Unit 1
Which of these securities would likely provide the greatest potential for capital appreciation? A) A common stock B) A preferred stock C) A convertible bond D) A U.S. Treasury STRIP
A Common stocks would be the most suitable for investors seeking capital appreciation (growth). Bonds and preferred stocks are better suited for conservative investors since each is primarily an income investment and has limited growth prospects.
Another term for stocks and bonds is A) equity and debt. B) shares and units. C) voting and nonvoting. D) taxable and tax-free.
A Equity is a common term for securities that represent ownership interest like stocks. Bonds are the most common type of debt security.
LMN Corporation has a $60 par, 4% preferred stock currently trading at $45 per share. Its annual dividend is A) $1.80. B) $2.40. C) $24.00. D) $4.00.
B 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.
How long must customer complaints be kept on file by the broker-dealer? A) As long as the firm is in business B) Four years C) Three years D) Two years
B The rule requires customer complaints to be kept on file for four years.
Which of the following is an example of an equity security? A) Equipment trust certificates B) Debentures C) Preferred shares D) Mortgage bonds
C Both common and preferred shares are equity securities. Each of the other choices represents a debt instrument.
Your client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of these are true about the position except A) the security may be traded in U.S. markets. B) they will receive dividends in U.S. dollars. C) they have the same voting rights as an owner of the common stock. D) they have the right to request the underlying common shares be issued to them directly.
C It is important to remember that American Depositary Receipts (ADR) are issued by a depositary bank and the bank is the registered owners of the shares. Depository banks are not required to pass voting proxies through to the ADR holders.
The United States Supreme Court decision that provided our current definition of a security is A) Hawkins v. Florida B) SEC v. Lorenzo C) SEC v. Howey D) County of San Francisco v. State of California
C The Howey decision (SEC v. Howey, 1946) gives us our current four-prong test, which defines what a security is. SEC v. Lorenzo is a recent case involving fraud. The other cases are made up.
An american depository receipt is a A) foreign security trading in U.S. markets. B) foreign security representing a domestic security in foreign markets. C) domestic security trading in foreign markets. D) domestic security representing a foreign security in U.S. markets.
D An ADR is a domestic security issued under U.S. law and registered with the SEC. It represents ownership in a non-U.S. security. It is used to ease ownership and trading of foreign securities in U.S. markets and for U.S. customers
Your customer, MJ, has a strong preference for investing in equity securities; however, she is hoping to increase the amount of current income her portfolio generates. Which of these is the least suitable for her? A) Duratech common stock, an exciting new tech manufacturer B) Long Beach Electric, a utility C) BuyMore, Inc., a big-box retailer with a long history of healthy dividend payments D) Generic Motors, Inc., 4 ¾% preferred stock
A New, rapidly growing companies tend to pay little or no dividends. The others all sound like decent sources of dividend payments
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) 25 shares B) 125 shares C) 100 shares D) 250 shares
A 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.
*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 online. B) by telephone or text message. C) by proxy delivered by mail. D) in person.
B 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.
Big Company, Inc., an NYSE listed manufacturer of large objects, has declared a 50-cent-per-share-dividend payable next month. Big Company also has options available for trade. The actual ex-dividend date will be declared by A) FINRA. B) the NYSE. C) the CBOE. D) the OTC.
B Ex-dividend dates are set by the market center where trades will likely take place. In the case of an NYSE listed stock, the New York Stock Exchange will determine the ex-date. The fact that Big Company, Inc., has listed options is not relevant to the question.
Mary owns 8% of Doyle Inc., a publically traded publishing company. She has recently married John, a doctor who owns 3% of Doyle. John wants to sell some of his shares to pay off the debt from the wedding and honeymoon. When he does so he will need to A) not file Form 144 because only owns 3% and is not a control person. B) not file Form 144 due to the spousal exception. C) file Form 144 because he is a control person. D) file Form 144 because he is a doctor.
C Because married couples aggregate their position, and collectively the Mary and John own 11% of the company, John is a control person and will need to file Form 144 to sell his shares of Doyle. There is no exception for spouses nor special requirements just for doctors.
Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) 6% B) 3% C) 1% D) 4%
C 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.
Squidco, Inc., is issuing 100 million dollars in 4 ½% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at $50 a share, anytime in the next 10 years. Squidco common is currently trading at $29.95 a share. This is an example of a A) follow-on offering. B) call. C) stock right. D) warrant.
D A warrant is normally issued attached to a fixed-income security to attract more interest in the debt issue. Warrants are generally longer term (five or more years) and have an exercise price that is higher than the current stock price.
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) take advantage of higher interest rates. C) call in the stock at less than par value and capture the difference as income. 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.
*The holders of which of the following securities are considered owners of the issuing corporation? Mortgage bonds Debentures Preferred stock Common stock A) I and II B) I and III C) II and IV D) III and IV
D 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.
Under Rule 144, which of these sales are subject to volume limitations on the number of shares sold? Control person selling registered stock held for 1 year Control person selling restricted stock held for 2 years Nonaffiliate selling registered stock held for 1 month Nonaffiliate selling restricted stock held for more than 6 months A) I and II B) I and IV C) II and III D) III and IV
A Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted, the volume limits for nonaffiliates end after 6 months. Registered shares have no Form 144 filing requirement.
Common shareholders have the right to A) no access to a company's books and records. B) limited access to a company's books and records. C) access a company's books and records with Securities and Exchange Commission (SEC) permission. D) full access to a company's books and records.
B 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).
An individual owning shares of a corporation's common stock would have all of the following rights except A) to vote when unable to be present at a shareholder meeting. B) to declare dividends. C) to vote for those who will serve on the board of directors (BOD). D) to review a list of stockholders.
B Common shareholders have a number of rights. While they may receive dividends, declaring dividends is a function of the BOD.
Regarding investment products, which of the following is true? A) Debt securities represent ownership in an issuing company. B) Equity securities represent ownership in an issuing company. C) Derivative securities represent ownership in an issuing company. D) Both derivatives and debt represent ownership in an issuing company.
B 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.
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) Both suitability and disclosure statements must be obtained. B) A disclosure statement is required, but not a suitability statement. C) A suitability statement is needed, but not a disclosure statement. D) No documentation is required.
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.
Preferred shareholders have A) preemptive rights only. B) no voting or preemptive rights. C) both voting and preemptive rights. D) voting rights only.
B 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.
*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 III C) II and III D) I and IV
B 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.
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) subject to volume restrictions within any 90-day period. C) at the discretion of the issuer's board of directors (BOD). D) completely unrestricted.
B 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
For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A) 300 votes each for the open seats. B) no voting rights. C) 900 votes he can divide anyway he wants among the three seats. D) 300 votes total to spread among the three open seats.
B Your customer owns preferred stock. Preferred stock carries no voting rights.
Jon owns 100 shares of the Bayside Fishing Company. Bayside has 1,000,000 shares outstanding and operates under a statutory voting system. At the next election for the board, there are two open seats. All of these are true except A) Jon owns 1/10000 of the Bayside Fishing Company. B) Jon has control of 200 votes, and he can cast up to 100 of those votes for each open seat. C) Jon has control of 200 votes, which he can cast any way he likes among the two open seats. D) Jon has a right to freely transfer his shares.
C Owners of common stock have a right to vote on several issues (including who sits on the board of directors and the right to transfer their ownership to another person). Jon's 100 shares is 1/10,000 (100/1,000,000) of the company. In a statutory voting system, an owner may vote once per share per open seat. In a cumulative voting system, the owner has a number of votes equal to the shares they own multiplied by the number of open seats, and may cast them any way they choose among the open seats.
All of the following statements regarding penny stocks are true except A) if an account holds penny stocks, broker/dealers must provide a monthly account statement to the customer. B) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document. C) penny stock rules apply to both solicited and unsolicited transactions. D) established customers of the firm need not sign a suitability statement.
C The special penny stock rules only apply to solicited transactions. Because of the greater perceived risk of investing in penny stocks, it is required that the penny stock disclosure document fully describing the risks associated with penny stock investments 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.
A customer investing in common equity securities could realize all of the following except A) potential hedge against inflation. B) potential capital appreciation. C) protection of principal investment. D) current income via dividend declarations.
C 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.
Which of these would most likely require shareholder approval? A) Declaring a dividend B) Hiring a new CFO C) Firing the CEO D) Changing the corporation's name
D Changing the corporation's name is a significant matter that will likely need shareholder approval. Declaring a dividend and the hiring and firing of senior executives is well within the board's power.
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 cannot take advantage of their insider status to gain access to shares for their own benefit. C) members may not withhold 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.
In 2011, RST Corp. had both common stock and $100 par value 4% noncumulative preferred stock, outstanding. The preferred stock, like the common stock, pays dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of A) $4.00. B) $17.00. C) $20.00. D) $1.00.
D In the case of a noncumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, which is always the case, it must pay the current preferred dividend prior to paying common. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00—an amount that must be paid before the quarterly common dividend can be paid.
*When a company wants to issue additional shares of stock, the preemptive right given to existing shareholders allows those shareholders to A) decrease their proportionate ownership in the corporation. B) increase their proportionate ownership in the corporation. C) pass on their proportionate ownership in the corporation to an heir. D) maintain their proportionate ownership in the corporation.
D 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.
American Liquidators Corporation (the ticker is LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to do this they must give their existing shareholders an opportunity to buy shares sufficient to maintain the shareholders percentage of ownership. In order to accomplish this they would A) suggest that existing shareholders go to the market and double their existing position. B) offer warrants to existing shareholders. C) perform a stock split. D) offer stock rights to existing shareholders.
D LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering. Warrants are long term and normally attached to a fixed-income offer. Neither the stock split nor investors buying in the market generates capital for the company.
Included under the term, equity security, would be A) equipment trust certificates. B) collateral trust certificates. C) debentures. D) participating preferred.
D Regardless of the adjective used, (e.g., participating, cumulative, convertible) if it is modifying a preferred stock, it is still an equity security. Each of the other choices represents a debt instrument.
*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.
Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares A) completely unrestricted. B) at the discretion of the issuer's board of directors (BOD). C) subject to the volume restrictions on any single day. D) subject to volume restrictions within any 90-day period.
D 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.
By purchasing shares of stock in a company, investors can benefit from which of the following? An increase in the price of the shares An increase in price of the company's debt securities An increase in the yield of the company's outstanding debt securities The receipt of profits to be distributed A) II and IV B) II and III C) I and III D) I and IV
D 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.
All of the following are considered securities except A) 15 British pound put contracts. B) common stock of XYZ corporation. C) Treasury bonds. D) U.S. minted gold coins.
D Stocks, bonds, and options are all examples of securities. Gold and gold coins are a commodity, not a security.
List the dates associated with dividend payment in their proper order. A) Declaration date, record date, ex-dividend date, pay date B) Declaration date, pay date, ex-dividend date, record date C) Record date, declaration date, ex-dividend date, pay date D) Declaration date, ex-dividend date, record date, pay date
D 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.
*An investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Convertible B) Straight C) Cumulative D) Callable
D 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.
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 not taxed because ADRs are tax-exempt securities. B) The profit is taxed as income in the United States only. C) The profit is taxed as income in France only. D) The profit is taxed as a capital gain in the United States only.
d 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.
Equity is to debt as A) stock is to bond. B) hedge fund is to mutual fund. C) stock is to preferred stock. D) stock is to mutual fund.
A Stocks are the most common example of equities while bonds are the most common example of debt securities.
Straight preferred shares are noncumulative. are cumulative. allow for missed dividends to be paid later. have no provision for paying missed dividends later. A) I and IV B) II and IV C) II and III D) I and III
A 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.
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 a fixed number of bonds issued by the corporation. C) for as many bonds as the issuer is willing to issue at that point in time. 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.
All of these dates are declared by the board of directors of a corporation except the A) ex-dividend date. B) declaration date. C) payable date. D) record date.
A The ex-dividend date is declared by the regulator that controls the trading location (exchange or OTC).
Transactions where the penny stock rules are applicable would be those that A) are solicited. B) are unsolicited. C) are neither solicited nor unsolicited transactions. D) are either solicited or unsolicited.
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.
All else being equal, which of the following preferred would pay the highest dividend? A) Cumulative preferred B) Callable preferred C) Straight preferred D) Participating 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.
