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1.
A capital gain on a share held for five years will be taxed at a lower rate than a share held for four months.
True. Once you have held a share for more than one year, your capital gains tax drops.
2.
Reinvested dividends are tax-free because they don't reach the investor.
False. As long as they are earned, they will be taxed no matter where they end up.
3.
A mutual fund with a 5 percent total return and a 7 percent dividend yield will have _______ 2 percentage points in its net asset value.
Lost. Total return – yield = net asset value. In this example, net asset value has dropped.
4.
Returns of capital are generally taxed at your ordinary income tax rate.
False. They are generally not taxed at all. However, if the return of capital exceeds the amount of after-tax dollars invested (basis), then they can be taxed as a capital gain.
5.
How does a mutual fund increase its value?
It receives the dividends, interest, and capital gains from the securities in its portfolio. The fund then passes these earnings to shareholders.
6.
Ordinary dividends are earned when a mutual fund sells securities for a profit.
False. Capital gains dividends are earned in this way, but ordinary dividends are distributions of interest or dividends from the fund's holdings.
