Question 1

A bond and a stock portfolio both provided unrealized pretax return of 8% to a taxable investor.If the stocks paid no dividends we know that the ________.

Accepted Answer

A)   after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio
B)   after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio
C)   after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio
D)   after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio depending on the marginal tax rate of the investor A

Question 2

The fact that the U.S.government provides deposit insurance to banks creates a form of ___________ which is at least partially offset by requiring banks to hold more capital if they are riskier.

Accepted Answer

A)   moral hazard
B)   adverse selection
C)   risk aversion
D)   interest rate risk A

Question 3

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year.
-What is John's effective salary reduction if he is in the 25% tax bracket?

Accepted Answer

A)   $2,100
B)   $2,800
C)   $5,600
D)   $8,400 A

Question 4

Inflation has an adverse effect on your savings because ____________.
I.it erodes the purchasing power of the dollars you have saved
II.it increases the real rate of return on the dollars you save
III.unless sheltered,it increases the taxes owed on investment income

Accepted Answer

A)   I only
B)   II and III only
C)   I and III only
D)   I, II and III

Question 5

An investor plans to retire at age 60,with a total savings of $1,000,000.If she is currently 35 years old,has no savings,and expects to earn 8% per year on her investments,how much money must she set aside every year?

Accepted Answer

A)   $15,546
B)   $13,679
C)   $11,892
D)   $10,324

Question 6

A saver who expects to have a higher tax rate after retirement would prefer a ______.

Accepted Answer

A)   Roth IRA
B)   traditional IRA
C)   401k plan
D)   403b plan

Question 7

A decrease of 1% in both your tax exemption and your income tax rate would on net _______________.

Accepted Answer

A)   make you better off
B)   make you worse off
C)   make you neither better off or worse off
D)   make you either better or worse off depending on your age

Question 8

An IRA-style tax shelter will defer ______________ taxes on contributions and investment earnings.

Accepted Answer

A)   income
B)   sales
C)   property
D)   estate

Question 9

The tax effect of a traditional IRA is to _____ taxes.

Accepted Answer

A)   evade
B)   postpone
C)   erase
D)   avoid

Question 10

The solvency of Social Security is threatened by ______________.

Accepted Answer

A)   growing population longevity
B)   above replacement growth of the U.S. population
C)   Medicare spending
D)   the growth of competing defined contribution plans

Question 11

An investor has an effective tax rate on all items of 30% and he decides to put $8,000 into a 401(k).The future value of the investment that results from the deferral of taxes over 30 years at an 8% return equals _____________.

Accepted Answer

A)   $2,400
B)   $8,000
C)   $10,400
D)   $24,150

Question 12

A worker plans to retire in 30 years.He hopes to receive $65,000 per year in retirement income.If inflation is forecast at 2.5% per year,what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $65,000?

Accepted Answer

A)   $65,000
B)   $76,159
C)   $98,398
D)   $136,342

Question 13

An investor must decide between putting $2,000 into a regular IRA or put $1,440 into a Roth IRA.If the investor's tax rate is 28% now and in retirement,and she expects to earn 12% per year over the next 20 years,which will produce more cash in the end?

Accepted Answer

A)   The investment in the regular IRA
B)   The investment in the Roth IRA
C)   Both investments will have the same future value after taxes
D)   There is not information to determine which will produce the most cash

Question 14

An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond.What is his after tax yield?

Accepted Answer

A)   3.90%
B)   4.75%
C)   6.50%
D)   9.90%

Question 15

How many years of Social Security contributions count for determination of benefits?

Accepted Answer

A)   25
B)   35
C)   45
D)   All yearly contributions count

Question 16

An insurance company plans to sell annuities to investors.Based on actuarial calculations,an investor has a 20 year life span and they want a $50,000 per year annuity,payable at the end of each year.If the insurance company uses a 3% assumed investment rate,how much should the annuity cost?

Accepted Answer

A)   $696,928
B)   $743,874
C)   $833,552
D)   $953.982

Question 17

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year.
-What is John's total cost of his 5% contribution?

Accepted Answer

A)   $2,100 cost
B)   $2,800 cost
C)   $700 benefit
D)   $3500 benefit

Question 18

You want to minimize your current tax bill by maximizing your contributions to your _____________.

Accepted Answer

A)   taxable bond portfolio
B)   Roth IRA
C)   401k or 403b plan
D)   taxable savings account

Question 19

If your marginal tax rate is 15% your capital gains tax rate on a stock you have held for 10 years would be ___.

Accepted Answer

A)   5%
B)   15%
C)   20%
D)   27.5%

Question 20

Taxes are applied to the _______________________.

Accepted Answer

A)   real value of sheltered investment income
B)   nominal value of unsheltered investment income
C)   nominal value of sheltered investment income
D)   real value of unsheltered investment income

Exam 21: Taxes,inflation,and Investment Strategy