Unit 1

Order of payments of how dividend are paid out.

1. Dividends in arrears paid to cumulative shares 2.Stated dividend paid to all preferred shares 3. Common dividend

Reasons a corporation buys back stock? (Three points)

1. Increase earnings per share 2. Have an inventory of stock available to distribute as stock options, fund an employee pension plan, etc.. 3. Use for future acquisitions

Three Methods of common stock valuations

1. Market Value 2. Book Value 3. Par Value

Treasury stock (four points)

1. Was outstanding stock before it was repurchased by the issuer 2.Has no voting rights 3. Does not receive dividends 4. Can be reissued or retired

Number of shares in a standard trading unit of stock

100

Who of the following are bearish 1) Call buyer 2) Call writer 3) Put buyer 4) Put writer

2 & 3 Call writer expects the stock to decrease in price, and that the call will therefore not be exercised. This permits him to keep the premium. The put buyer thinks the stock will go down in price, and thus reserves to himself the right to sell it at the higher put strike price.

Who of the following have acquired an obligation? 1) Call buyer 2) Call writer 3) Put buyer 4) Put writer

2 & 5 The call seller is obligated to sell stock, and the put seller is obligated to buy stock, should the option be exercised.

Which of the following entities are exempt from the Trust Indenture Act of 1939? 1) Any large corporation 2) The US government 3)Municipalities 4)A corporation issuing a bond for 40 million

Answer: 2 & 3 Government issues at the federal and municipal level are both exempt from the Trust Indenture Act of 1939. The Act applies to corporate bonds issuing for 5 million or more in a 12-month period with maturities exceeding 270 days.

Which of the following are found on a bond certificate? 1) Names of the chief officers of the corporations 2) The corporations credit rating 3) Call features, including first call date, if any 4) Interest rate and payment dates

Answer: 3 & 4 Bond certificates contain basic information's regarding the bond itself, such as the name of the issuing corporation, call features, the coupon rate, and the principal amount of the bond. There is no requirement that the corporations officers be named. or that is credit rating be given

All the following issue bonds EXCEPT? A) Sole Proprietorships B) The U.S> governments C) Municipalities D) Corporations

Answer: A Corporations, municipalities, and the US government issue bond. Sole proprietorships assume debt by barrowing from a bank.

Which of the following AA rated corporate bonds would be expected to have the lowest market price? A) A bond with 20 years to maturity when interest rate have risen B) A bond with 20 years to maturity when interest rate have dropped C) A bond with 10 years to maturity when interested rats have risen D) A bond with 10 years to maturity when interested rats have dropped

Answer: A Market prices of existing bonds drop when interest rates rise. The longer the bond has to go to maturity, the greater the effect.

Which of the following factors are disadvantages of investments in common stock, compared with fixed income securities, such as bonds? A) No assurance of return B) Lower priority of income payment C) No voting rights D) Less inflation protection

Answer: A Unlike bond interest, dividend on stock are not promised or ensured and do not need to be paid. Also when money is to be paid out, whether as income to an investor or as a return of capital of dissolution, common stock, unlike debt instruments, gives its owner the right to vote on the important decisions of the issuing company and has historically offered better inflation than fix securities.

In which of the following ways does preferred stock differ from common stock as an investment? A) Lower Dividends B) Greater sensitivity to interest rate fluctuation C) Lower priority of dividend payment D) Greater voting rights

Answer: B As a fixed income security, preferred stock has a markedly greater price to sensitivity to interest rates than common stock does.

The excess of par over the market price of a bond is called? A) The premium B) The discount C) The amount owed D) The overage

Answer: B If par is greater than (in excess over) the market price of a bond, the bond must be selling at the discount

Stockholders preemptive rights include the right to... A) Serve as an officer on the board of directors B) Maintain proportionate ownership interest in the corporation C) Purchase Treasure stock D) examine the corporation's books

Answer: B Preemptive rights enable stockholders to maintain their proportionate ownership when the corporation wants to issue more stock. If a stockholder owns 5% of the outstanding stock and the corporation wants to issue more stock, the stockholder has the right to purchase enough of the new shares to maintain a 5% ownership position in the company.

Rights and warrants are similar in that they? A) are both long-term instruments B) Afford access to stock and under possibly factorable conditions C) are both used to sweeten another securities offering D) Both pay relatively low dividends.

Answer: B Right afford access to new stock, often at a discount before its offered to the public. Warrants afford access to stock at a fixed price for a long period of time.

Which of the following statements regarding warrants is TRUE? A) Warrants are offered to current shareholders only B) Warrants have longer terms that rights C) Warrants do not trade in the secondary market D) At the time of issuance, the exercise price of a warrant is typically below the market price of the underlying stock

Answer: B Warrants are issued with long-term maturities. They may be used as sweeteners in an offering of the issuer's preferred stock or bond. Warrants are not offered only to current shareholder. The exercise price of a warrant is always above the market price of the stock at the time of issue.

At the annual meeting of ABC corporation, 5 directors are to be elected. Under the cumulative voting system, an investor with 100 shares of ABC would have a total of ? A) 100 votes to be cast for each of 5 directors B) 500 votes to be cast in any way the investor chooses for all 5 directors C) 500 Votes to be cast for each of 5 directors D) 100 votes to be cast for only 1 director

Answer: B With cumulative voting rights, this investor may cast 500 votes for the 5 directors in any way the investor chooses

Which of the following would you expect to have the higher state of rate? A) Straight B) Cumulative

Answer: B Cumulative preferred is safer, and there is always a risk-reward trade-off. Because straight preferred has no special features, it will pay a higher stated rate of dividend

Which of the following statements about right is TRUE? A) Common stockholders do not have the right to subscribe to right offerings B) preferred stock is not subject to rights offerings C) Rights are long-term instruments D) The exercise price of rights is greater than the current market price of the stock at the time of issuance.

Answer: B Preferred stockholders have no right to maintain a percentage of ownership when new shares are issued ( no preemptive rights). However, they do receive preference in dividend payments and company liquidation.

Upon exercise of an option, who of the following would buy stock? A) The call buyer because he is obligated to B) The put seller because he is obliged to C) The call seller because he elects to D) The put buyer because he elects to

Answer: B The put seller has sold another investor the right to sell stock to him at the put strike price. Thus, if the put is exercised, he will be obligated to buy the stock

Which of the following types of preferred stock is most influenced by the price of an issuers common stock? A) Participating B) Straight C) Convertible D) Callable

Answer: C Convertible preferred shares cab be exchanged for common shares, its price can be closely linked to the price of the issuers common and is less influenced by changes in interest rates.

Which of the following types of preferred stock might pay a dividend that is higher than that is printed on the certificate? A) Straight preferred B) Cumulative preferred C) Participating preferred D) Callable preferred

Answer: C Cumulative preferred and Participating preferred

Which of the following statements describe Treasury stock? A) Has no voting rights and is entitled to a dividend when declared B) it has no voting rights and not dividend entitlement C) It has been issued and repurchased by the company D) It is authorized but unissued stock.

Answer: C Treasury stock is stock a cooperation's has issued but subsequently repurchased from investor in the second market. The corporation can either reissue the stock at a later date or retire it. Stock that has been repurchased by the corporation has no voting right and is not entitled to any declared dividends.

All of the following are privileges or benefits of stock ownership, except? A) Dividend B) Growth C) Guaranteed income D) Voting rights

Answer: C Although stocks often pay a regular dividend it is not guaranteed. If the board decides the company cannot afford to pay a dividend this quarter, no dividend will be paid.

The owner of an ADR is likely to receive which of the following? A) Dividends B) Capital gains or losses C) Both dividends and capital gains or losses D) Neither dividends nor capital gains or losses

Answer: C An ADR represents ownership of a foreign corporation. The ADR holder receives a share of the dividends and capital appreciation ( or capital loss) when sold.

What of the following represent ownership (equity) in a company? A)Corporate bonds B) Common stock C) Preferred stock D) Mortgage bonds

Answer: C Owning either common or preferred tock represents ownership in a corporation.

Cumulative voting rights A) Benefit the larger investor B) Aid the corporations best customers C) Give the preferred stockholders an advantage over common stockholders D) Benefit the small investor

Answer: D Benefit the small investor

Which of the following types of preferred stock typically has the highest stated rate of dividend? A) Participating B) Straight C) Cumulative D) Callable

Answer: D When the stocks is called, dividend payments are no longer made to the compensate for that possibility, the issuer must pay higher dividend.

ADR are used to facilitate ... A) The foreign trading of domestic securities B) The foreign trading of US government securities C) The domestic trading of US government securities D) The domestic trading of foreign securities

Answer: D ADRs are tradable securities issued by banks, with the receipt's value based on the underlying foreign securities held by the bank.

What is the basic formula of the balance sheet?

Assets= Liabilities + New worth

Someone controlling or controlled by a member firm

Associated person

Number of shares that a corporation is permitted to issue.

Authorized stock

Hypothetical net worth of each share of common stock.

Book Value

Compensated by a commission in securities transaction

Broker

Contractual promise stating that the bond issue is not callable for a certain period of time.

Call protections

Annualized dividend divided by current market price

Current Yield

Compensated by a markup/markdown in securities transactions.

Dealer

The schedule of interest and principal payments due to a bond issue

Debt service

A firm must apply to become one of these

Member

Equity securities in the hands of the public

Out standing stock

Dollar amount assigned to security by issuer.

Par Value

Stockholders may maintain proportionate ownership by purchasing newly issued shares before they are offered to the public

Preemptive right

Difference between the higher price paid for a bond and the bond's face

Premium

Typical frequency of dividend payment on common stock

Quarterly

Short -term instruments, exercise price is below market price; issued to current shareholders only, who may exercise them, sell them on the open market, or let them expire

Right

Account established so that an issuer has the money to redeem its bonds

Sinking fund

Long-term instruments; exercise price is above market price at the time of issue; used as sweeteners with issues of more speculative corporate bonds; also, owners of warrants are not entitled to dividends, though they may sell the warrant on the open market.

Warrants