Chapter 1 - Equity Securities

Question 1

No-par value stock is characterized as stock which

Answer 1

Correct Answer:
Has not been assigned a par value by the corporation

Explanation:
No-par value stock is simply shares that have not been assigned a par value by the
corporation. Some states permit this to occur.

Textbook Reference:
Please see textbook section 1.1

Question 2

ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholder
that owns 200 shares of stock may:

I. Vote 200 shares of stock for each director under statutory voting

II. Vote 100 shares of stock for each director under statutory voting

III. Split a total of 200 votes any way between the two directors under cumulative voting

IV. Split a total of 400 votes any way between the two directors under cumulative voting

Answer 2

Correct Answer:
I and IV

Explanation:
Under 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 Reference:
Please see textbook section 1.1.1.2

Question 3

Treasury stock is best characterized as

Answer 3

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 been
repurchased by the issuer. These shares do not carry voting rights nor pay dividends.

Textbook Reference:
Please see textbook section 1.1

Question 4

Common stock holders have limited liability. This means that

Answer 4

Correct Answer:
They cannot lose more than their original investment

Explanation:
Limited liability means that an investor cannot lose more than their original investment.

Textbook Reference:
Please see textbook section 1.1.1.1

Question 5

When must proxy materials be filed with the SEC?

Answer 5

Correct Answer:
In advance of the shareholder solicitation

Explanation:
The 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 Reference:
Please see textbook section 1.1.1.2

Question 6

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

Answer 6

Correct Answer:
avoiding dilution.

Explanation:
Pre-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 Reference:
Please see textbook section 1.1.1.6

Question 7

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

Answer 7

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 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 Reference:
Please see textbook section 1.1.1.7

Question 8

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

Answer 8

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 the
holder to receive shares of the underlying company. Note that warrants do not make
interest payments to investors.

Textbook Reference:
Please see textbook section 1.1.1.7

Question 9

When comparing rights and warrants, which of the following statements are TRUE?

I. Rights are longer term than warrants

II. Warrants are longer term than rights

III. At issue, the exercise price of a right is lower than the market price of the underlying stock

IV. At issue, the exercise price of a warrant is lower than the market price of the underlying stock

Answer 9

Correct Answer:
II and III

Explanation:
Rights are short term instruments that allow the holder to buy the stock at a price that is
typically lower than the current market price of the stock. Warrants are long-term
instruments. The exercise price of the stock is typically higher than the market price of
the stock at the time the warrants are issued. Warrants have value only if the price of the
stock appreciates.

Textbook Reference:
Please see textbook section 1.1.1.8

Question 10

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

Answer 10

Correct Answer:
cyclical

Explanation:
Cyclical stocks tend to track to the economy, gaining value when the economy is growing
and declining when the economy is contracting.

Textbook Reference:
Please see textbook section 1.2.1.3

Question 11

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

Answer 11

Correct Answer:
Growth stock

Explanation:
Growth stocks are stocks of companies that reinvest most of their earnings into their
business. Because of their high potential for growth, they generally do not pay dividends.

Textbook Reference:
Please see textbook section 1.2.1.5

Question 12

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

Answer 12

Correct Answer:
protect the portfolio by using hedging strategies.

Explanation:
Systematic risk cannot be avoided by diversification or by selecting specific types of
stocks. It can be hedged with derivatives, such as buying put options on a stock market
index.

Textbook Reference:
Please see textbook section 1.3.1

Question 13

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.

Answer 13

Correct Answer:
C) business risk

Answer Explanation
Business 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 Reference
Please see textbook section 1.3.2

Question 14

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

Answer 14

Correct Answer:
B)

Answer Explanation
Adjustable -rate preferred stock pays dividends that are determined based on an underlying benchmark, typically the US Treasury bill.

Textbook Reference
Please see textbook section 1.5.2

Question 15

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

Answer 15

Correct Answer:
D)

Answer Explanation
The record date is one business day after the ex-dividend date.

Textbook Reference
Please see textbook section 1.7

Question 16

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.

Answer 16

Correct Answer:
C) include a detachable warrant as a sweetner with the bond offering.

Answer Explanation
The 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 Reference
Please see textbook section 1.1.1.7

Question 17

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

Answer 17

Correct Answer:
B) To maintain proportional ownership

Answer Explanation
Stock rights give shareholders the right, but not the obligation, to maintain proportionate share ownership, rather than be diluted when new shares are issued.

Textbook Reference
Please see textbook section 1.1.1.6

Question 18

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

Answer 18

Correct Answer:
A) Street name

Answer Explanation
When 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 Reference
Please see textbook section 1.6.2

Question 19

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

Answer 19

Correct Answer:
D) The business day before the ex-dividend date

Answer Explanation
To 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 Reference
Please see textbook section 1.7

Question 20

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

Answer 20

Correct Answer:
B) The transfer agent

Answer Explanation
When 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 Reference
Please see textbook section 1.6.1

Question 21

An investor who owns shares in ABC company is notified of a rights offering. If the investor decides to participate in this offering

I. her stake in company ownership will not be diluted
II. she must sell all her ABC shares
III. she will acquire more ABC shares
IV. 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

Answer 21

Correct Answer:
A) I and III

Answer Explanation
A 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 Reference
Please see textbook section 1.1.1.6

Question 22

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

Answer 22

Correct Answer:
B) Unlimited

Answer Explanation
Potential 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 Reference
Please see textbook section 1.8

Question 23

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

Answer 23

Correct Answer:
C) They must be cancelled

Answer Explanation
For reverse stock splits, all open orders must be cancelled before the ex-date.

Textbook Reference
Please see textbook section 1.7.4

Question 24

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

Answer 24

Correct Answer:
D) Non-systematic risk

Answer Explanation
Non-systematic risk, also called business risk, is a risk specific to an individual company, rather than the market as a whole.

Textbook Reference
Please see textbook section 1.3.2

Question 25

Which of the following statements about warrants are TRUE?

I. They may be sold with a bond as a sweetener
II. They have shorter expiration periods than options
III. They function very much like call options
IV. They trade exclusively on exchanges
A) II and III
B) I and IV
C) I and III
D) II and IV

Answer 25

Correct Answer
C) I and III

Answer Explanation
Warrants 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 Reference
Please see textbook section 1.1.1.7

Question 26

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

Answer 26

Correct Answer:
D) A corporation is permitted to sell to the public

Answer Explanation
Authorized stock represents the number of shares a corporation may sell to the public in the future.

Textbook Reference
Please see textbook section 1.1

Question 27

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

Answer 27

Correct Answer:
C) Call risk

Answer Explanation
ADRs 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 Reference
Please see textbook section 1.4.1.1

Question 28

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

Answer 28

Correct Answer:
D) Any missed dividends must be paid before any common shareholders are paid

Answer Explanation
With respect to cumulative preferred stock, any missed dividends have to be paid to these shareholders before any common dividends are paid.

Textbook Reference
Please see textbook section 1.5.2

Question 29

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.

Answer 29

Correct Answer:
B) American depository receipt (ADR).

Answer Explanation
An 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 Reference
Please see textbook section 1.4.1.1

Question 30

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

Answer 30

Correct Answer:
D) Cumulative voting

Answer Explanation
This is known as cumulative voting. The alternative process is statutory voting.

Textbook Reference
Please see textbook section 1.1.1.2

Question 31

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

Answer 31

Correct Answer:
D) More shares with a lower per share value

Answer Explanation
Upon 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 Reference
Please see textbook section 1.7.4

Question 32

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

Answer 32

Correct Answer:
B) Friday, Jan 13

Answer Explanation
Cash 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 Reference
Please see textbook section 1.7.1

Question 33

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

Answer 33

Correct Answer:
D)

Answer Explanation
A company may pay a dividend in cash, stock or stock of a subsidiary company, or even goods produced by the company

Textbook Reference
Please see textbook section 1.7.3

Question 34

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

Answer 34

Correct Answer:
A) Voting by proxy

Answer Explanation
A common shareholder often casts votes by proxy, or through a third party that is representing the shareholder’s votes.

Textbook Reference
Please see textbook section 1.1.1.2

Question 35

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

Answer 35

Correct Answer:
A) It depends on the warrants’ exercise price

Answer Explanation
Warrants 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 Reference
Please see textbook section 1.1.1.7

Question 36

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

Answer 36

Correct Answer:
D) 50 additional shares

Answer Explanation
Pre-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 Reference
Please see textbook section 1.1.1.6

Question 37

Brunswick issues a Series A $2.40 cumulative convertible preferred voting stock. This stock

I. is convertible into common stock
II. pays dividends in arrears
III. 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

Answer 37

Correct Answer:
C) I and II only

Answer Explanation
Cumulative 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 Reference
Please see textbook section 1.5.2

Question 38

Which of the following statements regarding preferred stock are TRUE?

I. Like common, preferred shares generally have voting rights
II. Unlike common, preferred shares generally do not have voting rights
III. Preferred shares typically have greater appreciation potential than common
IV. 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

Answer 38

Correct Answer:
D) II and IV

Answer Explanation
Preferred 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 Reference
Please see textbook section 1.5.1

Question 39

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

Answer 39

Correct Answer:
B) ADS

Answer Explanation
An 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 Reference
Please see textbook section 1.4.1

Question 40

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

Answer 40

Correct Answer:
C) Endorse the certificates to a brokerage firm

Answer Explanation
Endorsing 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 Reference
Please see textbook section 1.6.2

Question 41

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

Answer 41

Correct Answer:
A) receive higher dividends

Answer Explanation
Preferred 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 Reference
Please see textbook section 1.5.1.3

Question 42

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.

Answer 42

Correct Answer:
D) avoiding dilution

Answer Explanation
Pre-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 Reference
Please see textbook section 1.1.1.6

Question 43

ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholder that owns 200 shares of stock may

I. Vote 200 shares of stock for each director under statutory voting
II. Vote 100 shares of stock for each director under statutory voting
III. Split a total of 200 votes any way between the two directors under cumulative voting
IV. 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

Answer 43

Correct Answer:
D) I and IV

Answer Explanation
Under 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 Reference
Please see textbook section 1.1.1.2

Question 44

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.

Answer 44

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

Question 45

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.

Answer 45

Correct Answer:
B) Preferred stock is less risky than common stock and has less growth potential.

Answer Explanation
Preferred stock has both risk and growth potential. However, both are lower than in common stock, making preferred stock a more conservative investment.

Textbook Reference
Please see textbook section 1.5.3

Question 46

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

Answer 46

Correct Answer:
B) Wednesday, June 23rd

Answer Explanation
The 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 Reference
Please see textbook section 1.7

Question 47

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

Answer 47

Correct Answer:
C) 2.4

Answer Explanation
The 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 Reference
Please see textbook section 1.5.1.3

Question 48

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

Answer 48

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 Explanation
Rights 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 Reference
Please see textbook section 1.1.1.8

Question 49

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.

Answer 49

Correct Answer:
A) higher than the buy-to-cover price.

Answer Explanation
A 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 Reference
Please see textbook section 1.8

Question 50

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

Answer 50

Correct Answer:
D) 10 business days prior to the record date

Answer Explanation
An 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 Reference
Please see textbook section 1.7

Question 51

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

Answer 51

Correct Answer:
A) Any interested investor

Answer Explanation
The 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 Reference
Please see textbook section 1.1.1.6

Question 52

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

Answer 52

Correct Answer:
A) In advance of the shareholder solicitation

Answer Explanation
The 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 Reference
Please see textbook section 1.1.1.2

Question 53

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

Answer 53

Correct Answer:
A) Street name

Answer Explanation
When 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 Reference
Please see textbook section 1.6.2

Question 54

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

Answer 54

Correct Answer:
D) Record date

Answer Explanation
An 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 Reference
Please see textbook section 1.7

Question 55

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

Answer 55

Correct Answer:
B) Business day following the record date

Answer Explanation
For 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 Reference
Please see textbook section 1.7.1

Question 56

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

Answer 56

Correct Answer:
C) Negotiable

Answer Explanation
A 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 Reference
Please see textbook section 1.6

Question 57

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

Answer 57

Correct Answer:
B) Growth

Answer Explanation
Common 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 Reference
Please see textbook section 1.1.1.5

Question 58

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

Answer 58

Correct Answer:
D) 10 business days prior to the record date

Answer Explanation
The exchange must be notified 10 business days before the record date when a dividend is to be paid.

Textbook Reference
Please see textbook section 1.7

Question 59

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.

Answer 59

Correct Answer:
D) their potential lack of liquidity

Answer Explanation
Penny 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 Reference
Please see textbook section 1.2.2

Question 60

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

Answer 60

Correct Answer:
A) The owner of the shares does not have foreign currency risk

Answer Explanation
Owning 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 Reference
Please see textbook section 1.4.1.1

Question 61

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

Answer 61

Correct Answer:
B) Total value will not change

Answer Explanation
Stock 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 Reference
Please see textbook section 1.7.4

Question 62

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.

Answer 62

Correct Answer:
B) will not have any intrinsic value

Answer Explanation
A 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 Reference
Please see textbook section 1.1.1.7

Question 63

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

Answer 63

Correct Answer:
C) Wednesday, Jan 11

Answer Explanation
For 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 Reference
Please see textbook section 1.7

Question 64

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 date
II. Record date
III. Declaration date
IV. Payable date
A) I, II, III, IV
B) III, I, IV, II
C) II, III, I, IV
D) III, I, II, IV

Answer 64

Correct Answer:
D) III, I, II, IV

Answer Explanation
The 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 Reference
Please see textbook section 1.7

Question 65

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

Answer 65

Correct Answer:
A) T+2

Answer Explanation
The regular-way trade cycle for most trades settles on the second day after trade execution - T+2.

Textbook Reference
Please see textbook section 1.7

Question 66

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

Answer 66

Correct Answer:
A) having a claim on corporate assets before common stockholders if the corporation is dissolved

Answer Explanation
Preferred 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 Reference
Please see textbook section 1.5.1.2

Question 67

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

Answer 67

Correct Answer:
D) American Depository Receipts

Answer Explanation
American 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 Reference
Please see textbook section 1.4.1

Question 68

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

Answer 68

Correct Answer:
C) Thursday, July 3

Answer Explanation
For 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 Reference
Please see textbook section 1.7

Question 69

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

Answer 69

Correct Answer:
D) The record date

Answer Explanation
The record date is one business day after the ex-dividend date.

Textbook Reference
Please see textbook section 1.7

Question 70

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

Answer 70

Correct Answer:
A) ADS

Answer Explanation
An 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 Reference
Please see textbook section 1.4.1

Question 71

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

Answer 71

Correct Answer:
D) 2.4

Answer Explanation
The 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 Reference
Please see textbook section 1.5.1.3

Question 72

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

Answer 72

Correct Answer:
D) Warrants

Answer Explanation
Warrants do not pay dividends. UITs, Mutual Funds, and ADRs all pay dividends from the underlying securities.

Textbook Reference
Please see textbook section 1.1.1.7

Question 73

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.

Answer 73

Correct Answer:
C) inflationary risk

Answer Explanation
Interest 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 Reference
Please see textbook section 1.4.1.1

Question 74

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

Answer 74

Correct Answer:
A) The business day before the ex-dividend date

Answer Explanation
To 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 Reference
Please see textbook section 1.7