UNIT 1 QUIZ

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

C

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

D

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

D

Before effecting an initial penny stock transaction for a new customer, the registered representative must do all of the following except A) obtain a signed suitability statement from the customer. B) confirm whether the person is an established customer. C) obtain a signed risk disclosure document from the customer. D) confirm that a margin account has been established.

D According to penny stock rules, registered representatives must provide disclosure information to all penny stock buyers which customers must sign. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. Investors who are not considered established customers (new customers, as in this case) must sign a suitability statement as well. No rule prohibits penny stock purchases on margin, but there is no requirement that they be done in a margin account either.

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend? A) Convertible B) Participating C) Callable D) Adjustable rate

D Adjustable-rate preferred dividends are tied to benchmark interest rates such as Treasury securities. As these rates fluctuate up and down, so do the dividends on the adjustable shares.

Straight preferred shares I-are noncumulative. II-are cumulative. III-allow for missed dividends to be paid later. IV- have no provision for paying missed dividends later.

Straight preferred shares have no special features beyond the stated dividend payment. Any missed dividends are not paid to the holder, thus they are noncumulative; missed dividend payments do not accumulate.

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

A

The potential that inflation will devalue the fixed dividend income payments received by preferred shareholders is known as A) purchasing power risk. B) interest-rate risk. C) decreased dividend risk. D) market risk.

A

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

A

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

A Common stocks would be the most suitable for investors seeking capital appreciation (growth). Bonds and preferred stocks are better suited for conservative investors since each is primarily an income investment and has limited growth prospects.

A preemptive right for existing shareholders is best described as A) the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares. B) the right that allows new investors to purchase shares before existing shareholders when a company issues additional shares. C) the right for the board of directors (BOD) to preempt existing shareholders from purchasing additional shares so that they may be used for paying stock dividends by the corporation. D) the right for the board of directors (BOD) to preempt existing shareholders and only allow them to purchase the newly issued additional shares after the board has purchased the shares they want.

A Existing shareholders have what is known as a preemptive right, which is the right to maintain their proportionate share of ownership in the corporation if the company wants to issue additional shares.

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

A Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond

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

A Regardless of the adjective used, (e.g., participating, cumulative, convertible) if it is modifying a preferred stock, it is still an equity security. Each of the other choices represent

An example of a fixed-income security would include all of the following except A) common stock that has historically paid dividends. B) a municipal bond that has historically made late interest payments. C) preferred stock that has historically paid dividends. D) a money market instrument that has historically made timely interest payments.

A Securities that have an agreed rate of return, such as bonds, notes, money market instruments, and other debt instruments, are deemed fixed-income securities. Preferred stock acts in many ways like a bond in that it has a fixed dividend rate, making it a fixed-income security. Common stock may or may not pay a dividend depending on the board of directors. Common stock is not deemed a fixed-income security.

The decision to pay a dividend rests with A) the board of directors (BOD) but is not guaranteed. B) shareholders but is not guaranteed because they can vote against paying one. C) shareholders, which is why it is guaranteed. D) the board of directors (BOD) and is guaranteed.

A The decision to pay a dividend rests with the BOD but is not guaranteed. The declaration to pay a dividend may or may not occur. When it does occur, the amount can decrease, increase, or remain unchanged from the previous dividend.

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? A) The 7% shares are likely to be called. B) More 7% callable shares should be issued. C) The issuer will covert these shares to common stock. D) The issuer is likely to reduce the fixed dividend to 3%.

A When interest rates fall, callable preferred shares are likely to be called. This allows the issuer to cease the higher dividend payments and reissue shares with lower dividend payments that align more with the current interest-rate environment. With interest rates now at 3%, the issuer would have no desire to issue more 7% shares, nor could they reduce the fixed dividend on these 7% shares. If the shares were convertible, conversion would be at the discretion of the shareholders, not the issuer.

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Convertible B) Callable C) Cumulative D) Noncumulative

A Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

A common stock shareholder's residual right to corporate assets refers to which of the following? A) During the dissolution of corporate assets, common shareholders will be paid first— before debtholders and preferred shareholders are paid. B) During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid. C) During the dissolution of corporate assets, common shareholders will be paid if any funds are left after preferred shareholders are paid but before debtholders are paid. D) During the dissolution of corporate assets, common shareholders will be paid if any funds are left after debtholders are paid but before preferred shareholders are paid.

B

Common stockholders of a publicly traded corporation have which of the following rights and privileges? i-Residual claim to assets at dissolution ii-Right to a vote for stock dividends to be paid iii-Right to receive an audited financial report on an annual basis iv- Claim against dividends in default

B Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. The board of directors (BOD) would vote to pay a dividend.

Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own A) convertible preferred stock. B) cumulative preferred stock. C) callable preferred stock. D) straight preferred stock.

B Cumulative preferred stock accrues payments due its shareholders that have been missed in the event dividends are reduced or suspended.

Your customer, MJ, has a strong preference for investing in equity securities; however, she is hoping to increase the amount of current income her portfolio generates. Which of these is the least suitable for her? A) Generic Motors, Inc., 4 ¾% preferred stock B) Duratech common stock, an exciting new tech manufacturer C) Long Beach Electric, a utility D) BuyMore, Inc., a big-box retailer with a long history of healthy dividend payments

B New, rapidly growing companies tend to pay little or no dividends. The others all sound like decent sources of dividend payments

Once a dividend is initially declared by the board of directors (BODs), any future dividend payments A) are guaranteed to be paid, but no amount is stipulated. B) carry no guarantee of payment in any amount. C) are not guaranteed to be paid, but if they are paid, they must be at least equal to the initial declaration. D) are guaranteed to be paid in at least the same amount as the initial declaration.

B While the potential to share in the company's profits by receiving dividends is considered one of the benefits of equity ownership, one of the risks is the possibility of dividend income decreasing or ceasing entirely. Dividends are not guaranteed in any way

Once a dividend is initially declared by the board of directors (BODs), any future dividend payments A) are guaranteed to be paid in at least the same amount as the initial declaration. B) carry no guarantee of payment in any amount. C) are guaranteed to be paid, but no amount is stipulated. D) are not guaranteed to be paid, but if they are paid, they must be at least equal to the initial declaration.

B While the potential to share in the company's profits by receiving dividends is considered one of the benefits of equity ownership, one of the risks is the possibility of dividend income decreasing or ceasing entirely. Dividends are not guaranteed in any way.

Which of the following regarding established customers of a broker-dealer and the purchase of penny stocks are true? I-They are exempt from the suitability statement requirement. II-They are not exempt from suitability statement requirement. III-They are exempt from the disclosure rules. IV-They are not exempt from the disclosure rules. A) I and III B) II and III C) I and IV D) II and IV

C

Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate A) at any time but with volume restrictions. B) freely, with no holding period or volume restrictions. C) after holding them for six months and freely thereafter. D) after holding them for six months but then subject to volume restrictions.

C Nonaffiliates holding unregistered shares must wait six months before divesting of those shares, but because they are nonaffiliates, they may sell freely (without volume restrictions) thereafter.

An affiliate holding unregistered shares can sell under Rule 144 A) as often as wished. B) two times a year. C) four times a year. D) one time a year.

C Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.

Priority at dissolution for preferred shareholders means that they are paid I-before all creditors. II-after all creditors. III-before common shareholders. IV-after common shareholders. A) I and III B) I and IV C) II and III D) II and IV

C While preferred shareholders would not be paid until all creditors debts have been satisfied, they are paid first of the equity securities, which means they are paid before common shareholders.

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

C While stockholders have a voice in how the company is run, that voice is exercised through their vote for those who serve on the board of directors. Essentially, by electing a board of directors, stockholders have a say in the company's management but are not involved in the day-to-day details of its operations. However, there is no prohibition preventing a manager or director from owning stock in the company; their position is not directly related to their ownership of company stock.

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) callable. B) participating. C) convertible. D) adjustable rate.

D

Because common stock can be sold or given away, it is considered to be A) preemptive. B) limited in liability. C) voted by proxy. D) freely transferrable.

D Common stock is freely transferable to anyone who wants to buy it or receive it as a gift. In this regard, shareholders have the right to sell or give away their shares without permission of the corporation.

Each of the following is considered a control person under Securities and Exchange Commission (SEC) Rule 144 except A) corporate officers and directors. B) those persons who own 10% or more of the total beneficial interest of a company's common stock. C) another company that owns 10% or more of the company's equity securities. D) those persons who own 5% or more of the total beneficial interest of a company's common stock.

D Control securities are those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities. Those persons who own 5% or more of the total beneficial interest of a company's common stock are not deemed control persons under this rule.

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Unregistered stock acquired by a corporate affiliate in a stock option program B) Unregistered stock acquired by a nonaffiliate under an investment letter C) Stock acquired by a corporate affiliate in a private placement D) Stock acquired on the NYSE by a corporate affiliate

D The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.

All of the following statements regarding penny stocks are true except A) established customers of the firm need not sign a suitability statement. B) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document. C) if an account holds penny stocks, broker/dealers must provide a monthly account statement to the customer. D) penny stock rules apply to both solicited and unsolicited transactions.

D The special penny stock rules only apply to solicited transactions. Because of the greater perceived risk of investing in penny stocks, it is required that the penny stock disclosure document fully describing the risks associated with penny stock investments be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.

An investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Cumulative B) Straight C) Convertible D) Callable

D 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.