Chapter One Test Questions
John Trask, one of your customers, is long 100 shares of Plantation, Inc. 6% cumulative preferred stock ($100 par). Over the last three years, Plantation, Inc. has had negative net income and Mr. Trask hasn't received any dividends during that time period. How much must Mr. Trask receive in dividend income this year before common stockholders can receive a cash dividend?
$2,400 Even though the stated dividend is 6%, the Board of Directors must still declare it. Without sufficient earnings for the previous three years, the dividend could not be paid and therefore no common dividends could be paid. Currently, there is $1,800 (6% x $100 par x 100 preferred shares x three years) of preferred dividends in arrears that must be paid to Mr. Trask before a dividend can be paid to common shareholders. Add the $600 that Mr. Trask would need to be paid for this year to the $1,800 from past years and $2,400 must be paid to him before a common dividend can be paid.
A convertible bond has a conversion price of $40 and is currently selling in the market at $950. The conversion ratio is:
25 To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($40). In this question, the conversion ratio is $25 ($1,000 ÷ $40). To calculate the conversion ratio, the market price of the bond is irrelevant.
When a bond is called, the bondholder receives the:
Call price plus accrued interest The bondholder receives the call price (either at par or at a premium) plus accrued interest earned up to the call date.
Which of the following investments is the MOST suitable for a person who is interested in aggressive growth?
Common stock Of the choices listed, common stock has historically provided the greatest potential for growth. Bonds and preferred stock are typically suitable for investors who are seeking income.
A brokerage firm purchases 600 shares of stock from a customer and places the securities into its inventory. In this case, the firm likely acted as a(n):
Dealer Why: When a broker-dealer buys a security from a customer by using its own funds and places the securities into its inventory, it has acted as a dealer (principal). In this situation, the customer is charged a markdown on the transaction. If the firm bought the security for a customer or sold a security to a customer without being the other side of the transaction, it would be acting as a broker (agent) and it would charge the customer a commission. An underwriter assists an issuer in raising capital in the primary market by purchasing the securities from the issuer and selling them to customers. The firm that controls trading on an exchange for a specific stock is referred to as a designated market maker (DMM).
Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds?
Decreasing interest rates Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds.
The purpose of a depository facility is to:
Hold securities in book-entry form The Depository Trust Corporation (DTC) is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) and its primary function is to hold securities in book-entry form. This allows broker-dealers to buy and sell securities on behalf of their customers without the costs and time associated with physical certificates. A change of ownership is made from the account of the selling broker-dealer to the account of the buying broker-dealer. The DTC is not a clearing facility.
Which of the following statements is NOT TRUE regarding the characteristics of options and warrants?
If options are exercised, a set price must be paid for the underlying security; if warrants are exercised, the securities are received at no additional cost. Both options and warrants have a strike price—if exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or preferred stock that investors can convert the security into the underlying stock with no additional payment of money. All other statements are true.
When purchasing Treasury notes, an investor should understand:
Interest is paid semi-annually Treasury notes and bonds pay interest semi-annually. Treasury securities are only issued in book entry form. Treasury Inflation Protected Securities (TIPS) are adjusted for inflation
A bond is selling at a premium. This indicates that:
Interest rates have decreased since the bond was issued The amount that the market price exceeds the par value is known as a premium. One reason for selling at a premium is a decrease in interest rates after the bonds were issued. When looking at the yields for premium bonds, the nominal yield is the highest, followed by the current yield, with the yield to maturity being the lowest yield of the three.
Which of the following regulates the resale of restricted securities?
Rule 144 Rule 144 and 144A regulate the process by which restricted (unregistered) securities may be resold. Regulation D sets the regulations for raising capital through private placements. Rule 147/147A establish the requirements for intrastate offerings. Rule 145 establishes the registration requirements for the reclassification of securities. (
Which of the following statements is NOT TRUE of industrial development revenue bonds?
Their credit rating is determined by an analysis of the municipal government issuing the bonds Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.
Which of the following statements is TRUE concerning electronic communication networks (ECNs)?
They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.
SIPC is a(n):
U.S. Government Ageny The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation that was created by an act of Congress in 1970. SIPC insures a customer's account for up to $500,000 in the event of a brokerage firm's failure. SIPC is not a government-sponsored agency or a regulatory body.
A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is:
$958.75 U.S. government bonds are quoted as a percentage of par with a fraction in 32nds of a point. Therefore, a T-bond quoted at 95.28 is equal to 95 28/32. By converting the fraction to a decimal, the quote becomes which is 95.875% of the par value of $1,000. $1,000 x 95.875% = $958.75.
A common shareholder is not entitled to:
Appoint officers of the corporation Shareholders have the right to vote for the board of directors, but not to appoint officers of the corporation. (74128)
Which of the following organizations enforces municipal securities regulations for broker-dealers?
FINRA Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: The SEC or FINRA for broker-dealers The comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC
Which of the following government agencies is NOT involved in the housing market?
Federal Home Loan Banks (FHLB) The Federal Home Loan Banks are not involved in the housing market. Instead, the FHLB provides liquidity to savings and loan institutions by lending them money if/when they are in need of funds.
Which of the following is controlled by the Federal Reserve Board (FRB)?
The discount rate
Which of the following securities trades in fractional units of 1/32 of a point?
Treasury bonds Corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and Treasury bonds trade in increments of 1/32 of a point. A convertible bond is a type of corporate bond.
