Series 65 Unit 1
If a customer owns 7% of a publicly traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is true? A) The spouse is an affiliate and Rule 144 applies. B) The spouse is not an affiliate and Rule 144 does not apply. C) The spouse is not an affiliate and Rule 144 applies. D) The spouse is an affiliate and Rule 144 does not apply.
A) The spouse is an affiliate and Rule 144 applies. Together, the client and spouse own 13% of the company's stock, so the spouse is considered an affiliate and is bound by Rule 144. If there is a 10% or more ownership interest among members of an immediate family living at the same residence, then all members are considered control persons (affiliates) subject to Rule 144. For exam purposes, assume that spouses share the same residence. LO 1.e
A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has A) no effective change in the value of the position. B) greater exposure. C) a proportionately decreased interest in the company. D) a proportionately increased interest in the company.
A) no effective change in the value of the position. 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 1.b
ADRs are used to facilitate A) the domestic trading of foreign securities. B) the foreign trading of domestic securities. C) the foreign trading of U.S. government securities. D) the domestic trading of U.S. government securities.
A) the domestic trading of foreign securities An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities. LO 1.f
Which of the following has the least exposure to inflation risk? A) Preferred stock B) Fixed annuity C) Common stock D) Cash
C) Common stock The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power among the choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed-income instruments. LO 1.b
Which of the following have equity positions in a corporation? I. Common stockholders II. Preferred stockholders III. Convertible bondholders IV. Mortgage bondholders A) II and IV B) III and IV C) I and II D) I and III
C) I and II Common and preferred stockholders have equity or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners. LO 1.a
An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee A) has a capital gain of $10 per share. B) is taxed on $20 per share as if it were salary. C) is taxed on $10 per share as if it were salary. D) is taxed on $30 per share as if it were salary.
C) is taxed on $10 per share as if it were salary. In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee. LO 1.d
One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote, A) the stock must be paid for in full before the annual meeting. B) the stockholder must be a natural person. C) ownership must be established by the record date. D) the company must be current on its dividends to preferred stockholders.
C) ownership must be established by the record date. Only stockholders who are on the company's books by the record date are eligible to vote. LO 1.b
Which of these is among the advantages of including preferred stock in an investor's portfolio? A) Dividends must be paid before any distribution to common stockholders. B) The rate of return is likely to keep pace with inflation. C) The maturity date is likely shorter than that of debt securities offered by the same issuer. D) There is an opportunity for increased income if the issuer's profits increase.
A) Dividends must be paid before any distribution to common stockholders. Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income. Finally, unlike debt securities, preferred stock is not issued with a maturity date. Nothing has been borrowed so there is no future repayment date. LO 1.c
If a woman owns 9% of the common shares of XYZ and her spouse owns 2% and wishes to sell his shares, which of these is true? I. He is considered an affiliate. II. He is not considered an affiliate. III. He must file a Form 144 to sell. IV. He does not have to file a Form 144 to sell. A) I and III B) II and III C) II and IV D) I and IV
A) I and III If a married couple (either individually or jointly) owns a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. For exam purposes, assume spouses share the same residence. LO 1.e
Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? I. Registered securities held by a control person II. Unregistered securities held by a noncontrol person III. Registered securities held by a noncontrol person IV. Unregistered securities held by a control person A) II and III B) II and IV C) I and III D) I and IV
B) II and IV The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is. LO 1.e
An American depositary receipt (ADR) is A) a document used with interest rate swaps. B) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank. C) a certificate representing ownership of a U.S. security that is deposited in a foreign bank. D) a type of derivative used to speculate in foreign currencies.
B) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank. An American depositary receipt (ADR) is a certificate representing ownership of foreign securities that are on deposit at a U.S. bank. ADRs can be traded on U.S. stock exchanges, are quoted and pay in dividends in U.S. dollars, and receive all the shareholder protections of U.S. securities. LO 1.f
An investor may expect to receive dividends from A) a put option. B) an ADR. C) a call option. D) a warrant.
B) an ADR An American depositary receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock; one must own the security itself to be entitled to the dividend. LO 1.f
A company that has issued cumulative preferred stock A) pays the preferred dividend before paying the coupons due on its outstanding bonds. B) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. C) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. D) pays past and current preferred dividends before paying dividends on common stock.
B) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid. LO 1.b
All of the following statements regarding incentive stock options (ISOs) are correct except A) upon the exercise of an ISO, income for AMT purposes is created B) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise C) the exercise of ISOs does not create taxable income D) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain
B) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT. LO 1.d
Which of the following statements regarding international investing is not correct? A) One method to engage in international investing is through American depositary receipts. B) International investing offers diversification and potentially higher returns. C) An emerging market is a market in a highly developed foreign economy with stable political and social institutions. D) An international investor faces the additional risks of foreign currency risk and country risk.
C) An emerging market is a market in a highly developed foreign economy with stable political and social institutions. Emerging markets are markets in lesser-developed countries. As a result, the political risk tends to be higher than with developed economies. Whether it is emerging or developed, a U.S.-based investor will always face currency risk, and all countries have some degree of country risk. A way to simplify things is to invest in ADRs rather than the foreign stock itself. International equity is a subclass of equities when allocating assets, and the addition of them tends to offer diversification and potentially higher returns because foreign markets are not necessarily correlated to the U.S. ones. LO 1.f
An investor in an equity security A) has a say in the day-to-day operations of the business. B) is assured of a minimum rate of return. C) acquires an ownership interest in the company. D) becomes a creditor of the company.
C) acquires an ownership interest in the company. Equity means ownership, and this is a characteristic shared by both common and preferred stock. Holders of debt securities are creditors, and there are no guarantees when it comes to returns on equity securities. Only common stockholders have voting rights, but even then, those rights don't deal with daily operations because the vote is generally used at the annual meeting to vote for members of the board of directors. LO 1.a
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) $0 B) $16 C) $8 D) $24
D) $24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There are $16 due in back dividends, in addition to $8 this year, for a total of $24. LO 1.c
An investor holding which of the following equity securities would not expect to have preemptive rights? A) Common stock B) Common stock acquired in a private placement C) Control stock D) Preferred stock
D) Preferred stock Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership. LO 1.c
