Unit 1
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) $24 B) $0 C) $8 D) $16
A) $24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There are $16 due in back dividends, in addition to $8 this year, for a total of $24.
Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? (2 answers) A) 125 shares B) 100 shares C) Cost basis of $25 D) Cost basis of $20
A) 125 shares D) Cost basis of $20 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.
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? (2 answers) A) Business B) Currency C) Inflation D) Liquidity
A) Business B) 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 has the least exposure to inflation risk? A) Common stock B) Preferred stock C) Fixed annuity D) Cash
A) Common stock
Which of the following have equity positions in a corporation? (2 answers) A) Common stockholders B) Preferred stockholders C) Convertible bondholders D) Mortgage bondholders
A) Common stockholders B) Preferred stockholders Common and preferred stockholders have equity or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners.
Under Rule 144, which of the following sales are subject to volume limitations? (2 answers) A) Control person selling registered stock held for one year B) Control person selling restricted stock held for two year C) Nonaffiliate selling registered stock held for one year D) Nonaffiliate selling restricted stock held for two year
A) Control person selling registered stock held for one year B) Control person selling restricted stock held for two year Control persons are always subject to volume limitations.
Which of the following is not a characteristic of American depositary receipts (ADRs)? A) Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated B) Because ADRs are traded on the exchanges, they are relatively liquid and marketable investments C) ADR holders may surrender ADRs in exchange for receiving the shares of the non-U.S. company D) ADRs are denominated and pay dividends in U.S. dollars, not foreign currencies, thus saving the investor transaction costs with respect to converting currencies
A) Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated ADRs are receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank. Dividends are declared in the local currency, so exchange rate, or currency, risk is not completely eliminated. They are generally traded on one of the major exchanges ensuring liquidity. They are an alternative to investing directly in foreign companies or foreign mutual funds. If the investor desires the foreign shares, the ADR may be surrendered and the exchange made.
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? A) He is considered an affiliate B) He is not considered an affiliate C) He must file a Form 144 to sell D) He does not have to file a Form 144 to sell
A) He is considered an affiliate C) 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.
Which of the following statements concerning international direct investing is correct? A) Information is not as readily available on foreign investments as on domestic ones B) Foreign markets are usually mature and offer no growth advantages C) The rates of return on foreign securities are generally less than those available from U.S. markets 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. markets
A) Information is not 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.
An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? (Multiple answers) A) Loss of principal can occur B) Price volatility of preferred stock is closely related to interest rates C) Preferred stock cannot be traded as readily as bonds D) If the stock is callable, the client's income can be suddenly lowered
A) Loss of principal can occur B) Price volatility of preferred stock is closely related to interest rates D) If the stock is callable, the client's income can be suddenly lowered Because bonds have seniority over any equity security, there is a greater risk of loss of principal with preferred stock than with bonds. The price volatility of preferred stocks, like bonds, is impacted by interest rate changes. Unlike bonds, however, preferred stock does not have a maturity date. This means that preferred shares may never return to their par value, as bonds do at maturity date. Because the preferred stock may have a callable feature, the company can redeem its shares anytime after the call protection period (if any) is over. This usually happens when interest rates have declined, so the client whose stock was called will not be able to reinvest the proceeds at the same rate and could, therefore, suffer an unexpected drop in income. Preferred shares, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse).
Which of the following statements about equity securities is not true? A) Preferred stock is an equity security while common stock is a hybrid B) Common stock is less sensitive to interest rate risk than preferred stock C) Preferred stock is usually nonvoting D) Preferred stock pays a fixed dividend
A) 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.
Which of the following statements regarding ADRs are true? (2 answers) A) The securities are vehicles used to facilitate U.S. trading of foreign securities B) Dividends are received in the foreign currency C) Holders have foreign currency risk D) The receipts are issued by a foreign branch of a domestic bank
A) The securities are vehicles used to facilitate U.S. trading of foreign securities C) Holders have foreign currency risk ADRs are vehicles that facilitate U.S. trading of foreign securities. They are issued in English in the United States by domestic banks. Dividends are declared in the foreign currency but are payable to holders in U.S. dollars, which means that ADR holders are subject to foreign currency risk.
Which of the following statements regarding a 100% stock dividend are true? (2 answers) A) The share price is reduced by half B) The total market value of the outstanding stock decreases C) The total market value of the outstanding stock may increase or decrease as a result of the split D) The number of shares doubles
A) The share price is reduced by half D) The number of shares doubles In a 100% stock dividend, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same.
Which of the following statements regarding ADRs are true? (2 answers) A) They are issued by large domestic commercial banks B) They are issued by foreign banks C) They facilitate U.S. trading in foreign securities D) They facilitate a foreign investor who wants to trade U.S. securities
A) They are issued by large domestic commercial banks C) They facilitate U.S. trading in foreign securities ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.
An investor may expect to receive dividends from: A) a warrant B) a put option C) a call option D) an ADR
A) a warrant An American depositary receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock; one must own the security itself to be entitled to the dividend.
The residual right of common stockholders refers to their right to: A) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid B) vote in elections for the board of directors and in other important business decisions, such as changes to the charter C) receive all announced dividends in accordance with the number of shares held D) examine the corporation's annual reports and other reports, and take legal action if irregularities are found
A) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid The residual right of common shareholders refers to their position in the event of bankruptcy.
For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are: A) cumulative B) common C) convertible D) participating
A) cumulative Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed and, regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock; do not make a silly error and choose common stock.
A company's dividend on its common stock is: A) determined by its board of directors B) voted on by shareholders C) specified in the company charter D) mandatory if the company is profitable
A) determined by its board of directors
All of the following represent ownership in a corporation except: A) mortgage bonds B) preferred stock C) convertible preferred stock D) common stock
A) mortgage bonds Ownership in a corporation resides in its equity securities. All stock is equity, while all bonds are debt.
A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has: A) no effective change in the value of the position B) a proportionately increased interest in the company C) a proportionately decreased interest in the company D) greater exposure
A) no effective change in the value of the position When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same.
ADRs are used to facilitate: A) the domestic trading of foreign securities B) the foreign trading of domestic securities C) the foreign trading of U.S. government securities D) the domestic trading of U.S. government securities
A) the domestic trading of foreign securities An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.
One of the features of convertible preferred stock is that: A) the owner has the opportunity to participate in the growth of the company B) the dividend is paid ahead of all other securities C) the holder is able to select the conversion price D) the owner has the opportunity to convert the stock into the issuer's bonds
A) 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.
A common stockholder's rights include all of the following except: A) the right to determine the par value of the stock B) preemptive rights C) the receipt of dividends, if declared by the board of directors D) electing the board of directors
A) the right to determine the par value of the stock Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders. Common stockholders are the owners of a corporation. This basic form of ownership entitles them to all of the privileges discussed here. It also allows them to transfer their ownership, inspect company records, vote on corporate objectives, and lay claim to any residual assets in the event of a liquidation.
Investments in which of the following offer the best long-term protection against inflation? A) Corporate bonds B) Common stocks C) Government bonds D) Fixed annuities
B) 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.
Which of the following statements concerning equity securities is not correct? A) Preferred stock is an equity security with an intermediate claim (between the bondholders and the common stockholders) on a firm's assets and earnings B) Equity securities represent a lending interest in a corporation C) Common stock is an equity security representing an ownership interest in a corporation D) Equity securities provide a residual claim, after payment of all obligations to fixed-income claims, on the income and assets of a corporation
B) Equity securities represent a lending interest in a corporation Equity securities represent an ownership interest in a corporation. Preferred stock, as a senior security, has a claim ahead of common but behind debt securities.
Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues? A) Business risk B) Exchange rate risk C) Market risk D) Credit risk
B) 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 regarding foreign investing is (are) true? A) Foreign financial markets are more efficient than the U.S. market B) Most foreign investment entails foreign exchange or currency risk C) Adding foreign-issued securities to a portfolio provides the greatest diversification when the foreign stock market has a 1.0 correlation relative to the U.S. market D) Foreign securities markets are more highly regulated than the U.S. market
B) Most foreign investment entails foreign exchange or currency risk Foreign markets entail foreign exchange risk (currency risk). It's possible that the foreign market value of the investment increases while the value of that currency decreases against the U.S. currency. Most foreign markets are not more efficient than the U.S. market. The U.S. market is among the most highly regulated markets in the world. A 1.0 correlation offers no diversification.
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 have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock C) Owners lose any claim to dividends that are not paid in any one year D) Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend
B) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock Owners of cumulative preferred stock have a continuing claim to their dividends, even when the directors pass a dividend. Their claim accumulates, which means that all past dividends (arrears), as well as current dividends, must be paid before any dividend can be paid on common stock. By contrast, the owners of noncumulative preferred stock lose their claim to dividends that are not paid in any one year.
Which of the following statements regarding preemptive rights is true? A) Common stockholders do not have the right to subscribe to a rights offering B) Preferred stockholders do not have the right to subscribe to a rights offering C) Both common and preferred stockholders have the right to subscribe to a rights offering D) Neither common nor preferred stockholders have the right to subscribe to a rights offering
B) Preferred stockholders do not 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
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 does not apply B) The spouse is an affiliate and Rule 144 applies C) The spouse is an affiliate and Rule 144 does not apply D) The spouse is not an affiliate and Rule 144 applies
B) 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.
Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? (2 answers) A) Registered securities held by a control person B) Unregistered securities held by a noncontrol person C) Registered securities held by a noncontrol person D) Unregistered securities held by a control person
B) Unregistered securities held by a noncontrol person D) Unregistered securities held by a control person The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.
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 interest may be paid on NAR's subordinated debentures B) all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock C) the customer has 300 votes times the number of directors being elected and can vote them in any manner desired D) the annual dividend is $5 per year
B) all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock When a preferred stock is cumulative, any prior-year dividends that have been skipped must be paid in full along with the current year's before a dividend payment may be made to common stockholders. Don't confuse the cumulative feature here with cumulative voting that applies to common stock. Any debt security has priority over an equity security. Although it is true that a 5% $100 par stock pays dividends at an annual rate, that has nothing to do with the subject of the question: the cumulative feature.
A corporation would like to offer their employees an opportunity to participate in the future growth of the company. Among the methods you might suggest are: A) subordinated debentures B) employee stock options C) preemptive rights D) voting trust certificates
B) employee stock options One of the most popular ways to give employees the chance to benefit from an increase in the value of the employer's stock is through employee stock options.
An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer: A) nonqualified stock options B) incentive stock options C) listed stock options D) portable stock options
B) incentive stock options Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while nonqualified options are always treated as ordinary income.
One characteristic found in equity securities issued by a corporation is: A) preemptive rights B) limited liability C) a history of keeping pace with inflation D) cumulative dividends
B) limited liability Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends.
Three years ago, an investor purchased 1,000 shares of stock in the Equity Protective Life Insurance Company (EPLIC). The purchase price was $53 per share. The current market value of EPLIC stock is $79 per share. If the investor is in the 24% federal income tax bracket, it is correct to state that: A) the investor's tax liability is $3,900 B) no tax is owed by the investor C) the investor owes tax on a $26,000 short-term capital gain D) the investor owes tax on a $26,000 long-term capital gain
B) no tax is owed by the investor Because the investor has not sold the EPLIC stock, the gain is unrealized. It is only when a gain (or loss) is realized that there are tax consequences. Had the stock been sold, it would have been a long-term capital gain, which is taxed at 15% rather than the investor's marginal rate.
Rule 144 applies to the sale of all of the following except: A) registered securities by an officer of the issuer B) registered securities by a nonaffiliated shareholder of the issuer C) unregistered securities by a nonaffiliated shareholder of the issuer D) unregistered securities by an officer of the issuer
B) 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.
In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable-rate preferred stock, changes in interest rates would be most likely to affect the market price of the: A) common stock B) straight preferred stock C) convertible preferred stock D) adjustable rate preferred stock
B) straight preferred stock Fixed income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.
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) $25 B) $5 C) $10 D) $15
C) $10 This stock has a par value of $100 and a dividend rate of 10%. That means the annual dividend will be 10% of the $100 par, or $10. Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shareholders. Any dividends from previous years that were not paid are ignored. If this had been a cumulative preferred stock, all of the dividends in arrears (past unpaid) would have to be paid before the common shareholders could get a dividend. In that case, it would have been $10 for two years ago, $5 for the balance of last year's dividend, and $10 for this year's (a total of $25).
Which of the following statements about dividends on common stock is not true? A) Dividends may be paid in cash, property, or stock B) Dividends represent a pro rata distribution of corporate profits to shareholders C) Corporations are contractually obligated to pay dividends to their shareholders each year D) Only those who are owners of the stock on the record date will receive dividends
C) Corporations are contractually obligated to pay dividends to their shareholders each year Dividends are the share of a corporation's profits that the corporation pays to shareholders as owners of the corporation. Dividends are not paid to shareholders automatically, and shareholders have no contractual right to receive dividends. Instead, dividends must be declared by the corporation's board of directors. The board of directors may elect to pay a dividend in cash, property, or stock.
An investor holding which of the following equity securities would not expect to have preemptive rights? A) Control stock B) Common stock C) Preferred stock D) Common stock acquired in a private placement
C) Preferred stock Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.
An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee: A) is taxed on $30 per share as if it were salary B) is taxed on $20 per share as if it were salary C) is taxed on $10 per share as if it were salary D) has a capital gain of $10 per share
C) is taxed on $10 per share as if it were salary In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.
The primary defining characteristic of an equity security is: A) voting rights B) it pays dividends, usually quarterly C) it represents ownership in a corporation D) the ability to keep pace with inflation
C) 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.
One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote: A) the stockholder must be a natural person B) the company must be current on its dividends to preferred stockholders C) ownership must be established by the record date D) the stock must be paid for in full before the annual meeting
C) ownership must be established by the record date Only stockholders who are on the company's books by the record date are eligible to vote.
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) pays past and current preferred dividends before paying dividends on common stock D) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends
C) pays past and current preferred dividends before paying dividends on common stock Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid.
One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that: A) gains on an ISO are always short term, while those on an NQSO are long term B) there is a maximum five-year limit for exercise on the ISO, while the time limit on the NQSO is 10 years C) the bargain element of the ISO is an AMT preference item D) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee
C) the bargain element of the ISO is an AMT preference item The only true statement here is that the bargain element (the difference between the current market price at the time of exercise and the strike price) of the ISO (but not the NQSO) is one of the preference items for the alternative minimum tax. It is the bargain element of the NQSO that is reported as wages and it is possible, although difficult, to have long-term capital gains on both. Only the ISO has a maximum time limit and it is 10 years, not five.
One of the rights of being a common stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to vote is: A) the election date B) the ex-dividend date C) the record date D) the last day of the company's fiscal year
C) the record date The record date is a date announced by the company as the official date you must be an owner on the company's records in order to participate in the annual meeting and corporate election. A fact not tested is there is no standard regarding how far in advance of the voting date this should be other than it must be at least the normal settlement period, currently two business days.
Which of these is among the advantages of including preferred stock in an investor's portfolio? A) There is an opportunity for increased income if the issuer's profits increase B) The maturity date is likely shorter than that of debt securities offered by the same issuer C) The rate of return is likely to keep pace with inflation D) Dividends must be paid before any distribution to common stockholders
D) Dividends must be paid before any distribution to common stockholders Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income. Finally, unlike debt securities, preferred stock is not issued with a maturity date. Nothing has been borrowed so there is no future repayment date
Investing in emerging market stocks is least likely to expose your client to which of the following risks? A) Liquidity B) Political C) Currency D) Interest rate
D) 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 sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Unregistered stock acquired by a corporate affiliate in a stock option program B) Stock acquired by a corporate affiliate in a private placement C) Unregistered stock acquired by a nonaffiliate under an investment letter D) Stock acquired on the NYSE by a corporate affiliate
D) Stock acquired on the NYSE by a corporate affiliate The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.
An American depositary receipt (ADR) is: A) a document used with interest rate swaps B) a certificate representing ownership of a U.S. security that is deposited in a foreign bank C) a type of derivative used to speculate in foreign currencies D) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank
D) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank An American depositary receipt (ADR) is a certificate representing ownership of foreign securities that are on deposit at a U.S. bank. ADRs can be traded on U.S. stock exchanges, are quoted and pay in dividends in U.S. dollars, and receive all the shareholder protections of U.S. securities.
An investor in an equity security: A) has a say in the day-to-day operations of the business B) becomes a creditor of the company C) is assured of a minimum rate of return D) acquires an ownership interest in the company
D) acquires an ownership interest in the company Equity means ownership, and this is a characteristic shared by both common and preferred stock. Holders of debt securities are creditors, and there are no guarantees when it comes to returns on equity securities. Only common stockholders have voting rights, but even then, those rights don't deal with daily operations because the vote is generally used at the annual meeting to vote for members of the board of directors.
Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except: A) the holder of an ISO can recognize capital gain (loss) as a result of exercise and sale, whereas ordinary income (loss) is the result with an NSO B) ISOs may only be granted to employees, while NSOs may be given to virtually anyone C) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO D) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation
D) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees, while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.
Ownership in a corporation is evidenced by holding shares of the company's: A) warrants B) common stock only C) bonds with a first mortgage on the property D) common or preferred stock
D) common or preferred stock If you have equity in a corporation, it means you have an ownership interest. Equity securities (common and preferred stock) represent ownership in a corporation. A mortgage bond is a debt security, and a warrant gives the holder the right to acquire equity, but, in itself, is not equity.
Reasons why a corporation might issue a convertible preferred stock would include: A) tax savings to the issuer B) giving those shareholders the ability to convert into the issuer's bonds C) a lower cost to the issuer than would be incurred by the issuance of convertible bonds D) giving those shareholders an opportunity to participate in the future success of the company
D) giving those shareholders an opportunity to participate in the future success of the company The benefit of any convertible security, debt security, or preferred stock is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.
All of the following statements regarding incentive stock options (ISOs) are correct except: A) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain B) the exercise of ISOs does not create taxable income C) upon the exercise of an ISO, income for AMT purposes is created D) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise
D) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.
