3. Paying taxes on stocks What does it mean to invest in stocks? Common stock is considered to be one of the most popular investment vehicles for long-term wealth building. Investors earn income from common stock in the form of dividends and/or capital gains. As an investor it is important to understand the implications of investing in stocks from a tax perspective. Calculating taxes owed on Alex's investment Two years ago, Alex purchased 100 shares of a particular company's stock at a price of $111.17 per share. Last year, Alex received an annual dividend of $1.20 per share, and at the end of the year, a share of stock was trading at $112.22 per share. This year, Alex received an annual dividend of $1.32 per share and at the end of the year sold all 100 shares at a price of $122.43 per share. In the first column of the following table, enter the total annual dividends Alex received each year, as well as the total capital gains at the end of each year. Suppose Alex is in the 24% tax bracket. Compute the taxes Alex pays each year on dividends and capital gains from this investment by completing the second column in the table. Note: Throughout this problem, please round your answers to the nearest cent. Amount Taxes Owed Year 1 Dividends: $ $ Capital Gains: $ $ Year 2 Dividends: $ Capital Gains: $ $ The total amount of investment income (pre-taxes) that Alex earned on this investment over the course of 2 years is $ The total amount that Alex pays in taxes on income from this investment income is Attempts Keep the Highest / 4 7. Bond basics Understanding How Bonds Work as Investment Vehicles From an investment point of view, bonds are generally considered to be safer investments than stocks. They are generally low risk low return investments, unlike stocks. As an investor in bonds, you would lend money to the issuer of the bonds. It is important to understand what bonds are and how they work as investment vehicles. Suppose a friend of yours is looking to invest $5,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about corporate bonds but wants to learn more before purchasing them. Fill in the blanks in the following conversation to give your friend the appropriate information regarding corporate bonds. FRIEND: Can you explain to me the basics of how investing in a corporate bond will increase my current income? YOU: Under a standard bond agreement, if you were to purchase a 10-year, $5,000 corporate bond with a 9% coupon, you would receive in interest each year, and at the end of the 10-year period, you would receive the par value of 5 FRIEND: OK, and am I guaranteed to receive these interest payments and the par value? YOU: Well, some corporate bonds are issued as debentures, which have daim on some specific property. A special type of corporate bond, known as a you to convert them into a certain amount of stock. standing, meaning that they backed by a legal bond, comes with a provision allowing FRIEND: Are there any other general features I should be aware of? YOU: Corporate bonds can be issued in a wide variety of forms. As far as general features go, they tend to come in denominations of and many have call provisions so that the issuers can't retire the bond (by paying you back and ceasing to pay interest payments) within the first 5 or 10 years of the issue date. Such bonds FRIEND: So if the interest rate were to fall and the issuer were able to retire my bond, I would be holding the bond, because if I reinvest the money the issuer returns to me, I would receive a off than if I were to continue interest rate. YOU: Exactly. In such a case, the issuer would pay you a loss. but this generally would not fully compensate you for your FRIEND: Got it. Thanks for your help! 3. Paying taxes on stocks What does it mean to invest in stocks? Common stock is considered to be one of the most popular investment vehicles for long-term wealth building. Investors earn income from common stock in the form of dividends and/or capital gains. As an investor it is important to understand the implications of investing in stocks from a tax perspective. Calculating taxes owed on Alex's investment Two years ago, Alex purchased 100 shares of a particular company's stock at a price of $111.17 per share. Last year, Alex received an annual dividend of $1.20 per share, and at the end of the year, a share of stock was trading at $112.22 per share. This year, Alex received an annual dividend of $1.32 per share and at the end of the year sold all 100 shares at a price of $122.43 per share. In the first column of the following table, enter the total annual dividends Alex received each year, as well as the total capital gains at the end of each year. Suppose Alex is in the 24% tax bracket. Compute the taxes Alex pays each year on dividends and capital gains from this investment by completing the second column in the table. Note: Throughout this problem, please round your answers to the nearest cent. Amount Taxes Owed Year 1 Dividends: $ $ Capital Gains: $ $ Year 2 Dividends: $ Capital Gains: $ $ The total amount of investment income (pre-taxes) that Alex earned on this investment over the course of 2 years is $ The total amount that Alex pays in taxes on income from this investment income is Attempts Keep the Highest / 4 7. Bond basics Understanding How Bonds Work as Investment Vehicles From an investment point of view, bonds are generally considered to be safer investments than stocks. They are generally low risk low return investments, unlike stocks. As an investor in bonds, you would lend money to the issuer of the bonds. It is important to understand what bonds are and how they work as investment vehicles. Suppose a friend of yours is looking to invest $5,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about corporate bonds but wants to learn more before purchasing them. Fill in the blanks in the following conversation to give your friend the appropriate information regarding corporate bonds. FRIEND: Can you explain to me the basics of how investing in a corporate bond will increase my current income? YOU: Under a standard bond agreement, if you were to purchase a 10-year, $5,000 corporate bond with a 9% coupon, you would receive in interest each year, and at the end of the 10-year period, you would receive the par value of 5 FRIEND: OK, and am I guaranteed to receive these interest payments and the par value? YOU: Well, some corporate bonds are issued as debentures, which have daim on some specific property. A special type of corporate bond, known as a you to convert them into a certain amount of stock. standing, meaning that they backed by a legal bond, comes with a provision allowing FRIEND: Are there any other general features I should be aware of? YOU: Corporate bonds can be issued in a wide variety of forms. As far as general features go, they tend to come in denominations of and many have call provisions so that the issuers can't retire the bond (by paying you back and ceasing to pay interest payments) within the first 5 or 10 years of the issue date. Such bonds FRIEND: So if the interest rate were to fall and the issuer were able to retire my bond, I would be holding the bond, because if I reinvest the money the issuer returns to me, I would receive a off than if I were to continue interest rate. YOU: Exactly. In such a case, the issuer would pay you a loss. but this generally would not fully compensate you for your FRIEND: Got it. Thanks for your help