investors establish a position in a security, they are said to have a long position if they purchase the security for their account. Those who have no position at all, borrow a security from the brokerage firm and sell it for their account.

Question 3

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

Accepted Answer

A security must be held for a minimum of 1 year to qualify for long-term capital gains treatment.

Question 4

You buy 100 shares of stock at $40 per share on margin of 40%. 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 tax rate that specifically applies to each new dollar of income is the:

Accepted Answer

The percentages given in tax tables are called the marginal tax rates.

Question 6

Margin accounts are mostly used by:

Accepted Answer

Margin accounts are used mostly by traders and speculators or by investors who think their long-run return will be greater than the cost of borrowing.

Question 7

The Nikkei average relates to stock movements in what market?

Accepted Answer

The Nikkei average tracks stock movements on the Japanese market.

Question 8

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, such as the S&P indexes, weighs each company by its total market value, as a percentage of the total market value of all firms.

Question 9

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

Accepted Answer

Since the stock has been held for more than 1 year, it qualifies for the long-term capital gains tax at 15%.

Question 10

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 11

The amount of taxes paid, divided by taxable income, is called:

Accepted Answer

The average tax rate is equal to the amount of taxes paid, divided by taxable income.

Question 12

An investor who is in a 33% tax bracket for normal (ordinary) income buys a stock for $5,000 and sells it for $9,000. How much will her tax obligation be if she holds the stock for:
(a) 6 months?
(b) 14 months?

Accepted Answer

The answer of An investor who is in a 33%...

Question 13

Assume the following five companies are used in computing an index (there have been no stock splits during this time). $\begin{array}{lrrr}
&&\text { Base Period }&\text { Current Period }\
&\text { Shares} &\text { January 1, 1977 }&\text { December 31,  2004}\
\underline{\text {Company}}&\underline{\text { Outstanding }} & \underline{\text { Market Price }} & \underline{\text { Market Price }}\
\text { A } & 2,000 & \$ 2.00 & \$ 14.00 \
\text { B } & 6,000 & 6.00 & 18.00 \
\text { C } & 5,000 & 9.00 & 23.00 \
\text { D } & 8,000 & 10.00 & 5.00 \
\text { E } & 1,000 & 13.00 & 40.00
\end{array}$ (a) If the index is price-weighted, what will be the value of the index on Dec. 31, 2004?
(b) Using the same data from the above table, determine the index value if the index is calculated on a value-weighted basis.

Accepted Answer

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

Question 14

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 15

The following are all value-weighted indexes, except:

Accepted Answer

The DJIA is a price-weighted average.

Question 16

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

Accepted Answer

The average tax rate is the total amount of taxes paid, divided by the taxable income.

Question 17

An investor is in a 35% tax bracket for normal (ordinary) income. During the course of the year, he received $5,000 in dividends and had $15,000 capital gains on stock he had held for 19 months. How much will his total tax be on this investment-related income?

Accepted Answer

The answer of An investor is in a 35% tax...

Question 18

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

Accepted Answer

A cash account requires full payment, while a margin account allows the investor to borrow a percentage of the purchase price from the brokerage firm.

Question 19

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

Accepted Answer

Since dividends and long-term capital gains are taxed at the same 15% rate, high-income investors have little tax preference between high-dividend stocks and low-dividend stocks that attempt to provide capital gains. Growth stocks provide the opportunity for potentially higher capital gains.

Quiz 3: Participating in the Market