Chapter Five Practice Question Answers
- 1. Answer: B. A C-corp, or subchapter C-corp, does not pass through its earnings without taxation. A C-corp’s net profits are actually subject to a corporate tax rate before they are distributed to its owners, who are then taxed again on that income.
- 2. Answer: A. A JTWROS account is automatically divided equally among the remaining joint account holders in the event of the death of one of the others. An individual’s percentage ownership interest in a joint tenancy in common account, a general partnership, or LLC is passed to their heirs according to their estate plan or state law.
- 3. Answer: A. An inability to tolerate even temporary drops in a portfolio’s value would best be described as a conservative risk tolerance. A moderate risk tolerance would be able to sustain temporary drops in value with the expectation of a rebound. Just because someone is conservative in their risk tolerance doesn’t mean that they identify current income as their primary goal; even that may be too risky for some conservative clients.
- 4. Answer: A. The two types of funds will provide the liquidity that John will need in the next few years to purchase his house. They also will provide both income from interest and dividends that can be reinvested and appreciation from the stocks in the fund. Preferred stocks offer large dividends that he could reinvest and he would also be able to sell the stock on the market because it was issued by a large corporation. Municipal bonds may not offer the necessary liquidity to get a fair market price when he needs the money. In addition, he will not be able to take advantage of the tax-free status as a person in a higher tax bracket. Finally, municipal bonds pay lower interest rates than corporate bonds because they are tax-free.
- 5. Answer: B. Municipal bonds would be the most suitable investment for Alex, because as an executive for a Fortune 500 company, he would be earning a high income,