Chapter 1: Securities Markets, Investment Securities & Economic Factors Flashcards
Common stock is classified in these 4 ways:
- Authorized shares
- Issued stock
- Treasury stock
- Outstanding stock
What are the distinguishing factors of a Treasury stock?
Was outstanding stock before it was repurchased by the issuer
Has no voting rights
Does not receive dividends
Can be reissued or retired
This preferred stock has no special features
Straight preferred (noncumulative)
This preferred stock pays might pay a dividend that is higher than printed on the certificate, dividends must be paid prior to paying a common dividend and may cost extra (less dividend income) because of it’s feature
Cumulative preferred
This preferred stock is most influenced by the price of an issuer’s common stock
Convertible preferred
Because convertible preferred shares can be exchanged for common shares, its price can be closely linked to the price of the issuer’s common and is less influenced by changes in interest rates
This preferred stock the might pay a dividend that is higher than that printed on the certificate. Owners receive shares of corporate profits after all dividends and interest due to other securities are paid. Common dividend must be declared first.
Participating preferred
Name 3 features of participating preferred stock
- This preferred stock the might pay a dividend that is higher than that printed on the certificate.
- Owners receive shares of corporate profits after all dividends and interest due to other securities are paid.
- Common dividend must be declared first.
This preferred stock issuer’s can buy back from investors at a stated price after a specific date?
Callable preferred
Which two preferred stocks might pay a dividend that is higher than that printed on the certificate?
Cumulative preferred and Participating preferred
Cumulative preferred might pay a dividend in arrears in addition to the fixed dividend. Participating preferred might pay part of the common dividend, over and above the fixed dividend.
Which preferred stock issuers call securities when interest rates are falling and replace them with securities that have a lower fixed rate obligation?
Callable preferred
Which preferred stock is tied to the rates of other interest rate benchmarks, such as a treasury bill and money market rates, and can be adjusted as often as semiannually?
Adjustable-rate preferred
Adjustable-rate preferred stocks are tied to what rates?
Other interest rate benchmarks, such as a treasury bill and money market rates
How frequently can adjustable-rate preferred stocks be adjusted?
As often as semiannually
In which of the following ways does preferred stock differ from common stock as an investment?
a. Lower dividends
b. greater sensitivity to interest rate fluctuation
c. lower priority of dividend payment
d. greater voting rights
b. greater sensitivity to interest rate fluctuation
As a fixed income security, preferred stock has a markedly grater price sensitivity to interest rates than does common stock.
Which types of preferred stock typically has the highest stated rate of dividend (all other factors being equal?)
a. participating
b. straight
c. cumulative
d. callable
d. callable
When the stock is called, dividend payments are no longer made. To compensate for that possibility, the issuer must pay a higher dividend.
This type of preferred stock - dividends are no longer made when the stock is called. To compensate for that possibility, the issuer must pay a higher dividend.
Callable preferred
Would straight or cumulative have a higher stated rate?
Cumulative preferred is safer, and there is always a risk-reward trade-off. Because straight preferred has no special features, it will pay a higher stated rate of dividend.
How do you calculate a dividend yield/current yield?
divide the annual dividend by the current price of the stock
This type of dividend is not taxed when received. No tax consequences are incurred until the investor chooses to liquidate the shares and realize the gains and losses.
Stock dividends
This dividend is paid by check or brokerage account
Cash dividends
This dividend is taxed as income in the year received
Cash dividends
Name the 3 types of dividend options
- Cash dividends
- Stock dividends
- Stock splits
This type of dividend changes the number of outstanding stock shares by means of a split
Stock split dividend
This type of dividend must have shareholder approval before changing the trading characteristics
Stock split dividend
This type of dividend keeps the company’s market value the same, but the stock market price per share declines
Stock dividend
Stock dividends are typical of what type of companies?
Growth companies that invest cash resources in research and development
True or False:
Dividends are guaranteed to shareholders.
FALSE.
True or False:
Dividends are paid automatically each quarter
FALSE
A company’s board of directors (BOD) votes when to make these distributions and they are not always guaranteed.
If XYZ Corp did a 2-for-1 stock split, an investor who owned 100 XYZ shares worth $20 per share before the split would own 200 shares worth how much per share?
$10
The total value of the outstanding stock must be the same before and after a split.
If XYZ Corp did a 1-for-2 stock split, an investor with 100 shares worth $20 per share before the split would own 50 shares worth how much per share?
$40
Although the individual share value changes as result of the split, the total value of the stock remains the same.
RST stock has a current market value of $50. Total dividends paid during the year were $5. What is the dividend yield?
The solution is found by dividing $5 by $50. The yield is 10%.
RST stock has a current market value of $50. The most recent quarterly dividend paid was $1.25. What is the dividend yield?
The solution is found by annualizing the quarterly dividend (multiplying by 4) FIRST. $1.25 x 4 = $5.
$5 divided by $50 = 10% dividend yield.
** Remember to use the ANNUAL dividends in calculating yield.
What is the priority of dividend payments made?
- Dividends in arrears paid to cumulative shares
- Stated dividends paid to all preferred shares
- Common dividend
How are total returns calculated
Combination dividend income (for equity investments) or interest paid (for debit investments) and price appreciate or decline over a given period of time
Equity investments pay ________________ and debt investments pay _______________ .
Equity = dividend income Debt = interest
If a common stock is purchased for $20 with an annual dividend of $1 and it’s sold after one year for $24, what is the total return?
25%
The total return is $5. $1 in dividends plus $4 in capital appreciation. $5 divided by $20 = 25%
Stockholders may maintain proportionate ownership by purchasing newly issued shares before they are offered to the public
Preemptive rights
Annualized dividend divided by current market price
Current yield/Dividend yield
These facilitate the trading of foreign stocks in the US Markets
American Depository Receipts (ADRs) or
American Depository Shares (ADS)
True or False
ADR owners have voting rights
False
True or False
ADR owners have no preemptive rights
True
True or False
ADR owners have no rights to exchange the ADRs for the actual foreign share certificates
False
ADR owners CAN exchange the ADRs for the actual foreign share certificates
What is an ADR?
An ADR (American Depositary Receipts) allow domestic US markets & investors buy foreign securities
One ordinary share equals how many ADRs?
One
Name 5 characteristics of an ADR
- Bought and sold like stock
- Share certificates are held by a US depository bank
- The US depository bank then issues receipts for the shares
- Investor purchases the ADR, receives dividends and sells it all in US dollars, however the stock is traded and dividends are paid in the foreign currency
- ADR owners are subject to currency risk
Who must approve decisions to issue additional stock through a rights offering?
The board of directors
Certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued.
Warrants
True or False
Warrants are offered to current shareholders only
False
True or False
Warrants have longer terms than rights
True
True or False
Warrants do not trade in the secondary market
False
True or False
At the time of issuance, the exercise price of a warrant is typically below the market price of the underlying stock.
False, this right or feature makes it always above the market price of the underlying security
True or False
Common stockholders do not have the right to subscribe to rights offerings
False
True or False
Preferred stock is not subject to rights offerings
True
True or False
Rights are short-term instruments.
True
True or False
The exercise rights of rights is greater than the current market price of the stock at the time of issuance
False. Rights afford access to new stock, often at a discount, before it’s offered to the general public.
True or False
Warrants afford access to a stock at a fixed price for a long period of time
True
Rights and warrants are similar in this way
afford access to stock under possible favorable conditions
What are the two basic types of options contracts
- call option: the buyer of the call has a right to buy, the seller of the call has the obligation to sell
- put option: the buyer of the put has the right to sell, the seller of the put has the obligation to guy
In general, the maximum life of an option is how long?
Nine months
True or False
Options are longer term than warrants but shorter than stock rights
False
Options are longer term than stock rights but shorter than warrants
Premiums are quoted in _______ per share
Dollars
What is the premium if I have 100 shares totaling $300?
$3 is the premium. An option’s cost is called the premium. Premiums are quoted in dollars per shares
Which options positions are bearish?
Long put/short call
Which options positions are bullish?
Long call/short put
Which positions buy stock at exercise?
Long call/short put
Which positions sell stock at exercise?
Long put/short call
Which positions have rights?
Long call/Long put
Which positions have obligations?
Short call/Short put
The price investors must pay to buy the stock. Price is driven by supply and demand.
Current market value (CMV) or market price
An arbitrary account value when valuing a common stock
Par value
Current hypothetical liquidation value of a share when valuing a common stock
Book value
Name 2 types of common stock values
- current market value
- par value
- book value
What are the two voting rights and the difference between them?
- Statutory voting: 1 vote per share 2. Cumulative voting: allocate votes in any manner chosen (ie. Small shareholders combining votes)
1 vote per share owned like statutory, times the number of directorships to be elected. Example - if an investor owns 100 stock shares and there are 5 directorships to be elected, the investor will have a total of 500 votes.
The price at which the option owner is entitled to buy or sell the underlying security and the price at which the option seller has agreed to buy or sell the security
Strike price or Exercise price
Relatively small cash outlay allows an investor to control an investment that would otherwise require a much larger sum
Leverage
In general, the maximum life of an option is how long?
Nine months
How is the interest calculated on a bond?
From the par value (aka face value), normally $1000 per bond.
How often does interest accrue on a bond?
Daily
How often is interest paid to bondholders?
Semiannually
A bond with a coupon value of 6% pays how much interest semi-annually?
A bond is $1000
6% times $1000 = $60 - but REMEMBER, this is the annual amount! For semi-annual interest it is $30
Bonds issued today must be issued in what format?
Fully registered or book-entry. Cannot be bearer or registered as to principal only.
True or false
Bonds are junior to stock
False
Bonds are senior to stock.
True or false
Bond interest must be paid before dividends may be paid
True
