Series 65: Unit 1 Exam

Which of the following statements about equity securities is not true? A. Preferred stock is an equity security while common stock is a hybrid. B. Preferred stock is usually nonvoting. C. Common stock is less sensitive to interest rate risk than preferred stock. D. Preferred stock pays a fixed dividend.

Preferred stock is an equity security while common stock is a hybrid Both common and preferred stock are equity securities. Common stock is never referred to as a hybrid; there are times when preferred stock is because of those features that are similar to a debt security. The dividend on preferred stock is fixed, and shares do not have voting rights. The price of a common share generally doesn't fluctuate with changes to interest rates in the same manner as that of preferred stock.

All of the following represent ownership in a corporation except A. common stock. B. convertible preferred stock. C. preferred stock. D. mortgage bonds.

Mortgage bonds Ownership in a corporation resides in its equity securities. All stock is equity, while all bonds are debt.

The residual right of common shareholders refers to their right to A. receive all announced dividends in accordance with the number of shares held. B. claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid. C. vote in elections for the board of directors and in other important business decisions, such as changes to the charter. D. examine the corporation's annual reports and other reports, and take legal action if irregularities are found.

Claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid The residual right of common shareholders refers to their position in the event of bankruptcy.

Which of the following statements regarding foreign investing is (are) true? 1. Foreign financial markets are more efficient than the U.S. market. 2. Most foreign investment entails foreign exchange or currency risk. 3. 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. 4. Foreign securities markets are more highly regulated than the U.S. market.

Most foreign investment entails foreign exchange or currency risk Foreign markets entail foreign exchange risk (currency risk). It's possible that the foreign market value of the investment increases while the value of that currency decreases against the U.S. currency. Most foreign markets are not more efficient than the U.S. market. The U.S. market is among the most highly regulated markets in the world. A 1.0 correlation offers no diversification.

One difference between common stock and preferred stock is that common stockholders A. have a priority claim on earnings. B. own equity in the company. C. have voting rights. D. receive dividends when declared by the board of directors.

Have voting rights It is rare to find a preferred stock with voting rights and even rarer to find a common stock without them. Both receive dividends when, and if, declared by the board of directors, and these dividends are usually paid quarterly. Both are equity securities, and preferred has the prior claim.

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. International investing offers diversification and potentially higher returns. D. An emerging market is a market in a highly developed foreign economy with stable political and social institutions.

An emerging market is a market in a highly developed foreign economy w/ stable political and social institutions Emerging markets are markets in lesser-developed countries. As a result, the political risk tends to be higher than with developed economies. Whether it is emerging or developed, a U.S.-based investor will always face currency risk, and all countries have some degree of country risk. A way to simplify things is to invest in ADRs rather than the foreign stock itself. International equity is a subclass of equities when allocating assets, and the addition of them tends to offer diversification and potentially higher returns because foreign markets are not necessarily correlated to the U.S. ones.

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

Information isn't 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 nonqualified stock options (NQSOs) is correct? A. The NQSO is taxable to the recipient at the time of grant to the extent of the difference between the fair market value of the stock and the grant price. B. The NQSO is taxable to the recipient at the time of exercise to the extent of the difference between the fair market value of the stock and the exercise price. C. The exercise of NQSOs does not create taxable income. D. Unlike incentive stock optio

The NQSO is taxable to the recipient at the time of exercise to the extent of the difference between the fair market value of the stock and the exercise price The bargain element of an NQSO is taxed to the recipient as salary income at the time the option is exercised. Neither of the employee stock options is publicly traded

All of the following statements regarding incentive stock options (ISOs) are correct except A. the exercise of ISOs does not create taxable income B. 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 D. if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-ter

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.

Investing in an emerging market mutual fund subjects the investor to all of the following risks except A. political instability. B. currency fluctuations. C. market volatility. D. liquidity.

Liquidity Although direct investment in emerging market securities would have liquidity risk, the benefit of doing so through a mutual fund is that, under federal regulations, the fund must redeem at NAV upon request.

Ownership in a corporation is evidenced by holding shares of the company's A. common or preferred stock. B. warrants. C. common stock only. D. bonds with a first mortgage on the property.

Common or preferred stock If you have equity in a corporation, it means you have an ownership interest. Equity securities (common and preferred stock) represent ownership in a corporation. A mortgage bond is a debt security, and a warrant gives the holder the right to acquire equity but, in itself, is not equity.

KAPCO common stock is listed on the New York Stock Exchange, Inc. (NYSE). If an executive vice president of the company buys 400 shares of the company's stock on the NYSE, she A. may sell under Rule 144 only after a six-month holding period. B. may sell immediately subject to Rule 144 volume limitations. C. may not sell until she leaves the company. D. may sell immediately without restriction.

May sell immediately subject to Rule 144 volume limitations If purchased in the open market, such as on the NYSE, the transaction is not a private placement, and the stock does not have a holding period restriction. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.

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. 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. B. there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. C. ISOs may only be granted to empl

The recipient of the grant of the ISO has no income tax consequences at the time of the grant Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees, while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the opt

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. Information regarding the foreign company is easily attainable. C. ADRs are denominated and pay dividends in U.S. dollars. D. They are not subject to exchange rate, or currency, risk.

They aren't subject to exchange rate, or currency, risk Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best-known companies typically trade on the NYSE or the Nasdaq stock market while lesser companies trade OTC.

The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 was a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend? A. $8 B. $16 C. $12 D. $6

$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.

An investor may expect to receive dividends from A. an ADR. B. a call option. C. a put option. D. a warrant.

An ADR An American depositary receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock; one must own the security itself to be entitled to the dividend.

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

Dividends must be paid before any distribution to common stockholders Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income. Finally, unlike debt securities, preferred stock is not issued with a maturity date. Nothing has been borrowed so there is no future repayment date.

The issuer of an ADR is A. a foreign branch of a foreign bank. B. the exchange on which the ADR is traded. C. a U.S. depositary bank. D. a domestic branch of a foreign bank.

a U.S. depositary bank The stocks of most foreign companies that trade in the U.S. markets are traded as American depositary receipts (ADRs). U.S. depositary banks (domestic branches of U.S. banks) issue these stocks. Each ADR represents one or more shares of foreign stock or a fraction of a share. If you own an ADR, you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR.

An ADR is used to A. reduce currency risk when investing in foreign securities. B. facilitate trading in foreign securities in U.S. markets by U.S. citizens living in the United States. C. finance foreign trade in which U.S. citizens are engaged. D. facilitate trading in U.S. securities in foreign markets by U.S. citizens living abroad.

facilitate trading in foreign securities in U.S. markets by U.S. citizens living in the United States American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors

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

$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).

Under Rule 144, which of the following sales are subject to volume limitations? 1. Control person selling registered stock held for one year 2. Control person selling restricted stock held for two year 3. Nonaffiliate selling registered stock held for one year 4. Nonaffiliate selling restricted stock held for two year

Control person selling registered stock held for one and two years Control persons are always subject to volume limitations.

For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are A. common. B. participating. C. cumulative. D. convertible.

Cumulative Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed, and regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock; do not make a silly error and choose common stock.

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

Interest rate Interest rate risk applies primarily to fixed income securities. Stock, unless it specifies preferred stock, are not normally considered to have interest rate risk. However, any foreign investment incurs currency risk and, when dealing with emerging markets, there is a higher degree of liquidity and political risk than with developed economies.

One characteristic found in equity securities issued by a corporation is A. a history of keeping pace with inflation. B. preemptive rights. C. limited liability. D. cumulative dividends.

Limited liability Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends.

When comparing restricted stock to nonrestricted stock, it is important to note that the restricted stock has a restriction placed upon its A. priority in liquidation. B. receipt of dividends. C. resale. D. voting rights.

Resale When a stock is restricted, the restriction applies solely to a time limit within which the stock cannot be sold. That restriction is found in Rule 144 of the Securities Act of 1933 and applies to unregistered or control stock.

In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable-rate preferred stock, changes in interest rates would be most likely to affect the market price of the A. common stock. B. adjustable-rate preferred stock. C. straight preferred stock. D. convertible preferred stock.

Straight preferred stock Fixed-income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable-rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.

A common stockholder's rights include all of the following except A. preemptive rights. B. the right to determine the par value of the stock. C. electing the board of directors. D. the receipt of dividends if declared by the board of directors.

The right to determine the par value of the stock Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders. Common stockholders are the owners of a corporation. This basic form of ownership entitles them to all of the privileges discussed here. It also allows them to transfer their ownership, inspect company records, vote on corporate objectives, and lay claim to any residual assets in the event of a liquidation.

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? 1. Registered securities held by a control person 2. Unregistered securities held by a noncontrol person 3. Registered securities held by a noncontrol person 4. Unregistered securities held by a control person

Unregistered securities held by a noncontrol and a control person The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.