Achievable Chapter 1 Quiz

A registered rep makes a presentation to a client regarding the risks and benefits f short sales of securities. Which of the following statements would be considered misleading or false?

A. most investors are suitable to make short sales

B. Short sales are bearish investmnet strategies

C. short sales invovle borrowed secrutiies

D. loss potential on short positions is unlimited

A

Market risk is best described as which of the following?

A/ a circumstance or event negatively affects the overall market

B. regulations on a sector of the market negatively affect an investment

C. an investmnet cannot be sold without deep discount on the market price

D. a company faces problmes selling their porducts in the market

A - a cirucmstance or event negatively affects the overall market

A csutomer sells stock regualr-way on the ex-date for a cash dividen and inquires about receiving the dividend. What should you tell them?

A. They must exercise the dividen to receive it

B. they will not receive the dividend

C. they are eligible to vote on the dividend

D. they will receive the dividend

C. they will receive the dividend

A retail investor places a trade to purchase shares of a penny stock through their broker-dealer. If the trade is executed, what market did the transaction take place in?

A. second market

B. fourth market

C. third market

D. first market

A. second market - is where unlisted stocks trade in the OTC markets - a penny stock is an unlisted stock trading below $5 per share

All of the following are directly associated with investments in equit securities. EXCEPT:

A. Divident payments

B. Low liquidation priority

C. interest payments

D. ownership

C. interest payments

An issuers common stock is listed on an exchange with pricing requirments. In particular, the security will be de-listed if the stocks market price falls below $5 per share. What is the most efficient method the issuer may pursure to avoid de-listing?

A. Reverse stock-split

B. Stock divident

C. Forward stock split

C. Rights offering

A. reverse stock split - reverse stock splits allow the issuer to inflate its market price to make its stock more expensive without illegaly manipulating the market. Forward stock splits and stock dividens result in decreasing market price. A rights offering typically does not impact stock prices considerably

Stock repurchased from outstanding shares by the issuer is known as:

A. issued stock

B. authorized stock

C. participating stock

D. treasury stock

D. treasury stock

a customer learns of a bond being issued by a company they are intersted in. Recently the issuer had trouble selling the debt secruity, so they sweetened the offer by attaching another security to the bond sale. What did the issuer most likely utilize to sweeten the offer?

A. warrants

B. call options

C. preferred stock

D. rights

A. warrants - warrants are commonly utlized as sweeteners alongside offerings of other securities. For example, an issuer may sell a bond and add a warrant to the offering to make ti more marketable. Warrants allow for the purchase of shares at a fixed price and typically last for five years or longer

Sutton co. netted $323 million in profits Q3 last year. It paid out $116 million in dividends to its shareholders. The difference ($207 million) is placed into the corporate business account. How would Sutton Co’s CFO caregorize the $207 million?

A. net worth

B. debt service

C. retained earnings

D. current liability

C. retained earnings

A registered rep is apporached by a client that is considering an investmnet in an ADR. During the conversation the represenative discusses the characterisitics of this type of investmnet. Which of the following statements is considered false or misleading?

A. ADRs are typically created by domestic financial institutions with foreign branches

B. an ADRA trades in US dollars, and therefore is not subject to currency risk

C. ADR holders are not provided voting rights

D. foregin taces withheld on ADR dividends result in US tax credits

B. an ADRA trades in US dollars, and therefore is not subject to currency risk

An investor places a tradem which is executed in the third market. What statement made by a representative confirimg the trade to a customer is misleading or incorrect?

A. the third market is considered part of the secondary market

B. only listed stocks trade in the third market

C. none of these choices

D. third market trades occur OTC

C. none of these choices

Which of the following statements related to market risk are true?

I. It is a type of non-systemic risk

II. it is a type of systemic risk

III. Diversification nullifies market risk

IV. Diversification does not nullify market risk

II and IV

After studying the fundamentals of investing, an investor reaches out to their registered representative to ask questions about nonsystematic risk. Which of the following statements made by the representative would be considered false or misleading?

A. purchasing power risk is not a type of nonsystematic risk

B. liquidity risk is not a type of nonsystematic risk

C. diversification greatly reduces nonsystematic risk

D. nonsystematic risks affect small portions of the market

B. liquidty risk is not a type of nonsystematic risk

A large financial institution trades secuirties with a large bank. Where is the most likely market this trade took place in?

A. third market

B. first market

C. second market

D. fourth market

D. fourth market

an investor faces difficulty liquidating a security during a volatile market environment. What risk does the investor face?

A. non-systematic risk

B. inflation risk

C. systematic risk

D. business risk

A. non systematic risk

Sawyer Execution Co. performs a 1:5 reverse stock split on its outstanding stock. Just prior to the split, the shares were trading for $15. Which of the following statements is true?

A. the price per share will rise to $75

B. the shares are more likely to be purchased by retail investors post-split

C. an investor owning 500 shares re-split will own 2,500 shares post-split

D. this action requires approval from the BOD only

A. the price per share will rise to $75

Which of the following statements related to risks of securities is considered false or misleading?

A. exchange listed securites are genrally subject to liquidity risk

B. investmnets in highly leverage companies exposes an investor to business risk

C. purchasing power risk is considered a type of systematic risk

D. non systematic risks can be significantly reduced through diversifcation

B. investments in highly leveraged companies exposes an investor to business risk

Skyler execution corporation declares a $3.25 per share dividend to shareholders on record as of Tuesday, Oct 7, to be paid on Wednesday, Oct 22. Which of the following statements is true?

A. the ex-date is wednesday, Oct 8 for cash settlement trades

B. the ex-date is monday, oct 6 for regular-way trades

C. the first day an investor with long shares could sell the stock by regualr way settlement and keep the dividend is Monday, Oct 6

D. the last day an investor could buy the stock by regualr way settlement and receive the dividend is Tuesday. Oct 7

A. the ex-date is wednesday, Oct 8 for cash settlement trades

Diversification can be utilized to minimize all of the following risks. EXCEPT:

A. liquidty risk

B. regulatory risk

C. financial risk

D. systematic risk

D. systematic risk

Required financial disclosures made by publicly traded compnaies must be filled with which of the following regulatory authorities?

A. SEC

B. CFTC

C. MSRB

D. FINRA

A. SEC

Which of the following statements regarding the regular way ex-date for a cash dividend from common stock is true?

A. The ex-date is determine by the issuers Board of Directors

B. The ex-date is the same day as record date

C. An investor selling stock on the ex-date will not receive the dividend

D. An investor buying stock on the ex-date will receive the dividend

B. the ex-date is the same as record date

Elliot Products Group declares a $1.25 per share dividend to shareholders on record as of Tuesday, January 9. To be paid on Wednesday, January 24. Which of the following statements is true?

A. The ex-date is tuesday, january 9 for cash settlement trades

B. the ex-date is monyda, january 8 for regular way trades

C. the first day an investor with long shares could sell the stock by regualr way settlement and keep the dividend is Tuesday, January 9

D. the last day an investor could buy the stock by regualr way settlement and receive the dividend is Tuesday, January 9

C. the first day an investor with long shares could sell the stock by regualr way settlement and keep the dividend is Tuesday, January 9

All of the following securities or strategies profit when market prices increase EXCEPT:

A. covered call writes

B. short puts

C. long calls

D. short sales

D. short sales

An investor reads in an economic newsletter that CPI increased by 14% in one year.What risk should this investor be concerned with?

A. business risk

B. purchasing power risk

C. non-systmatic risk

D. financial risk

B. purchasing power risk

An investor places a trade, which is executed in the third market. What statement made by a representative confirming the trade to a customer is misleading or incorrect?

A. all of these choices

B. the third market is considered part of the primary market

C. third market trades occur on exchanges

D. only unlisted stocks trade in the third market

A. all of these choices

Which of the following are true in relation to short sales of securities?

I. Gains occur when sales proceeds exceed cost basis

II. Gains occur when cost basis exceeds sales proceeds

III. Losses occur when sales proceeds exceed cost basis

IV. Losses occur when cost basis exceeds sales proceeds

I and IV

Common stockholders maintain which of the following rights?

A. right to vote for the CEO

B. right to approve payment of a stock dividend

C. right to approve payment of a cash dividend

D. right to inspect books and records

D. right to inspect books and records

Parking professionals corporation perfomrs a 1:5 reverse stock split on its outstanding stock. Just prior to the split, the hsares were trading for $20. Which of the following statements is true?

A. The price per share rise to $120

B. the shares are most likely to be purchased ny retail investors post-split

C. an investor owning 300 shares pre-split will own 60 shares post-split

D. this action requires approval from the BOD only

C. an investor owning 300 shares pre-split will own 60 shares post-split

Common stockholder maintain all of the following rights EXCEPT:

A. right to receive a dividend

B. right to maintain proportionate ownership

C. right to vote for the BOD

D. right to approve internal management decisions

D. right to approve internal management decisions

Which of the following statements related to cash dividends paid by common stock securities are false?

I. the ex-date for cash settlement transactions is on business day before the record date

II. teh ex-date for cash settlement transactions is one business day after the record date

III. The ex-date for regular-way settlement transactions is the same day as the record date

IV. the ex-date for regular-way settlement transactions is one business day after the record date

I and IV

Baker has a diversivided portfolio of common stock. The economy goes through a recession and the S&P 50 declines by 26%. Bakers portfolio falls 35% in value. What typer of risk is Bakers portfolio facing?

A. inflation risk

B. regulatory risk

C. market risk

D. non-systematic risk

C. market risk

Common stockholders do not hvae the right to vote for which of the following?

A. issuance of stock dividends

B. issuance of convertible preferred stock

C. issuance of convertible bonds

D. stock splits

A. issuance of stock dividends

A customer of yours owns 600 shares of Caramel Co at $20.54. Your customer had fewer shares last month, but they didn’t purchase any additional stock. Also, the stock price has dropped considerably since last month, but Caramel Cos revenues increased and expenses decreased. What is the most likely reason for this?

A. stock dividend

B. reverse stock split

C. changes to the BOD structure

D. increasing PE ratio

A stock dividend

Stock dividens result in more shares owned but at a lower price per share.

Which of the following rights do ADR holders typically maintain?

A. voting rights

B. dividend rights

C. preemptive rights

D. management rights

B. dividend rights

Which of the following statements are false regarding SEC Form 10-G?

A. the form covers a period of 3 months

B. disclosures of this form fulfills the shareholder right to insepct books and records

C. issuers with publicly traded stock are obligated to perpetually issue the form

D. the form is audited prior to public release

D. the form is audited prior to public release

On the ex-date for an action taken by the issuer of a publicly traded stock, an investors position results in fewer shares at a higher market price. What action most likely occured?

A. stock split

B. cash dividend

C. reverse stock split

D. stock dividend

C. reverse stock split

On the ex-date for a reverse stock split the sharehodler will have less shares, but worth proportionately more per share. Forward stock splits result in more shares, but worth less per share.

Which of the following line items on an issuances financial disclosure statements would be considered a long-term liability?

A. cash

B. mortgage outstanding

C. copyrights

D. taxes payable

B.mortgages outstanding

All of the following statements regarding equity investments are true EXCEPT:

A. equity investors maintain higher priority in corporate liquidations than debt holders

B. equity relates to ownership

C. convertible debentures are not considered equity investments

D. common and preferred stock are equity investments

A. equity investors maintain higher priority in corporate liquidations than debt holders

Which of the following statements is/are true?

I. inflation risk is a type of systematic risk

II. financial risk is a type of systematic risk

III. regulatory risk is a type of systematic risk

IV. liquidity risk is a type of systematic risk

I only

Rylan Co has $410.175 in retianed earnings iwth 143,987,295 shares outstnading. They want to issue a dividend to their investors. Which would be the most likely dividend to be paid?

A. $0.80 per share cash dividend

B. 18% stock dividend

C. $2.95 per share cash dividend

D. inventory (product) dividend

B. 18% stock dividend because they don;t have a lot of money

Which of the following statemeents regarding pre-exemptive rights are incorrect?

A. one right is provided per share of stock owned

B. rights maintain intrinsic value at issuance

C. rights maintain little time value at issuance

D. rights offerings are typically connected to initial public offerings

D. rights offerings are typically connected to initial public offerings

An investor goes long 500 shares of NFLX stock at $310 on a Thursday, paying a $3 per share commission. Assuming the trade is performed regualr-way and there are no upcoming holidays observed by the stock market. What statements are true?

I. the trade settles on a Friday

II. the trade settles on a saturdau

III. the investors cost basis per share is $313

IV. the investors cost basis per share is $307

I and III

XYZ Brokerage Company maintains a book of customers that submit trade requests. Their customers assets are held at ABC Securities Firm, who also processes trades for XYZ Brokerage Company. Which of the following statements is true?

A. there is no indication either firm is a transfer agent

B. XYZ Brokerage Company is a transfer agent

C. XYZ Brokerage Company is likely the clearing agent for their customers

D. ABC securities Firm is an introducing broker

A. there is not indication either firm is a transfer agent

Shareholders equity can be calculated by which of the following formulas?

A. total assets - total liablities

B. long-term liablities - fixed assets

C. current assets - current liabilites

D. crrent assets/current liabilites

A. total assets - total liabilites

A corporate issuer with outstanding common stock is contemplating large stock buyback program. Which of the following statements is true regarding tis action?

A. stock buybacks result in lower reported EPS

B. Stock buybacks increase outstnadning shares

C. Stock buybacks dilute shareholder owndership

D. stock buybacks do not require shareholder approval

D. stock buybacks do not require shareholder approval

An investor goes long 200 shares of NFLX stock at $330 on a Tuesday, paying a $1 per share commission. Assuming the trade is perfomred regular-way and there are no upcoming holidays observed by the stock market. What statements are true?

I. The trade settles on a wednesday

II. The trade settles on a thursday

III. The investors cost basis per share is $331

IV. The investors cost basis per share is $330

I and III

An investor perfomrs fundamental analysis on securities held in their portfolio. After inspecting a specific issuers financial disclosure forms, they discover a significant amount of long-temr liabilites as compared to assets. What does this indicate about the financial health of the company?

A. impending bankruptcy

B. high leverage

C. high asset to liability ratio

D. low cash flow

A. high leverage

All of the following statements regarding equity investments are true, EXCEPT:

A. equity investors have lower priority in corporate liquidations than debt holders

B. an equity investor is considered a creditor

C. convertible debenture are not considered equity investments

D. common and preferred stock are equity investments

C. convertible debenture are not considered equity investments

Explanation: equity positions represent ownership; equity investors are owners of a company, not creditoers (bond holders)

An investor places a trade to purchase a coporate security thorugh their broker dealer. Assuming the trade request was submitted on the weekend, the transaction will process as soon as the traditional markets open, and no holidays exist on this timeline, when will the transaction settle?

A. Thursday

B. Monday

C. Wednesday

D. Tuesday

D. Tuesday

Your customer owns 700 shares of Kingsley Co. stock which is under statutory voting system. With 7 open board seats, what is the maximum number of votes your customer mayu apply towards one board seat?

A. 7 votes

B. 700 votes

C. 100 votes

D. 4900 votes

B. 700 votes

Explanation: with a statutory voting structure, each stockholder obtains one vote for every share owned and can use those votes for each seat. The customer owns 700 shares, therefore can utilize up to 700 votes per board seat.

Which of the following statements regarding pre-exemptive rights are incorrect?

A. Rights maintain significant time value at issuance

B. rights maintain intrinsic value at issuance

C. rights offerings are typically connected to additional offerings

D. one right is received per share of stock owned

C. rights offerings are typically connected to additional offerings

An investor places a trade, which is executed in the third market. What statement made by a representative confirming the trade to a customer is misleading or inocrrect?

A. only unlisted stocks trade in the third market

B. none of these choices

C. third market trades occur in OTC

D. the third market is considered part of the secondary market

A. only unlisted stocks trade in the third market

Which of the following statements are true regarding a stock buyback programs institued by common stock issuers?

A. stock buybacks do not dilute shareholder ownership

B. stock buybacks result in lower reported EPS

C. stock buybacks increase outstanding shares

D. stock buybacks require shareholder approval

A. stock buybacks do not dilute shareholder ownership

Explanation: stock buybacks occur when issuers purchase their shares back from the market. This is typically done to benefit shareholders. With fewer shares outstanding, earnings per share increase, and each investors proportionate owndership increases. Stock buybacks do not require shareholder approval

The prices of goods and services rise faster than expected across the economy. The price acceleration is two-fold in the automobile industry, and three-fold in the energy stock. What statement is true?

A. purchasing power, non-systematic risk, is unfolding

B. purchasing power, systematic risk, is unfolding

C. market, non-systemic risk, is unfolding

D. market, a systematic risk, is unfolding

B. purchasing power, systematic risk, is unfolding

Explantion: Purchasing power, also known as inflation risk, occurs when prices of goods and services in the economy rise more than expected. Although the risk is impacting specific sectors more than others in the scenario, purchasing power risk is always considered systematic as it has some impact on the broad market/economy

An investor holds shares of preferred stock in their portfolio. The stock price just increased by 10% in a single day, and the investor calls their registered represetnatvie to inquire about the sudden increase. What is the most likely reason?

A. Mortgage interest rates rise by 100 basis points

B. the fed reserve announces measures to bring interst rates down

C. economic reports show a stron, potentiall peaking economy

D. the issuer reports a significant increase ine arnings over the past fiscal year

B. the fed reserve announces measures to bring interst rates down

A number of factors influence the market values of fixed income securities like preferred stock. What statement regarding these factors is incorrect?

A. interst rates maintain negative correlation with market values

B. low interst rate environments can lead to high inflation levels

C. inflation is a significant risk, espeically over long periods of time

D. the issuers future profitability is the primary driving force behind market values

D. the issuers future profitability is the primary driving force behind market values

ABC Company $50 par, 5% preferred shares are trading in the market at $52. Which of the following statements is true?

A. an investor will receive $0.63 per dividend payment

B. the 5% dividend rate is based on the $52 market value

C. the current yield is 5.00%

D. preferred stock is considered a debt security

A. an investor will receive $0.63 per dividend payment

Explanation:

Annual income = dividend rate * par value

Annaul income = 0.05 × 50

Annual income = 2.5

Dividends are typically paid quarterly so 2.50/4 = $0.63 per share at each dividend payment

Now we can find the current yield

CY = annual income/market price

CY=2.4/52

CY=0.048077

CY= 4.81%

Marlet Inc has $100 par 3.80% preferred stock outstanding. Dividend rates for new issues rise to 4.80% a year after issuance. Which of the following is the most likely current market price of the preferred stock?

A. $79.17

B. $105.48

C. $100

D. $111.73

A. $79.17

Explanation: when dividend and interst rates rise, fixed income securities fall in price. With the lower dividend rate of 3.80% compared to a market interst rate of 4.80%, other invetors will avoid purchasing the 3.80% preferred stock at par or a premium (price above par), they can simply go purchase another new issue preferred stock and reasonably expect a yield close to 4.80%. With $79.17 being the only disocunt as an answer choice, it is most likely price the preferred stock would be trading at.

An investor owns 600 shares of $100 par ABC 5% preferred stock, which they purhcased as a new issue at par. The securitys market price falls by 14% in the first year after issuance. What is the most likely reason for the market price decline?

A. postive economic reports

B. falling interst rates

C. low inflation levels

D. rapidly declining issuer profitability

D. rapidly declining issuer profitability

Fixed income securities flucuate in value when interest rates change, which is the primary driving factor of demand for the security. Their correltaiton is negative when interst rates fall, market value increase and vise versa. When interst rates fall, coupons on currently outstanding preferred stock become more attactive, resulting in higher market prices

Low levels of inflation tend not to have an effecet on preferred stock values, but high levels of inflation are a risk that drives market value downward. Rapidly declinging issuer profitabilty result in skipped or suspened dividends, which would result in preferred stock values declinging. In fact this is the only answer chjoice provided that could resonably result in lower market values.

Generally speaking, a good economy doesnt do much for preferred shares due to their fixed coupon. With the exception of participating or convertible shares, prefered stock pays a fixed dividedn rate no matter how wel things are going

A customer age 34, purchases a 6.40% $25 par preferred stock with current yield of 8.97%. Which of the following is the market price for preferred stock?

A. $13.76

B.$20.57

C. $17.83

D.$26.41

C. $17.83

Explanation: It requires a little reverse engineering to get thie question right. The current yield can be found by using this formula:

CY = annual income/mkt price

Market price = annual income/CY

The annual income of preferred stock is based on the dividend rate and the par value

annual income= dividned rate * par value

= 6.40% *25

= 1.6

Therefore:

Market price = annual income/CY

=1.6/8.97%

=$17.83

As an alternatve to calculating the market value directly, you could also plug in the answer choices into the equation to see which comes out to be the current yield

Which of the following statements regarding the relationship between interst rates and fixed income securities is accurate?

A. fixed income market values rise when interest rates rise due to competition for investors

B. fixed income market values fall when interest rates rise due to market make actions

C. fixed income market values fal when interst rates rise due to competition for investors

D. fixed income market values rise when interst rates rise due to market maker actions

C. fixed income market values fal when interst rates rise due to competition for investors

Explanation:

Fixed income market values have an inverse relationship with interst rates. When interst rates rise, fixed income market values fall due to competition for investors. Existing fixed income securities have fixed income rates. When interst rates rise, new issues of fixed income securities are being issued with higher income rates. To compensate for investors, existing fixed income security market values decline. The lower their market values fall, the higher their yield climb and more likely theyll entice investments from investors that could otherwise purchase new issue securities with higher coupons.