Series 65: Unit 1 Quiz 2

An investor wishing to add some diversification to his portfolio wants to purchase 200 shares of an ADR for a Japanese electronics manufacturer. The ADR is listed on the NYSE. Which of the following risks should be of most concern to this investor? 1. Business 2. Currency 3. Inflation 4. Liquidity

Business and currency Owning stock in any corporation always subjects the holder to business risk—the uncertainty that the entity might fail to meet its economic goals. Whenever one invests internationally, whether directly or through the vehicle of an ADR, one is subject to currency risk, sometimes called exchange rate risk. Inflation risk is of concern to those who purchase fixed-income investments, and any security listed on the NYSE has little or no liquidity risk.

Which of the following statements regarding ADRs are true? 1. The securities are vehicles used to facilitate U.S. trading of foreign securities. 2. Dividends are received in the foreign currency. 3. Holders have foreign currency risk. 4. The receipts are issued by a foreign branch of a domestic bank.

The securities are vehicles used to facilitate U.S. trading of foreign securities and holders have foreign currency risk

Rule 144 applies to the sale of all of the following except A. unregistered securities by an officer of the issuer. B. registered securities by a nonaffiliated shareholder of the issuer. C. registered securities by an officer of the issuer. D. unregistered securities by a nonaffiliated shareholder of the issuer.

Registered securities by a nonaffiliated shareholder of the issuer Rule 144 applies to the sale of unregistered securities owned by affiliates or nonaffiliates and the sale of control stock. It does not apply to the sale of registered securities by nonaffiliated persons.

Which of the following statements best describes cumulative preferred stock? A. Owners are allowed to vote for directors using the cumulative voting procedures. B. Owners lose any claim to dividends that are not paid in any one year. C. Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock. D. Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend.

Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock

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 not an affiliate and Rule 144 applies. B. The spouse is an affiliate and Rule 144 does not apply. C. The spouse is an affiliate and Rule 144 applies. D. The spouse is not an affiliate and Rule 144 does not apply.

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.

Investing in emerging market stocks is least likely to expose your client to which of the following risks? A. Political B. Interest rate C. Currency D. Liquidity

Interest rate Interest rate risk applies primarily to fixed income securities. Stock, unless it specifies preferred stock, are not normally considered to have interest rate risk. However, any foreign investment incurs currency risk and, when dealing with emerging markets, there is a higher degree of liquidity and political risk than with developed economies.

Which of the following statements concerning international direct investing is correct? A. The rates of return on foreign securities are generally less than those available from U.S. markets. B. Information is not as readily available on foreign investments as on domestic ones. C. Foreign markets are usually mature and offer no growth advantages. D. The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S.

Information isn't as readily available on foreign investments as on domestic ones In general, foreign investments don't have the transparency of domestic ones. Rather than directly investing in the foreign security, trading the ADR has the advantage of the full disclosure requirements of the SEC. Investors may earn higher returns in foreign markets, and including foreign securities in an investment portfolio may lower risk through greater diversification. This is because there may be a low correlation with U.S. markets. Although securities markets in most developed economies are mature, that doesn't mean they can't grow, and the markets in emerging economies offer great potential growth commensurate with their greater risk.

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? 1. 125 shares 2. 100 shares 3. Cost basis of $25 4. Cost basis of $20

125 shares and cost basis of $20 Remember that the ex-date is the first day on and after which a purchaser of a stock is not entitled to a previously declared dividend (cash or stock). That means the owner of the stock on and after the ex-date is the one who receives the cash or, in this case, the additional stock. The payment of a stock dividend causes the number of shares owned to increase while the cost per share decreases. The total value of the position will always remain unchanged. Julie had 100 shares at $25 per share, or $2,500, and now has 125 shares × $20 = $2,500.

Which of the following statements concerning equity securities is not correct? A. Equity securities represent a lending interest in a corporation. B. Preferred stock is an equity security with an intermediate claim (between the bondholders and the common stockholders) on a firm's assets and earnings. C. Equity securities provide a residual claim, after payment of all obligations to fixed-income claims, on the income and assets of a corporation. D. Common stock is an equity security representing an ownership interest in a corporation.

Equity securities represent a lending interest in a corporation

Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues? A. Exchange rate risk B. Credit risk C. Market risk D. Business risk

Exchange rate risk An investor who invests in foreign stocks is subject to many of the same risks associated with domestic stock investment, but a unique risk faced by investors in foreign stocks is exchange rate risk, sometimes called currency risk. Someone who invests in foreign stocks has as much invested in the currency of the foreign stock as in the stock itself. Exchange rate risk is not necessarily a bad thing, but it is one more significant factor that investors in foreign stocks must take into account. Credit risk never applies to stock; only debt securities and both domestic and foreign issues are subject to business risk.

Which of the following statements about equity securities is not true? A. Preferred stock pays a fixed dividend. B. Preferred stock is an equity security while common stock is a hybrid. C. Preferred stock is usually nonvoting. D. Common stock is less sensitive to interest rate risk than preferred stock.

Preferred stock is an equity security while common stock is a hybrid Both common and preferred stock are equity securities. Common stock is never referred to as a hybrid; there are times when preferred stock is because of those features that are similar to a debt security. The dividend on preferred stock is fixed, and shares do not have voting rights. The price of a common share generally doesn't fluctuate with changes to interest rates in the same manner as that of preferred stock.

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders this year, each preferred share must be paid a dividend of A. $10. B. $5. C. $25. D. $15.

$10

The board of directors of DDC omitted dividends in 2020 on their $100 par 6% noncumulative preferred stock. In 2021, a $2 preferred dividend was paid. For DDC, 2022 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2022 in order to pay a common dividend? A. $6 B. $16 C. $8 D. $12

$6 Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share.

An American depositary receipt (ADR) is A. a certificate representing ownership of a U.S. security that is deposited in a foreign bank. B. a type of derivative used to speculate in foreign currencies. C. a document used with interest rate swaps. D. a certificate representing ownership of a foreign security that is on deposit at a U.S. bank.

A certificate representing ownership of a foreign security that is on deposit at a U.S. bank

One of your customers owns 300 shares of the 5% $100 par cumulative preferred stock issued by the Northern Atlantic Railroad (NAR). The cumulative feature provides that A. all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock. B. the annual dividend is $5 per year. C. all unpaid dividend arrearage must be brought current before interest may be paid on NAR's subordinated debentures. D. the customer has 300 votes times the number of directors being elected and can vote them in any manner desired.

All unpaid dividend arrearage must be brought current before interest may be paid on NAR's subordinated debentures

Which of the following have equity positions in a corporation? 1. Common stockholders 2. Preferred stockholders 3. Convertible bondholders 4. Mortgage bondholders

Common and preferred stockholders Common and preferred stockholders have equity or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners.

Which of the following has the least exposure to inflation risk? A. Common stock B. Fixed annuity C. Cash D. Preferred stock

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.

Investments in which of the following offer the best long-term protection against inflation? A. Corporate bonds B. Fixed annuities C. Common stocks D. Government bonds

Common stocks Common stocks have historically offered returns that outpace inflation over the long term. Investments paying a fixed return, such as bonds and fixed annuities, have the greatest inflation risk.

A company's dividend on its common stock is A. voted on by shareholders. B. specified in the company charter. C. determined by its board of directors. D. mandatory if the company is profitable.

Determined by its board of directors

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? 1. He is considered an affiliate. 2. He is not considered an affiliate. 3. He must file a Form 144 to sell. 4. He does not have to file a Form 144 to sell.

He is considered an affiliate and he must file a Form 144 to sell 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.

The primary defining characteristic of an equity security is A. it pays dividends, usually quarterly. B. the ability to keep pace with inflation. C. voting rights. D. it represents ownership in a corporation.

It represents ownership in a corporation What does the term equity mean? It means ownership and that is the single most significant fact about an equity security, whether common or preferred stock. Many pay dividends, but that is not at the core of being an equity security. Equity securities include preferred stock, which, with its fixed dividend, does not offer inflation protection and does not have voting rights.

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.

Pays past and current preferred dividends before paying dividends on common stock

Which of the following statements about equity securities is not true? A. Preferred stock is usually nonvoting. B. Common stock is less sensitive to interest rate risk than preferred stock. C. Preferred stock pays a fixed dividend. D. Preferred stock is an equity security while common stock is a hybrid

Preferred stock is an equity security while common stock is a hybrid

Which of the following statements regarding preemptive rights is true? A. Preferred stockholders do not have the right to subscribe to a rights offering. B. Both common and preferred stockholders have the right to subscribe to a rights offering. C. Neither common nor preferred stockholders have the right to subscribe to a rights offering. D. Common stockholders do not have the right to subscribe to a rights offering.

Preferred stockholders don't have the right to subscribe to a rights offering Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

One of the features of convertible preferred stock is that A. the holder is able to select the conversion price. B. the owner has the opportunity to convert the stock into the issuer's bonds. C. the dividend is paid ahead of all other securities. D. the owner has the opportunity to participate in the growth of the company.

The owner has the opportunity to participate in the growth of the company Any convertible security, preferred stock, or debenture is convertible into the issuer's common stock. As a result, if the business is successful, the common stock's price will rise to the point where conversion is a wise idea. Although the investor can generally select when to convert, the conversion price or ratio is set at the time of issuance. Interest on debt securities is paid before the dividends on any stock. When it comes to preferred stock, there is frequently a pecking order, such as a prior lien preferred or first preference preferred that would come ahead of the other preferred shares.

Which of the following statements regarding international investing is not correct? A. An international investor faces the additional risks of foreign currency risk and country risk. 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. One method to engage in international investing is through American depositary receipts.

An emerging market is a market in a highly developed foreign economy w/ 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.

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? 1. Registered securities held by a control person 2. Unregistered securities held by a noncontrol person 3. Registered securities held by a noncontrol person 4. Unregistered securities held by a control person

Unregistered securities held by a noncontrol and a control person

Which of the following statements regarding a 100% stock dividend are true? 1. The share price is reduced by half. 2. The total market value of the outstanding stock decreases. 3. The total market value of the outstanding stock may increase or decrease as a result of the split. 4. The number of shares doubles.

The share price is reduced by half and the number of shares doubles

ADRs are used to facilitate A. the domestic trading of U.S. government securities. B. the foreign trading of U.S. government securities. C. the domestic trading of foreign securities. D. the foreign trading of domestic securities.

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.