Fixed-Income Portfolio Management
Fixed-income portfolio managers often aim to maximize returns by purchasing securities with a... Read More
Taxable and tax-exempt investors share a common goal of maximizing risk-adjusted returns. The CFA exam is designed with a global perspective and does not require candidates to possess specific country knowledge. Nevertheless, noting several similarities in the tax treatment of fixed-income investments worldwide is beneficial.
To optimize tax management, consider the following approaches:
When investors buy ETFs, mutual funds, or other pooled assets with fixed-income investments, it's essential to consider the local jurisdiction's policy on pass-through taxation of gains. While income tax is typically due from the investors in the fund, pass-through taxation may or may not be allowed in certain areas. Therefore, investors in regions where pass-through taxation is not permitted should consider this before making investment decisions.
Question
Which of the following taxable account strategy descriptions is the least accurate?
- Realize capital losses to offset capital gains.
- Avoid short-term gain rates by holding securities for more extended periods.
- Defer taxes by shortening holding periods.
Solution
The correct answer is C.
C is the least accurate because it suggests deferring taxes by shortening holding periods, which is incorrect. In reality, taxes are deferred by extending holding periods.
A is incorrect: Capital losses can be used to offset capital gains.
B is incorrect: Holding securities for extended periods can help avoid short-term gains.
Reading 19: Overview of Fixed-Income Portfolio Management
Los 19 (f) Discuss differences in managing fixed-income portfolios for taxable and tax-exempt investors