Chapter 1 - Equity Securities

No-par value stock is characterized as stock which

Correct Answer:Has not been assigned a par value by the corporationExplanation:No-par value stock is simply shares that have not been assigned a par value by thecorporation. Some states permit this to occur.Textbook Reference:Please see textbook section 1.1

ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholderthat owns 200 shares of stock may:I. Vote 200 shares of stock for each director under statutory votingII. Vote 100 shares of stock for each director under statutory votingIII. Split a total of 200 votes any way between the two directors under cumulative votingIV. Split a total of 400 votes any way between the two directors under cumulative voting

Correct Answer:I and IVExplanation:Under statutory voting, a shareholder has one vote per share for each director that is tobe elected. Under cumulative voting, the shareholder may pool together the total votes(400 in this example, 2 directors x 200 votes) and cast them as preferred.Textbook Reference:Please see textbook section 1.1.1.2

Treasury stock is best characterized as

Correct Answer:authorized stock that was previously outstanding but has been repurchased by the issuer.Explanation:Treasury stock are shares that were previously sold to the public but have since beenrepurchased by the issuer. These shares do not carry voting rights nor pay dividends.Textbook Reference:Please see textbook section 1.1

Common stock holders have limited liability. This means that

Correct Answer:They cannot lose more than their original investmentExplanation:Limited liability means that an investor cannot lose more than their original investment.Textbook Reference:Please see textbook section 1.1.1.1

When must proxy materials be filed with the SEC?

Correct Answer:In advance of the shareholder solicitationExplanation:The information contained in proxy materials must be filed with the SEC in advance ofthe shareholder solicitation, and it must disclose all important facts upon whichshareholders are asked to vote.Textbook Reference:Please see textbook section 1.1.1.2

Pre-emptive rights are available to current shareholders of a company as a means of

Correct Answer:avoiding dilution.Explanation:Pre-emptive rights are available to current shareholders. They give shareholders theright to maintain their proportionate interest when a company does a follow-on offering.This, in effect, helps prevent dilution.Textbook Reference:Please see textbook section 1.1.1.6

At the time of the issuance of a warrant by a corporation, the warrant

Correct Answer:will not have any intrinsic value.Explanation:A warrant is a type of equity instrument issued by a corporation, where at the time ofissuance the exercise price of the warrant will be higher than the current market price ofthe company's common stock. In other words, warrants are not issued with intrinsicvalue.Textbook Reference:Please see textbook section 1.1.1.7

An investor owns ten warrants of XYZ Co. These warrants are considered

Correct Answer:equity securities, as they may be exercised for shares in XYZ.Explanation:Warrants are considered equity securities of a company, as their exercise will allow theholder to receive shares of the underlying company. Note that warrants do not makeinterest payments to investors.Textbook Reference:Please see textbook section 1.1.1.7

When comparing rights and warrants, which of the following statements are TRUE?I. Rights are longer term than warrantsII. Warrants are longer term than rightsIII. At issue, the exercise price of a right is lower than the market price of the underlying stockIV. At issue, the exercise price of a warrant is lower than the market price of the underlying stock

Correct Answer:II and IIIExplanation:Rights are short term instruments that allow the holder to buy the stock at a price that istypically lower than the current market price of the stock. Warrants are long-terminstruments. The exercise price of the stock is typically higher than the market price ofthe stock at the time the warrants are issued. Warrants have value only if the price of thestock appreciates.Textbook Reference:Please see textbook section 1.1.1.8

ABC Corporation common shares tend to increase during stronger economic times and decreaseduring weaker economic times. ABC common shares might best be described as

Correct Answer:cyclicalExplanation:Cyclical stocks tend to track to the economy, gaining value when the economy is growingand declining when the economy is contracting.Textbook Reference:Please see textbook section 1.2.1.3

The stock of an issuer that reinvests most of its earnings back into the business is most likely classifiedas a(n) A) Growth stock B) Small cap stock C) Cyclical stock D) Income stock

Correct Answer:Growth stockExplanation:Growth stocks are stocks of companies that reinvest most of their earnings into theirbusiness. Because of their high potential for growth, they generally do not pay dividends.Textbook Reference:Please see textbook section 1.2.1.5

An effective technique for reducing the systematic risk of an equity portfolio is to

Correct Answer:protect the portfolio by using hedging strategies.Explanation:Systematic risk cannot be avoided by diversification or by selecting specific types ofstocks. It can be hedged with derivatives, such as buying put options on a stock marketindex.Textbook Reference:Please see textbook section 1.3.1

A technology company commits millions of dollars to advertising that fails to attract attention, causing its stock price to drop. This is an example of A) credit risk. B) political risk. C) business risk. D) market risk.

Correct Answer:C) business riskAnswer ExplanationBusiness risk, also called non-systematic risk, is created by negative events that impact one company or stock, such as management changes, poor business execution, or failure to reach profit targets. Textbook ReferencePlease see textbook section 1.3.2

Adjustable-rate preferred stock pays dividends that are determined A) by the registrar of the corporation B) based on an underlying benchmark C) based on the latest GDP figures D) by the US Treasury Department

Correct Answer:B)Answer ExplanationAdjustable -rate preferred stock pays dividends that are determined based on an underlying benchmark, typically the US Treasury bill. Textbook ReferencePlease see textbook section 1.5.2

What date occurs one business day after the ex-dividend date? A) The declaration date B) The payable date C) The notification date D) The record date

Correct Answer:D)Answer ExplanationThe record date is one business day after the ex-dividend date.Textbook ReferencePlease see textbook section 1.7

ABC Corporation is planning to do a $50,000,000 debenture offering in the next few months and hopes to make the offering as attractive as possible to investors. To achieve this goal, ABC Corporation would most likely A) market the offering to accredited investors only. B) structure the offering with a call feature, allowing investors to sell their bonds back to the issuer based on a specific schedule. C) include a detachable warrant as a sweetener with the bond offering. D) provide a pre-emptive right with the bond offering.

Correct Answer:C) include a detachable warrant as a sweetner with the bond offering.Answer ExplanationThe inclusion of a warrant with the bond deal makes the offering more attractive to investors. The warrants can be detached later and sold in the open market or exercised for the shares of the company at a pre-set price. This would enable the issuer to sell their bond to the public at a lower interest rate than would otherwise be possible. Warrants typically have long expirations, giving investors flexibility as to how they would like to use the warrant to their best advantage. Textbook ReferencePlease see textbook section 1.1.1.7

What option does a shareholder receive under a "stock rights" event? A) To sell shares back to the company B) To maintain proportional ownership C) To participate in a stock dividend D) To vote shares in a special election

Correct Answer: B) To maintain proportional ownershipAnswer ExplanationStock rights give shareholders the right, but not the obligation, to maintain proportionate share ownership, rather than be diluted when new shares are issued.Textbook ReferencePlease see textbook section 1.1.1.6

An issuer will send proxy statements directly to the beneficial owner of the securities when they are held in all of the following forms EXCEPT A) Street name B) DRS C) Registered physical certificates D) DWAC

Correct Answer:A) Street nameAnswer ExplanationWhen securities are held in street name the broker-dealer is the nominal, or named, owner, and the issuer sends proxy statements and all other information about the securities to the firm, which must then distribute the information to the customer, who is the beneficial owner. DRS, DWAC and registered physical securities all list the customer as the named owner, so the issuer can communicate with the customers directly.Textbook ReferencePlease see textbook section 1.6.2

In order to receive a cash dividend payment based on regular way settlement process, an investor must purchase stock no later than A) The record date B) The business day before the record date C) The ex-dividend date D) The business day before the ex-dividend date

Correct Answer: D) The business day before the ex-dividend dateAnswer ExplanationTo own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Textbook ReferencePlease see textbook section 1.7

Who maintains records of the change in ownership of securities, whenever they are transferred or sold? A) The corporate secretary B) The transfer agent C) The custodian D) The escrow agent

Correct Answer:B) The transfer agentAnswer ExplanationWhen securities are transferred or sold, the transfer agent records the change in ownership on the books of the securities issuer. In many cases, the transfer agent doubles as registar for the same company.Textbook ReferencePlease see textbook section 1.6.1

An investor who owns shares in ABC company is notified of a rights offering. If the investor decides to participate in this offeringI. her stake in company ownership will not be dilutedII. she must sell all her ABC shares III. she will acquire more ABC sharesIV. she will convert her equity holdings to a senior debt position A) I and III B) II and III C) I and IV D) II and IV

Correct Answer:A) I and IIIAnswer ExplanationA rights offering raises new equity capital by giving existing shareholders the right to acquire more shares in proportion to their current holdings. Shareholders who exercise their rights will not have their ownership stakes in the company diluted. Textbook ReferencePlease see textbook section 1.1.1.6

If Janice sells short 100 shares of Microsoft stock at $20 per share, what is the maximum she can lose on the trade? A) $20 per share B) Unlimited C) $10 per share D) $5 per share

Correct Answer:B) UnlimitedAnswer ExplanationPotential losses on short sales are unlimited. If the stock price soars, the investors must buy back the stock at a very high price, to replace the shares borrowed. This is why short-selling can be so risky.Textbook ReferencePlease see textbook section 1.8

What must be done with open limit orders at the close of business on the day before the ex-date for a reverse stock split? A) They must be adjusted in number of shares only, not price B) They must be adjusted in price only, not number of shares C) They must be cancelled D) They must be adjusted in both price and number of shares

Correct Answer:C) They must be cancelledAnswer ExplanationFor reverse stock splits, all open orders must be cancelled before the ex-date. Textbook ReferencePlease see textbook section 1.7.4

A computer company develops a product which contains significant flaws, resulting in a diminished share price. This is an example of A) Faulty engineering B) Systematic risk C) Negative correlation D) Non-systematic risk

Correct Answer: D) Non-systematic riskAnswer ExplanationNon-systematic risk, also called business risk, is a risk specific to an individual company, rather than the market as a whole.Textbook ReferencePlease see textbook section 1.3.2

Which of the following statements about warrants are TRUE?I. They may be sold with a bond as a sweetenerII. They have shorter expiration periods than optionsIII. They function very much like call optionsIV. They trade exclusively on exchanges A) II and III B) I and IV C) I and III D) II and IV

Correct Answer C) I and IIIAnswer ExplanationWarrants are often added to bonds as sweeteners to make the issue more attractive to investors. Like a call option, they give the holder the right to buy a specified number of shares of stock at a specified price. However, they have a longer expiration period than options Â- sometimes up to 15 years. Though some warrants are listed on exchanges, most trade over-the-counter.Textbook ReferencePlease see textbook section 1.1.1.7

Authorized stock is best described as common shares that A) All investors currently own in the corporation B) A corporation will sell to the public in the future C) A corporation has sold to the public D) A corporation is permitted to sell to the public

Correct Answer:D) A corporation is permitted to sell to the publicAnswer ExplanationAuthorized stock represents the number of shares a corporation may sell to the public in the future.Textbook ReferencePlease see textbook section 1.1

Which of the following is a type of risk not commonly associated with ADRs? A) Political risk B) Inflation risk C) Call risk D) Currency risk

Correct Answer:C) Call riskAnswer ExplanationADRs do not carry call risk, as they are equity securities and as such the issuer does not have the right to redeem the shares from the investor.Textbook ReferencePlease see textbook section 1.4.1.1

Concerning cumulative preferred stock, A) These shareholders are paid before any other preferred stockholder in the event of a corporate bankruptcy B) All dividends accumulate on a tax deferred basis C) All future dividends for the year must be paid on these shares before any common dividends may be paid D) Any missed dividends must be paid before any common shareholders are paid

Correct Answer:D) Any missed dividends must be paid before any common shareholders are paidAnswer ExplanationWith respect to cumulative preferred stock, any missed dividends have to be paid to these shareholders before any common dividends are paid.Textbook ReferencePlease see textbook section 1.5.2

An investor owns a security which carries currency risk but not interest rate risk. This investor is likely holding a(n) A) Treasury bond. B) American depository receipt (ADR). C) Eurodollar CD. D) convertible debenture.

Correct Answer:B) American depository receipt (ADR).Answer ExplanationAn American Depository Receipt is an equity instrument which facilitates the trading of a foreign security in the US. This asset category carries currency risk but not interest rate risk, because it is an equity, and not a debt instrument. Textbook ReferencePlease see textbook section 1.4.1.1

The type of voting that enables a shareholder to pool their votes together and cast them as desired is A) Statutory voting B) Standard voting C) Proxy voting D) Cumulative voting

Correct Answer:D) Cumulative votingAnswer ExplanationThis is known as cumulative voting. The alternative process is statutory voting.Textbook ReferencePlease see textbook section 1.1.1.2

XYZ Co. has engaged in a 4:1 stock split. As a result, holders of XYZ shares will now have A) Fewer shares with a greater per share value B) Fractional shares with a pro-rated value per value C) The same number of shares at the same per share value D) More shares with a lower per share value

Correct Answer:D) More shares with a lower per share valueAnswer ExplanationUpon the occurrence of a forward stock split, an investor will have more shares with a lower per share value. The important point with a stock split is that the investor does not gain or lose any absolute value with respect to their holdings in the company. Textbook ReferencePlease see textbook section 1.7.4

On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for cash settled trades in the security? A) Wednesday, Jan 11 B) Friday, Jan 13 C) Thursday, Jan 12 D) Tuesday, Jan 10

Correct Answer:B) Friday, Jan 13Answer ExplanationCash settled trades settle on the same day. Therefore, an investor could buy stock on the record date and still settle in time to receive the dividend. Therefore, the ex-dividend date for a cash settled trade will be the business day after the record date.Textbook ReferencePlease see textbook section 1.7.1

A company can declare dividends in which of the following ways? A) Cash B) Stock or stock of a subsidiary company C) Goods produced by the company D) All of the above

Correct Answer:D) Answer ExplanationA company may pay a dividend in cash, stock or stock of a subsidiary company, or even goods produced by the companyTextbook ReferencePlease see textbook section 1.7.3

The process of a shareholder assigning voting rights to a third party is A) Voting by proxy B) Surrogate voting C) Voter assignment D) Absentee ballot

Correct Answer: A) Voting by proxyAnswer ExplanationA common shareholder often casts votes by proxy, or through a third party that is representing the shareholder's votes. Textbook ReferencePlease see textbook section 1.1.1.2

An investor holds 10 warrants in XYZ Company. The company's common stock currently sells for $30.00 per share. What are the warrants worth? A) It depends on the warrants' exercise price. B) $300 C) $3,000 D) $30,000

Correct Answer:A) It depends on the warrants' exercise priceAnswer ExplanationWarrants have value only if the stock appreciates over time to a level above the warrant's exercise price. Profit then is approximately the stock price less the exercise price. In this example, if the exercise price is $30.00 or above, the warrants may have little value. However, any appreciation above the exercise price can generate profit.Textbook ReferencePlease see textbook section 1.1.1.7

A shareholder owns 1,000 shares of a corporation's stock with pre-emptive rights. There are a total number of 100,000 shares outstanding. If 5,000 new shares are issued the shareholder may purchase A) 100 additional shares B) 5 additional shares C) 10 additional shares D) 50 additional shares

Correct Answer:D) 50 additional sharesAnswer ExplanationPre-emptive rights enable a current shareholder to maintain proportionate ownership interest when new shares are issued. The shareholder in this example may purchase 1% of the new shares or 50 shares. Textbook ReferencePlease see textbook section 1.1.1.6

Brunswick issues a Series A $2.40 cumulative convertible preferred voting stock. This stockI. is convertible into common stockII. pays dividends in arrearsIII. receives excess dividends on a pro rata basis with common stock A) I only B) I, II and III C) I and II only D) I and III only

Correct Answer:C) I and II onlyAnswer ExplanationCumulative convertible preferred stock can be converted into common stock. Additionally, all dividends in arrears from cumulative stock must be paid before any dividends are paid on the common stock. Participating preferred stock may receive excess dividends based on better than expected earnings for the company. Textbook ReferencePlease see textbook section 1.5.2

Which of the following statements regarding preferred stock are TRUE?I. Like common, preferred shares generally have voting rightsII. Unlike common, preferred shares generally do not have voting rightsIII. Preferred shares typically have greater appreciation potential than commonIV. Preferred shares typically have less appreciation potential than common A) II and III B) I and IV C) I and III D) II and IV

Correct Answer:D) II and IVAnswer ExplanationPreferred shares differ from common shares in that they do not typically have voting rights. There are exceptions, however, which permit voting under unique circumstances like a takeover or merger. Preferred stock typically does not have as much appreciation potential as common. Textbook ReferencePlease see textbook section 1.5.1

A share in a foreign corporation that underlies an ADR is known as a(n) A) ADP B) ADS C) GDS D) GDR

Correct Answer:B) ADSAnswer ExplanationAn American Depositary Share (ADS) is the name given to the shares of the foreign corporation that are held by the depositary institution. These shares are packaged to create the ownership interests known as American Depositary Receipts. A Global Depositary Share (GDS) is the underlying for a Global Depositary Receipt (GDR) Textbook ReferencePlease see textbook section 1.4.1

Nigel owns stock certificates that he inherited from his grandfather. How can he continue to hold the stock without having responsibility for lost or damaged certificates? A) Register the certificates with the Secretary of State B) Sell the certificates to a trust C) Endorse the certificates to a brokerage firm D) Convert the certificates to registered form

Correct Answer:C) Endorse the certificates to a brokerage firmAnswer ExplanationEndorsing stock certificates to a brokerage firm transfers ownership into street name. The brokerage firm maintains a record of ownership, and the investor may sell the stock without the need to deliver a paper certificate.Textbook ReferencePlease see textbook section 1.6.2

When compared to ownership rights of common stock, owners of preferred stock generally A) receive higher dividends B) are able to vote on more corporate issues C) are guaranteed to receive dividend payments regularly D) are junior in claim to assets of a corporation in bankruptcy

Correct Answer:A) receive higher dividendsAnswer ExplanationPreferred stock is typically purchased for the income stream it delivers; so owners of preferred stock usually receive higher dividends than owners of common stock. Preferred stock has seniority over common in corporate liquidations, but usually does not have voting rights. Dividends for common or preferred shares are not guaranteed; they must be declared by the Board of Directors. Textbook ReferencePlease see textbook section 1.5.1.3

Pre-emptive rights are available to current shareholders of a company as a means of A) locking in a profit over the next 60 days. B) purchasing additional shares at the discretion of the issuer. C) receiving additional shares as awarded by the board of directors. D) avoiding dilution.

Correct Answer:D) avoiding dilutionAnswer ExplanationPre-emptive rights are available to current shareholders. They give shareholders the right to maintain their proportionate interest when a company does a follow-on offering. This, in effect, helps prevent dilution. Textbook ReferencePlease see textbook section 1.1.1.6

ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholder that owns 200 shares of stock mayI. Vote 200 shares of stock for each director under statutory votingII. Vote 100 shares of stock for each director under statutory votingIII. Split a total of 200 votes any way between the two directors under cumulative votingIV. Split a total of 400 votes any way between the two directors under cumulative voting A) I and III B) II and IV C) II and III D) I and IV

Correct Answer:D) I and IVAnswer ExplanationUnder statutory voting, a shareholder has one vote per share for each director that is to be elected. Under cumulative voting, the shareholder may pool together the total votes (400 in this example, 2 directors x 200 votes) and cast them as preferred. Textbook ReferencePlease see textbook section 1.1.1.2

An investor owns ten warrants of XYZ Co. These warrants are considered A) equity securities, as they may be exercised for shares in XYZ. B) call options, which can always be exercised for their intrinsic value. C) stock rights, as they give the holder the ability to convert into the equity securities of XYZ for an indefinite period of time. D) convertible bonds, making regular interest payments, which may be exercised at any time.

Correct Answer:A) equity securities, as they may be exercised for shares in XYZ.

Which of the following statements best describes the risk and reward profile of preferred stock versus common stock? A) Preferred stock is not risky and has no growth potential. B) Preferred stock is less risky than common stock and has less growth potential. C) Preferred stock is more risky than common stock but has about the same growth potential. D) Preferred stock is less risky than common stock and has about the same growth potential.

Correct Answer:B) Preferred stock is less risky than common stock and has less growth potential.Answer ExplanationPreferred stock has both risk and growth potential. However, both are lower than in common stock, making preferred stock a more conservative investment.Textbook ReferencePlease see textbook section 1.5.3

A cash dividend will be paid to shareholders of record on Thursday, June 24. What is the ex-dividend date? A) Thursday, June 24th B) Wednesday, June 23rd C) Monday June 21st D) Tuesday, June 22nd

Correct Answer:B) Wednesday, June 23rdAnswer ExplanationThe ex-dividend date normally is one business day before the dividend record date. For transactions on or after the ex-date, the buyer will not receive the dividend.Textbook ReferencePlease see textbook section 1.7

A company has issued 8% preferred stock with a par value of $30 per share. The preferred stock currently is selling for $40 per share. The annual dividend paid to holders of the preferred shares will be A) 1.2 B) 3.6 C) 2.4 D) 3.2

Correct Answer:C) 2.4Answer ExplanationThe annual dividend in preferred stock is expressed as a percentage of par value. "8% preferred stock" would pay 8% of par value annually. 8% x $30 = $2.40 per year. Textbook ReferencePlease see textbook section 1.5.1.3

When comparing rights and warrants, which of the following statements is TRUE? A) Warrants have shorter expiration periods than rights B) Warrants protect shareholders against dilution, rights do not C) The exercise price of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued D) Rights are often added to bond issues as sweeteners; warrants are offered to existing shareholders to permit them to maintain their proportionate interest in the company when additional shares are issued

Correct Answer:C) The exercise price of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued...Answer ExplanationRights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution. Textbook ReferencePlease see textbook section 1.1.1.8

To earn a profit on a short sale position, the short sale transaction price must be A) higher than the buy-to-cover price. B) lower than the buy-to-cover price. C) higher than the option premium earned. D) lower than the option premium earned.

Correct Answer:A) higher than the buy-to-cover price.Answer ExplanationA short sale is a bet that a stock's price will fall – i.e., the price at which the short sale is covered (buy-to-cover price) is lower than the short sale transaction price.Textbook ReferencePlease see textbook section 1.8

According to SEC rules, an issuer must give advance notice of a dividend distribution to the exchange where the security trades A) 5 business days prior to the record date B) 10 business days prior to the payable date C) 5 business days prior to the payable date D) 10 business days prior to the record date

Correct Answer:D) 10 business days prior to the record dateAnswer ExplanationAn issuer is required to give advance notice of a dividend distribution 10 business days prior to the record date. This notice is required for all such distributions, including stock dividends, stock splits, reverse stock splits and rights or other subscription offerings. Textbook ReferencePlease see textbook section 1.7

Who is allowed to buy stock rights during the ex-rights period? A) Any interested investor B) Only holders of warrants C) Only preferred shareholders D) Only shareholders of record

Correct Answer:A) Any interested investorAnswer ExplanationThe ex-rights period begins on the ex-rights date and continues until the rights expire, usually several weeks later. During this period, the rights are detached from the stock and trade separately, under their own symbol. Anyone can buy them.Textbook ReferencePlease see textbook section 1.1.1.6

When must proxy materials be filed with the SEC? A) In advance of the shareholder solicitation B) Within ten days of posting proxy materials online C) Within five days after the shareholder vote D) There is no requirement to file proxy materials

Correct Answer:A) In advance of the shareholder solicitationAnswer ExplanationThe information contained in proxy materials must be filed with the SEC in advance of the shareholder solicitation, and it must disclose all important facts upon which shareholders are asked to vote. Textbook ReferencePlease see textbook section 1.1.1.2

In which form of registration is the broker-dealer identified as the nominal owner of the securities? A) Street name B) Book entry C) DWAC D) DRS

Correct Answer:A) Street nameAnswer ExplanationWhen securities are held in street name the broker-dealer is the nominal, or named, owner, and holds the securities for the benefit of the customer. Book entry is not a type of registration; it is an electronic method of tracking ownership of securities.Textbook ReferencePlease see textbook section 1.6.2

In order to receive a dividend, a shareholder must own stock as of the A) Payable date B) Declaration date C) Ex-dividend date D) Record date

Correct Answer:D) Record dateAnswer ExplanationAn investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business days before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Textbook ReferencePlease see textbook section 1.7

In a cash transaction on the record date, when does the ex-dividend date occur? A) Four days following the record date B) Business day following the record date C) Four business days preceding the record date D) Record date

Correct Answer:B) Business day following the record dateAnswer ExplanationFor a cash transaction, the ex-dividend date is the business day after the record date. For a non-cash transaction, the ex-dividend date is one business day before the record date. Textbook ReferencePlease see textbook section 1.7.1

A security that can be freely transferred, assigned or delivered to another entity is called A) Marketable B) Viable C) Negotiable D) Fungible

Correct Answer:C) NegotiableAnswer ExplanationA negotiable security is one that can be freely transferred, assigned or delivered to another entity. Listed equities are negotiable when they are traded or assigned by an authorized owner, unless they are encumbered as debt or collateral.Textbook ReferencePlease see textbook section 1.6

Common stock is most often purchased to satisfy which of the following investment objectives? A) Principal protection B) Growth C) Tax Minimization D) Income

Correct Answer:B) GrowthAnswer ExplanationCommon stock is typically recommended to satisfy growth or capital appreciation objectives. Income objectives are met with fixed income instruments such as bonds or preferred stock. Government securities are often recommended when there is concern for loss of principal, and municipal securities are used to achieve tax minimization. Textbook ReferencePlease see textbook section 1.1.1.5

ABC stock is traded on the New York Stock Exchange. If a dividend is declared by the ABC Board of Directors, the NYSE must be notified no later than A) 2 business days prior to the payable date B) 10 business days prior to the payable date C) 2 business days prior to the record date D) 10 business days prior to the record date

Correct Answer:D) 10 business days prior to the record dateAnswer ExplanationThe exchange must be notified 10 business days before the record date when a dividend is to be paid. Textbook ReferencePlease see textbook section 1.7

Penny stocks present added risk to customers because of A) their high surrender charges. B) their low potential for return. C) their potential for exposure to adverse tax consequences. D) their potential lack of liquidity.

Correct Answer:D) their potential lack of liquidityAnswer ExplanationPenny stocks, or stocks priced below $5 per share that do not trade on an exchange, are frequently thinly traded, which means that there may be no market for the stock if customers want to liquidate their positions. Because of this market risk additional disclosure must be made to all buyers of penny stock.Textbook ReferencePlease see textbook section 1.2.2

The advantages of owning American Depositary Receipts include all of the following EXCEPT A) The owner of the shares does not have foreign currency risk B) The owner of the shares does not have to deal with foreign currency conversions C) The owner of the shares does not have to deal with cross border administrative hassles D) The owner of the shares is able to trade them in domestic markets

Correct Answer:A) The owner of the shares does not have foreign currency riskAnswer ExplanationOwning American Depositary Receipts (ADRs) shares enables U.S. investors to access shares of foreign companies through U.S. markets. When purchasing these shares, investors do not have to deal directly with rules of the foreign country and the shares are denominated in U.S. dollars. Although shareholders do not have to deal with currency conversions, there is foreign currency risk, as the exchange rate between the U.S. Dollar and the foreign currency will affect the price of shares as well as any dividend payments, which must be converted into U.S. dollars. Textbook ReferencePlease see textbook section 1.4.1.1

A company "reverse splits" its stock on a 1-for-10 basis. If an investor holds 800 shares before the event, what will be the impact of the split, if any, on the total value of the investors' shares? A) Total value will decline by 90% B) Total value will not change C) Total value will decline by 10% D) Total value will increase by 10 times

Correct Answer:B) Total value will not changeAnswer ExplanationStock splits and reverse splits don't change the total value of investors' holdings. For example, if the investor owned 800 shares at $1 per share before the 1-for-10 reverse split, he/she will own 80 shares at about $10 per share after the event.Textbook ReferencePlease see textbook section 1.7.4

At the time of the issuance of a warrant by a corporation, the warrant A) may be exercised by the issuer into shares of the preferred stock of the company. B) will not have any intrinsic value. C) will have a strike price lower than the current market value of the underlying stock. D) will have a call feature that the issuer may immediately exercise.

Correct Answer:B) will not have any intrinsic valueAnswer ExplanationA warrant is a type of equity instrument issued by a corporation, where at the time of issuance the exercise price of the warrant will be higher than the current market price of the company's common stock. In other words, warrants are not issued with intrinsic value. Textbook ReferencePlease see textbook section 1.1.1.7

On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for regular way trades in the security? A) Friday, Jan 13 B) Tuesday, Jan 10 C) Wednesday, Jan 11 D) Thursday, Jan 12

Correct Answer:C) Wednesday, Jan 11Answer ExplanationFor regular way trades, the ex-dividend date is one business day before the record date. Investors who buy the stock two business days before the record date will receive the dividend. Investors who purchase the stock on or after the ex-dividend date will not receive the dividend.Textbook ReferencePlease see textbook section 1.7

Arrange the dates below in the order in which they occur, first to last, in a typical cash dividend payment process for a regular way transaction.I. Ex-dividend dateII. Record dateIII. Declaration dateIV. Payable date A) I, II, III, IV B) III, I, IV, II C) II, III, I, IV D) III, I, II, IV

Correct Answer:D) III, I, II, IVAnswer ExplanationThe process of cash dividend payment typically takes place over approximately a three week period. They must first be declared, and they will be paid on the payable date, which is the last date in the process. They are paid to persons who own the stock on the date of record. In order to own the stock on date of record, an investor must buy the stock before the ex-date (regular way settlement requires 2 business days), which is 1 business day before the record date. Textbook ReferencePlease see textbook section 1.7

The regular-way trade cycle for most trades is A) T+2 B) T+1 C) T+3 D) T+5

Correct Answer:A) T+2Answer ExplanationThe regular-way trade cycle for most trades settles on the second day after trade execution - T+2.Textbook ReferencePlease see textbook section 1.7

Preferred stockholders are entitled to certain rights, including A) having a claim on corporate assets before common stockholders if the corporation is dissolved B) receiving dividends based on a specified percentage of the current market value of the stock C) receiving dividends after common stockholders D) the right to vote for directors

Correct Answer:A) having a claim on corporate assets before common stockholders if the corporation is dissolvedAnswer ExplanationPreferred stockholders receive dividends before common stockholders, preferred dividends are based on a percentage of par value (usually $100), and have a claim on assets before common stockholders. Textbook ReferencePlease see textbook section 1.5.1.2

The individual shares of non-U.S. companies that are listed on U.S. stock exchanges are known as A) Global Depository Shares B) Global Depository Receipts C) American Depository Shares D) American Depository Receipts

Correct Answer:D) American Depository ReceiptsAnswer ExplanationAmerican Depository Shares (ADSs) refer to the individual shares of an ADR held by the bank, but the ADRs are actually listed on an exchange. American Depository Receipts (ADRs) are used by non-U.S. companies to enable U.S. investors to purchase shares of their company's stock and for that stock to trade on a U.S. stock exchange. ADRs are issued by a U.S. depository bank and are quoted and pay dividends in U.S. dollars. Global Depository Receipts (GDRs) are blank certificates issued by a bank that represent shares of a stock that are traded on a foreign stock exchange. Global Depository Shares (GDSs) refer to the individual shares of a GDR. Textbook ReferencePlease see textbook section 1.4.1

XYZ Inc. declares a $0.45 dividend payable on Monday, July 14, to all shareholders of record as of Monday, July 7. When is the ex-dividend date for a regular way trade in the stock? A) Wednesday, July 2 B) Friday, July 4 C) Thursday, July 3 D) Tuesday, July 1

Correct Answer:C) Thursday, July 3Answer ExplanationFor regular way trades in equities, the ex-dividend date is one BUSINESS day before the record date. In this case, July 4 is a holiday. Therefore, the ex-date will be Thursday, July 3.Textbook ReferencePlease see textbook section 1.7

What date occurs one business day after the ex-dividend date? A) The notification date B) The declaration date C) The payable date D) The record date

Correct Answer:D) The record dateAnswer ExplanationThe record date is one business day after the ex-dividend date.Textbook ReferencePlease see textbook section 1.7

A share in a foreign corporation that underlies an ADR is known as a(n) A) ADS B) GDS C) GDR D) ADP

Correct Answer:A) ADSAnswer ExplanationAn American Depositary Share (ADS) is the name given to the shares of the foreign corporation that are held by the depositary institution. These shares are packaged to create the ownership interests known as American Depositary Receipts. A Global Depositary Share (GDS) is the underlying for a Global Depositary Receipt (GDR) Textbook ReferencePlease see textbook section 1.4.1

A company has issued 8% preferred stock with a par value of $30 per share. The preferred stock currently is selling for $40 per share. The annual dividend paid to holders of the preferred shares will be A) 1.2 B) 3.2 C) 3.6 D) 2.4

Correct Answer:D) 2.4Answer ExplanationThe annual dividend in preferred stock is expressed as a percentage of par value. "8% preferred stock" would pay 8% of par value annually. 8% x $30 = $2.40 per year. Textbook ReferencePlease see textbook section 1.5.1.3

Which of the following does not pay a dividend? A) ADR B) Mutual fund C) Unit investment trust D) Warrants

Correct Answer:D) WarrantsAnswer ExplanationWarrants do not pay dividends. UITs, Mutual Funds, and ADRs all pay dividends from the underlying securities.Textbook ReferencePlease see textbook section 1.1.1.7

All of the following risks are common with ADR ownership EXCEPT A) political risk. B) interest rate risk. C) inflationary risk. D) exchange rate risk.

Correct Answer:C) inflationary riskAnswer ExplanationInterest rate risk is typically more common with debt instruments; ADRs are equity investments. Political risk, exchange rate risk and inflationary risk are all risks that must be evaluated by ADR owners. Inflationary risk can be significant because it can cause devaluation of the currency in the home country of the ADR. Textbook ReferencePlease see textbook section 1.4.1.1

In order to receive a cash dividend payment based on regular way settlement process, an investor must purchase stock no later than A) The business day before the ex-dividend date B) The record date C) The business day before the record date D) The ex-dividend date

Correct Answer:A) The business day before the ex-dividend dateAnswer ExplanationTo own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Textbook ReferencePlease see textbook section 1.7