Exercise

Answer the following questions.

1. Investors pay taxes on all of the following except:

A. Capital gains realized through sale of a tax-exempt municipal bonds within the fund

B. Capital appreciation on stocks in the fund that have not been sold

C. Capital gains realized through sale of a tax-exempt municipal bond fund

D. Capital gains realized through sale of a corporate bond fund

2. An investor purchases several shares of a mutual fund in December. Two weeks later, the mutual fund sends the customer a capital gains distribution. How should the investor’s capital gains distribution be taxed?

A. As a short-term gain

B. As a long-term gain

C. It depends on how long the mutual fund has held their investments

D. The investor will not pay taxes on the capital gains distribution; the mutual fund will pay those taxes

3. How does an unrealized capital gain become realized?

I. The portfolio manager sells securities.

II. The investor sells shares.

III. The AMT (alternative minimum tax) is applied.

IV. The NAV increases.

A. I and IV

B. I and II

C. II and III

D. II and IV