Taxes — Review for the Series 7 Exam
Taxes are a part of life. Investors face additional taxes that aren’t imposed on your average consumer, including capital gains and dividends. The Series 7 exam tests your ability to understand the tax categories, what happens when you purchase a bond at a discount or premium.
An investor buys 1,000 shares of a stock at $40. If the stock increases in value to $60, how would the result be categorized?
A. as a profit
B. ordinary income
D. capital gain
Answer: C. appreciation
At this point, the investor just has appreciation of securities. You don’t know whether the investor is going to have a profit or loss until the securities are sold. Capital gains or losses take place when a security is sold, and ordinary income would be from interest or dividends received.
An investor receives interest from a corporate bond that he has held for more than one year. If the investor is in the 28% tax bracket, what tax rate will he be required to pay on the interest received?
Answer: D. 28%
When dealing with bond interest, the holding period doesn’t come into play. Unlike qualified dividends and long-term capital gains, corporate bond interest is taxed at the investor’s tax bracket.
An investor purchases 1,000 shares of common stock at $23. If the stock increases in value to $25, how would the result be categorized?
B. capital gain
C. passive income
D. ordinary income
Answer: A. appreciation
In this case, the shares just appreciated in value. The investor wouldn’t have a capital gain or loss unless selling the securities at a price other than his cost basis. Passive income is income received from limited partnerships, and ordinary income is interest received from bonds or dividends received from stock.