1.8.1 - CHARACTERISTICS OF ADRs

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How are ADRs taxed?

A foreign income tax. The foreign income tax may be taken as a credit against any U.S. income taxes owed by the investor.

Dividends may be paid to holders of: A) American depositary receipts. B) treasury stock. C) rights. D) warrants.

A) American depositary receipts. American depositary receipt (ADR) owners have most of the rights common stockholders normally hold. One of these includes the right to receive dividends when declared. Rights and warrants allow holders to purchase stock from a corporation and treasury stock is stock that has been issued by the corporation and then bought back. Neither rights, warrants or treasury stock holders have the right to receive dividends. Reference: 1.8.1.2 in the License Exam Manual

The issuer of an ADR is a: A) foreign branch of a foreign bank. B) foreign branch of a domestic bank. C) domestic branch of a domestic bank. D) domestic branch of a foreign bank.

B) foreign branch of a domestic bank. The American Depositary Receipt (ADR) is issued by a foreign branch of a domestic bank. Everything is in English and in U.S. dollars. Reference: 1.8.1.1 in the License Exam Manual

TRUE OR FALSE? ADR owners do not have the right to receive dividends when declared.

FALSE ADR owners DO have the right to receive dividends when declared.

TRUE OR FALSE? The individual investors in the ADRs are considered the stock's registered owners.

FALSE The ADRs are registered on the books of the U.S. banks responsible for them. ADRs are registered on the books of U.S. banks, so dividends are sent to the custodian banks as registered owners.

What does it mean for an exchange-listed ADR to be sponsored?

It means that the foreign company sponsors the issue to increase its ownership base.

TRUE OR FALSE? ADR owners have the right to exchange their ADR certificates for the foreign shares they represent.

TRUE

TRUE OR FALSE? Dividends are declared in the foreign currency but are payable in U.S. dollars.

TRUE

TRUE OR FALSE? Foreign branches of large commercial U.S. banks issue ADRs.

TRUE

What is currency risk?

The possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with the U.S. dollar.

What shares do ADRs represent?

They represent shares of stock in companies located in foreign countries.

Where are the shares of foreign stock normally held?

With a custodian, typically a bank in the issuer's country holds the shares.


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