SIE 2.2 Understanding Product and their Risk

Which of the following preferred stocks' price would remain most stable in an environment of changing interest rates?

Adjustable rate preferred

A potential customer asks about investing in a German car maker. You find that the company's stock trades on an exchange in Germany and has ADRs. What is the easiest way for the U.S.-based customer to make this investment?

Purchase American depositary receipts for the company that trade in the U.S. markets

Past-due dividends on cumulative preferred shares

accumulate on the company's books until paid.

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be

adjustable rate.

Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate

after holding them for six months and freely thereafter.

Preferred shares have

characteristics of both equity and debt securities.

When shareholders owning participating preferred shares receive the additional participating amount, this was determined by

the board of directors (BOD).

For those owning preferred classes of stocks, priority of asset dissolution refers to

the order in which preferred shareholders are paid in the event of a bankruptcy liquidation.

Securities and Exchange Commission Rule 144 regulates

the sale of control and restricted securities.

Which of the following securities provides U.S. investors with a way to gain exposure to the common stock of a foreign issuer?

ADR

Which of the following statements is correct concerning the pricing of American depositary receipts (ADRs)?

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

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend?

Adjustable rate

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?

Both Mr. and Mrs. Smith are considered control persons.

An investor and his mother own 20% and 10%, respectively, of a corporation's outstanding shares, and the mother wants to sell all of her holdings. According to Rule 144, which of the following statements are true? She must file Form 144 to sell the shares. She does not have to file Form 144 to sell the shares. She is considered an affiliated person. She is not considered an affiliated person.

I She must file form 144 to sell the shares III She is considered an affiliated person

An investor who is an affiliate of XYZ Corporation holds shares of restricted XYZ stock. These shares have

a six-month holding period and are subject to volume limits for as long as the investor is an affiliate.

Different categories of preferred shares offered by an issuer

all have preference over the issuer's common shares.

All of the following are considered control persons (owning control stock) except

an unaffiliated shareholder owning 8% of the outstanding shares.

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

any shares sold will be subject to volume restrictions if still an affiliate.

An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor

can sell the shares unrestricted at any time.

A preferred shareholder's priority claim on assets is the preferred shareholder's priority standing over

common shareholders.

An investor owns 4% preferred stock participating to 6%. This means the investor

could receive an additional 2% over the stated 4% dividend if the board declares it.

An investor owns 3% preferred stock participating to 6%. This means the investor

could receive an additional 3% over the stated 3% dividend if the board declares it.

Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own

cumulative preferred stock.

The common stock of a U.S. corporation and an American depositary receipt (ADR) issued in the United States share all of the following types of risk except

currency risk.

MJS Corporation has called in its 6% preferred shares. Owners of these shares should expect that

dividend payments will cease on the call date.

As interest rates rise, prices of preferred stock will

fall.

A convertible feature for preferred shares allows the owner to exchange the shares

for a fixed number of shares of the issuing corporation's common stock.

The primary purpose of American depositary receipts (ADRs) is to facilitate the trading of

foreign stocks in U.S. markets.

An affiliate holding unregistered shares can sell under Rule 144

four times a year.

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell

immediately, subject to Rule 144 volume limitations.

The growth potential in the price of preferred shares is generally considered to be

less than that of the issuer's common shares.

The potential that inflation will devalue the fixed dividend income payments received by preferred shareholders is known as

purchasing power risk.

Restricted securities may not be sold until they have been held fully paid for

six months.

Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares

subject to volume restrictions within any 90-day period.

The rate on an adjustable preferred stock would most likely be indexed to

the Treasury bill (T-bill) rate.

A reason that a company based outside the United States may encourage the creation of American depositary receipts (ADRs) for their stock is

they offer easier access to U.S. investors.

If a preferred shareholder received a $3.50 annual dividend each year, it could be assumed that

this is a 3.5% preferred class.

Your customer would like to invest in the stock of a Japanese manufacturer. The company's stock trades on the Tokyo stock exchange. Which of the following would be the best way to invest for this U.S.-based investor?

Purchase American depositary receipts for the company that trade in the U.S. markets

Each of the following is considered a control person under Securities and Exchange Commission (SEC) Rule 144 except

those persons who own 5% or more of the total beneficial interest of a company's common stock.

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

$1.

LMN Corporation has a $60 par, 4% preferred stock currently trading at $45 per share. Its annual dividend is

$2.40.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the two previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first?

$24

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past three 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

$4.00.

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days?

1%

Rule 144 limits the amount of shares an affiliate of a company may sell to

1% of the shares outstanding or the average weekly volume of trading in the previous four weeks, whichever is greater.

Sierra Verde Coffee Company has 122 million shares of common stock outstanding. The last four weeks of trading volume are as follows: 1.2 million shares; 1 million shares; 1.1 million shares; and 900,000 shares. What is the volume limitation for an affiliate selling shares of the company over the next 90 days?

1.22 million

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

2%.

A nonaffiliated owns 3% of an issuer's common stock. This person will be considered a control person if a spouse owns

8% of the issuer's common stock.

Regarding preferred stock, which of the following is false?

A corporation issuing common shares must issue at least one class of preferred shares.

Which of the following statements about American depositary receipts (ADRs) is not correct?

ADRs normally trade on foreign exchanges.

All of the following are advantages of using American depositary receipts (ADR) when investing in the stock of a foreign corporation except

ADRs provide a hedge against currency risk.

An investor would expect which type of preferred stock to pay the highest stated dividend rate?

Callable

Which of the following preferred stocks allows the issuer to pay the shareholders par and cease dividend payments following a stated period?

Callable

All else being equal, which of the following preferred would pay the highest dividend?

Callable preferred

Which of the following securities is the underlying asset used to create an American depositary receipt (ADR)?

Common shares

Which of the following features of preferred stock allows the holder to reduce the risk of inflation?

Convertible

Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares?

Convertible

Which of the following statements is correct concerning currency risk when investing in an American depositary receipt (ADR)?

Currency risk is still a factor when purchasing an ADR.

What is the primary benefit for an American investor when purchasing an American depositary receipt (ADR)?

Diversification

Why would a foreign corporation want to see American depositary receipts issued for its common stock?

Easier access to U.S. capital markets

Rule 144 imposes volume limitations on the number of shares that can be sold by control persons selling registered stock held for one year. control persons selling restricted stock held for two years. nonaffiliates selling registered stock held for one month. nonaffiliates selling restricted stock held for more than six months.

I Control persons selling registered stock held for one year II Control persons selling restricted stock held for two years

Straight preferred shares are noncumulative. are cumulative. allow for missed dividends to be paid later. have no provision for paying missed dividends later.

I are noncumulative IV have no problem provision for paying missed dividends later

Priority at dissolution for preferred shareholders means that they are paid before all creditors. after all creditors. before common shareholders. after common shareholders.

II after all creditors III before common shareholders

The holders of which of the following securities are considered owners of the issuing corporation? Mortgage bonds Debentures Preferred stock Common stock

III Preferred stock IV Common Stock

Owning an American depositary receipt (ADR) effectively eliminates which of the following risks?

Liquidity risk

For registered shares held by an affiliate (known as control stock), which of the following applies?

No holding period, but volume limits always apply

Which of the following is an example of an equity security?

Preferred shares

Which of these is an equity security?

Preferred stock

For restricted stock (unregistered) held by a nonaffiliated, which of the following applies?

Six-month holding period, with sales allowed freely thereafter

For restricted stock (unregistered) held by an affiliate (insider), which of the following applies?

Six-month holding period, with volume limits thereafter

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?

Stock acquired in the OTC market by a corporate affiliate

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?

Stock acquired on the NYSE by a corporate affiliate

MMS Corporation has 7% callable preferred shares outstanding. Over the past few years, benchmark interest rates have declined and hovered close to 3%. Which of the following is true?

The 7% shares are likely to be called.

Which of the following is true regarding taxation of dividends paid by American depositary receipts?

The dividends may be subject to withholding by the foreign government.

Your customer has owned a position in a London-based corporation's American depositary receipts (ADRs) for several years and has now sold them for a substantial profit. What are the tax implications of the sale?

The gains are subject to the capital gains tax as long-term capital gains.

Mr. Smith bought an American depositary receipt (ADR) in a French company at $13.03 and recently sold the shares for $24.88. How would this trading profit be taxed?

The profit is taxed as a capital gain in the United States only.

Which of the following rights are specific to holders of American depositary receipts and are not available to owners of domestic common stock?

The right to convert to the underlying asset

What rights do owners of American depositary receipts (ADRs) and owners of domestic common stock share?

The right to transfer the asset freely

What is the primary purpose of an issuer sponsoring an American depositary receipt (ADR)?

These securities are created to attract a U.S. investor base.

A customer purchases 100 American depositary receipts (ADRs) of a London-based company. When does the trade settle?

Two business days following the trade date

Your customer purchased 100 Foreign Motors, Limited, American depositary receipts (ADRs). The ADRs represent 100 shares of Foreign Motors, Limited, a London-based company. What is regular way settlement for this trade?

Two business days following the trade date

American Depositary Receipts (ADRs) for a French corporation would be denominated in which of the following currencies?

U.S. dollars

Regarding preferred stock, all of the following are true except

a corporation issuing common shares must issue at least one class of preferred shares.

Preferred shareholders have

no voting or preemptive rights.

When the board of directors (BOD) declares a dividend,

owners of preferred shares must be paid before any payment is made to common shareholders.

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at

par value or higher.

A preferred stock dividend is stated as a percentage of

par value.

A shareholder owns preferred shares that allow for the possibility of receiving more than the stated dividend. This type of preferred share would be known as

participating.

A company that has issued noncumulative preferred stock

pays current preferred dividends before paying dividends on common stock.

A corporation that has issued cumulative preferred stock

pays past and current preferred dividends before paying dividends on common stock.

The common stock of a U.S. corporation and an American depositary receipt (ADR) issued in the United States share significant exposure to all of the following types of risk except

political risk.

Callable preferred stock is advantageous to the issuing company because it allows the company to

replace a higher, fixed-rate issue with a lower issue after the call date.

Securities acquired through some means other than a registered public offering are known as

restricted.

Interest-rate sensitivity for preferred shareholders should be understood to mean that

when interest rates rise, the prices for preferred shares can fall.