Unit 1- Understanding products and their risks

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

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

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

A) when interest rates rise, so do the prices of preferred shares 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 United States Supreme Court decision that provided our current definition of a security is A) SEC v. Lorenzo B) SEC v. Howey C) Hawkins v. Florida D) County of San Francisco v. State of California

B) SEC v. Howey 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.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and missed in the 2 previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay? A) $24 B) $16 C) $8 D $0

A) $24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears. There are $16 due in back dividends for the 2 years missed, in addition to $8 this year, for a total of $24.

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) American depositary receipts (ADRs) B) Yen-based stocks C) Foreign depositary receipts D) Global stocks

A) American depositary receipts (ADRs) 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.

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 has control of 200 votes, which he can cast any way he likes among the two open seats. B) Jon has a right to freely transfer his shares. C) Jon has control of 200 votes, and he can cast up to 100 of those votes for each open seat. D) Jon owns 1/10000 of the Bayside Fishing Company.

A) Jon has control of 200 votes, which he can cast any way he likes among the two open seats. 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 else being equal, which of the following preferred would pay the highest dividend? A) Participating preferred B) Callable preferred C) Cumulative preferred D) Straight preferred

B) Callable preferred Callable preferred is a benefit to the issuer- not the investor- so callable has to pay higher dividend than the others because the other features are neutral or benefit the investor.

Which of these would most likely require shareholder approval? A) Declaring a dividend B) Changing the corporation's name C) Firing the CEO D) Hiring a new CFO

B) Changing the corporation's name 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.

An investor owns 3% preferred stock participating to 6%. This means the investor A) must receive a total of 9% in any year the board declares the 6% participating be paid B) could receive an additional 3% over the stated 3% dividend if the board declares it C) must receive at least 6% each year D) could receive an additional 6% over the stated 3% dividend

B) Could receive an additional 3% over the state 3% dividend if the board declares it If a preferred stock is describe as 3% preferred participating to 6%, the company pays its holders up to 3% in additional dividends in profitable years if the board of directors declares it.

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 IV B) I and II C) II and III D) III and IV

B) I and II 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.

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

B) I and III 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.

All of the following could be characterized as benefits to owning common stock except A) Income potential via the receipt of dividends B) Low dissolution priority C) Limited Liability D) Capital gains via increases in share price

B) Low dissolution priority Low dissolution priority refers to being paid last in the event of a corporate dissolution (bankruptcy). 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.

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

B) Trades are executed overseas in US dollars ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and traded throughout the day. Trades in these securities are $ denominated. ADRs trade and settle in the same fashion as a traditional US based common stock

All of the following are considered securities except A) 15 British pound put contracts. B) U.S. minted gold coins. C) common stock of XYZ corporation. D) Treasury bonds.

B) US minted gold coins Stocks, bonds and options are all examples of securities. Gold and gold coins are a commodity, not a security.

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) increase their proportionate ownership in the corporation. C) decrease their proportionate ownership in the corporation. D) maintain their proportionate ownership in the corporation.

B) increase their proportionate ownership in the corporation 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 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) penny stock rules apply to both solicited and unsolicited transactions. C) established customers of the firm need not sign a suitability statement. D) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document.

B) penny stock rules apply to both solicited and unsolicited transactions 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.

Which of the following preferred stocks' price would remain most stable in an environment of changing interest rates? A) Straight preferred B) Participating preferred C) Adjustable rate preferred D) Noncumulative preferred

C) Adjustable rate preferred Adjustable rate preferred dividend resets when interest rates change so the price remains stable.

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) the shares are no longer restricted, having been held fully paid for six months. C) any shares sold will be subject to volume restrictions if still an affiliate. D) 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 restriction if still an affiliate

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) Because she owns more shares, only Mrs. Smith is considered a control person. B) Neither Mr. or Mrs. Smith is considered a control person. C) Both Mr. and Mrs. Smith are considered control persons. D) Only Mr. Smith, as the initial shareholder, would be considered a control person.

C) Both Mr. and Mrs. Smith are considered control persons. 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%).

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) 900 votes he can divide anyway he wants among the three seats. B) 300 votes each for the open seats. C) no voting rights. D) 300 votes total to spread among the three open seats.

C) No voting rights Your customer owns preferred stock. Preferred stock carries no voting rights.

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

C) Shares can be sold or given away without the permission of the corporation. Shareholders have the right to sell of give away their shares without permission of the corporation

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) fixed and stated as a percentage of its current market value (CMV). D) 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) 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.

Purchasers of common stock may generally look to all of the following risks associated with that investment except A) interest rate risk. B) low priority. C) market risk. D) reduction in dividend payout.

C) market risk Investors in common stock face market risk, in that the market value of the security may fall, and business difficulties may lead to possible reduction or elimination of the dividend—and even bankruptcy leading to loss of principal. If the firm is bankrupted, a company's debt and preferred shares are considered senior securities and will have residual rights to corporate assets upon dissolution prior to common shareholders. Interest rate risk applies to preferred shares, bonds, and other fixed-income securities, but common stock generally bears little risk due to fluctuations in interest rates.

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) perform a stock split. B) suggest that existing shareholders go to the market and double their existing position. C) offer stock rights to existing shareholders. D) offer warrants to existing shareholders.

C) offer stock rights to existing shareholders 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.

Equity is to debt as A) stock is to mutual fund. B) hedge fund is to mutual fund. C) stock is to bond. D) stock is to preferred stock.

C) stock is to bond Stocks are the most common example of equities while bonds are the most common example of debt securities.

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

C) this is a 3.5% preferred class 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.

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) call. B) stock right. C) warrant. D) follow-on offering.

C) warrant 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.

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

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.

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

D) declared, increased, reduced or suspended by the board of directors (BOD) Common dividends may be declared, increased, reduced, or suspended at the discretion of the BOD. Shareholders have no vote on these dividend matters.

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

A) Rights are long term, warrants are short term 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.

Regarding the rights of a common stockholder, each of the following is true except A) stockholders may never be part of the management of the company. B) stockholders have the right to receive audited financial statements annually. C) stockholders can vote for those who will serve on the board of directors. D) stockholders have a limited right to examine the minutes of meetings held by the board of directors.

A) stockholders may never be part of the management of the company While stockholders have a voice in how the company is run, that voice is exercised through their vote for those who serve on the board of directors. Essentially, by electing a board of directors, stockholders have a say in the company's management but are not involved in the day-to-day details of its operations. However, there is no prohibition preventing a manager or director from owning stock in the company; their position is not directly related to their ownership of company stock.

Your client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of these are true about the position except A) they have the same voting rights as an owner of the common stock. B) they have the right to request the underlying common shares be issued to them directly. C) they will receive dividends in U.S. dollars. D) the security may be traded in U.S. markets.

A) they have the same voting rights as an owner of the common stock 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.

Another term for stocks and bonds is A) shares and units. B) voting and nonvoting. C) taxable and tax-free. D) equity and debt.

D) equity and debt Equity is a common term for securities that represent ownership interest like stocks. Bonds are the most common type of debt security.

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) $17.00. B) $4.00. C) $1.00. D) $20.00.

B) $4.00 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.

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) 2%. C) 10%. D) 6%.

B) 2% 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%.

Which of the following preferred stocks allows the issuer to pay the shareholders par and cease dividend payments following a stated period? A) Puttable B) Callable C) Adjustable D) Redeemable

B) Callable The issuer can pay off callable preferred at any time after the call protection period, and dividends will cease.

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) Generic Motors, Inc., 4 ¾% preferred stock B) Duratech common stock, an exciting new tech manufacturer C) Long Beach Electric, a utility D) BuyMore, Inc., a big-box retailer with a long history of healthy dividend payments

B) Duratech common stock, an exciting new tech manufacturer New, rapidly growing companies tend to pay little or no dividends. The others all sound like decent sources of dividend payments.

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 first- before debt holders and preferred shareholders are paid. B) During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debt-holders 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 debt holders are paid. D) During the dissolution of corporate assets, common shareholders will be paid if any funds are left after debt holders are paid but before preferred shareholders are paid.

B) During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debt-holders and preferred shareholders are paid. For common shareholders, having 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 debt holders and preferred shareholders are paid.

Which of the following preferred stocks price would remain most stable in an environment of changing interest rates? A) Straight Preferred B) Noncumulative preferred C) Adjustable rate preferred D) Participating preferred

C) Adjustable rate preferred Adjustable rate preferred dividend resets when interest rates change so the price remains stable.

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

C) a board of directors (BOD) elected by shareholders Most corporations are organized in such a way that their stockholders regularly vote for a elect individuals to a BOD to oversee company business operations

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

C) characteristics of both equity and debt securities 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).

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 due to the spousal exception. B) not file Form 144 because only owns 3% and is not a control person. C) file Form 144 because he is a control person. D) file Form 144 because he is a doctor.

C) file Form 144 because he is a control person 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.

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past 3 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) $2.50 B) $1.00 C) nothing D) $4.00

D) $4.00 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% x $100 par value = $4.00

Which of these securities would likely provide the greatest potential for capital appreciation? A) A convertible bond B) A preferred stock C) A U.S. Treasury STRIP D) A common stock

D) A common stock 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.

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

D) ADR 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.

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

D) ADR pricing is dollar-based and fluctuates throughout the day. 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.

All of these dates are declared by the board of directors of a corporation except the A) record date. B) payable date. C) declaration date. D) ex-dividend date.

D) Ex-dividend date The ex-dividend date is declared by the regulator that controls the trading location (exchange or OTC)

An American depositary receipt is a A) foreign security trading in U.S. markets. B) domestic security trading in foreign markets. C) domestic security representing a foreign security in U.S. markets. D) foreign security representing a domestic security in foreign markets.

D) foreign security representing a domestic security in foreign markets 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

Included under the term, equity security, would be A) debentures. B) equipment trust certificates. C) collateral trust certificates. D) participating preferred.

D) participating preferred 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.

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 OTC. C) the CBOE. D) the NYSE.

D) the NYSE 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.