SIE Unit 1
When the board of directors (BOD) declares a dividend, A) owners of preferred shares must be paid before any payment is made to common shareholders. B) owners of preferred shares must be paid at least the same amount as any payment made to common shareholders. C) owners of preferred shares are paid only after any payment is made to common shareholders. D) owners of common shares must be paid at least the same amount as any payment made to preferred shareholders.
a- When the BOD declares dividends, owners of preferred shares must be paid before any payment is made to common shareholders. This is known as the dividend preference allotted to preferred shareholders. There is no relationship between the amounts paid to preferred shareholders and common shareholders.
Which of the following statements is correct concerning currency risk when investing in an American depository receipt (ADR)? A) U.S. investors are protected from currency risk by the underlying foreign corporation. B) Currency risk is still a factor when purchasing an ADR. C) U.S. investors are protected from currency risk by the depositary bank. D) Currency risk is eliminated because the securities are dollar denominated.
b
A guaranteed bond is usually guaranteed by which of the following entities? A) The U.S. Guarantee Association B) A parent company C) The U.S. government D) The broker-dealer who sold it
b- A guaranteed bond is back by a third party, normally a parent company backing the debt of a subsidiary company.
For preferred shares, the annual dividend payment is A) subject to variation and stated as a percentage of its current market value (CMV). B) fixed and stated as a percentage of its par value. C) fixed and stated as a percentage of its current market value (CMV). D) subject to variation and stated as a percentage of its par value.
b- A preferred stock's annual dividend payment is its fixed rate of return, unlike that of common shares where the dividend is subject to variation.
Securities and Exchange Commission Rule 144 regulates A) communications with public retail investors. B) the sale of control and restricted securities. C) the sale of new issue securities in the primary market. D) state-level (blue-sky) registration of securities.
b- Securities and Exchange Commission Rule 144 regulates the sale of control and restricted securities in the secondary market. The rule stipulates the holding period, quantity limitations, manner of sale, and filing procedures when divesting of control or restricted shares.
An american depository receipt is a A) domestic security representing a foreign security in U.S. markets. B) domestic security trading in foreign markets. C) foreign security representing a domestic security in foreign markets. D) foreign security trading in U.S. markets.
a- An ADR is a domestic security issued under U.S. law and registered with the SEC. It represents ownership in a non-U.S. security. It is used to ease ownership and trading of foreign securities in U.S. markets and for U.S. customers
Because common stock can be sold or given away, it is considered to be A) freely transferrable. B) limited in liability. C) preemptive. D) voted by proxy.
a- Common stock is freely transferable to anyone who wants to buy it or receive it as a gift. In this regard, shareholders have the right to sell or give away their shares without permission of the corporation.
Mr. Smith purchases 2% of MES Corporation's common stock. Four years later Mrs. Smith purchases 9% for her own account. Which of the following is true? A) Both Mr. and Mrs. Smith are considered control persons. B) Only Mr. Smith, as the initial shareholder, would be considered a control person. C) Because she owns more shares, only Mrs. Smith is considered a control person. D) Neither Mr. or Mrs. Smith is considered a control person.
a- If a 10% or more interest is held by immediate family members, then all those family members owning voting stock are control persons. In this instance the combined ownership is more than 10% (2% + 9% = 11%).
When selling a bond, the issuer is taking A) a borrower's position. B) a creditors position. C) an equity position. D) a loaners position.
a- Issuers of bonds are borrowing money from the purchaser of the bond.
American Liquidators Corporation (the ticker is LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to do this they must give their existing shareholders an opportunity to buy shares sufficient to maintain the shareholders percentage of ownership. In order to accomplish this they would A) offer stock rights to existing shareholders. B) perform a stock split. C) suggest that existing shareholders go to the market and double their existing position. D) offer warrants to existing shareholders.
a- LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering. Warrants are long term and normally attached to a fixed-income offer. Neither the stock split nor investors buying in the market generates capital for the company.
The rate on an adjustable preferred stock would most likely be indexed to A) the Treasury bill (T-bill) rate. B) the Consumer Price Index (CPI). C) the Producer Price Index (PPI). D) the Dow Jones Industrial Average (DJIA).
a- The dividend on an adjustable-rate preferred stock is tied to a particular benchmark interest rate, and the Treasury bill rate is a common benchmark. The CPI, the PPI, and the DJIA are not interest rates.
For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A) no voting rights. B) 300 votes total to spread among the three open seats. C) 300 votes each for the open seats. D) 900 votes he can divide anyway he wants among the three seats.
a- Your customer owns preferred stock. Preferred stock carries no voting rights.
A corporation that has issued cumulative preferred stock A) pays only the current dividends on the preferred, before paying a dividend on the common and then pays any past-due dividends. B) pays past and current preferred dividends before paying dividends on common stock. C) pays only current dividends with no liability for missed or past-due dividends. D) pays the preferred dividend before paying the interest payments due on its outstanding bonds.
b
A certificate issued by a company granting its owner the right to purchase securities from the issuer at some specified price years into the future would best be described as A) a proxy. B) a warrant. C) a rights certificate. D) a call option.
b- A rights certificate is a very short-term security that grants the holder the right to buy the common stock of the company at a price lower than the current market price. A warrant is a long-term security that grants its owner the right to purchase securities from the issuer at a specified price that is higher than the current market price at the time the warrants are issued and at some point, in the future. Note that while the exercise price is higher than the current market value when the warrants are issued, it is hoped that the exercise price will be below current market value when the warrants are eventually exercised.
Which of the following is an example of an equity security? A) Mortgage bonds B) Preferred shares C) Equipment trust certificates D) Debentures
b- Both common and preferred shares are equity securities. Each of the other choices represents a debt instrument.
Which of these would most likely require shareholder approval? A) Hiring a new CFO B) Changing the corporation's name C) Declaring a dividend D) Firing the CEO
b- Changing the corporation's name is a significant matter that will likely need shareholder approval. Declaring a dividend and the hiring and firing of senior executives is well within the board's power.
Someone who purchases shares of a corporation's common stock has A) neither liability nor voting rights. B) limited liability and voting rights. C) no liability and no voting rights. D) unlimited liability and voting rights.
b- Common stockholders enjoy limited liability in that they can only lose what was invested. They are in no way responsible for any debt of the corporation. Voting rights are one of the key benefits for common shareholders.
Which of these securities would likely provide the greatest potential for capital appreciation? A) A convertible bond B) A common stock C) A preferred stock D) A U.S. Treasury STRIP
b- Common stocks would be the most suitable for investors seeking capital appreciation (growth). Bonds and preferred stocks are better suited for conservative investors since each is primarily an income investment and has limited growth prospects.
A customer has held an account with a broker-dealer for over one year. A registered representative associated with the firm recommends the purchase of an unlisted security trading at $3.50. What documentation, if any, is required prior to the trade? A) Both suitability and disclosure statements must be obtained. B) A disclosure statement is required, but not a suitability statement. C) No documentation is required. D) A suitability statement is needed, but not a disclosure statement.
b- Established customers are exempt from the suitability statement requirement but not from the disclosure requirements when penny stocks are being solicited. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made at least three penny stock purchases of different issuers on different days.
A common stock shareholder's residual right to corporate assets refers to which of the following? A) During the dissolution of corporate assets, common shareholders will be paid first— before debtholders and preferred shareholders are paid. B) During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid. C) During the dissolution of corporate assets, common shareholders will be paid if any funds are left after debtholders are paid but before preferred shareholders are paid. D) During the dissolution of corporate assets, common shareholders will be paid if any funds are left after preferred shareholders are paid but before debtholders are paid.
b- For common shareholders, having a residual right to corporate assets means that they will only be paid in the event of a corporate dissolution if there are any funds left after debtholders and preferred shareholders are paid.
For restricted stock (unregistered) held by an affiliate (insider), which of the following applies? A) No holding period or any volume restrictions B) Six-month holding period, with volume limits thereafter C) Six-month holding period, with sales allowed freely thereafter D) No holding period, but volume limits always apply
b- For restricted stock (unregistered) held by an affiliate (insider), there is a six-month holding period, with volume limits applicable thereafter. The volume limits would remain in effect for as long as the individual is an affiliate.
The market price of a company's common stock could be affected by the company's earnings. changes in the business cycle. Federal Reserve Board (FRB) policies. International conflicts. A) I and III B) I, II, III, and IV C) I and II D) II and III
b- Obviously, the price of a company's common stock will be impacted by earnings, whether it is higher or lower than anticipated. Changes in the business cycle, as well as FRB policies, will also carry weight in the marketplace. In today's global economy, conflicts even on the other side of the world can affect stock market prices.
Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares A) completely unrestricted. B) subject to volume restrictions within any 90-day period. C) subject to the volume restrictions on any single day. D) at the discretion of the issuer's board of directors (BOD).
b- Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares but is subject to volume restrictions within any 90-day period.
In order to receive a declared dividend a shareholder must be an owner of record at the close of business on the A) declaration date. B) record date. C) ex-dividend date. D) payable date.
b- Shareholders must be owners of the stock on or before the record date in order to receive the current dividend.
The decision to pay a dividend rests with A) shareholders, which is why it is guaranteed. B) the board of directors (BOD) but is not guaranteed. C) shareholders but is not guaranteed because they can vote against paying one. D) the board of directors (BOD) and is guaranteed.
b- The decision to pay a dividend rests with the BOD but is not guaranteed. The declaration to pay a dividend may or may not occur. When it does occur, the amount can decrease, increase, or remain unchanged from the previous dividend.
Which of the following preferred stocks allows the issuer to pay the shareholders par and cease dividend payments following a stated period? A) Redeemable B) Callable C) Puttable D) Adjustable
b- The issuer can pay off callable preferred at any time after the call protection period, and dividends will cease.
All of the following statements regarding penny stocks are true except A) if an account holds penny stocks, broker/dealers must provide a monthly account statement to the customer. B) penny stock rules apply to both solicited and unsolicited transactions. C) established customers of the firm need not sign a suitability statement. D) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document.
b- The special penny stock rules only apply to solicited transactions. Because of the greater perceived risk of investing in penny stocks, it is required that the penny stock disclosure document fully describing the risks associated with penny stock investments be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.
During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend? A) Callable B) Participating C) Adjustable rate D) Convertible
c- Adjustable-rate preferred dividends are tied to benchmark interest rates such as Treasury securities. As these rates fluctuate up and down, so do the dividends on the adjustable shares.
If a stock is at risk of failing to maintain the minimum price requirements to remain listed on the NYSE, the most likely corporate action taken to preserve the listing could be A) increasing earnings. B) a stock dividend. C) a reverse split. D) reducing staff.
c- Reverse splits are a way of increasing a company's share price. In a reverse split, the number of shares outstanding decreases, but the price per share increases. As with all adjustments, a shareholder's total position in the stock remains unchanged before and after the action.
Straight preferred shares are noncumulative. are cumulative. allow for missed dividends to be paid later. have no provision for paying missed dividends later. A) II and III B) II and IV C) I and IV D) I and III
c- Straight preferred shares have no special features beyond the stated dividend payment. Any missed dividends are not paid to the holder, thus they are noncumulative; missed dividend payments do not accumulate.
All of these dates are declared by the board of directors of a corporation except the A) record date. B) payable date. C) ex-dividend date. D) declaration date.
c- The ex-dividend date is declared by the regulator that controls the trading location (exchange or OTC).
Under penny stock rules, what is required for a broker-dealer to consider an investor an established customer? A) Signed transaction agreement B) Signed risk disclosure statement C) At least three separate penny stock purchases D) Open cash account for six months or more
c- Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least one year before the penny stock transaction, or have purchased at least three different penny stocks from the same broker-dealer.
MMS Corporation has 7% callable preferred shares outstanding. Over the past few years, benchmark interest rates have declined and hovered close to 3%. Which of the following is true? A) The issuer is likely to reduce the fixed dividend to 3%. B) More 7% callable shares should be issued. C) The 7% shares are likely to be called. D) The issuer will covert these shares to common stock. Explanation
c- When interest rates fall, callable preferred shares are likely to be called. This allows the issuer to cease the higher dividend payments and reissue shares with lower dividend payments that align more with the current interest-rate environment. With interest rates now at 3%, the issuer would have no desire to issue more 7% shares, nor could they reduce the fixed dividend on these 7% shares. If the shares were convertible, conversion would be at the discretion of the shareholders, not the issuer.
The growth potential in the price of preferred shares is generally considered to be A) less than that of the issuer's common shares. B) unrelated to the financial well-being of the issuer. C) greater than that of the issuer's common shares. D) no different than that of the issuer's common shares.
c- While the growth potential of both common and preferred shares can be tied to a company's financial well-being, preferred share growth is generally less than that of the common shares. The trade-off is that the preferred shares have preference with dividends received, enjoy a fixed rate of return via those dividends, and have a priority claim over common shareholders in the event of bankruptcy and the dissolution of assets.
A Japanese computer chip manufacturer wants to attract U.S equity investors. Which of the following securities would help the issuer to accomplish this goal? A) Global stocks B) Foreign depositary receipts C) Yen-based stocks D) American depositary receipts (ADRs)
d- ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR provides U.S. investors with a convenient way to diversify their holdings beyond domestic companies.
All of the following are considered control persons (owning control stock) except A) the corporation's CFO owning 1% of the outstanding shares. B) a director on the board of directors (BOD) owning 2% of the outstanding shares. C) an officer of the corporation owning less than 1% the outstanding shares. D) an unaffiliated shareholder owning 8% of the outstanding shares.
d- By virtue of their positions, directors and officers are considered control persons and any stock they own, no matter how little, is considered control stock. To be considered a control person, an unaffiliated person would have to own 10% or more of the voting (outstanding) shares.
All else being equal, which of the following preferred would pay the highest dividend? A) Participating preferred B) Straight preferred C) Cumulative preferred D) Callable preferred
d- Callable preferred is a benefit to the issuer—not the investor—so callable has to pay a higher dividend than the others because the other features are neutral or benefit the investor.
A shareholder owns preferred shares that allow for the possibility of receiving more than the stated dividend. This type of preferred share would be known as A) callable. B) adjustable. C) convertible. D) participating.
d- In addition to the fixed stated dividend, participating preferred stock offers its owners the possibility of receiving a share of corporate profits that remain after all dividends and interest due other securities are paid.
Characteristics common to penny stocks would include which of the following? A) Market price greater than or equal to $5 per share and unlisted B) Market price less than $5 per share and listed on an exchange or Nasdaq C) Market price greater than or equal to $5 per share and listed on an exchange or Nasdaq D) Market price less than $5 per share and unlisted
d- Penny stocks are generally defined as those with a market price below $5 per share that are not listed (traded) on any exchange or Nasdaq.
Once a dividend is initially declared by the board of directors (BODs), any future dividend payments A) are guaranteed to be paid, but no amount is stipulated. B) are guaranteed to be paid in at least the same amount as the initial declaration. C) are not guaranteed to be paid, but if they are paid, they must be at least equal to the initial declaration. D) carry no guarantee of payment in any amount.
d- While the potential to share in the company's profits by receiving dividends is considered one of the benefits of equity ownership, one of the risks is the possibility of dividend income decreasing or ceasing entirely. Dividends are not guaranteed in any way.