S7 UNIT 2 (Equity Securities)

An investor purchased 200 shares of Hightown National Bank (HNB) common stock at $120.06 per share. Thirteen months later, HNB pays a 15% stock dividend. Three months after that, the investor sells the shares received from the stock dividend at $112.57 per share. The tax consequence to the investor is A) $245.10 long-term capital gain. B) $245.10 short-term capital gain. C) $1,879.10 long-term capital gain. D) $122.55 short-term capital gain.

A) $245.10 long-term capital gain. Explanation The total value of the initial position is unchanged, remaining at $24,012 (200 × $120.06). After the stock dividend, the investor owns 230 shares (200 × 15% = 30 + 200 = 230). Therefore, the adjusted cost basis is $104.40 per share ($24,012 ÷ 230 = $104.40). The question tells us that the investor sells those 30 additional shares at $112.57 per share. That is a difference of $8.17 per share. Multiply that gain by 30 shares and the result is a profit of $245.10. It is a long-term gain because the holding period of shares received from a stock dividend or stock split begins with the initial purchase, not the receipt of the new shares. It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same. If you have to guess or are running out of time, when you see two identical numbers with the only difference being short- or long-term gain, in almost all questions, one of those two is the correct answer. Now you have a 50% chance of guessing correctly and, if you remember that the holding period always begins with the initial purchase, then the odds are 100% in your favor. LO 2.e

The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by A) 20%. B) 10%. C) 25%. D) 30%.

A) 20%. Explanation The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5-for-4 stock split, the new price should be about four-fifths of the old price. A one-fifth change equals 20% (100% ÷ 5 = 20%). LO 2.a

Which of the following statements is true regarding dividend payments on common stock? A) Dividends on common stock are paid at the discretion of the board of directors and may be paid even where there are no earnings. B) Dividends on common stock are paid at the discretion of the board of directors and can be paid only when there are sufficient earnings. C) Dividends on common stock are paid at the discretion of the board of directors and may be paid ahead of preferred stock when necessary to allow the company to remain listed on the exchange. D) Dividends on common stock are paid at the discretion of the board of directors and are paid as a stated percentage of the corporation's net income.

A) Dividends on common stock are paid at the discretion of the board of directors and may be paid even where there are no earnings. Explanation Dividends on common stock are paid at the discretion of the corporation's board of directors. Although each stockholder receives an amount proportionate to their holdings, the dividend can be any proportion of the company's earnings. In fact, a corporation can pay a dividend even when there are no earnings. However, no dividend on common stock can ever be paid before payment of the dividends due on preferred stock. LO 2.b

The issuer of an American depositary receipt (ADR) is A) a domestic bank. B) a foreign branch of a domestic bank. C) a domestic branch of a foreign bank. D) a foreign branch of a foreign bank.

A) a domestic bank. Explanation The ADR is issued by a domestic bank. Everything is in English and in U.S. dollars. The foreign certificates are usually held on deposit at a foreign branch of the domestic bank, and the ADRs are issued domestically. LO 2.c

Due to a sudden drop in earnings, the board of directors of Amalgamated Metal Industries (AMI) has voted to suspend all dividend payments this year. This would have the least effect on holders of AMI's A) cumulative preferred stock. B) common stock. C) callable preferred stock. D) adjustable-rate preferred stock.

A) cumulative preferred stock. Explanation The notable feature of cumulative preferred stock is that it carries any skipped dividends on its books. They appear as dividends in arrears. This arrearage must be paid before any dividend can ever be paid on the company's common shares. There is no guarantee that the company will ever be able to make up those dividends, but in none of the other choices is there any concept of arrearage. LO 2.b

Many investors diversify by adding foreign securities to their portfolios. Those who do so with ADRs are least likely to be concerned with A) liquidity risk. B) market risk. C) currency risk. D) political risk.

A) liquidity risk. Explanation Most ADRs actively trade on the exchanges or OTC market. As such, their liquidity is generally quite good. Because the investment is in a foreign corporation, there is foreign currency risk. Market risk is universal anytime you are investing in something traded in the market. Political risk is always a concern when investing overseas. It is true that it is not very high in most developed markets, but it is still there and more prevalent than liquidity risk. LO 2.c

A corporation has gone out of business and the assets are being liquidated. Investors of the corporation have claim to those assets, including common stockholders. All the following terms apply to the common stockholders' claim except A) senior. B) last. C) residual. D) junior.

A) senior. Explanation Creditors, such as bondholders and general creditors, as well as preferred stockholders of the corporation, would have a prior or senior claim to corporate assets in liquidation. Common stockholders have the last claim to assets in liquidation. This also known as the most junior or residual claim. LO 2.a

Owners of a corporation's common stock who are unable to attend the corporation's annual meeting are A) sent proxies to cast their votes. B) required to give voting instructions to the broker-dealer handling the account. C) forfeiting their right to vote. D) unable to change their vote if they should be able to attend the meeting.

A) sent proxies to cast their votes. Explanation A proxy is this industry's version of an absentee ballot. Most are handled electronically now. Should the situation change and the individual be able to make the meeting, the vote can be changed at that time if desired. The broker-dealer handling the account is frequently the one who solicits the proxy on behalf of the issuer. There is no action taken against a client who ignores the proxy, just as nothing happens to a citizen who decides not to vote in an election. LO 2.f

Aenical Corporation issued $100 million of $100 par value preferred stock a number of years ago. The stock pays quarterly dividends of $1.25. Recent issues of comparable preferred stock carry a dividend yield of 4%. One could expect the market price of the Aenical preferred stock to be closest to A) $75. B) $125. C) $120. D) $80.

B) $125. Explanation As with other fixed-income securities, as market yields change, the price of previously issued securities increases or decreases to offer a comparable return. The logic is that investors will purchase fixed-income securities only if they can receive a return comparable to the current market rate. This stock is paying an annual dividend of $5 ($1.25 per quarter times four). Investors purchasing this stock expect their return to be approximately 4%, the current rate being paid in the market. The math here needs to first answer "$5 is 4% of what number?" Divide $5 by 4% and the answer is $125. At $125 per share, Aenical stock paying a $5 annual dividend is offering a 4% return on investment. LO 2.b

Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year? A) None B) $2,500 C) $5,500 D) $4,500

B) $2,500 Explanation He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward. LO 2.e

A corporation's corporate charter allows for cumulative voting. A shareholder with 300 shares would be able to vote in an election for three open seats in any of the following ways except A) 900 votes for any one open seat. B) 900 votes for each open seat. C) 300 votes for each open seat. D) 450 votes for any two open seats.

B) 900 votes for each open seat. Explanation With cumulative voting, the shareholder multiplies the number of shares owned by the number of seats being contested. With 300 shares and three seats, the shareholder has 900 shares to be invested in any manner desired. But, that is a total of 900, not 900 times 3. LO 2.a

Investors should always be aware of taxes applicable to investments they own. Which of the following taxes might be associated with income derived from American depositary receipts (ADRs) but not income from other investments? A) Federal income tax B) Foreign income tax C) Excise tax D) State income tax

B) Foreign income tax Explanation In most countries, a withholding tax on dividends is taken at the source. To the holder of an ADR, this would be a foreign income tax. The foreign income tax paid may be taken as a credit against U.S. income taxes owed. LO 2.c

Regarding the taxation of dividends received from corporate securities, which of the following are true? I) Nonqualified dividends are taxed at the rate the investor's ordinary income will be taxed. II) Nonqualified dividends are not taxed. III) Qualified dividends are taxed at a maximum rate specified by the IRS and will depend on the investor's income tax bracket. IV) Qualified dividends are taxed at the rate the investor's ordinary income will be taxed. A) II and III B) I and III C) II and IV D) I and IV

B) I and III Explanation For income tax purposes, corporate dividends are divided into two categories: qualified and nonqualified. We don't expect you'll be tested on what makes a dividend qualified or not, but you will need to know the difference in taxation. Qualified dividends are taxed at the same rate as long-term capital gains—a rate significantly lower than the ordinary income tax rate levied against nonqualified dividends. That lower rate ranges from 0% to as high as 20%, with an even higher effective rate for those with an extraordinarily high income. For most investors, the rate is 15%, and that is the number you should use in any computations. With ordinary income tax rates on nonqualified dividends as high (currently) as 37%, there is a real benefit for most investors to receive qualified dividends. LO 2.e

Investors in all of the following securities could receive dividend payments at an increased rate over time except A) common stock. B) cumulative preferred stock. C) adjustable-rate preferred stock. D) participating preferred stock.

B) cumulative preferred stock Explanation The dividend rate on cumulative preferred stock is fixed. It is never more than the stated rate. The cumulative feature simply means that if there are skipped dividend payments, those must be made up before dividends may be paid on common stock. That is not considered an increase in the dividend rate. Adjustable-rate preferred stock has a dividend that adjusts based on market interest rates. In a period of increasing interest rates, the dividends will increase. Participating preferred stock has a tie-in to the common stock dividend. As companies become more profitable or the need for retaining earnings decreases, the common stock dividend tends to increase, and that increases the payout to the participating preferred shareholders. LO 2.b

A share of common stock in the hands of a stockholder carries with it certain rights. Among those rights is A) entitlement to receive profits through dividends when distributed and the right to vote for the amount of that dividend. B) entitlement to receive profits through dividends when distributed and the right to vote for who will serve on the board of directors. C) a claim on the assets of the corporation second only to that of the company's secured creditors. D) entitlement to receive profits through dividends when distributed but not the right to vote for who will serve on the board of directors.

B) entitlement to receive profits through dividends when distributed and the right to vote for who will serve on the board of directors. Explanation Each share of common stock entitles its owner to a portion of the company's earnings through dividends when distributed and a proportionate vote in major management decisions such as electing individuals to the board of directors (BOD). It is the board that determines the amount and frequency of dividend payments. The common stockholders' claim is behind everyone; they are last in line. LO 2.a

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has A) greater exposure. B) no effective change in the value of the position. C) a proportionately increased interest in the company. D) a proportionately decreased interest in the company.

B) no effective change in the value of the position. Explanation When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same. LO 2.a

Issued and outstanding stock is the authorized stock of a corporation that has been purchased by investors. The remaining authorized but unissued stock may be used for all of the following except A) raising capital at a later date. B) sending to the IRS for payment of federal income taxes. C) exchanging stock with stockholders in a conversion. D) paying stock dividends to stockholders.

B) sending to the IRS for payment of federal income taxes. Explanation The IRS does not want a corporation's authorized but unissued stock to pay federal income taxes. The IRS treats a corporation as an entity like an individual taxpayer and wants money, not stock. This unissued stock can be issued to raise future capital, used to pay stock dividends, and to exchange for convertible preferred stock and convertible bonds upon conversion. LO 2.a

Dividends from American depositary receipts (ADRs) held by U.S. investors are declared in A) U.S dollars but paid in the foreign currency. B) the foreign currency but paid in U.S. dollars. C) U.S. dollars and paid in U.S. dollars. D) the foreign currency and paid in the foreign currency.

B) the foreign currency but paid in U.S. dollars. Explanation Although the dividends paid by ADRs held by U.S. investors are declared in the foreign currency, they are paid in U.S. dollars. This is one reason currency risk is a factor for ADR holders. LO 2.c

If a customer buys $28,000 of ABC stock in April 2022 and at year end, the stock is worth $23,000, how much may the customer deduct on his 2022 tax return? A) $3,000 B) $2,000 C) $0 D) $5,000

C) $0 Explanation Until the customer realizes the loss by selling, there is no tax deduction. LO 2.e

A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into five shares of common stock. The conversion price of the common stock is A) $25. B) $1,200. C) $20. D) $100.

C) $20. Explanation Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into five shares, we need to know what number goes into $100 five times. That number is $20. The current market value of the preferred stock is unnecessary information. LO 2.b

An investor holds 3,000 shares of a stock with a current market value of $12 per share. After a 1:6 stock split, the investor's position will be A) 500 shares with a market value of $2.40 per share. B) 15,000 shares with a market value of $12 per share. C) 500 shares with a market value of $72 per share. D) 15,000 shares with a market value of $2.40 per share.

C) 500 shares with a market value of $72 per share. Explanation This is an example of a reverse split. For each share owned, the investor will now have 1/6 of a share. That turns 3,000 shares into 500. At the same time, the market price per share will increase approximately by a factor of six. The key to any stock split question is that the total value of the account remains the same. Presplit, it was 3,000 × $12 = $36,000 and postsplit it is 500 × $72 = $36,000. LO 2.a

Which of the following actions of XYZ Corporation would raise additional capital? I) Issue callable preferred stock II) Declare a stock dividend III) Make a rights offering IV) Encourage convertible bondholders to convert to common stock A) I and II B) II and III C) I and III D) II and IV

C) I and III Explanation Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another, and no money is raised. LO 2.e

An investor establishes a $5,000 position by purchasing 100 shares at $50 per share. She then sells all the shares six months later at $60 per share. Her taxable consequences are A) a $1,000 short-term capital loss. B) a $1,000 long-term capital gain. C) a $1,000 short-term capital gain. D) a $6,000 short-term capital gain.

C) a $1,000 short-term capital gain. Explanation The taxable consequence for this investor is a $1,000 short-term capital gain. She sold shares for $6,000 and purchased them for $5,000 resulting in a $1,000 gain. It is short-term gain because she did not hold the shares longer than one year. Short-term capital gains are taxed as ordinary income at the investor's marginal tax rate. Long-term capital gains are taxed at lower tax rates. LO 2.e

At year's end, your client reports $12,000 in capital gains and $20,000 in capital losses. The net effect of this on his taxes would be A) a $3,000 deduction from ordinary income with a $2,500 loss carryforward. B) a $4,000 deduction from ordinary income with a $4,000 loss carryforward. C) a $3,000 deduction from ordinary income with a $5,000 loss carryforward. D) an $8,000 deduction from ordinary income.

C) a $3,000 deduction from ordinary income with a $5,000 loss carryforward. Explanation The customer may offset all of the gains with the losses. This leaves a new loss of $8,000. Because the maximum net capital loss that may be deducted against ordinary income is $3,000 per year, we take off the $3,000 and have a carryforward of the balance ($5,000). LO 2.e

Synapse Communication Corporation (SCC) is growing. To finance the expansion, the company has a $100 million debenture offering. Attached to the offering are five-year warrants to purchase SCC common shares. Each warrant allows for the purchase of one SCC share at a price of $53 per share. Three years after the issue date, SCC stock is trading at $63 per share. Each warrant has A) an intrinsic value of $20 per warrant. B) no intrinsic value, only time value. C) an intrinsic value of $10 per warrant. D) an intrinsic value of $5 per warrant.

C) an intrinsic value of $10 per warrant. Explanation A warrant has intrinsic value when the exercise price is lower than the stock's current market price. In this question, each warrant allows the holder to purchase one share of a $63 stock for $53 per share. That is a $10 per share difference. Therefore, intrinsically, the warrant is worth $10. With two years to go, it also has time value, but the question is not dealing with that. LO 2.c

One of your customers has asked you about trading penny stocks. After discussing the risks, the customer decides to go ahead. The firm sends the individual a copy of the special penny stock risk disclosure document. The firm needs the customer's signed and dated acknowledgment of receipt of the document. Trading in penny stocks may not begin in that account until A) at least $25,000 in equity is in the account. B) at least two business days after receiving the statement. C) at least two business days after sending the statement. D) the day the signed acknowledgment has been received.

C) at least two business days after sending the statement. Explanation It is SEC Rule 15g-2 that requires the firm to wait at least two business days after sending the risk disclosure document before executing the first penny stock trade for a new customer. The $25,000 is the minimum equity in a pattern day trading account. LO 2.g

All of the following are advantages of investing in American depositary receipts (ADRs) except A) dividends are received in U.S. currency. B) ADRs fall under the oversight of the SEC. C) currency risk is virtually eliminated. D) transactions are done in U.S. currency.

C) currency risk is virtually eliminated. Explanation ADRs carry currency risk because distributions on ADRs must be converted from foreign currency to U.S. dollars on the date of distribution. In addition, the trading price of the ADR is affected by foreign currency fluctuation. LO 2.c

Common stockholders have certain voting rights. Those rights do not include voting on A) declaring stock splits. B) important corporate decisions such as mergers and acquisitions. C) determining the annual dividend rate. D) issuing convertible products or additional common stock.

C) determining the annual dividend rate. Explanation Common stockholders cannot determine the annual dividend rate. Only the board of directors can declare dividends. Common stockholders do have the right to vote for or against conversions, substantial corporate decisions, and the declaration of stock splits. LO 2.a

A new bond issue will include warrants to A) increase the price of the issue to the public. B) increase the capital raised by the issuer through the bond offering. C) increase the attractiveness of the issue to the public. D) increase the spread to the underwriter.

C) increase the attractiveness of the issue to the public. Explanation By including warrants with debt issues, issuers increase the marketability of bonds. The warrants offer a long-term opportunity to buy the underlying stock at a fixed price. In addition to increasing the marketability of the issue, the issuer can offer the bonds with a lower coupon rate and, as a result, reduce fixed costs. LO 2.c

The 5% markup policy applies to A) mutual funds. B) new issues. C) principal over-the-counter (OTC) trades. D) all of these.

C) principal over-the-counter (OTC) trades. Explanation The 5% markup policy applies to agency and principal nonexempt securities and transactions, both exchange and OTC traded. It does not apply to prospectus offerings (mutual funds and new issues). LO 2.f

Reasons why a corporation might engage in a stock buy-back program would include all of these except A) increasing earnings per share. B) using the stock for employee stock options. C) reducing annual interest expense. D) having stock available for future acquisitions.

C) reducing annual interest expense. Explanation There is no interest expense with stock. When a company buys back its stock, it becomes treasury stock. That stock is no longer outstanding. Buying back the stock should cause the earnings per share to increase (there are now fewer shares outstanding). Many times one company will acquire another one by paying for the purchase with its treasury stock rather than cash. Many companies offer employees ownership opportunities through employee stock options. This is a way to ensure that the company has enough stock to meet the needs. LO 2.a

A company is offering investors the opportunity to purchase shares for the next five years at a fixed price slightly above today's market price. The company is issuing A) call options. B) futures. C) warrants. D) a letter of intent.

C) warrants. Explanation A warrant is a security that allows the holder to purchase shares of the underlying issue at a fixed price (above the current market price when issued) for an extended period (typically two years or longer). Call options are similar, except they are short-term securities (nine months at issue). LO 2.c

Gargantuan Computers, Inc., (GCI) conducts a rights offering to its current shareholders at $50 per share, plus one right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights? A) 15 B) 3 C) 5 D) 10

D) 10 Explanation The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV minus subscription price divided by the number of rights to purchase one share plus 1. Therefore, one right is valued at $10, computed as ($70 − $50) ÷ 2 = $10. LO 2.c

A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which six candidates are running for three seats on the board, the stockholder could cast the votes in which of the following ways? A) 300 votes for each of two directors. B) 100 votes for each of six directors. C) 600 votes for any one director D) 200 votes for each of three directors

D) 200 votes for each of three directors Explanation A stockholder has one vote per seat for each share of stock he owns. Thus, in this case, the stockholder has a total of 600 votes. Under the statutory voting method, he must allocate an equal number to each seat, or 200 for each of three seats. LO 2.a

A customer of yours has expressed interest in penny stocks, which you do not think are suitable for his investment situation. In discussing the matter with him, you want to give him both sides of the argument and grant that penny stocks do have positive aspects. Which of the following might you cite as an advantage to penny stock investing? A) Penny stock prices are more stable than those of exchange-listed securities. B) The companies that issue penny stocks tend to be well-established firms. C) Requirements for listing in the quotation services are stringent. D) A change of just a few cents per share can yield a substantial profit.

D) A change of just a few cents per share can yield a substantial profit. Explanation It is true that a change of 5 cents per share is a greater percentage increase for a stock priced at $0.50 than for a stock priced at $20. Historically, however, penny stocks have been far more volatile than those listed on exchanges or quoted on Nasdaq. The issuers of penny stock tend to be new companies without much business history, and listing requirements are all but nonexistent. LO 2.f

Which of the following would least likely occur when a corporation engages in a rights offering? A) The corporation would use a standby underwriter. B) After successful completion of the offering, the market price would decline slightly. C) The number of outstanding shares would increase. D) After successful completion of the offering, the market price would rise slightly.

D) After successful completion of the offering, the market price would rise slightly. Explanation Successful completion of a rights offering generally results in a slight decline in the market price of the stock. This is because the subscribers were able to purchase at a price below the current market. This would have a small dilutive effect, causing a slight reduction in the market price. The rights offering is of additional shares, so the number outstanding would increase. Most corporations use a standby underwriter who will buy any shares that were not exercised. Please note: From a test-taking skill point of view, when you have two answer choices that are the opposite of each other (the price would rise slightly or the price would decline slightly), in almost all cases, one of those two must be the correct answer. LO 2.c

An associated person has a customer who wants to purchase an unlisted security trading at around $1.45. In order for the customer to make this purchase, which of the following must occur? A) The broker must send a risk disclosure document to the customer. B) The customer must return to the firm a signed and dated acknowledgment of having received the risk disclosure document. C) The customer must wait two business days after sending the response before entering a trade. D) All of these.

D) All of these. Explanation All of these. Before a customer's initial transaction in a penny stock, they must be given a copy of the risk disclosure document. The member firm must receive a signed and dated acknowledgment from the customer that the document has been received. In addition to obtaining the client's signature, the SEC requires the firm to wait at least two business days after sending the statement before executing the first trade. LO 2.g

One of your customers is a very careful investor. He insists on full knowledge of an issuer's business and investment performance before he will commit money to a security. Which of the following classes of security are you least likely to recommend to him? A) Nasdaq Global Select securities B) Government bonds C) Speculative bonds D) Penny stocks

D) Penny stocks Explanation One characteristic of penny stocks is that the issuers are often new companies with very little business history. Also, analysts often overlook penny stock issuers, so information about them is sparse at best. These facts would prevent you from recommending these securities to your investor who like to know a lot about the issuer's business. LO 2.f

All of the following are traded on the Nasdaq Stock Market except A) American Depositary Receipts (ADRs). B) preferred stocks. C) closed-end investment companies. D) U.S. government securities.

D) U.S. government securities. Explanation The Nasdaq Stock Market is an equity market and includes common stock, preferred stock, and ADRs. Publicly traded funds (closed-end funds) can be traded there as well. U.S. government securities are not traded on any exchange; they only trade over the counter and are quoted in various sources. LO 2.d

An investment banker purchasing what is left unsold from a rights offering is engaging in A) all or none underwriting. B) preemptive rights underwriting. C) firm commitment underwriting. D) standby underwriting.

D) standby underwriting. Explanation In many cases, when a corporation is issuing new shares, existing shareholders receive preemptive or stock rights to buy these new shares to maintain their current proportionate ownership. In the event some of the rights are not used, the standby underwriter agrees to purchase those unsubscribed for shares. LO 2.c

All of the following would be included in a penny stock risk disclosure statement except A) the risks of investing in penny stock. B) investors' legal rights. C) the definition of penny stock. D) the broker-dealer's statement of guarantee.

D) the broker-dealer's statement of guarantee. Explanation Penny stock disclosure statements must be furnished to all buyers of unlisted, non-Nasdaq stocks of less than $5 per share. The disclosure must include the risks of penny stock investing, the rights of the investors, and the responsibilities of the broker-dealer to the investor. There would be no statements—either implied or expressly written—regarding guarantees. LO 2.g

Corporate stocks trade in all of the following locations except A) stock exchanges. B) the third market. C) the over-the-counter (OTC) market. D) the commodities market.

D) the commodities market. Explanation Corporate securities issues do not trade in the commodities market. That is where physical assets such as agricultural products, industrial metals, and precious metals trade. Listed stocks are the ones that have qualified for listing on exchanges. Unlisted stocks are traded OTC. The third market is the trading of listed stocks in the OTC market. LO 2.d