Series 65 QBank Questions

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) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. B) the holder of an ISO can recognize capital gain (loss) as a result of exercise, whereas ordinary income (loss) is the result with an NSO. C) the recipient of the grant of the ISO has no income tax consequences at the time of the grant. D) ISOs may only be granted to employees, while NSOs may be given to virtually anyone.

the recipient of the grant of the ISO has no income tax consequences at the time of the grant.

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) $8 B) $24 C) $0 D) $16

B) $24

The minimum face amount of a negotiable CD is A) $25,000. B) $50,000. C) $10,000. D) $100,000.

D) $100,000. Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are usually traded in blocks of $1 million or more. LO 2.k

All the following securities are issued at a discount except A) CDs. B) zero-coupon bonds. C) commercial paper. D) Treasury bills.

A) CDs. CDs are interest-bearing debt instruments issued by banks at their face value. All of the others are issued at a discount. In truth, only about 85% of commercial paper is, but that's good enough for NASAA. LO 2.k

With respect to safety of principal, of the following investments, the least risky is A) common stock. B) equity options. C) exchange-listed warrants. D) corporate AA debentures.

D) corporate AA debentures. The least risky investment listed is the corporate debenture because, as a debt instrument, it has priority over the others. LO 2.b

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.

Rule 144 applies to the sale of all of the following except A) registered securities by an officer of the issuer. B) unregistered securities by an officer of the issuer. C) unregistered securities by a nonaffiliated shareholder of the issuer. D) registered securities by a nonaffiliated shareholder of the issuer.

registered securities by a nonaffiliated shareholder of the issuer.

The call feature available on some bonds A) allows the issuer to refinance the debt if interest rates rise above the call rate. B) allows bond issuers to extend the life of the bond. C) may be used to convert the bond into preferred shares. D) allows the issuer the option to escape high interest rates if market rates decline.

D) allows the issuer the option to escape high interest rates if market rates decline. Many bonds have a call feature that allows the issuer to call in the bonds, assuming the issuer has the cash available to pay them off, and escape high interest rates if market interest rates decline. If the company does not have the cash, it may issue a new bond at the lower prevailing interest rate and use that money to pay off the old bonds. This is known as refunding and, in essence, is no different from refinancing the mortgage on a home. LO 2.j

The net asset value of an international bond fund can be expected to increase if which of these occur? Interest rates rise abroad. Interest rates fall abroad. The U.S. dollar strengthens. The U.S. dollar weakens. A) II and IV B) I and IV C) II and III D) I and III

A) II and IV If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. If the U.S. dollar weakens, the value of other currencies will rise. This would also increase the NAV for a portfolio of international bonds. LO 2.i

When discussing convertible debt securities, it would be incorrect to state that A) holders receive a higher interest rate. B) holders may share in the growth of the common stock. C) holders have a fixed interest rate. D) the issuer pays a lower interest rate.

A) holders receive a higher interest rate. Because of the possibility of participating in the growth of the common stock through an increase in the market price of the common, the convertible can be issued with a lower interest rate. LO 2.j

Which of the following statements regarding a zero-coupon corporate bond is true? A) Bonds selling at a premium have a yield lower than the coupon rate. B) The investor has phantom income, which must be reported on an annual basis. C) The investor reports the difference between the purchase price and maturity value as ordinary income at maturity. D) These bonds have higher reinvestment risk as to interest than bonds paying semiannual interest.

B) The investor has phantom income, which must be reported on an annual basis. On a taxable zero-coupon bond, the annual imputed interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Zero-coupon bonds always sell at a discount from their maturity value—never at a premium—and one risk that zero-coupon bonds avoid is reinvestment risk because there are no interest payments to reinvest. LO 2.j

A new client is looking for a recommendation. The client is 72 years old, has sufficient income from Social Security, and has a pension plan to cover all of her living expenses. She has just inherited $100,000. She wants to invest this money to have a bit more income so she can spoil her grandchildren. Which of the following would be antipodal to her wishes? A) Jumbo CDs B) Treasury STRIPS C) Public utility stock D) Treasury bonds

B) Treasury STRIPS If she wants additional income, she cannot get that from Treasury STRIPS. They are zero-coupon bonds and pay nothing until maturity.

An unsecured long-term debt security issued by a corporation is known as A) a collateral trust bond. B) a debenture. C) an equipment trust certificate. D) a mortgage bond.

B) a debenture. A debenture is a long-term debt security issued by a corporation with no specific asset pledged as security for the loan. LO 2.g

The DERP Corporation has an outstanding convertible bond issue that is convertible into eight shares of stock. If the current market price of the bond is 80, the parity price of the stock is A) $125 per share. B) $64 per share. C) $100 per share. D) $80 per share.

C) $100 per share. Parity means equal. With a conversion ratio of eight shares per bond, the investor can convert the bond into eight shares. If the bond is currently selling for $800, then, to be of equal value (parity), the eight shares must be selling at $100 each. LO 2.d

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 $20 per share as if it were salary. B) is taxed on $30 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.

The DERP Corporation has an outstanding convertible bond issue that is convertible into eight shares of stock. If the current market price of the bond is 80, the parity price of the stock is A) $64 per share. B) $80 per share. C) $125 per share. D) $100 per share.

D) $100 per share. Parity means equal. With a conversion ratio of eight shares per bond, the investor can convert the bond into eight shares. If the bond is currently selling for $800, then, to be of equal value (parity), the eight shares must be selling at $100 each.

All of the following statements regarding bonds selling at a discount are correct except A) they can indicate that the issuer's credit rating has fallen. B) they can indicate that interest rates have risen. C) they will appreciate more than comparable bonds selling at a premium if interest rates fall. D) they are more likely to be called than comparable bonds selling at a premium.

D) they are more likely to be called than comparable bonds selling at a premium. Issuers tend to call bonds with higher coupons. Bonds trading at a premium have higher coupons than those trading at a discount (and are more likely to be called—wouldn't you pay off your high-interest debt before the low-interest debt?). The longer the duration, the more volatile the bond's price. Lower coupon rates mean a longer duration. If rates rise, prices fall. If a bond's rating falls, so does its price. LO 2.j

An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,027.81. B) $1,020.25. C) $102.25. D) $1,022.50.

A) $1,027.81. Treasury notes are quoted in 32nds, where each 32nd equals $0.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81, bringing the total to $1,027.81.

An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is A) $325.00. B) $32.50. C) $282.50. D) $28.25.

A) $325.00. The first step is remembering that Treasuries are quoted in 32nds. That means that 102.20 is 102 and 20/32 which is 102 5/8. Subtract 99 3/8 from 102 5/8 to get 3 2/8 or 3 1/4. On a $1,000 bond, that is $32.50. Then, note that this investor is purchasing 10 bonds, so the difference in price is $32.50 times 10 or $325. LO 2.c

The board of directors of DDC omitted dividends in 2020 on their $100 par 6% noncumulative preferred stock. In 2021, a $2 preferred dividend was paid. For DDC, 2022 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2022 in order to pay a common dividend? A) $6 B) $8 C) $12 D) $16

A) $6 Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share. LO 1.c

A corporate bond that pays interest semiannually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%? A) $922.78 B) $1,051.23 C) $1,221.17 D) $1,144.31

A) $922.78 How did we calculate that? We used a tool that you won't have available at the test center (a financial calculator), but there is a great tool you will have—common sense. When a bond has a yield to maturity that is greater than its coupon rate, the bond must be selling at a discount, and that only leaves one possible answer. The only way to get a 10% return on an 8% bond is to buy it at a price below par. LO 2.e

Which of the following investments would provide the highest after-tax income to your client in the 35% federal income tax bracket? A) 8% debenture issued by the LMN Corporation B) 7% bond issued by Canadian Province M C) 5% general obligation municipal bond issued by State H D) 6% U.S. Treasury bond

A) 8% debenture issued by the LMN Corporation Only the State H bond is exempt from federal income tax. Using the tax-equivalent yield formula of the muni coupon divided by (100% minus the investor's tax bracket %), we get 5% divided by 65%, or 7.7%. That's a better deal than receiving 6% on the Treasury and paying taxes as well as 7% on the Canadian bond (although you learned that securities issued by Canadian provinces were exempt from registration under the Uniform Securities Act, that has nothing to do with U.S. income taxes). However, with a TEY of 7.7%, your client would take home more with the 8% taxable corporate security. You can also work backward to get the correct answer. Simply subtract 35% tax from each of the choices (other than the muni) and see which is the highest. In this case, 8% minus a 35% tax equals 5.2%—just a bit higher than the 5% coupon on the municipal bond.

All the following securities are issued at a discount except A) CDs. B) zero-coupon bonds. C) Treasury bills. D) commercial paper.

A) CDs. CDs are interest-bearing debt instruments issued by banks at their face value. All of the others are issued at a discount. In truth, only about 85% of commercial paper is, but that's good enough for NASAA. LO 2.k

Which of the following is a direct obligation of the U.S. government? A) Ginnie Maes B) Fannie Maes C) Bank for cooperatives bonds D) Government bond mutual funds

A) Ginnie Maes Ginnie Maes are backed by the full faith and credit of the United States. Other agencies have a moral, but not direct, government backing. Government bond mutual funds are not backed by the U.S. government.

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? Business Currency Inflation Liquidity A) I and II B) III and IV C) I and IV D) II and III

A) I and II 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.

The interest from which of the following bonds is exempt from federal income tax? State of California bonds City of Anchorage bonds Treasury bonds GNMA bonds A) I and II B) III and IV C) I and III D) II and IV

A) I and II Municipal bonds are exempt from federal income tax. Treasury bonds are exempt from state tax but not federal tax. GNMAs are subject to federal, state, and local income tax.

Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA rated debentures at par. Which of the following statements regarding the outstanding 4% issue are true? The dollar price per bond will be higher than par. The dollar price per bond will be lower than par. The current yield on the issue will be higher than the coupon. The current yield on the issue will be lower than the coupon. A) II and III B) I and III C) II and IV D) I and IV

A) II and III Interest rates in general have risen since the issuance of the 4% bonds, so the bond's price will be discounted to produce a higher current yield on the bonds. Remember that as interest rates go up, the price of outstanding debt securities goes down. LO 2.e

Which of the following statements regarding foreign investing is (are) true? Foreign financial markets are more efficient than the U.S. market. Most foreign investment entails foreign exchange or currency risk. 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. Foreign securities markets are more highly regulated than the U.S. market. A) II only B) I and II C) I, II, III, and IV D) II and IV

A) II only

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.

Which of the following statements regarding preemptive rights is true? A) Preferred stockholders do not have the right to subscribe to a rights offering. B) Both common and preferred stockholders have the right to subscribe to a rights offering. C) Neither common nor preferred stockholders have the right to subscribe to a rights offering. D) Common stockholders do not have the right to subscribe to a rights offering.

A) 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.

Which type of risk is a mortgage-backed security most likely to experience? A) Reinvestment risk B) Business C) Market risk D) Exchange-rate risk

A) Reinvestment risk A mortgage-backed security, such as a Ginnie Mae, is most likely to experience reinvestment-rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower-yielding securities. This is the practical effect of prepayment risk. LO 2.f

On the initial public offering, an investor buys a $10,000 Aa-rated, 20-year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following statements is most likely true with reference to the current market price of this bond? A) The bond would be selling at a discount. B) The yield to maturity of this bond is above 4%. C) The bond would be selling at a premium. D) The bond would be selling at par value.

A) The bond would be selling at a discount. When interest rates go up, bond prices go down. Had interest rates remained the same, the slight improvement in rating would have probably caused the bond to sell at a very slight premium, but that rating increase is not nearly strong enough to offset a 25% increase in market interest rates. Because this bond would be selling at a discount, its YTM would be above 4%, but the question is asking about the current market price, not the yield. LO 2.e

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 an affiliate and Rule 144 applies. B) The spouse is not 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 does not apply.

A) 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. LO 1.e

A U.S. dollar-denominated bond that is sold outside the United States and the issuer's country but for which the principal and interest are stated and paid in U.S. dollars is best described as A) a Eurodollar bond. B) a Yankee bond. C) a eurobond. D) a Brady bond.

A) a Eurodollar bond. This is the definition of a Eurodollar bond. Yes, it is also a eurobond, but because the question specifies U.S. dollars, the more accurate choice is Eurodollar bond. A Yankee bond is U.S. dollar-denominated but is issued in the United States; Eurodollar bonds are not. Brady bonds are issued only by foreign governments, usually—but not always—are U.S. dollar-denominated, and are available for purchase in the United States. LO 2.i

The call feature available on some bonds A) allows the issuer the option to escape high interest rates if market rates decline. B) may be used to convert the bond into preferred shares. C) allows the issuer to refinance the debt if interest rates rise above the call rate. D) allows bond issuers to extend the life of the bond.

A) allows the issuer the option to escape high interest rates if market rates decline. Many bonds have a call feature that allows the issuer to call in the bonds, assuming the issuer has the cash available to pay them off, and escape high interest rates if market interest rates decline. If the company does not have the cash, it may issue a new bond at the lower prevailing interest rate and use that money to pay off the old bonds. This is known as refunding and, in essence, is no different from refinancing the mortgage on a home.

The current yield of a callable bond selling at a premium is calculated A) as a percentage of its market value. B) as a percentage of its call price. C) as a percentage of its par value. D) to its maturity date.

A) as a percentage of its market value. Current yield for any security is always computed on the basis of the current market value. LO 2.e

A bank is advertising a no-cost DDA. Your client asks you to describe what that is. You would respond that DDA stands for A) demand deposit account. B) deferred deposit account. C) direct deposit account. D) digital deposit account.

A) demand deposit account. In the banking industry, the most common definition of a DDA is demand deposit account, better known as a checking account. LO 2.k

An advantage of being a bondholder compared with owning common stock in the same corporation is that A) income payments are more reliable. B) the bondholder can select the optimum time to have the issuer redeem the bond. C) common stock has priority over the bond in the event of liquidation. D) there is limited liability.

A) income payments are more reliable. Even though bond interest is semiannual, while dividends are typically paid quarterly, the payment of interest is an obligation that comes ahead of the payment of any dividend. Companies can elect to skip or reduce their dividends but not their interest payments. LO 2.g

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) greater exposure. C) a proportionately decreased interest in the company. D) a proportionately increased interest in the company.

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.

A company that has issued cumulative preferred stock A) pays past and current preferred dividends before paying dividends on common stock. B) pays the preferred dividend before paying the coupons due on its outstanding bonds. C) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. D) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends.

A) 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. LO 1.b

A European corporation seeking a short-term loan would probably be most concerned about an increase to A) the SOFR. B) the eurobond rate. C) the Fed funds rate. D) the U.S. Treasury bill rate.

A) the SOFR. For more than 40 years, the London Interbank Offered Rate—commonly known as LIBOR—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages, and corporate debt. Over the last decade, LIBOR has been burdened by scandals and crises. Effective January 2022, LIBOR is no longer being used to issue new short-term loans in the U.S. It was replaced by the Secured Overnight Financing Rate (SOFR) which many experts consider a more accurate and more secure pricing benchmark. As is always the case with NASAA, we do not know when the exam questions will be updated. One thing we can promise you is that any question relating to this topic will not have both LIBOR and SOFR as choices, so you should choose whichever one appears. LO 2.k

A new convertible debt security has a provision that it cannot be called for five years after the issue date. This call protection is most valuable to a recent purchaser of the security if A) the market price of the underlying common stock is increasing. B) interest rates are rising. C) interest rates are falling. D) interest rates are stable.

A) the market price of the underlying common stock is increasing. Convertible debt securities are more sensitive to the price of the underlying common stock than they are to interest rates. Call protection would enable this investor to hold on to the debt security while the stock rises in value rather than having it called away. Although it is true that call protection protects against a potential call when interest rates decline, the protection against a call when the underlying stock is rising is considered to be more valuable. LO 2.j

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 record date. B) the election date. C) the last day of the company's fiscal year. D) the ex-dividend date.

A) the record date.

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 record date. B) the last day of the company's fiscal year. C) the ex-dividend date. D) the election date.

A) 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.

All of the following are true of government agency bonds except A) they are direct obligations of the U.S. government. B) older ones have coupons attached, while new ones are book-entry. C) they trade openly. D) they are considered relatively safe investments.

A) they are direct obligations of the U.S. government. The only government agency that is a direct obligation of the U.S. government is the Ginnie Mae security. All of the others are moral obligations. LO 2.f

A $1,000 bond with a nominal yield of 8% will pay how much interest each year? A) $40 B) $80 C) $800 D) $160

B) $80 The nominal yield (or coupon rate) is the interest rate stated on the bond and is the rate the bondholder promises to pay on the bond until the bond matures. A $1,000 bond with an 8% nominal yield will pay $80 per year in interest. LO 2.e

Corporate bonds are considered safer than common stock issued by the same company because A) the par value of bonds is generally higher than that of stock. B) bonds place the issuer under an obligation but stock does not. C) if there is a shortage of cash, dividends are paid before interest. D) bonds and similar fixed-rate securities are guaranteed by the FDIC.

B) bonds place the issuer under an obligation but stock does not. A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation. FDIC coverage is for bank deposits, not securities. LO 2.g

The longest initial maturity for U.S. T-bills is A) 13 weeks. B) 52 weeks. C) 39 weeks. D) 2 years.

B) 52 weeks. As money market instruments, the longest initial maturity of Treasury bills (T-bills) is 52 weeks. Those bills are auctioned every four weeks. T-bills of shorter maturities are auctioned weekly. The shortest initial maturity is four weeks. LO 2.f

Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity? A) 8.68% B) 8.50% C) 8.19% D) 9.36%

B) 8.50% No calculation is necessary here. Why not? Because anytime a bond is purchased at a premium over par (103½% is a premium), the YTM must be less than the nominal (coupon) rate. There is only one choice lower than 8.5%. It isn't about your computational skills; it is about your understanding of the relationship between prices and yields.

Which of these is among the advantages of including preferred stock in an investor's portfolio? A) The maturity date is likely shorter than that of debt securities offered by the same issuer. B) Dividends must be paid before any distribution to common stockholders. C) There is an opportunity for increased income if the issuer's profits increase. D) The rate of return is likely to keep pace with inflation.

B) Dividends must be paid before any distribution to common stockholders.

Which of the following have equity positions in a corporation? Common stockholders Preferred stockholders Convertible bondholders Mortgage bondholders A) I and III B) I and II C) III and IV D) II and IV

B) I and II Common and preferred stockholders have equity or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners. LO 1.a

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

B) I and III

Which of the following statements concerning international direct investing is correct? A) 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. B) Information is not as readily available on foreign investments as on domestic ones. C) Foreign markets are usually mature and offer no growth advantages. D) The rates of return on foreign securities are generally less than those available from U.S. markets.

B) Information is not as readily available on foreign investments as on domestic ones.

A bond with a par value of $1,000 and a coupon rate of 8% paid semiannually is currently selling for $1,150. The bond is callable in 10 years at $1,100. In the computation of the bond's yield to call, which of these would be a factor? A) Present value of $1,100 B) Interest payments of $40 C) Future value of $1,150 D) 60 payment periods

B) Interest payments of $40 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with an 8% coupon will make $40 semiannual interest payments. With a 10-year call, there are only 20 payment periods, not 60. The present value is $1,150 and the future value is $1,100, the reverse of the numbers indicated in the answer choices. LO 2.e

Investing in emerging market stocks is least likely to expose your client to which of the following risks? A) Currency B) Interest rate C) Political D) Liquidity

B) Interest rate

Your customer owns 1,000 shares of the XYZ $100 par 5½% callable convertible preferred stock convertible into four shares of XYZ common stock at $25. What should she be advised to do if the board of directors were to call all the preferred at 106 when the XYZ common stock is trading at $25.50? A) Place irrevocable instructions to convert the preferred stock into common stock and sell short the common stock immediately. B) Present the preferred stock for the call because the call price is $4 above the parity price. C) Convert her preferred stock into common stock because it is selling above parity. D) Hold the preferred stock to continue the 5½% yield.

B) Present the preferred stock for the call because the call price is $4 above the parity price.

An investor in an equity security A) has a say in the day-to-day operations of the business. B) acquires an ownership interest in the company. C) becomes a creditor of the company. D) is assured of a minimum rate of return.

B) 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. LO 1.a

An investor owns a debenture convertible into 20 shares of the issuer's common stock. After a 2-for-1 stock split, the terms of the debenture provide for conversion into 40 shares. This is because the debenture has A) increased its par value to $2,000 to account for the split. B) an antidilution clause. C) preemptive rights. D) warrants attached.

B) an antidilution clause. Most convertible securities are sold with antidilutive clauses that provide for an adjustment in the number of shares based on stock splits or stock dividends. LO 2.d

Your client in the 35% federal income tax bracket currently owns some corporate bonds with a coupon yield of 7%. In order to receive the same income after taxes, he would need to buy municipal bonds with a coupon of A) 9.45%. B) 2.45%. C) 7.00%. D) 4.55%.

D) 4.55%. Because the 7% on the corporate bond is fully taxable, the client receives a net of 4.55% ($70 per bond less 35% in taxes [$24.50], or $45.50 per year). Interest on municipal bonds is tax free, so a 4.55% coupon will result in the same amount of after-tax income. LO 2.h

Reasons why a corporation might issue a convertible preferred stock would include A) giving those shareholders the ability to convert into the issuer's bonds. B) giving those shareholders an opportunity to participate in the future success of the company. C) tax savings to the issuer. D) a lower cost to the issuer than would be incurred by the issuance of convertible bonds.

B) 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. LO 1.c

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 company must be current on its dividends to preferred stockholders. B) ownership must be established by the record date. C) the stock must be paid for in full before the annual meeting. D) the stockholder must be a natural person.

B) 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. LO 1.b

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) the customer has 300 votes times the number of directors being elected and can vote them in any manner desired. B) all unpaid dividend arrearage must be brought current before interest may be paid on NAR's subordinated debentures. C) all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock. D) the annual dividend is $5 per year.

C) all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock.

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) $15. B) $5. C) $10. D) $25.

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).

One year ago, ABC Widgets, Inc., funded an expansion to its manufacturing facilities by issuing a 20-year first mortgage bond. The bond is secured by the new building and land. The bond was issued with a 5.5% coupon and is currently rated Aa. The current market price of the bond is 105, resulting in a current yield of approximately A) 4.99%. B) 5.61%. C) 5.24%. D) 5.50%.

C) 5.24%. Corporate bonds are quoted as a percentage of the $1,000 par value. A market price of 105 is equal to $1,050 (105% × $1,000). Each $1,000, 5.5% bond pays $55 of interest annually ($1,000 × 5.5% = $55). Current yield equals the annual interest divided by the current price of $1,050. The calculation is $55 ÷ $1,050, which is equal to approximately 5.24%. Because the bond is at a premium, the current yield must be below the nominal yield, which removes two of the choices from consideration. LO 2.e

An investor in the 25% federal income tax bracket is considering the purchase of some fixed-income instruments. Which of the following would provide the investor with the greatest after-tax return? A) 5% U.S. Treasury bond B) 4.8% AAA rated insured municipal bond C) 7% Ba rated corporate bond D) 6% FDIC-insured CD

C) 7% Ba rated corporate bond The greatest after-tax return is provided by the instrument listed that, after subtracting 25% for income tax, leaves the investor with the greatest amount. Because the Treasury bond, the CD, and the corporate bond are all taxable at the same rate, the 7% bond must be the best deal. Even though the municipal bond is not taxed, its 4.8% net yield is far lower than the 5.25% ($70 − 25% tax) return on the corporate bond. LO 2.h

Which of the following statements regarding international investing is not correct? A) An international investor faces the additional risks of foreign currency risk and country risk. B) One method to engage in international investing is through American depositary receipts. C) An emerging market is a market in a highly developed foreign economy with stable political and social institutions. D) International investing offers diversification and potentially higher returns.

C) An emerging market is a market in a highly developed foreign economy with stable political and social institutions.

Which of the following is true of Ginnie Maes but not of other agency mortgage-backed securities? A) Collateralized by mortgages B) Are pass-through securities C) Backed by the full faith and credit of the U.S. government D) Yield more than T-bonds

C) Backed by the full faith and credit of the U.S. government Of the mortgage-backed government agency securities, only the Ginnie Maes are backed by the full faith and credit of the U.S. government. They are all collateralized by mortgages (the name MBS gives that away), and even the Ginnie Maes yield more than Treasury bonds. As an MBS, they all pass through the income and principal repayments to the investors. LO 2.f

Which of the following statements about zero-coupon bonds are true? Zero-coupon bonds are sold at a deep discount from face value. Zero-coupon bonds pay periodic interest payments. The owner of a zero-coupon bond receives his return only at maturity. A) II and III B) I and II C) I and III D) I, II, and III

C) I and III A zero-coupon bond is a type of debt security that pays no periodic interest payments. Instead, the investor receives his return only at maturity, when the bonds are redeemed. Zero-coupon bonds are sold at a deep discount from face value, but they are redeemed at full face value when they mature. LO 2.j

An investor purchased a bond with a 6% coupon rate exactly three months after its most recent interest payment. As a result, the buyer will pay $15 accrued interest. the buyer will receive $15 accrued interest. the seller will pay $15 accrued interest. the seller will receive $15 accrued interest. A) II and III B) II and IV C) I and IV D) I and III

C) I and IV First of all, a 6% bond pays $30 semiannually (half of $60 per year). Therefore, the accrued interest on this bond purchased halfway between interest payments is half of $30 or $15. That $15 dollars is added to the purchaser's cost and will be paid to the seller as it represents the interest the seller earned for holding the bond for three months. At the next interest payment date, the purchaser will receive the full $30 payment representing the accrued interest paid to the seller plus the interest earned for the three months the purchaser held the bond. LO 2.a

Which of the following are characteristics of commercial paper? Backed by money market deposits Negotiated maturities and yields Issued by insurance companies Not registered with the SEC A) III and IV B) I and III C) II and IV D) I and II

C) II and IV Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Most commercial paper is sold to institutions, and the borrower and lender negotiate the terms. Those terms include the interest rate (the yield because they're discounted) and whether these are overnight, 30-day, or longer maturities. Because commercial paper is issued with maturities of no more than 270 days, it is exempt from registration under the Securities Act of 1933. LO 2.k

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) ADRs are traded on exchanges and the OTC markets. B) ADRs are denominated and pay dividends in U.S. dollars. C) They are not subject to exchange rate, or currency, risk. D) Information regarding the foreign company is easily attainable.

C) They are not subject to exchange rate, or currency, risk.

As defined in the Securities Exchange Act of 1934, the term municipal security would include all of the following except A) a City of Atlanta, GA, public library bond. B) a State of Texas general obligation bond. C) an Illinois Tool Company debt issue backed by its full faith and credit. D) a New Jersey Turnpike revenue bond.

C) an Illinois Tool Company debt issue backed by its full faith and credit. The Illinois Tool Company is a corporation, even though it has a state in its name. Under federal law, municipal bonds are those issued by any domestic political body or subdivision from the state level on down. LO 2.h

When a corporation domiciled in the United Kingdom issues U.S. dollar-denominated bonds in the United States, it is issuing A) Yankee bonds. B) Ameribonds. C) eurobonds. D) ADRs.

C) eurobonds. Yankee bonds are foreign bonds, denominated in U.S. dollars and issued in the United States by foreign banks and corporations. ADRs are issued in the United States by domestic banks and represent receipts for securities traded on foreign exchanges. Eurobonds are issued by a borrower in a foreign country, denominated in a currency other than one native to the issuer's country. Yankee bonds are a form of eurobond, but that is not the best answer to this specific question. LO 2.i

For a bond selling at a discount, the yield to maturity will be A) lower than the nominal yield. B) equal to the nominal yield. C) higher than the nominal yield. D) higher than the yield to call.

C) higher than the nominal yield. Yield to maturity is a measure of the total return on a long-term bond, including capital appreciation and interest, while nominal yield measures the interest rate stated on the face of the bond. An investor who buys a $1,000 bond at a discount (for less than $1,000) will receive the interest payments on the bond at the nominal rate and will still receive $1,000 for the bond when it matures. As a result, the total return will be higher than the nominal yield. When a bond is selling at a discount, the YTC will always be higher than the YTM. LO 2.e

A client plans to purchase a home within the next three months and will require $100,000 for the down payment. The client has the money in her DDA and asks you for your recommendation as to the best place to put the money. Your recommendation would probably be for the client to A) move the money into a 1-year CD. B) purchase a GNMA for the monthly income. C) keep the money where it is. D) use the money to buy IPOs until the home is purchased.

C) keep the money where it is. DDA stands for demand deposit account, usually a checking account at a bank. Because this client cannot afford any risk to principal, and the bank account is covered by FDIC insurance, this is the most attractive option. The 1-year CD would offer more income, but there would likely be a penalty for early withdrawal. Even though the GNMA is directly backed by the U.S. government, it is subject to market fluctuation, a risk this client cannot take.

A client plans to purchase a home within the next three months and will require $100,000 for the down payment. The client has the money in her DDA and asks you for your recommendation as to the best place to put the money. Your recommendation would probably be for the client to A) purchase a GNMA for the monthly income. B) move the money into a 1-year CD. C) keep the money where it is. D) use the money to buy IPOs until the home is purchased.

C) keep the money where it is. DDA stands for demand deposit account, usually a checking account at a bank. Because this client cannot afford any risk to principal, and the bank account is covered by FDIC insurance, this is the most attractive option. The 1-year CD would offer more income, but there would likely be a penalty for early withdrawal. Even though the GNMA is directly backed by the U.S. government, it is subject to market fluctuation, a risk this client cannot take. LO 2.k

DERP Corporation's 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect the DERP common stock to be selling A) somewhat below $30 per share. B) somewhat above $30 per share. C) somewhat below $48 per share. D) somewhat above $48 per share.

C) somewhat below $48 per share. The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $1,200, the parity price of the stock would be $48. Because convertible securities generally sell at a slight premium over their parity price, the stock should have a current market value a bit less than $48 per share. LO 2.d

A bond's yield to maturity is A) determined by dividing the coupon rate by the bond's current market price. B) the annualized return of a bond if it is held to call date. C) the annualized return of a bond if it is held to maturity. D) set at issuance and printed on the face of the bond.

C) the annualized return of a bond if it is held to maturity. The yield to maturity is the annualized return of a bond if it is held to maturity. The computation reflects the internal rate of return and is frequently referred to as the market required rate of return for a debt security. The rate set at issuance and printed on the face of the bond is the nominal or coupon rate. Dividing the coupon rate by the current market price of the bond provides the current yield. The return of a bond if it is held to the call date is the YTC. LO 2.e

The bond document that states the issuer's obligation to pay the investor a specific rate of interest for the use of the funds as well as any collateral pledged as security for the loan and all other pertinent details might be referred to by all of these terms except A) the deed of trust. B) the indenture. C) the debenture. D) the bond contract.

C) the debenture. A debenture is an unsecured long-term debt security. Whether it is a debenture or a secured bond (such as a mortgage bond) there is, in essence, a contract between the borrower (the issuer) and the lender (the investor). The terms of the loan are expressed in a document known as the bond's indenture. The indenture (sometimes also referred to as the deed of trust) states the issuer's obligation to pay back a specific amount of money on a specific date. The indenture also states the issuer's obligation to pay the investor a specific rate of interest for the use of the funds as well as any collateral pledged as security for the loan and all other pertinent details.

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) 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) upon the exercise of an ISO, income for AMT purposes is created

C) 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. LO 1.d

An investor sells ten 5% bonds at a profit and buys another 10 bonds with a 5¼% coupon rate. The investor's yearly return will increase by A) $2.00 per bond. B) $1.50 per bond. C) $1.00 per bond. D) $2.50 per bond.

D) $2.50 per bond. The first bonds are 5% and pay $50 per year per bond. The new bonds are 5¼% and pay $52.50 per year per bond. A 5% coupon rate × $1,000 face value = $50 per year per bond; a 5¼% coupon rate × $1,000 face value = $52.50 per year per bond.

If a convertible bond is purchased at its $1,000 par value and is convertible at $83.33 per common share, what is the conversion ratio of common shares per bond? A) 1.2 shares for each bond B) 8 shares for each bond C) 2 shares for each bond D) 12 shares for each bond

D) 12 shares for each bond The conversion ratio is determined by dividing the par value of the bond, or $1,000, by its conversion price of $83.33 per common share. This results in a conversion ratio of 12 shares for each bond.

Your client in the 35% federal income tax bracket currently owns some corporate bonds with a coupon yield of 7%. In order to receive the same income after taxes, he would need to buy municipal bonds with a coupon of A) 7.00%. B) 9.45%. C) 2.45%. D) 4.55%.

D) 4.55%. Because the 7% on the corporate bond is fully taxable, the client receives a net of 4.55% ($70 per bond less 35% in taxes [$24.50], or $45.50 per year). Interest on municipal bonds is tax free, so a 4.55% coupon will result in the same amount of after-tax income. LO 2.h

Which of the following indicates a bond selling at a discount? A) 10% coupon yielding 9% B) 7% coupon yielding 6.5% C) 5% coupon yielding 5% D) 7% coupon yielding 7.5%

D) 7% coupon yielding 7.5% Whenever the yield is higher than the coupon, the bond is selling at a discount from the par value. When the question says "yielding," it is generally referring to the yield to maturity. However, whether referring to the YTM or the current yield, the answer here is the same: the yield is higher than the coupon. LO 2.e

The term Eurodollars refers to A) obsolete currency that was formerly backed by the gold standard. B) a worldwide currency system that is expected to someday replace existing currency systems. C) European currency held in U.S. banks. D) American dollars held by banks in other countries, especially in Europe.

D) American dollars held by banks in other countries, especially in Europe. American dollars held in international banks, especially—but not exclusively—in Europe, are known as Eurodollars. LO 2.i

An investor is analyzing various risks related to corporate and government bonds. She is interested in finding a risk that is more specific to corporate bonds than to government bonds. Which of the following options correctly defines that risk? A) Liquidity risk B) Purchasing power risk C) Interest rate risk D) Default risk

D) Default risk Default risk is avoided with U.S. government bonds. There is no chance (at least for test purposes) that timely payment of interest and principal will not be made on them. All bonds have interest rate and purchasing power risk. Although it is true that government bonds are generally more liquid than corporate bonds, many corporate bonds are exchange listed. That ensures good liquidity. More important is the test-taking skill. If you have to choose between lack of credit risk and lack of liquidity, it should be clear where the government bond comes out ahead. LO 2.g

Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues? A) Market risk B) Credit risk C) Business risk D) Exchange rate risk

D) 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.

Securities issued by which of the following agencies offer direct government backing? A) Federal Home Loan Mortgage Corporation (Freddie Mac) B) Federal National Mortgage Association C) Federal Intermediate Credit Bank D) Government National Mortgage Association

D) Government National Mortgage Association FNMA, FHLMC, and FICB are considered GSEs (government-sponsored enterprises), and although their securities are quite safe, they do not have the direct backing of the Treasury. It is important to remember for the exam that the only security without the word Treasury in its name that is backed by the U.S. government is a GNMA.

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? Business Currency Inflation Liquidity A) I and IV B) II and III C) III and IV D) I and II

D) I and II

Which of the following statements regarding ADRs are true? The securities are vehicles used to facilitate U.S. trading of foreign securities. Dividends are received in the foreign currency. Holders have foreign currency risk. The receipts are issued by a foreign branch of a domestic bank. A) II and IV B) I, II, and III C) I, III, and IV D) I and III

D) I and III

When an income-oriented investor wishes to compute the current yield of a specific investment, which one of these items would not be considered? A) Dividends paid B) Interest coupon C) Current market price D) Net present value

D) Net present value The current yield of any investment is the income return (dividends on equity; interest on debt) divided by the current market price. The NPV is a tool that evaluates the reasonableness of the price of an investment. LO 2.e

A money market mutual fund would be least likely to invest in which of the following assets? A) Jumbo CDs B) Newly issued ​U.S. Treasury bills C) Repurchase agreements D) Newly issued ​U.S. Treasury notes

D) Newly issued ​U.S. Treasury notes A money market mutual fund typically invests in money market instruments—those with a maturity date not exceeding 397 days. Treasury notes are issued with maturity dates of 2-10 years. LO 2.k

Which of the following statements best describes cumulative preferred stock? A) Owners lose any claim to dividends that are not paid in any one year. B) Owners are allowed to vote for directors using the cumulative voting procedures. C) Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend. D) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.

D) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.

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.

DERP Corporation has issued 5% convertible debentures maturing in 2040. The conversion price is $40 and the common is currently trading at $48 per share. One would expect the DERP debentures to be selling somewhat A) below $1,000. B) above $1,000. C) below $1,200. D) above $1,200.

D) above $1,200. The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $48 per share, the parity price of the convertible would be $1,200 (25 × $48). Because convertible securities generally sell at a slight premium over their parity price, the debentures should have a current market value a bit higher than $1,200. LO 2.d

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock will benefit by converting if the price of the common stock is A) above $18.20 per share. B) above $20.00 per share. C) below $22.00 per share. D) above $22.00 per share.

D) above $22.00 per share. With a conversion price of $20 and a par value of $60, this preferred stock is convertible into three shares of the company's common stock. We divide the current price of the preferred ($66) by the three shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace. LO 2.d

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) the annual dividend is $5 per year. B) the customer has 300 votes times the number of directors being elected and can vote them in any manner desired. C) all unpaid dividend arrearage must be brought current before interest may be paid on NAR's subordinated debentures. D) all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock.

D) 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) preemptive rights. C) voting trust certificates. D) employee stock options.

D) employee stock options.

Money market investments consistently fulfill all these roles within a client's portfolio except A) serve as an alternative to bonds and equities in a multi-asset class portfolio to lower the overall volatility. B) earn higher returns than cash. C) serve as a short-term home for cash balances. D) outperform the stock market.

D) outperform the stock market. Money market investments can fulfill a number of roles within a client's portfolio, including short-term allocation for cash balances; serving as an alternative to bonds and equities in a multi-asset class portfolio to lower the overall volatility of the portfolio; and serving as part of the asset allocation strategy to get higher returns than they would receive on cash. LO 2.k

Rule 144 applies to the sale of all of the following except A) unregistered securities by a nonaffiliated shareholder of the issuer. B) registered securities by an officer of the issuer. C) unregistered securities by an officer of the issuer. D) registered securities by a nonaffiliated shareholder of the issuer.

D) 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.