SIE - Unit 1: Individual Securities - Equities

A penny stock is best described as A) an unlisted stock valued at less than $5 per share. B) an unlisted stock valued at less than $2 per share. C) an unlisted stock valued at less than $1 per share. D) an exchange-listed stock valued at less than $5 per share.

A A penny stock is an unlisted (not listed on a U.S. stock exchange) security offered at less than $5 per share.

For preferred shares, the annual dividend payment is A) fixed and stated as a percentage of its par value. B) subject to variation and stated as a percentage of its par value. C) subject to variation and stated as a percentage of its current market value (CMV). D) fixed and stated as a percentage of its current market value (CMV).

A 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.

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 warrant. B) a proxy. C) a rights certificate. D) a call option.

A 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 corporate actions are designed to allow investors to buy shares of stock under specific, defined conditions? A rights offering A forward split Issuing warrants A stock dividend A) I and III B) II and III C) II and IV D) I and IV

A A rights offering allows current shareholders to purchase enough additional stock to maintain their proportionate ownership of the corporation, in the event more shares are sold to the public. The shareholders may purchase the stock before the public has access and will purchase the stock at a discount from its market price. Warrants allow the owner to purchase a certain number of shares of stock at a specified price at a specified time later. Splits and stock dividends, the other choices, do not involve the purchase of stock but instead are adjustments to existing stock positions.

What is the primary benefit for an American investor when purchasing an American depository receipt (ADR)? A) Diversification B) Hedging currency risk C) Tax-deferred dividends D) Exemption from U.S. taxation

A ADRs are a type of equity security designed to simplify foreign investing for Americans. ADRs provide Americans with an easy way to invest in foreign companies that might otherwise be difficult or impossible to own. This overseas exposure provides investors with additional diversification within their portfolio.

Which of the following best describes the trade execution of American depository receipts (ADRs)? A) Trades are executed domestically in U.S. dollars. B) Trades are executed domestically in a foreign currency. C) Trades are executed overseas in U.S dollars. D) Trades are executed overseas in a foreign currency.

A ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and trade throughout the day. Trades in these securities are dollar denominated. ADRs trade and settle in the same fashion as a traditional U.S.-based common stock.

When shareholders owning participating preferred shares receive the additional participating amount, this was determined by A) the board of directors (BOD). B) the vote of all other preferred class shareholders. C) common shareholders. D) Securities and Exchange Commission (SEC) mandate.

A Additional dividends in profitable years payable to participating preferred shareholders is at the direction of the BOD. Just as a dividend is declared, the BOD would declare any participating dividend to be paid.

All corporations will issue A) common stock. B) common and preferred stock. C) preferred stock. D) different classes of common stock.

A All corporations will issue common stock, of which there can be only one class, but not all corporations issue preferred stock. Corporations that choose to issue preferred shares can issue more than one class.

If a preferred shareholder received a $3.50 annual dividend each year, it could be assumed that A) this is a 3.5% preferred class. B) these shares are trading at $35.00. C) the shares had increased by 3.5% each year. D) the common shareholders receive the same $3.50 annual dividend.

A An annual dividend of $3.50 simply tells you that this is a 3.5% preferred class of stock (3.5% × par ($100) = $3.50) or ($3.50 ÷ par ($100) = 0.035). The current market value is not used to calculate the fixed dividend, nor does this dividend amount tell us what common shareholders received.

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell A) immediately, subject to Rule 144 volume limitations. B) only after leaving (becoming unaffiliated with) the company. C) immediately, with no volume restrictions. D) under Rule 144 only after a six-month holding period

A Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

By electing a board of directors (BOD), stockholders have A) a say in the company's management but are not involved in the day-to-day details of its operations. B) a say in the day-to-day details of its operations but no say in the management selected to carry out those operations. C) neither a say in the company's management nor a say in any of the day-to-day details of its operations. D) a say in the company's management and all day-to-day details of its business operations.

A By electing a BOD, stockholders have a say in the company's management but are not involved in the day-to-day details of its operations

Which of the following is an example of an equity security? A) Preferred stock B) Municipal bonds C) Debentures D) Mortgage bonds

A Common and preferred stock are examples of an equity security. Bonds of any type by comparison are certificates of indebtedness—debt instruments.

Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own A) cumulative preferred stock. B) callable preferred stock. C) convertible preferred stock. D) straight preferred stock.

A Cumulative preferred stock accrues payments due its shareholders that have been missed in the event dividends are reduced or suspended.

In the dividend disbursement process three of the four critical dates are determined by the board of directors (BOD) but one is determined by either Financial Industry Regulatory Authority (FINRA) for OTC stocks or the exchange for listed stocks. Which one is it? A) ex-dividend B) payable C) declaration D) record

A Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.

A corporation that has issued cumulative preferred stock A) pays past and current preferred dividends before paying dividends on common stock. B) pays the preferred dividend before paying the interest payments due on its outstanding bonds. C) pays only current dividends with no liability for missed or past-due dividends. D) pays only the current dividends on the preferred, before paying a dividend on the common and then pays any past-due dividends.

A Dividends in arrears (those missed) on cumulative preferred have the highest priority of dividends to be paid. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest, however, is always paid before any dividends, preferred or common.

A share of stock in the hands of a stockholder represents A) entitlement to receive profits through dividends when distributed and the right to vote for who will serve on the board of directors (BOD). B) entitlement to receive profits through dividends when distributed but not the right to vote for who will serve on the board of directors (BOD). C) neither the entitlement to receive profits through dividends when distributed nor the right to vote for who will serve on the board of directors (BOD). D) no entitlement to receive profits through dividends when distributed but the right to vote for who will serve on the board of directors (BOD).

A Each share of 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 BOD.

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) A disclosure statement is required, but not a suitability statement. B) No documentation is required. C) A suitability statement is needed, but not a disclosure statement. D) Both suitability and disclosure statements must be obtained.

A 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 preemptive right for existing shareholders is best described as A) the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares. B) the right for the board of directors (BOD) to preempt existing shareholders and only allow them to purchase the newly issued additional shares after the board has purchased the shares they want. C) the right for the board of directors (BOD) to preempt existing shareholders from purchasing additional shares so that they may be used for paying stock dividends by the corporation. D) the right that allows new investors to purchase shares before existing shareholders when a company issues additional shares.

A Existing shareholders have what is known as a preemptive right, which is the right to maintain their proportionate share of ownership in the corporation if the company wants to issue additional shares.

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Convertible B) Callable C) Noncumulative D) Cumulative

A Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

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 if there are any funds left after debtholders and preferred shareholders are paid. B) During the dissolution of corporate assets, common shareholders will be paid first— before debtholders and preferred shareholders are paid. C) 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. D) 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.

A 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.

LMN Corporation has a $60 par, 4% preferred stock currently trading at $45 per share. Its annual dividend is A) $2.40. B) $4.00. C) $24.00. D) $1.80.

A For preferred shares, the annual dividend is stated as a percentage of par. In this case, 4% of par value of $60 equals $2.40.

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) Because she owns more shares, only Mrs. Smith is considered a control person. C) Only Mr. Smith, as the initial shareholder, would be 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%).

A nonaffiliated owns 3% of an issuer's common stock. This person will be considered a control person if a spouse owns A) 8% of the issuer's common stock. B) any shares of the issuer's common stock. C) 2% of the issuer's common stock. D) 5% of the issuer's common stock.

A If there is a 10% or more interest held by immediate family members, then all those family members owning voting stock are considered to be control persons.

Common stockholders owning dividend paying stocks are exposed to A) market risk and current income risk. B) market risk but not current income risk. C) neither market risk nor current income risk. D) current income risk but not market risk.

A In owning common shares, the investor stands to lose current income through dividend reduction or suspension (current income risk), as well as capital loss, should the market price decline (market risk).

When selling a bond, the issuer is taking A) a borrower's position. B) a creditors position. C) a loaners position. D) an equity position.

A Issuers of bonds are borrowing money from the purchaser of the bond.

An investor has just received stock rights in the mail allowing the purchase of 250 shares of a stock offering at a discount. With these rights, the investor may take any of the following actions except A) purchase 125 shares at double the discount. B) sell the rights for a portion of their value. C) exercise some rights and sell the rest. D) sell some rights and let the rest expire unexercised.

A Once an investor has received stock rights, the rights may be exercised in whole or in part, sold on the open market in whole or in part, allowed to expire in whole or in part, or some combination of these. The discount, however, stands as offered and may not be manipulated.

Penny stock rules apply to both solicited and unsolicited transactions. specify that established customers of the firm need not sign a suitability statement. mandate that an account holding penny stocks only need not be provided with a monthly statement. require that prospects be given a copy of a risk disclosure document before their initial penny stock transaction. A) II and IV B) I and III C) II and III D) I and IV

A Penny stock rules only apply to solicited transactions, and it is required that the penny stock disclosure document 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.

Characteristics common to penny stocks would include which of the following? A) Market price less than $5 per share and unlisted B) Market price greater than or equal to $5 per share and unlisted C) Market price less than $5 per share and listed on an exchange or Nasdaq D) Market price greater than or equal to $5 per share and listed on an exchange or Nasdaq

A 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.

The holders of which of the following securities are considered owners of the issuing corporation? Mortgage bonds Debentures Preferred stock Common stock A) III and IV B) I and III C) II and IV D) I and II

A Persons who own stock in a company are considered owners; thus, both common and preferred shareholders have ownership (equity) in a corporation. Mortgage bonds and debentures are two types of debt securities offered by corporations. Debtholders are creditors of the corporation, not owners.

Securities acquired through some means other than a registered public offering are known as A) restricted. B) control. C) affiliate's stock. D) convertible.

A Restricted securities are those acquired through some means other than a registered public offering. Securities purchased via a private placement are an example. These securities may not be sold (are restricted) until they have been held fully paid for six months.

An affiliate holding unregistered shares can sell under Rule 144 A) four times a year. B) two times a year. C) one time a year. D) as often as wished.

A Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.

An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor A) can sell the shares unrestricted at any time. B) can only sell subject to volume limits. C) must wait six months before selling shares subject to volume limits. D) must wait six months before any sales can be made.

A Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.

A convertible feature for preferred shares allows the owner to exchange the shares A) for a fixed number of shares of the issuing corporation's common stock. B) for as many bonds as the issuer is willing to issue at that point in time. C) For a fixed number of bonds issued by the corporation. D) for the preferred shares of another issuer.

A The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares.

List the dates associated with dividend payment in their proper order. A) declaration date, ex-dividend date, record date, pay date B) record date, declaration date ex-dividend date, pay date C) declaration date, pay date, ex-dividend date, record date D) declaration date, record date, ex-dividend date, pay date

A The declaration date is the day the board of directors (BOD) meet to declare the dividend. The ex-date is the first day that a purchaser of the stock is too late to get the dividend. The record date is the day the shareholder must be on the records of the company to receive the dividend and the checks are mailed on pay date.

Exempt from the penny stock rules are A) unsolicited transactions. B) both solicited and unsolicited transactions. C) all transactions. D) solicited transactions.

A Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt and the rules therefore apply.

Common shareholders have the right to receive an audited set of financial statements of the company's performance A) annually. B) monthly. C) each quarter. D) biannually.

A While a company can supply this information as often as they want to shareholders, it is only required that an audited report be received on an annual basis.

Common stockholders of a publicly traded corporation have which of the following rights and privileges? I) Residual claim to assets at dissolution II) Right to a vote for stock dividends to be paid III) Right to receive an audited financial report on an annual basis IV) Claim against dividends in default

A) I and III Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. The board of directors (BOD) would vote to pay a dividend.

A preferred shareholder's priority claim on assets is the preferred shareholder's priority standing over A) creditors of the corporation. B) common shareholders. C) employees of the corporation. D) bondholders.

B A preferred shareholders priority claim on assets is the preferred shareholders priority standing over common shareholders only. Employees of the corporation, debt (bond) holders and other creditors would all have claims on assets settled before preferred shareholders.

Which of the following statements about rights and warrants is true? A) Rights and warrants are both long term. B) Rights are short term; warrants are long term. C) Rights are long term; warrants are short term. D) Rights and warrants are both short term.

B A security with a termination, maturity, or expiration date that is one year or less from the date of issue is said to be short term. Rights offerings have a lifetime of four to six weeks, which makes them short term. If the end date is more than a year from the issue date, the security is long term. Warrants have expiration dates typically two to five years from the date of issue, which makes them long term.

What is the primary purpose of an issuer sponsoring an American depository receipt (ADR)? A) These securities permit the issuer to avoid Securities and Exchange Commission (SEC) jurisdiction. B) These securities are created to attract a U.S. investor base. C) These securities are created to provide tax relief for U.S. investors. D) These securities are created to facilitate foreign investment in U.S. companies.

B ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common 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 trades in the U.S and is denominated in U.S. currency making the process of buying a foreign stock much easier for an American investor. ADRs are subject to U.S. securities regulations.

Which of the following securities is the underlying asset used to create an American depository receipt (ADR)? A) Preferred shares B) Common shares C) Warrants D) Bonds

B ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares of a foreign issuer 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. Each ADR may represent one or more shares of foreign-company stock held on deposit.

An affiliate has held restricted shares fully paid for six months. In anticipation of the desire to divest the shares, the affiliate should know that A) while no longer restricted, all sales of these shares must be approved by the issuer's board of directors (BOD). B) any shares sold will be subject to volume restrictions if still an affiliate. C) no limit on the number of shares that can be sold will be imposed. D) the shares are no longer restricted, having been held fully paid for six months.

B Although held fully paid for six months, the sales of these shares would be subject to volume restrictions for as long as this individual is an affiliate. If the individual was not an affiliate, the shares held fully paid for six months could now be sold completely unrestricted.

Which of the following regarding established customers of a broker-dealer and the purchase of penny stocks are true? They are exempt from the suitability statement requirement. They are not exempt from suitability statement requirement. They are exempt from the disclosure rules. They are not exempt from the disclosure rules. A) I and III B) I and IV C) II and III D) II and IV

B An established customer is one who has effected a non-penny securities transaction or made a deposit of funds or securities into the account at least one year before the proposed penny stock trade or has made three purchases of penny stocks on three separate days involving three separate issues. Established customers are exempt from the suitability statement required but are subject to the disclosure rules.

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be A) callable. B) adjustable rate. C) convertible. D) participating.

B Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price.

Which of the following is an example of an equity security? A) Debentures B) Preferred shares C) Equipment trust certificates D) Mortgage bonds

B Both common and preferred shares are equity securities. Each of the other choices represents a debt instrument.

Callable preferred stock is advantageous to the issuing company because it allows the company to A) issue fixed-rate securities at a yield lower than usual. B) replace a higher, fixed-rate issue with a lower issue after the call date. C) take advantage of higher interest rates. D) call in the stock at less than par value and capture the difference as income.

B By issuing a callable preferred stock, a corporation can call in a high dividend payment issue and replace it with a lower one when interest rates have fallen. This feature allows the company to take advantage of reduced interest rates by calling in high-rate preferred issues and replacing them with lower ones.

All else being equal, which of the following preferred would pay the highest dividend? A) Cumulative preferred B) Callable preferred C) Participating preferred D) Straight preferred

B 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.

All else being equal, which of the following preferred would pay the highest dividend? A) Cumulative preferred B) Callable preferred C) Participating preferred D) Straight preferred

B 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 common stockholder's voting rights apply to which of the following? Election of the board of directors (BOD) Declaration of dividends Authorization or issue of more common shares Changing suppliers for raw material or parts used in production A) II and IV B) I and III C) II and III D) I and IV

B Common stockholders never vote directly on dividend payment or size. They may elect the BOD indirectly influencing the policy on payment of dividends) and may vote on issues concerning the company's capitalization, such as the issuance of more common stock. They do not vote on day-to-day business decisions, such as suppliers used.

Each of the following is considered a control person under Securities and Exchange Commission (SEC) Rule 144 except A) those persons who own 10% or more of the total beneficial interest of a company's common stock. B) those persons who own 5% or more of the total beneficial interest of a company's common stock. C) another company that owns 10% or more of the company's equity securities. D) corporate officers and directors.

B Control securities are those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities. Those persons who own 5% or more of the total beneficial interest of a company's common stock are not deemed control persons under this rule.

For registered shares held by an affiliate (known as control stock), which of the following applies? A) Six-month holding period, with volume limits thereafter B) No holding period, but volume limits always apply C) Six-month holding period, with sales allowed freely thereafter D) No holding period or any volume restrictions

B Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.

In the dividend disbursement process three of the four critical dates are determined by the board of directors (BOD) but one is determined by either Financial Industry Regulatory Authority (FINRA) for OTC stocks or the exchange for listed stocks. Which one is it? A) record B) ex-dividend C) payable D) declaration

B Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.

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) No documentation is required. B) A disclosure statement is required, but not a suitability statement. C) Both suitability and disclosure statements must be obtained. 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.

For restricted stock (unregistered) held by a nonaffiliated, which of the following applies? A) No holding period, but volume limits always apply B) Six-month holding period, with sales allowed freely thereafter C) No holding period or any volume restrictions D) Six-month holding period, with volume limits thereafter

B For restricted stock (unregistered) held by a nonaffiliated, a six-month holding period before any sales can be made applies. After the holding period, sales can be made freely.

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at A) par value or lower. B) par value or higher. C) par value. D) current market value.

B In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call.

Each of the following are likely benefits of owning shares of common stock except A) voting rights. B) interest payments. C) limited liability. D) dividend payments.

B Interest payments are paid to bond holders but not on common stock. Common shareholders may receive dividends if declared by the board of directors. They may also expect to vote on certain critical issues facing the company such as its leadership. Common shareholders have a liability limited to the amount invested.

A company's business operations are overseen by A) a board of directors (BOD) elected by bondholders. B) a board of directors (BOD) elected by shareholders. C) stockholders placed in position by the board of directors (BOD). D) bondholders placed in position by the board of directors (BOD).

B Most corporations are organized in such a way that their stockholders regularly vote for and elect individuals to a BOD to oversee company business operations.

Rules to protect the investing public during the public offering process include all of the following except A) securities industry insiders may not take advantage of their insider status to gain access to new issues for their own benefit. B) limiting the number of shares of an initial public offering (IPO) that may be purchased by the issuing company's employees. C) member firms may not withhold securities in a public offering for their own benefit. D) members must offer the securities at the public offering price.

B No rule limits the number of shares that an issuer can direct to persons who are employees of the issuer.

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 II B) I, II, III, and IV C) I and III 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.

An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? A) Rights will be distributed to existing stockholders; they have only two options: exercise the rights or let them expire. B) Rights will be distributed to existing stockholders with an exercise price lower than the current market value. C) Warrants will be distributed to existing stockholders with an exercise price equal to the current market value. D) Warrants will be distributed to existing stockholders and they will have two to five years to decide whether or not to buy the stock at the strike price.

B Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.

Preferred shares have A) only the characteristics matching those of debt securities. B) characteristics of both equity and debt securities. C) only the characteristics matching those of equity securities. D) characteristics of neither equity nor debt securities.

B Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security).

Interest-rate sensitivity for preferred shareholders should be understood to mean that A) preferred share prices are not impacted by (insensitive to) changes in interest rates. B) when interest rates rise, the prices for preferred shares can fall. C) when interest rates fall, so do the prices of preferred shares. D) when interest rates rise, so do the prices of preferred shares.

B Preferred shares, like debt securities, are sensitive to and have an inverse relationship to interest rates. Rates up, prices down. Rates down, prices up.

The potential that inflation will devalue the fixed dividend income payments received by preferred shareholders is known as A) interest-rate risk. B) purchasing power risk. C) decreased dividend risk. D) market risk.

B Remember that the fixed dividends received by preferred shareholders are a stated percentage of par value. Purchasing power risk is the possibility that the income produced via the fixed dividend received will not purchase as much in the future for preferred shareholders as it does today due to inflation.

The potential that inflation will devalue the fixed dividend income payments received by preferred shareholders is known as A) interest-rate risk. B) purchasing power risk. C) market risk. D) decreased dividend risk.

B Remember that the fixed dividends received by preferred shareholders are a stated percentage of par value. Purchasing power risk is the possibility that the income produced via the fixed dividend received will not purchase as much in the future for preferred shareholders as it does today due to inflation.

Restricted securities may not be sold until they have been held fully paid for A) two years. B) six months. C) one year. D) one month.

B Restricted securities may not be sold until they have been held fully paid for a period of six months. This applies to both affiliates and nonaffiliates, but affiliates would be subject to volume restrictions.

Different categories of preferred shares offered by an issuer A) must all be convertible shares. B) all have preference over the issuer's common shares. C) must all be callable shares. D) all must have the same fixed dividend rate.

B Separate categories of preferred shares may differ in several ways, including dividend rate and profit participation privileges. However, all maintain preference over common stock shares issued.

In order to receive a declared dividend a shareholder must be an owner of record at the close of business on the A) payable date. B) record date. C) declaration date. D) ex-dividend date.

B Shareholders must be owners of the stock on or before the record date in order to receive the current dividend.

A corporation with 1 million shares of stock outstanding wishes to sell another 250,000 shares. When management conducts a rights offering, a shareholder owning 100 shares will be given stock rights to purchase how many additional shares? A) 250 shares B) 25 shares C) 125 shares D) 100 shares

B Stock rights (also known as preemptive rights or subscription rights) give current shareholders the ability to preemptively purchase enough shares to maintain their proportionate ownership of the corporation. This prevents their dividend and voting power from being diluted. The shares outstanding in this case will go from 1,000,000 to 1,250,000. This investor must thus go from owning 100 shares out of 1,000,000 to 125 shares out of 1,250,000. This would require that the investor be able to purchase an additional 25 shares.

The rate on an adjustable preferred stock would most likely be indexed to A) the Dow Jones Industrial Average (DJIA). B) the Treasury bill (T-bill) rate. C) the Producer Price Index (PPI). D) the Consumer Price Index (CPI).

B 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.

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.

MAS Corporation has enjoyed an extremely profitable year. It has been determined that those owning the MAS 4% preferred, participating to 6% preferred shares, will receive the full participating dividend. The participating shareholders will receive an additional dividend of A) 6%. B) 2%. C) 4%. D) 10%.

B The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.

MJS Corporation has called in its 6% preferred shares. Owners of these shares should expect that A) dividend payments will continue until the owner chooses to turn in the shares. B) dividend payments will cease on the call date. C) the shares will continue to trade in the open market. D) the shares will be resold to new investors.

B When a corporation calls in preferred shares, the shares stop trading and dividend payments cease on the call date.

The growth potential in the price of preferred shares is generally considered to be A) unrelated to the financial well-being of the issuer. B) less than that of the issuer's common shares. C) no different than that of the issuer's common shares. D) greater than that of the issuer's common shares.

B 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.

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) carry no guarantee of payment in any amount. C) are guaranteed to be paid in at least the same amount as the initial declaration. D) are not guaranteed to be paid, but if they are paid, they must be at least equal to the initial declaration.

B 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.

An investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Convertible B) Callable C) Cumulative D) Straight

B With callable preferred stock, to compensate for the possibility that the shares may be called, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past three years but now is in a position to resume paying them again. Before paying common shareholders a dividend, the company would be required to pay the preferred shareholders A) nothing. B) $4.00. C) $2.50. D) $1.00.

B With noncumulative preferred stock, missed or skipped dividends need not be paid or made up. However, in order to pay common shareholders in any year, preferred shareholders must receive their full dividend for that year. While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. 4% × $100 par value = $4.00.

All of the following are possible actions of an investor who has received stock rights except A) sell the rights for a short-term capital gain or loss. B) exercise the rights to purchase the new stock at a discount. C) hold the rights for a possible long-term capital gain. D) allow the rights to expire unexercised.

C A long-term capital gain would require a holding period of more than one year. Rights expire four-six weeks after issue, so this would not be possible.

A preferred shareholder's priority claim on assets is the preferred shareholder's priority standing over A) bondholders. B) employees of the corporation. C) common shareholders. D) creditors of the corporation.

C A preferred shareholders priority claim on assets is the preferred shareholders priority standing over common shareholders only. Employees of the corporation, debt (bond) holders and other creditors would all have claims on assets settled before preferred shareholders.

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 rights certificate. B) a proxy. C) a warrant. D) a call option.

C 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 securities provides U.S. investors with a way to gain exposure to the common stock of a foreign issuer? A) GNMA B) CMO C) ADR D) STRIP

C ADRs are a type of equity security that simplify foreign investing for Americans. An ADR is created when common 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 trades in the United States and is denominated in U.S. currency. A GNMA is a type of mortgage-backed security. A CMO is a mortgage-backed derivative. A STRIP is a zero-coupon Treasury security.

Before effecting an initial penny stock transaction for a new customer, the registered representative must do all of the following except A) obtain a signed risk disclosure document from the customer. B) obtain a signed suitability statement from the customer. C) confirm that a margin account has been established. D) confirm whether the person is an established customer.

C According to penny stock rules, registered representatives must provide disclosure information to all penny stock buyers which customers must sign. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. Investors who are not considered established customers (new customers, as in this case) must sign a suitability statement as well. No rule prohibits penny stock purchases on margin, but there is no requirement that they be done in a margin account either.

When shareholders owning participating preferred shares receive the additional participating amount, this was determined by A) the vote of all other preferred class shareholders. B) common shareholders. C) the board of directors (BOD). D) Securities and Exchange Commission (SEC) mandate.

C Additional dividends in profitable years payable to participating preferred shareholders is at the direction of the BOD. Just as a dividend is declared, the BOD would declare any participating dividend to be paid.

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend? A) Callable B) Convertible C) Adjustable rate D) Participating

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.

An affiliate has held restricted shares fully paid for six months. In anticipation of the desire to divest the shares, the affiliate should know that A) no limit on the number of shares that can be sold will be imposed. B) while no longer restricted, all sales of these shares must be approved by the issuer's board of directors (BOD). C) any shares sold will be subject to volume restrictions if still an affiliate. D) the shares are no longer restricted, having been held fully paid for six months.

C Although held fully paid for six months, the sales of these shares would be subject to volume restrictions for as long as this individual is an affiliate. If the individual was not an affiliate, the shares held fully paid for six months could now be sold completely unrestricted.

If a preferred shareholder received a $3.50 annual dividend each year, it could be assumed that A) these shares are trading at $35.00. B) the common shareholders receive the same $3.50 annual dividend. C) this is a 3.5% preferred class. D) the shares had increased by 3.5% each year.

C An annual dividend of $3.50 simply tells you that this is a 3.5% preferred class of stock (3.5% × par ($100) = $3.50) or ($3.50 ÷ par ($100) = 0.035). The current market value is not used to calculate the fixed dividend, nor does this dividend amount tell us what common shareholders received.

Mr. Smith bought an American depository receipt (ADR) in a French company at $13.03 and recently sold the shares for $24.88. How would this trading profit be taxed? A) The profit is taxed as income in the United States only. B) The profit is not taxed because ADRs are tax-exempt securities. C) The profit is taxed as a capital gain in the United States only. D) The profit is taxed as income in France only.

C Any trading profits (capital gains) from an ADR would only be taxable here in the United States. A capital gain is the profit realized when buying then selling the shares. Remember, dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability.

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be A) participating. B) convertible. C) adjustable rate. D) callable.

C Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price.

Common dividends may be A) declared or suspended by the board of directors (BOD), with increases and reductions decided by the shareholders. B) declared, increased, reduced, or suspended by the shareholders. C) declared, increased, reduced, or suspended by the board of directors (BOD). D) declared or increased only by the board of directors (BOD).

C Common dividends may be declared, increased, reduced, or suspended at the discretion of the BOD. Shareholders have no vote on these dividend matters.

An individual owning shares of a corporation's common stock would have all of the following rights except A) to vote for those who will serve on the board of directors (BOD). B) to review a list of stockholders. C) to declare dividends. D) to vote when unable to be present at a shareholder meeting.

C Common shareholders have a number of rights. While they may receive dividends, declaring dividends is a function of the BOD.

Rule 144 imposes volume limitations on the number of shares that can be sold by control persons selling registered stock held for one year. control persons selling restricted stock held for two years. nonaffiliates selling registered stock held for one month. nonaffiliates selling restricted stock held for more than six months. A) II and III B) I and IV C) I and II D) III and IV

C Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) when selling registered stock. If, however, the shares are restricted, volume limits for nonaffiliates are imposed for six months.

For registered shares held by an affiliate (known as control stock), which of the following applies? A) Six-month holding period, with volume limits thereafter B) Six-month holding period, with sales allowed freely thereafter C) No holding period, but volume limits always apply D) No holding period or any volume restrictions

C Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.

A preemptive right for existing shareholders is best described as A) the right that allows new investors to purchase shares before existing shareholders when a company issues additional shares. B) the right for the board of directors (BOD) to preempt existing shareholders from purchasing additional shares so that they may be used for paying stock dividends by the corporation. C) the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares. D) the right for the board of directors (BOD) to preempt existing shareholders and only allow them to purchase the newly issued additional shares after the board has purchased the shares they want.

C Existing shareholders have what is known as a preemptive right, which is the right to maintain their proportionate share of ownership in the corporation if the company wants to issue additional shares.

For restricted stock (unregistered) held by an affiliate (insider), which of the following applies? A) Six-month holding period, with sales allowed freely thereafter B) No holding period or any volume restrictions C) Six-month holding period, with volume limits thereafter D) No holding period, but volume limits always apply

C 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.

When a company wants to issue additional shares of stock, the preemptive right given to existing shareholders allows those shareholders to A) pass on their proportionate ownership in the corporation to an heir. B) decrease their proportionate ownership in the corporation. C) maintain their proportionate ownership in the corporation. D) increase their proportionate ownership in the corporation.

C In the event a corporation wants to issue additional shares of stock, the preemptive right given to existing shareholders allows the shareholders to maintain their proportionate ownership in the corporation by purchasing shares before the shares are available to new investors.

All of the following could be characterized as benefits to owning common stock except A) income potential via the receipt of dividends. B) limited liability. C) low dissolution priority. D) capital gains via increases in share price.

C Low dissolution priority refers to being paid last in the event of a corporate dissolution (bankruptcy). Obviously, this is not a benefit. However, price appreciation and the receipt of dividends are potential benefits and limited liability is guaranteed, only being able to lose what one has invested.

Rules to protect the investing public during the public offering process include all of the following except A) member firms may not withhold securities in a public offering for their own benefit. B) members must offer the securities at the public offering price. C) limiting the number of shares of an initial public offering (IPO) that may be purchased by the issuing company's employees. D) securities industry insiders may not take advantage of their insider status to gain access to new issues for their own benefit.

C No rule limits the number of shares that an issuer can direct to persons who are employees of the issuer.

Past-due dividends on cumulative preferred shares A) are written off as nonpayable. B) must be reallocated to common shareholders. C) accumulate on the company's books until paid. D) can never be paid until common shareholders receive a dividend.

C Past-due dividends on cumulative preferred stock accumulate on the company's books until the corporation's board of directors decides to pay them. When the company resumes dividend payments, cumulative preferred stockholders receive current dividends plus the total accumulated dividends in arrears (those that were missed) before any dividends may be distributed to common stockholders. Common shareholders have no claim on preferred dividends.

Preferred shareholders have A) preemptive rights only. B) both voting and preemptive rights. C) no voting or preemptive rights. D) voting rights only.

C Preferred shareholders have no voting rights, nor do they have preemptive rights, which is the right to maintain the same percentage ownership in the corporation should additional shares be issued.

For those owning preferred classes of stocks, priority of asset dissolution refers to A) the order in which preferred shareholders receive dividend payments and the order in which preferred shareholders are paid in the event of a bankruptcy liquidation. B) the order in which the board of directors (BOD) declares dividend payments. C) the order in which preferred shareholders are paid in the event of a bankruptcy liquidation. D) the order in which preferred shareholders receive dividend payments when declared.

C Priority at dissolution refers to the priority that preferred stockholders have over the claims of common stockholders on any assets remaining after creditors have been paid when assets are being liquidated.

Securities acquired through some means other than a registered public offering are known as A) affiliate's stock. B) convertible. C) restricted. D) control.

C Restricted securities are those acquired through some means other than a registered public offering. Securities purchased via a private placement are an example. These securities may not be sold (are restricted) until they have been held fully paid for six months

Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares A) subject to the volume restrictions on any single day. B) at the discretion of the issuer's board of directors (BOD). C) subject to volume restrictions within any 90-day period. D) completely unrestricted.

C 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) ex-dividend date. B) payable date. C) record date. D) declaration date.

C Shareholders must be owners of the stock on or before the record date in order to receive the current dividend.

Which statement describes rights and warrants? A) Both rights and warrants are short term. B) Rights are long term; warrants are short term. C) Rights are short term; warrants are long term. D) Both rights and warrants are long term.

C Stock rights, also known as preemptive rights or subscription rights, are issued to current stockholders in the event more stock is to be sold. This allows them to purchase the new stock at below the current market price for a period of four to six weeks before the stock is offered to the public. Hence, they are short term. Warrants may be issued at any time and allow the holder to purchase the stock at a price above the current market, for a period of typically two years or more. Hence, they are long term. The hope with warrants, of course, is that the market price will rise above the exercise price before the warrant expires.

List the dates associated with dividend payment in their proper order. A) Declaration date, pay date, ex-dividend date, record date B) Declaration date, record date, ex-dividend date, pay date C) Declaration date, ex-dividend date, record date, pay date D) Record date, declaration date, ex-dividend date, pay date

C The declaration date is the day the board of directors meets to declare the dividend. The ex-dividend date is the first day that a purchaser of the stock is too late to get the dividend. The record date is the day the shareholder must be on the records of the company to receive the dividend, and the checks are mailed on the pay date.

How long must customer complaints be kept on file by the broker-dealer? A) As long as the firm is in business B) Three years C) Four years D) Two years

C The rule requires customer complaints to be kept on file for four years.

Transactions where the penny stock rules are applicable would be those that A) are unsolicited. B) are either solicited or unsolicited. C) are solicited. D) are neither solicited nor unsolicited transactions.

C Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt, and the rules therefore apply.

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 will covert these shares to common stock. B) More 7% callable shares should be issued. C) The 7% shares are likely to be called. D) The issuer is likely to reduce the fixed dividend to 3%.

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.

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) More 7% callable shares should be issued. B) The issuer will covert these shares to common stock. C) The 7% shares are likely to be called. D) The issuer is likely to reduce the fixed dividend to 3%.

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.

Of the following stocks, which would be defined as penny stocks? I) Nasdaq-listed stock trading at $4 per share II) Bulletin Board stock trading at $4 per share III) Exchange-listed stock trading at $4 per share IV) OTC Pink stock trading at $4 per share

C) II and IV A penny stock is a non-Nasdaq listed (therefore, Bulletin Board or OTC Pink) stock trading under $5 per share. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price.

A penny stock is best described as A) an exchange-listed stock valued at less than $5 per share. B) an unlisted stock valued at less than $1 per share. C) an unlisted stock valued at less than $2 per share. D) an unlisted stock valued at less than $5 per share.

D A penny stock is an unlisted (not listed on a U.S. stock exchange) security offered at less than $5 per share.

For preferred shares, the annual dividend payment is A) subject to variation and stated as a percentage of its par value. B) subject to variation and stated as a percentage of its current market value (CMV). C) fixed and stated as a percentage of its current market value (CMV). D) fixed and stated as a percentage of its par value.

D 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.

What is the primary purpose of an issuer sponsoring an American depository receipt (ADR)? A) These securities are created to facilitate foreign investment in U.S. companies. B) These securities are created to provide tax relief for U.S. investors. C) These securities permit the issuer to avoid Securities and Exchange Commission (SEC) jurisdiction. D) These securities are created to attract a U.S. investor base.

D ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common 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 trades in the U.S and is denominated in U.S. currency making the process of buying a foreign stock much easier for an American investor. ADRs are subject to U.S. securities regulations.

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.

Which of the following statements is correct concerning currency risk when investing in an American depository receipt (ADR)? A) Currency risk is eliminated because the securities are dollar denominated. B) U.S. investors are protected from currency risk by the depositary bank. C) U.S. investors are protected from currency risk by the underlying foreign corporation. D) Currency risk is still a factor when purchasing an ADR.

D ADRs are issued and pay dividends in U.S. dollars eliminating the complications of currency conversion. However, ADRs are still subject to currency risk. Why? The company pays dividends in its home currency, and the issuing bank pays out those dividends in U.S. dollars. When the exchange rate changes, the amount these dividends (in U.S. dollar terms) will fluctuate as well. Also, the value of the ADR itself will rise and fall with the value of the underlying foreign stock which is partially due to currency swings.

The primary purpose of American depositary receipts (ADRs) is to facilitate the trading of A) foreign stocks in both domestic and foreign markets. B) domestic stocks in both foreign and domestic markets. C) U.S. stocks in foreign markets. D) foreign stocks in U.S. markets.

D ADRs facilitate the trading of foreign stocks in U.S. markets.

Callable preferred stock is advantageous to the issuing company because it allows the company to A) call in the stock at less than par value and capture the difference as income. B) issue fixed-rate securities at a yield lower than usual. C) take advantage of higher interest rates. D) replace a higher, fixed-rate issue with a lower issue after the call date.

D By issuing a callable preferred stock, a corporation can call in a high dividend payment issue and replace it with a lower one when interest rates have fallen. This feature allows the company to take advantage of reduced interest rates by calling in high-rate preferred issues and replacing them with lower ones.

Common shareholders have the right to A) access a company's books and records with Securities and Exchange Commission (SEC) permission. B) full access to a company's books and records. C) no access to a company's books and records. D) limited access to a company's books and records.

D By virtue of owning the company's common stock, shareholders have a limited right to review the company's books and records. For example, they have the right to examine the minutes of meetings of the board of directors (BOD).

All of the following are considered control persons (owning control stock) except A) an officer of the corporation owning less than 1% the outstanding shares. B) a director on the board of directors (BOD) owning 2% of the outstanding shares. C) the corporation's CFO owning 1% of 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.

An individual owning shares of a corporation's common stock would have all of the following rights except A) to review a list of stockholders. B) to vote for those who will serve on the board of directors (BOD). C) to vote when unable to be present at a shareholder meeting. D) to declare dividends.

D Common shareholders have a number of rights. While they may receive dividends, declaring dividends is a function of the BOD.

Common shareholders wanting to vote on issues at a shareholder meeting can do so in all of the following ways except A) by proxy delivered by mail. B) by proxy delivered online. C) in person. D) by telephone or text message.

D Common shareholders wanting to vote at a shareholder meeting can do so in person or in absentia, using a proxy delivered by mail or online. Voting by text or telephone would not be permitted.

Because common stock can be sold or given away, it is considered to be A) voted by proxy. B) preemptive. C) limited in liability. D) freely transferrable.

D 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.

Someone who purchases shares of a corporation's common stock has A) no liability and no voting rights. B) unlimited liability and voting rights. C) neither liability nor voting rights. D) limited liability and voting rights.

D 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

Each of the following is considered a control person under Securities and Exchange Commission (SEC) Rule 144 except A) another company that owns 10% or more of the company's equity securities. B) those persons who own 10% or more of the total beneficial interest of a company's common stock. C) corporate officers and directors. D) those persons who own 5% or more of the total beneficial interest of a company's common stock.

D Control securities are those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities. Those persons who own 5% or more of the total beneficial interest of a company's common stock are not deemed control persons under this rule.

Rules to protect the public during initial public offerings (IPOs) include all of the following except A) shares must be offered to the public at the public offering price. B) members may not withhold shares for their own benefit. C) members cannot take advantage of their insider status to gain access to shares for their own benefit. D) shares may be held to reward others who can direct business to the member.

D Designed to protect the integrity of the public offering process, the rules ensure that members make a bona fide public offering of securities at the public offering price, do not withhold securities in a public offering for their own benefit or use shares to reward others in a position to direct future business to the member and that members and their associated persons do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers. Note that this is an "except" question. "Shares may be held to reward . . ." is not only not in the rule, it is expressly prohibited.

What is the tax status of a dividend paid to a U.S.-based American depository receipts (ADR) investor? A) These dividends are tax free. B) These dividends are tax deferred. C) These dividends are only taxable to foreign buyers. D) These dividends may be taxed by both the foreign country and the United States.

D Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability. Note: Any trading profits (capital gains) from the ADR would only be taxable here in the United States.

Regarding investment products, which of the following is true? A) Derivative securities represent ownership in an issuing company. B) Both derivatives and debt represent ownership in an issuing company. C) Debt securities represent ownership in an issuing company. D) Equity securities represent ownership in an issuing company.

D Equity securities represent ownership in an issuing company and debt securities represent a loan to the issuing company, but derivative products, such as options, represent neither.

An investor looking to speculate in penny stocks would be exempt from the suitability statement requirement under which of the following circumstances? A) The investor has already received the risk disclosure statement. B) The investor is already exempt from the risk disclosure requirements. C) The investor's account is approved for margin purchases. D) The investor is an established customer.

D Established customers are exempt from the penny stock suitability statement requirement. 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 three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the two previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first? A) $0 B) $8 C) $16 D) $24

D If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the two years missed, in addition to $8 this year, for a total of $24.

A shareholder feels strongly about some of the issues to be voted on at the next shareholder meeting but is unable to attend. Which of the following is true? A) The shareholder will need to attend in person in order to vote. B) The shareholder must deliver the vote in person but can do so before the date of the meeting. C) The shareholder must relinquish the right to vote at this meeting. D)The shareholder can vote by proxy.

D If unable to attend a shareholder meeting, shareholders can vote by an absentee ballot, known as a proxy. Delivery of the proxy can be made online or by mail.

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) convertible. C) adjustable. 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.

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at A) par value or lower. B) par value. C) current market value. D) par value or higher.

D In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call.

Which of the following statements is correct concerning the pricing of American depository receipts (ADRs)? A) ADR pricing is dollar-based using an end of day public offering price (POP). B) ADRs are priced in foreign currency. C) ADR pricing is dollar-based using an end of day net asset value (NAV). D) ADR pricing is dollar-based and fluctuates throughout the day.

D Many ADRs are listed on exchanges such as the NYSE or Nasdaq. ADRs trade throughout the day and settle in the same manner as would the shares of a U.S.-based company. ADRs are priced in U.S. dollars.

Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate A) after holding them for six months but then subject to volume restrictions. B) at any time but with volume restrictions. C) freely, with no holding period or volume restrictions. D) after holding them for six months and freely thereafter.

D Nonaffiliates holding unregistered shares must wait six months before divesting of those shares, but because they are nonaffiliates, they may sell freely (without volume restrictions) thereafter.

Voting rights are a privilege generally afforded to A) both common and preferred shareholders. B) neither common nor preferred shareholders. C) preferred shareholders only. D) common shareholders only.

D One of the differences between common and preferred shareholders is that preferred shareholders generally have (with few rare exceptions) no voting rights.

The potential that inflation will devalue the fixed dividend income payments received by preferred shareholders is known as A) market risk. B) decreased dividend risk. C) interest-rate risk. D) purchasing power risk.

D Remember that the fixed dividends received by preferred shareholders are a stated percentage of par value. Purchasing power risk is the possibility that the income produced via the fixed dividend received will not purchase as much in the future for preferred shareholders as it does today due to inflation.

An affiliate holding unregistered shares can sell under Rule 144 A) as often as wished. B) one time a year. C) two times a year. D) four times a year.

D Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.

An investor and his mother own 20% and 10%, respectively, of a corporation's outstanding shares, and the mother wants to sell all of her holdings. According to Rule 144, which of the following statements are true? She must file Form 144 to sell the shares. She does not have to file Form 144 to sell the shares. She is considered an affiliated person. She is not considered an affiliated person. A) II and IV B) I and IV C) II and III D) I and III

D Rule 144 defines an affiliate as one who is in a control relationship with an issuer. Because the investors' combined ownership is at least 10% of the stock, they are control persons under Rule 144 and in order to sell, the mother must do so in compliance with the rule.

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) 3% B) 6% C) 4% D) 1%

D Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last four weeks' trading volume (whichever is greater), every 90 days.

Under the rules, a penny stock is defined as an unlisted, security trading at less than A) $1 per share. B) $2 per share on three consecutive days. C) $2.50 per share on three consecutive days. D) $5 per share.

D Securities and Exchange Commission (SEC) rules define penny stocks as those that are unlisted on an exchange or Nasdaq trading at less than $5 per share.

Securities and Exchange Commission Rule 144 regulates A) communications with public retail investors. B) the sale of new issue securities in the primary market. C) state-level (blue-sky) registration of securities. D) the sale of control and restricted securities.

D 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.

Regarding transferability for common shares, which of the following is true? A) Shares can be sold or given away but only with the permission of the corporation. B) Shares can be sold without the permission of the corporation but may never be simply given away. C) Shares can be sold but not given away, unless the permission of the corporation is received first. D) Shares can be sold or given away without the permission of the corporation.

D Shareholders have the right to sell or give away their shares without permission of the corporation.

A convertible feature for preferred shares allows the owner to exchange the shares A) for as many bonds as the issuer is willing to issue at that point in time. B) for the preferred shares of another issuer. C) for a fixed number of bonds issued by the corporation. D) for a fixed number of shares of the issuing corporation's common stock.

D The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares.

The decision to pay a dividend rests with A) shareholders but is not guaranteed because they can vote against paying one. B) the board of directors (BOD) and is guaranteed. C) shareholders, which is why it is guaranteed. D) the board of directors (BOD) but is not guaranteed.

D 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.

A company has distributed profits to its shareholders. This type of distribution would most likely be in the form of A) bonds. B) warrants. C) options. D) dividends.

D The distribution of profits to shareholders would generally be in the form of dividends to be received at the discretion of the board of directors (BOD). Bonds and warrants are other types of securities a company might issue, while options are a derivative product that would not be issued by the company.

MAS Corporation has enjoyed an extremely profitable year. It has been determined that those owning the MAS 4% preferred, participating to 6% preferred shares, will receive the full participating dividend. The participating shareholders will receive an additional dividend of A) 4%. B) 10%. C) 6%. D) 2%.

D The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.

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) Open cash account for six months or more D) At least three separate penny stock purchases

D 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.

When purchasing a bond, the investor is taking on A) a debtor position. B) an equity position. C) an obligation. D) a creditor position.

D When an investor is purchasing a bond, he is lending money to the issuer and becomes a creditor of the issuer.

When the board of directors (BOD) declares a dividend, A) owners of preferred shares are paid only after any payment is made to common shareholders. B) owners of common shares must be paid at least the same amount as any payment made to preferred shareholders. C) owners of preferred shares must be paid at least the same amount as any payment made to common shareholders. D) owners of preferred shares must be paid before any payment is made to common shareholders.

D 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.

A customer investing in common equity securities could realize all of the following except A) current income via dividend declarations. B) potential capital appreciation. C) potential hedge against inflation. D) protection of principal investment.

D While common shareholders could realize potential capital appreciation, current income via dividend declarations and a potential hedge against inflation, protection of the initial investment is not guaranteed. Common shareholders have limited liability, meaning that while they cannot lose more than was initially invested, they could still lose all of it.

Priority at dissolution for preferred shareholders means that they are paid before all creditors. after all creditors. before common shareholders. after common shareholders. A) I and IV B) I and III C) II and IV D) II and III

D While preferred shareholders would not be paid until all creditors debts have been satisfied, they are paid first of the equity securities, which means they are paid before common shareholders.

As interest rates rise, prices of preferred stock will A) rise. B) remain unaffected. C) become volatile. D) fall.

D Because it pays a fixed dividend, preferred stock is interest-rate sensitive. As rates rise, prices of preferred stocks tend to fall and vice versa.

Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares? A) Participating B) Adjustable rate C) Callable D) Convertible

D Convertible preferred shares can be converted into shares of the issuer's common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common.

A corporation is issuing a bond with an interest rate below that which is commonly being offered for this type of bond. To improve the bond's marketability without reducing the capital to be obtained, which of the following actions might the corporation take? A) Offer the bond at a discount B) Offer a stock dividend to the current shareholders C) Conduct a rights offering for potential bond buyers D) Offer a warrant on the stock with each bond

D Warrants are sometimes offered as sweeteners attached to bond issues to improve the marketability of bond. Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn't be able to raise the needed capital.

Common stockholders of a publicly traded corporation have which of the following rights and privileges? I) Residual claim to assets at dissolution II) Right to a vote for stock dividends to be paid III) Right to receive an audited financial report on an annual basis IV) Claim against dividends in default

D) II and III Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. The board of directors (BOD) would vote to pay a dividend.

By purchasing shares of stock in a company, investors can benefit from which of the following? I) An increase in the price of the shares II) An increase in price of the company's debt securities III) An increase in the yield of the company's outstanding debt securities IV) The receipt of profits to be distributed

I and IV Stockholders as owners can benefit from an increase in the price of the shares (capital appreciation) and by sharing in earnings through the receipt of dividends (distributed profits). Both are potential benefits, but neither are guaranteed.

Straight preferred shares I) are noncumulative. II) are cumulative. III) allow for missed dividends to be paid later. IV) have no provision for paying missed dividends later.

I and IV 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.

The market price of a company's common stock could be affected by I) the company's earnings. II) changes in the business cycle. III) Federal Reserve Board (FRB) policies. IV) International conflicts.

I, II, III, IV 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.