Chapter 1

Question 1

Security

Answer 1

An Investment that represents either an ownership stake or debt stake

Question 2

Common Stock

Answer 2

Equity in a corporation

Question 3

Preferred Stock

Answer 3

Represents equity in a corporation but usually does not have the same voting or appreciation potential as common stock. Normally pays a fixed dividend usually quarterly, and has priority claims over common stock. No right to maintain a percentage of ownership when new shares are issued.

Question 4

Capital Appreciation

Answer 4

An increase in the market price of a security

Question 5

Stock Dividend

Answer 5

Additional shares of common stock in the Issuing company. More shares– price per shares drops. Same overall value.

Question 6

Property Dividends

Answer 6

Payment via shares in a subsidiary company, or in company products

Question 7

Limited Liability

Answer 7

In the event of bankruptcy, when corporate assets are not adequate to meet corporate obligations, the stockholders personal assets are not at risk

Question 8

Market Risk

Answer 8

The chance that a stock will decline in price

Question 9

Business Risk

Answer 9

Possibility of decline in the company’s earnings

Question 10

Low priority Dissolution

Answer 10

If a company enters bankruptcy, the holders of its bonds and preferred stock have priority over common stock holders.

Question 11

Straight (Noncumulative) preferred Stock

Answer 11

Has no special features beyond the stated dividend. Missed dividends are not paid to the stockholder

Question 12

Cumulative Preferred Stock

Answer 12

Accrues payments due its shareholders in the event dividends are reduced or suspended

Question 13

Callable Preferred

Answer 13

A company can buy back from investors at a stated price after a specified date. Higher dividend rate and premium call price are ways to compensate holder.

Question 14

Convertible Preferred

Answer 14

Owner can exchange the shares for a fixed number of shares common stock in issuing corporation. Usually lower dividend rate due to this advantage. Note– since preferred stock is linked to value of common stock , the convertible preferred price tends to fluctuate in line with that of common stock.

Question 15

Adjustable Rate Preferred

Answer 15

Issues with adjustable (variable) dividend rates. Usually tied to rates of other interest benchmarks )T-bills, money market rates, etc.). Since payment adjusts to current interest rates, price is relatively stable.

Question 16

Nonqualified Stock Options (NSOs)

Answer 16

Employee Stock Option– Treated as a form of compensation. When exercised, the different between current market price and strike price is reported as wages on tax returns of the employer and employee. Employee taxed ordinary income tax instead of capital gains. Company gets tax write off as salary expense.

Question 17

Incentive Stock Options (ISOs)

Answer 17

Employee Stock Option– No tax consequence to employer. If stock purchased through exercise is held at least two years after grant and one year after exercise date, profits are reported as long term capital gains tax. 10 Year limit for exercise.

Difference between market value at purchase and strike price is a preference item in calculating alternative minimum tax.

Question 18

Restricted Securities

Answer 18

Restricted from immediate resale. Cannot sell until having held for certain period of time (Usually six months). Volume restrictions also apply to affiliates of issuer.

Question 19

Control Stock

Answer 19

Stock held by control person. Always has volume limits. Purchases and sales must be reported to SEC

Question 20

Control person

Answer 20

Corporate director, an office, a large stockholder (10% or more of voting stock) or immediate family member of the preceding residing in the same home

Question 21

SEC Rule 144

Answer 21

Mechanism for reporting sale or control stock and restricted stock

Question 22

American Depository Receipts (ADRs)

Answer 22

A negotiable security that represents a receipt for shares of stock in a non-US corporation. Facilitate the trading of foreign stocks in US markets. ADRs are bought/sold in USD. Dividends also paid in USD. ADR may represent several shares of underlying security or fractional shares in underlying security. Do not have preemptive rights.

Question 23

Currency Risk

Answer 23

The exchange rate in foreign currency investment security is denominated could decline in value against USD.

Question 24

Emerging Markets

Answer 24

Markets in less developed countries

Question 25

Frontier markets

Answer 25

Markets in countries even less developed than emerging markets. Extremely high risk.

Question 26

Developed Markets

Answer 26

Associated with countries that have highly developed economies with stable political and social institutions

Question 27

Country Risk

Answer 27

Composite of all risks of investing in a particular country. Political risk, structural risk, economic policy, inflation, etc.

Question 28

Exchange controls

Answer 28

Foreign investors can be subject to restrictions on currency conversion or movement

Question 29

Withholding, Fees and Taxes

Answer 29

Some countries may withhold portion of dividends and capital gains for taxes. May also impose heavy fees and taxes on securities.

Question 30

Participating Preferred Stock

Answer 30

May receive additional dividends if the firm’s profits exceed a stated level