Unit 1-3
An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of A) 5.6%. B) 7.4%. C) 7.8%. D) 4.5%.
A) 5.6%. Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 ÷ $900 = 5.6%). Years to maturity is not a factor in calculating current yield.
Of the following stocks, which would be defined as penny stocks? I: Nasdaq-listed stock trading at $4 per share II: Bulletin Board stock trading at $4 per share III: Exchange-listed stock trading at $4 per share IV: OTC Pink stock trading at $4 per share A) II and IV B) I and IV C) I and III D) II and III
A) II and IV A penny stock is a non-Nasdaq listed (therefore, Bulletin Board or OTC Pink) stock trading under $5 per share. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price.
Which of the following bonds trade flat (without interest) unless interest payments are declared by the board of directors (BOD)? A) Income bonds B) Mortgage bonds C) Debentures D) Callable bonds
A) Income bonds Bonds that trade flat (without interest), unless the payments are declared by the BOD, are income bonds (also known as adjustment bonds).
A corporation wanting to raise cash to finance accounts receivable and seasonal inventory needs is likely to issue any of the following except A) bonds. B) prime paper. C) commercial paper. D) promissory notes.
A) bonds. To raise cash for short-term needs, such as accommodating accounts receivable or inventory needs, corporations would issue commercial paper (also known as prime paper or promissory notes). Bonds should always be associated with long-term debt financing.
Which of the following preferred stocks allows the issuer to pay the shareholders par, and cease dividend payments following a stated period? A) Putt-able B) Callable C) Redeemable D) Adjustable
B) Callable The issuer can pay off callable preferred at any time after the call protection period, and dividends will cease.
Of the debt and equity holders listed here, in what order would claimants receive payment in the event that a corporate bankruptcy liquidation needed to occur? I: Holders of secured debt II: Holders of subordinated debentures III: General creditors IV: Preferred stockholders A) III, I, II, IV B) I, III, II, IV C) I, II, III, IV D) IV, I, II, III
B) I, III, II, IV In the event of a corporate bankruptcy liquidation, the order of payment is as follows: secured debtholders, unsecured debtholders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.
Rank the following in order of payment at the time of a corporate liquidation, from first to last. I: Secured debtholders II: Preferred stock III: Subordinated debentures IV: Debentures A) III, IV, II, I B) I, IV, III, II C) IV, III, I, II D) III, IV, I, II
B) I, IV, III, II When a corporation is liquidated, secured debt is paid first, then debentures and general creditors, followed by subordinated debt, preferred stock, and common stock last.
Regular way settlement for Treasury bonds is A) T+3. B) T+1. C) T+2. D) same day.
B) T+1. All U.S. government issues settle next business day (T+1).
When selling a bond, the issuer is taking A) a creditors position. B) an equity position. C) a borrower's position. D) a loaners position.
C) a borrower's position. Issuers of bonds are borrowing money from the purchaser of the bond.
What is the intrinsic value of an XYZ 30 call sold at a premium of 3 when the current market value of XYZ is at 40? A) -$10 B) -$7 C) $7 D) $10
D) $10 Intrinsic value is the amount that a contract is in the money. The premium of the contract is not a factor. All calls are in the money when the market value of the stock is above the strike price.
An investor is long a January 30 call at 2. Maximum loss for this position is A) $320. B) $30. C) $280. D) $200.
D) $200. For any long option (call or put), the maximum loss potential is the premium initially paid—in this case, 2 points ($200).
Which of the following shows Treasury bills, Treasury bonds, and Treasury notes listed in ascending order of maturity? A) Notes, bills, bonds B) Bills, bonds, notes C) Bonds, notes, bills D) Bills, notes, bonds
D) Bills, notes, bonds Treasury bills have a maturity of less than one year, Treasury notes mature in 1-10 years, and Treasury bonds mature in 10 years or more. Therefore, in ascending order, short-term to long-term, they are T-bills, T-notes, T-bonds.
When an issuer schedules portions of a bond issue's principal to mature at predetermined intervals over a period of years until the entire balance has been repaid, the issuer has issued what type of bond? A) Term B) Balloon C) Predetermined D) Serial
D) Serial A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire principal balance has been repaid.
Regular way settlement for Treasury bills is A) T+3. B) T+2. C) same day. D) T+1.
D) T+1. All U.S. government issues settle next business day (T+1).
T-bills are issued (auctioned) by the U.S. Treasury Department how often? A) Bimonthly B) Monthly C) Only when the U.S. Treasury Department deems it necessary D) Weekly
D) Weekly Treasury bills (T-bills) are issued (auctioned) by the U.S. Treasury weekly.
Regarding CDs and negotiable CDs issued by banks, A) both CDs and negotiable CDs are considered money market instruments. B) only CDs are considered money market instruments. C) neither CDs nor negotiable CDs are considered money market instruments. D) only negotiable CDs are considered money market instruments.
D) only negotiable CDs are considered money market instruments. Banks issue and guarantee CDs with fixed interest rates. Some that can be traded in the secondary market are known as negotiable CDs. Only these negotiable CDs are considered money market instruments.
A member firm is assigned an exercise notice by the Options Clearing Corporation (OCC). The member firm may assign the exercise notice to one of its short customers by any of the following methods except A) on a random-selection basis. B) to the customer having the oldest short position. C) in any way that is fair and reasonable. D) to the customer having the largest short position.
D) to the customer having the largest short position. While the OCC can assign exercise notices using only the random-selection basis, a member firm may use any method that is fair and reasonable. The two most common methods are first in, first out (FIFO) and random selection.
An investor is long 6 MAS February 60 calls at 2.25 each. If at the time of the February expiration, the calls expire unexercised, how much money will the investor lose? A) $225 B) $1,350 C) $6,225 D) $810
B) $1,350 Buyers of options (calls or puts) lose the premium paid if the options expire unexercised. The most this investor can lose is the number of contracts (six) multiplied by the amount of the premium received, $225. Therefore, this investor's maximum loss is $1,350.
An investor bought a put option and, in time, the underlying security declined below the strike price of the put. The put would probably A) not be exercised. B) be exercised. C) be worthless. D) decline in value.
B) be exercised. This is exactly what most put option buyers are looking for. They want the stock to go down. Because the market price of the stock declining would cause the option to be in the money, the investor would either exercise the option or sell it.
A penny stock is best described as A) an unlisted stock valued at less than $2 per share. B) an unlisted stock valued at less than $1 per share. C) an unlisted stock valued at less than $5 per share. D) an exchange-listed stock valued at less than $5 per share.
C) an unlisted stock valued at less than $5 per share. A penny stock is an unlisted (not listed on a U.S. stock exchange) security offered at less than $5 per share.
Automatic exercise will occur at expiration for any equity option contract that is in the money by at least A) 1/8 of a point. B) 1/4 of a point. C) 0.05. D) 0.01.
D) 0.01. Unless specific instructions are given by the customer not to do so, options contracts will be automatically exercised at expiration if they are in the money by at least 0.01.
Restricted securities may not be sold until they have been held fully paid for A) one year. B) one month. C) two years. D) six months.
D) six months. Restricted securities may not be sold until they have been held fully paid for a period of six months. This applies to both affiliates and nonaffiliates, but affiliates would be subject to volume restrictions.
The party who is short an option contract is known as A) the writer and receives the premium. B) the writer and pays the premium. C) the party with the right to exercise and pays the premium. D) the party with the right to exercise and receives the premium.
A) the writer and receives the premium. The party who is short an option contract is the seller of the contract. This party is known as the writer of the contract and receives the premium when the contract is sold. Buyers have the right to exercise—that is what they are paying the premium for—and when exercise occurs, the sellers of the contract are obligated to fulfill the terms of the contract.
For collateral trust bonds, all of the following are true except A) these are unsecured debt securities. B) a trust serves as a depository holding the securities to serve as collateral. C) securities backing the debt can be securities of either fully or partially owned subsidiaries. D) the issuer deposits securities it owns into a trust.
A) these are unsecured debt securities. For a collateral trust certificate, the issuer deposits securities of other corporations that it owns, or securities of fully or partially owned subsidiaries into a trust. The securities held in the trust are the collateral backing the certificates, and thus with this backing, the certificates are considered secured debt instruments.
An investor is short a January 30 call at 5. Maximum loss for the investor is A) unlimited. B) 5 points or $500. C) 25 points or $2,500. D) 50 points or $5,000.
A) unlimited. Maximum loss for a short call is unlimited. This could occur because the underlying stock can rise to some unlimited number.
The maximum loss on a long put is A) strike price - premium. B) the premium. C) the strike price. D) strike price + premium.
B) the premium. The maximum loss on any long option is the amount that was paid for the option (premium).
Commercial paper is A) secured debt with a maximum maturity of one year. B) unsecured debt with a maximum maturity of nine months. C) secured debt with a maximum maturity of nine months. D) unsecured debt with a maximum maturity of one year.
B) unsecured debt with a maximum maturity of nine months. Issued by corporations, commercial paper, also known as prime paper or promissory notes, are unsecured money market instruments with maximum maturities of 270 days (nine months).
All of the following terms and phrases are associated with the sell side of the contract except A) receives the premium. B) writes the contract. C) has an obligation. D) owns the contract.
D) owns the contract. The buyer of the contract pays the premium and loses it if the contract expires. The seller receives the premium and keeps it if the contract expires. The buyer has a right to exercise the contract. The seller has an obligation if the buyer decides to exercise. Buyer, holder, owner, and long all mean the same thing. Seller, short, and writer all mean the same thing.
Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own A)convertible preferred stock. B)straight preferred stock. C)callable preferred stock. D)cumulative preferred stock.
D)cumulative preferred stock. Cumulative preferred stock accrues payments due its shareholders that have been missed in the event dividends are reduced or suspended.
For options investors, which of the following are true? I: Buyers pay the premium for the right to exercise. II: Buyers pay the premium and incur an obligation to buy or sell. III: Sellers receive the premium and incur an obligation to buy or sell. IV: Sellers receive the premium for the right to exercise. A) I and III B) I and IV C) II and III D) II and IV
A) I and III Those who buy options contracts pay the premium for the right to exercise (buy or sell the underlying security). Those who sell the contract incur the obligation to either buy or sell the underlying to fulfill the buyers exercise.
Which of the following is the most junior security? A) Preferred stock B) Equipment trust certificates C) Collateral trust certificates D) Subordinate debentures
A) Preferred stock All of these are debt securities except preferred stock. All debt securities are senior to equity securities.
An investor has just received stock rights in the mail allowing the purchase of 250 shares of a stock offering at a discount. With these rights, the investor may take any of the following actions except A) sell the rights for a portion of their value. B) purchase 125 shares at double the discount. C) exercise some rights and sell the rest. D) sell some rights and let the rest expire unexercised.
B) purchase 125 shares at double the discount. Once an investor has received stock rights, the rights may be exercised in whole or in part, sold on the open market in whole or in part, allowed to expire in whole or in part, or some combination of these. The discount, however, stands as offered and may not be manipulated.
For registered shares held by an affiliate (known as control stock), which of the following applies? A) Six-month holding period, with sales allowed freely thereafter B) No holding period, but volume limits always apply C) No holding period or any volume restrictions D) Six-month holding period, with volume limits thereafter
B) No holding period, but volume limits always apply Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.
An investor sells short 1 MJS June 55 put at 2. The current market value of LMN is 56. The investor's maximum loss potential is A) $10,600. B) $5,425. C) $5,300. D) unlimited.
C) $5,300. Put sellers are bullish. Therefore, the maximum risk is if the stock falls to 0. The maximum potential loss, therefore, is the strike price less the premium received for the put (55 − 2 = 53). The maximum loss per contract is $5,300. The current market value of the stock at the time the put was sold short is of no consequence.
The buyer of a call has A) the right to sell the stock. B) the obligation to sell the stock. C) the right to buy the stock. D) the obligation to buy the stock.
C) the right to buy the stock. The buyer of the call has the right to buy the stock. The seller of the call has the obligation to sell the stock.
Listed option transactions settle A) trade date + 2 calendar days. B) trade date + 2 business days. C) trade date + 1 business day. D) trade date + 3 calendar days.
C) trade date + 1 business day. Listed options transaction settle on the next business day. Commonly referred to as T + 1 business day or simply T + 1.
The maximum loss on a short call is A) strike - premium. B) strike + premium. C) unlimited. D) the premium.
C) unlimited. An investor holding a short call begins to lose money as the stock price exceeds the strike price of the option. Because there is no limit to how high a stock price can go, the potential loss on a short call is unlimited.
Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary? A) Debenture B) Mortgage bond C) Equipment trust certificate D) Collateral trust bond
D) Collateral trust bond Collateral trust bonds are backed by a portfolio of other securities; mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment. Debentures are backed only by the company's promise to pay (good faith and credit).
All of the following may be callable except A) preferred stock. B) corporate bonds. C) muni bonds. D) common stock.
D) common stock. Fixed income and debt securities may have a call feature. Common stock does not.
The rate on an adjustable preferred stock would most likely be indexed to A) the Dow Jones Industrial Average (DJIA). B) the Producer Price Index (PPI). C) the Consumer Price Index (CPI). D) the Treasury bill (T-bill) rate.
D) the Treasury bill (T-bill) rate. The dividend on an adjustable-rate preferred stock is tied to a particular benchmark interest rate, and the Treasury bill rate is a common benchmark. The CPI, the PPI, and the DJIA are not interest rates.
A customer writes an MMM January 70 put at 6. The maximum potential gain on this position is A) $600. B) $760. C) $100. D) $300.
A) $600. The potential gain on any short (written) option position, call or put, is the premium received on the transaction.
The market price of a company's common stock could be affected by I. the company's earnings. II. changes in the business cycle. III. Federal Reserve Board (FRB) policies. IV. International conflicts. A) I, II, III, and IV B) II and III C) I and II D) I and III
A) I, II, III, and IV Obviously, the price of a company's common stock will be impacted by earnings, whether it is higher or lower than anticipated. Changes in the business cycle, as well as FRB policies, will also carry weight in the marketplace. In today's global economy, conflicts even on the other side of the world can affect stock market prices.
A call option reaches its expiration date and goes unexercised. This means I. the buyer gains the premium paid. II. the buyer loses the premium paid. III. the writer gains the premium received. IV. the writer loses the premium received. A) II and III B) I and III C) II and IV D) I and IV
A) II and III Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If the contract goes unexercised, the buyer loses the premium paid while the seller gets to keep it—a gain.
Which of the following option positions would offer a full hedge to a long stock position? A) Long put B) Short put C) Long call D) Short call
A) Long put The best way to hedge a long stock position is with a long put.
Being secured by no physical asset and backed only by a bank's good faith and credit, a bank's promise to pay principal and interest can be evidenced in which of the following securities that are traded in the secondary market? A) Negotiable CDs B) CDs C) Commercial paper D) Notes and bonds
A) Negotiable CDs A negotiable CD is an unsecured money market instrument issued by banks. Negotiable means that it can be traded in the secondary market and unsecured means that it is backed only by a promise to pay—a bank's good faith and credit.
Which of the following best describes the trade execution of American depository receipts (ADRs)? A) Trades are executed domestically in U.S. dollars. B) Trades are executed overseas in a foreign currency. C) Trades are executed domestically in a foreign currency. D) Trades are executed overseas in U.S dollars.
A) Trades are executed domestically in U.S. dollars. ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and trade throughout the day. Trades in these securities are dollar denominated. ADRs trade and settle in the same fashion as a traditional U.S.-based common stock.
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 A) adjustable rate. B) participating. C) convertible. D) callable.
A) adjustable rate. Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price.
All of the following are characteristics of 529 Savings Plans except A) contributions are federally tax deductible. B) withdrawals are tax free if used for qualified education expenses. C) contributions may be state deductible. D) contributions grow tax deferred.
A) contributions are federally tax deductible. Contributions of 529 Savings Plans are not federally tax deductible.
In order to meet federal budget needs, the types and quantity of government securities to be issued are determined by A) the U.S. Treasury Department. B) the chairman of the Federal Reserve Board. C) the U. S. president and Congress. D) the Federal Reserve Board (FRB).
A) the U.S. Treasury Department. It is the U.S. Treasury Department that determines the types and quantities of government securities to be issued each week in order to accommodate budgetary needs. At the time of issue, the Federal Reserve Board acts as the Treasury Departments agent.
A customer writes (sells) a call. This customer will realize the maximum gain if A) the option contract expires without being exercised. B) the customer is assigned on the contract. C) the price of the option contract rises. D) the price of the underlying stock rises.
A) the option contract expires without being exercised. Those who write options contracts realize the maximum gain if the contract goes unexercised at expiation. The maximum gain is the premium received. If the contract is not exercised by the owner, the writer keeps the premium. For calls, remember that as the underlying security rises in price, so will the price of the call contract; while good for the call owner, it is not good for the call writer.
A court has ordered a corporation to liquidate all assets under a federal bankruptcy proceeding. Which of the following is true? A) There is no priority for the payment of wages to employees. B) Debtholders are paid before stockholders. C) Common stockholders are paid before preferred stockholders. D) Preferred stockholders are paid before debtholders.
B) Debtholders are paid before stockholders. When a corporation is liquidated, employee wages and accrued taxes are paid first. These are followed by all debt instruments, which are to be followed by equity holders (stockholders). One of the preferences for preferred stockholders is that, in a liquidation, any preferred stock classes are paid before common stock. Secured creditors are paid first, followed by unsecured creditors (debentures) and general creditors (which includes taxes and wages), and then subordinated debentures. Equities follow debt with preferred shareholders paid before common shareholders.
A corporation is issuing a bond with an interest rate below that which is commonly being offered for this type of bond. To improve the bond's marketability without reducing the capital to be obtained, which of the following actions might the corporation take? A) Offer a stock dividend to the current shareholders B) Offer a warrant on the stock with each bond C) Offer the bond at a discount D) Conduct a rights offering for potential bond buyers
B) Offer a warrant on the stock with each bond Warrants are sometimes offered as sweeteners attached to bond issues to improve the marketability of bond. Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn't be able to raise the needed capital.
For restricted stock (unregistered) held by a nonaffiliated, which of the following applies? A) No holding period, but volume limits always apply B) Six-month holding period, with sales allowed freely thereafter C) Six-month holding period, with volume limits thereafter D) No holding period or any volume restrictions
B) Six-month holding period, with sales allowed freely thereafter For restricted stock (unregistered) held by a nonaffiliated, a six-month holding period before any sales can be made applies. After the holding period, sales can be made freely.
The U.S. federal government is the nation's A) smallest borrower and considered least safe credit risk. B) largest borrower and considered the best credit risk. C) largest borrower and therefore considered least safe credit risk. D) smallest borrower and therefore considered best credit risk.
B) largest borrower and considered the best credit risk. The federal government is the nation's largest borrower, as well as the best credit risk. Securities issued by the U.S. government are backed by its full faith and credit. There is no stronger backing than that of the U.S. federal government.
When a corporation issues a mortgage bond, the issue's total value A) is unrelated to the value of the real estate because it is an unsecured debt instrument. B) should be less than that of the real estate it is backed by. C) should be greater than that of the real estate it is backed by. D) must equal the value of the real estate by which it is backed.
B) should be less than that of the real estate it is backed by. Mortgage bond issues represent the amount the issuer is borrowing that is backed by its real estate assets. Just as with a home mortgage, the amount borrowed shouldn't exceed the value of the property. Hence, the issue's total value should be less than that of the real estate by which it is backed. Backed by real property, these are secured debt instruments.
An investor establishes the following position: Long 1 XYZ September 40 call at 2. Utilizing this position, the maximum potential gain for the investor is A) $38 per share. B) unlimited. C) $40 per share. D) $42 per share.
B) unlimited. Long calls are bullish positions. The investor wants to see the stock go up in price. The maximum gain on a long call is unlimited because, in theory, the underlying stock's price can go to infinity and is, therefore, also unlimited.
What is the primary purpose of an issuer sponsoring an American depository receipt (ADR)? A) These securities are created to provide tax relief for U.S. investors. B) These securities are created to facilitate foreign investment in U.S. companies. C) These securities are created to attract a U.S. investor base. D) These securities permit the issuer to avoid Securities and Exchange Commission (SEC) jurisdiction.
C) These securities are created to attract a U.S. investor base. ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR trades in the U.S and is denominated in U.S. currency making the process of buying a foreign stock much easier for an American investor. ADRs are subject to U.S. securities regulations.
An investor is short 1 December 15 put at 6. The investor's maximum loss on this position is A) $60. B) $1,500. C) $900. D) $2,100.
C) $900. A put writer's maximum loss is the put's strike price (15) less the premium received (6)—in this case, 9 points. Note that this is the same as the breakeven. This maximum loss occurs when the stock price drops to zero. The investor is forced to buy the worthless stock at the option's strike price of 15 and, therefore, has lost 15 points. The investor's total loss (15), however, is reduced by the premium (6) received, making the ML 9 points ($900).
An investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Straight B) Cumulative C) Callable D) Convertible
C) Callable With callable preferred stock, to compensate for the possibility that the shares may be called, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.
Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares? A) Adjustable rate B) Callable C) Convertible D) Participating
C) Convertible Convertible preferred shares can be converted into shares of the issuer's common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common.
What is the primary benefit for an American investor when purchasing an American depository receipt (ADR)? A) Hedging currency risk B) Tax-deferred dividends C) Diversification D) Exemption from U.S. taxation
C) Diversification ADRs are a type of equity security designed to simplify foreign investing for Americans. ADRs provide Americans with an easy way to invest in foreign companies that might otherwise be difficult or impossible to own. This overseas exposure provides investors with additional diversification within their portfolio.
A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true? A) Nominal yield is higher than either yield to maturity (YTM) or yield to call (YTC). B) Yield to call (YTC) is lower than yield to maturity (YTM). C) Yield to call (YTC) is the same as yield to maturity (YTM). D) Yield to call (YTC) is higher than yield to maturity (YTM).
C) Yield to call (YTC) is the same as yield to maturity (YTM). This bond was purchased at par. If a bond is trading at par, the nominal yield (coupon rate) = current yield (CY) = YTM = YTM. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.
When a company wants to issue additional shares of stock, the preemptive right given to existing shareholders allows those shareholders to A) increase their proportionate ownership in the corporation. B) decrease their proportionate ownership in the corporation. C) maintain their proportionate ownership in the corporation. D) pass on their proportionate ownership in the corporation to an heir.
C) maintain their proportionate ownership in the corporation. In the event a corporation wants to issue additional shares of stock, the preemptive right given to existing shareholders allows the shareholders to maintain their proportionate ownership in the corporation by purchasing shares before the shares are available to new investors.
Your customer has purchased an MJS October 35 call at 4. Their proof of ownership will be A) the executing broker-dealer's account records. B) the Options Clearing Corporation (OCC) issued certificate. C) the trade confirmation. D) the certificate issued by the underlying company (MJS).
C) the trade confirmation. Options are issued by the OCC and traded by investors without a physical certificate. The definitive proof of ownership is the trade confirmation—essentially, the document that confirms the purchase.
Which of the following securities is the underlying asset used to create an American depository receipt (ADR)? A) Preferred shares B) Warrants C) Bonds D) Common shares
D) Common shares ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares of a foreign issuer are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. Each ADR may represent one or more shares of foreign-company stock held on deposit.
For the following investors, which of the following is correctly ranked from lowest to highest in liquidation? A) Secured debt, debentures, subordinate debentures, preferred stock, common stock B) Debentures, secured debt, preferred stock, common stock, subordinated debt C) Preferred stock, debentures, subordinate debentures, secured debt, common stock D) Common stock, preferred stock, subordinate debentures, debentures, secured debt
D) Common stock, preferred stock, subordinate debentures, debentures, secured debt The normal priority from first to last is secured debt, debentures, subordinate debentures, preferred stock, common stock.
A certificate issued by a company granting its owner the right to purchase securities from the issuer at some specified price years into the future would best be described as A) a rights certificate. B) a call option. C) a proxy. D) a warrant.
D) a warrant. A rights certificate is a very short-term security that grants the holder the right to buy the common stock of the company at a price lower than the current market price. A warrant is a long-term security that grants its owner the right to purchase securities from the issuer at a specified price that is higher than the current market price at the time the warrants are issued and at some point, in the future. Note that while the exercise price is higher than the current market value when the warrants are issued, it is hoped that the exercise price will be below current market value when the warrants are eventually exercised.
An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor A) must wait six months before any sales can be made. B) must wait six months before selling shares subject to volume limits. C) can only sell subject to volume limits. D) can sell the shares unrestricted at any time.
D) can sell the shares unrestricted at any time. Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.
All of the following are names for the rate stated on the face of the bond except A) fixed rate. B) coupon rate. C) nominal yield. D) current yield.
D) current yield. The current yield is calculated by dividing the annual interest payment amount by the current price of the bond. The others are all the same as the stated rate and are calculated by dividing the annual interest payment amount by $1,000.
In the dividend disbursement process three of the four critical dates are determined by the board of directors (BOD) but one is determined by either Financial Industry Regulatory Authority (FINRA) for OTC stocks or the exchange for listed stocks. Which one is it? A) record B) payable C) declaration D) ex-dividend
D) ex-dividend Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.
Par value for a bond is also known as A) principal value or the amount of interest the bond pays annually. B) face value or the amount of interest the bond pays annually. C) stated or coupon yield payable annually. D) face value or the amount a bond will be redeemed for at maturity.
D) face value or the amount a bond will be redeemed for at maturity. Par value (usually $1,000) is the face value of a bond or the amount a bond will be redeemed for by the investor at maturity.
When XYZ is trading at 30, an XYZ 40 put bought at 3 would be A) at the money. B) at parity. C) out of the money. D) in the money.
D) in the money. All puts are in the money when the market price is below the strike price. They are out of the money when the market price is above the strike price. They at the money when the market price equals the strike price. They are at parity when the premium equals the intrinsic value.
Investors who sell call and put options are known as A) uncovered. B) covered. C) long. D) writers.
D) writers. Those who sell calls and puts, those who are short the contract, are known as writers.
