1.8 American Depository Receipts

American Depositary Receipts Question ID: 24027 A holder of an ADR assumes all of the following risks EXCEPT: A) liquidity risk. B) foreign currency risk. C) market risk. D) political risk.

Answer: A An American Depository Share (ADR) represents an ownership interest in a foreign domiciled company. The shares trade on the New York Stock Exchange or in the OTC. The risk of lack of liquidity is absorbed by the presence of trading on U.S. exchanges or in the OTC market. The shares are subject to market risk, political risk, and foreign currency risk. Reference: 1.8 in the License Exam Manual.

American Depositary Receipts Question ID: 24030 An ADR is used to: A) sweeten a bond offering. B) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. C) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. D) finance foreign trade in which U.S. citizens are engaged.

Answer: B American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors. Reference: 1.8 in the License Exam Manual.

American Depositary Receipts Question ID: 24025 Which of the following taxes does NOT impact the holder of an ADR? A) Foreign income tax. B) Excise tax. C) Federal income tax. D) State income tax.

Answer: B Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investor's federal income tax return. Reference: 1.8 in the License Exam Manual.

American Depositary Receipts Question ID: 24026 The issuer of an ADR is a: A) foreign branch of a foreign bank. B) foreign branch of a domestic bank. C) domestic branch of a domestic bank. D) domestic branch of a foreign bank.

Answer: B The American Depositary Receipt (ADR) is issued by a foreign branch of a domestic bank. Everything is in English and in U.S. dollars. Reference: 1.8.1.1 in the License Exam Manual.

American Depositary Receipts Question ID: 24020 ADR owners have all the following rights EXCEPT: A) the right to receive dividends in U.S. dollars. B) the right to receive the underlying foreign security. C) the right to sell the ADR in the foreign market. D) the right to sell in the secondary market.

Answer: C The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas. Reference: 1.8.1.2 in the License Exam Manual.

American Depositary Receipts Question ID: 24028 Which of the following is an advantage of owning American depositary receipts? A) The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency. B) The investor has the right to vote at stockholders' meetings. C) The investor receives preemptive rights should the issuer make an additional stock offering. D) The investor avoids the currency risk that characterizes many foreign investments.

Answer: A ADRs permit an American investor to purchase, not stock, but a certificate of deposit for stock in a foreign company. The advantage is that the transactions are done in dollars, but the ADR itself does not carry a vote or stock rights, and subjects the owner to currency risk. Reference: 1.8.1.4 in the License Exam Manual.

American Depositary Receipts Question ID: 24021 All of the following are advantages of investing in American Depositary Receipts (ADRs) EXCEPT: A) ADRs fall under the oversight of the SEC. B) dividends are received in U.S. currency. C) transactions are done in U.S. currency. D) currency risk is virtually eliminated.

Answer: D ADRs carry currency risk because distributions on ADRs must be converted from foreign currency to U.S. dollars on the date of distribution. In addition, the trading price of the ADR is affected by foreign currency fluctuation. Reference: 1.8.1.3 in the License Exam Manual.

Dividends may be paid to holders of: A) American depositary receipts. B) rights. C) warrants. D) treasury stock.

Answer: A American depositary receipt (ADR) owners have most of the rights common stockholders normally hold. One of these includes the right to receive dividends when declared. Rights and warrants allow holders to purchase stock from a corporation and treasury stock is stock that has been issued by the corporation and then bought back. Neither rights, warrants or treasury stock holders have the right to receive dividends.

American Depositary Receipts Question ID: 24024 Which of the following statements regarding ADRs are TRUE? Dividends are payable in the underlying foreign currency. Dividends are payable in U.S. dollars. Holders have voting rights. Holders do not have voting rights. A) II and IV. B) I and III. C) I and IV. D) II and III.

Answer: A The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well. Reference: 1.8.1 in the License Exam Manual.

American Depositary Receipts Question ID: 24022 Which of the following statements regarding ADRs are TRUE? They are issued by large domestic commercial banks. They are issued by foreign banks. They facilitate U.S. trading in foreign securities. They facilitate a foreign investor who wants to trade U.S. securities. A) II and III. B) II and IV. C) I and III. D) I and IV.

Answer: C ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities. Reference: 1.8.1 in the License Exam Manual.

American Depositary Receipts Question ID: 24019 An ADR represents a: A) U.S. security trading in a foreign market. B) U.S. security trading in both the U.S. and a foreign market. C) foreign security trading in both the U.S. and a foreign market. D) foreign security trading in the U.S. market.

Answer: D ADRs are receipts issued by U.S. banks that represent ownership of a foreign security and are traded in U.S. securities markets. Reference: 1.8.1 in the License Exam Manual.

American Depositary Receipts Question ID: 24023 ADRs are used to facilitate the: A) foreign trading of domestic securities. B) foreign trading of U.S. government securities. C) domestic trading of U.S. government securities. D) domestic trading of foreign securities.

Answer: D 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. Reference: 1.8 in the License Exam Manual.

American Depositary Receipts Question ID: 196141 For U.S. investors holding American Depositary Receipts (ADRs), dividends received are: A) tax-free in the country of origin. B) tax-free in both the country of origin and in the U.S. C) taxed as a capital gain in the U.S. D) subject to a foreign withholding tax.

Answer: D Any tax taken on dividends received from ADRs is taken in the country of origin. This is a foreign withholding tax for U.S. investors. The foreign withholding tax may later be taken as a credit against any U.S. income taxes owed by the U.S. investor. Reference: 1.8.1.2.2 in the License Exam Manual.

American Depositary Receipts Question ID: 24029 Investors should always be aware of taxes applicable to investments they own. Which of the following taxes might be associated with income derived from ADRs but not income from other investments? A) Federal income tax. B) State income tax. C) Excise tax. D) Foreign income tax.

Answer: D In most countries, a withholding tax on dividends is taken at the source. To the holder of an ADR, this would be a foreign income tax. The foreign income tax paid may be taken as a credit against U.S. income taxes owed. Reference: 1.8.1.2 in the License Exam Manual.