Flash Card

Question 1

How does the “participating feature “ that can be included with a preferred shares benefit an investor?

Answer 1

The preferred shareholder may receive a bigger dividend if the company performs well.

Question 2

How is the market capitalization of stock calculated?

Answer 2

The number of shares outstanding multipled by the current market value of each share

Question 3

When are preferred shares most commonly called?

Answer 3

When they are trading at a premium

Question 4

What are “restricted share”?

Answer 4

A class of common shares by which shareholders are given the right to vote only on certain issues

Question 5

A convertible preferred share is typically convertible into what?

Answer 5

Common shares

Question 6

What is the difference between a rate-reset preferred share and a fixed/floating rate preferred share?

Answer 6

How the dividend rate is determined

Question 7

Which two sectors are weighted the most in the S&P/TSX Composite Index?

Answer 7

Financials and energy are weighted the most, accounting for more than half of weighting of the index. Information technology, utilities and health care are weighted the least, together accounting for only 5%

Question 8

With respect to common shares, what is a “regularly dividend “?

Answer 8

A designated dividend amount that will be pid each year barring a major decline in earning

Question 9

What is the difference between the “record date” and the “ex- dividend date”?

Answer 9

Record date: The date on which an investor must own the shares of a company to be entitled to a declared dividend

Ex-Dividend date: the date on which the shares begin to trade without any entitlement to the dividend. The ex-dividend date is one business day before the record date.

Question 10

The dividend rate for the first five years of a rate-reset preferred shares is based in the yield to maturity on the five-year benchmark Government of Canada bond plus a spread. What does a smaller spread represent?

Answer 10

Stronger creditworthiness of the issuer at the time the shares were issued.

Question 11

What is a stock split?

Answer 11

The issuer split existing shares in order to lower the shares price.

Question 12

What type of preferred shares will pay dividends that are adjusted as interest rates change?

Answer 12

Floating rate preferred shares

Question 13

Are the dividend premium on a deferred preferred share eligible for the dividend tax credit?

Answer 13

No

Question 14

“Responsible investment” (previously known as “ethical” or “socially responsible investing “) involves considering environmental, social, and governance (ESG) factors. What are some examples of social factors?

Answer 14

• Diversity and Inclusion
• Human capital management
• Human rights
• Indigenous and Community relations

Question 15

What is a stock consolidation?

Answer 15

The is opposite of a stock split. The issuer consolidated existing shares. This decreases the number of shares outstanding and increases the price of each

Question 16

What do “float- adjusted market-capitalization-weighted indexes” refer to?

Answer 16

The index calculation reflects only shares that are included in the float.

Question 17

What is another name for a market-weighted index?

Answer 17

Value-weighted index

Question 18

What is interest rate risk when it comes to preferred shares?

Answer 18

The risk that interest rates will rise, causing the market price of a preferred share to decline.

Question 19

What would the issuer of a non-callable preferred share be most concerned about?

Answer 19

The issue will freeze a part of the company’s capital structure for as long as the company exists

Question 20

The dividend rate for the first five years of a rate-reset preferred share is based on the yield to maturity on the five-year benchmark Government of Canada bond plus a spread. What does the spread represent?

Answer 20

The market’s view of the issuer’s creditworthiness at the time the preferred shares were issued.

Question 21

How are stock dividends treated from a tax perspective?

Answer 21

Exactly like cash dividends

Question 22

What is an “odd lot”?

Answer 22

A group of shares trading in less than a standard trading unit

Question 23

What is the relationship between the market price of fixed rate perpetual preferred shares and interest rate?

Answer 23

They are inversely related

Question 24

On a cumulation preferred shares, will missed dividends accrue with or without interest?

Answer 24

Without interest

Question 25

What are the two types of investment approaches used by responsible investor?

Answer 25

Values-driven approaches and valuation- driven approaches

Question 26

Tom purchased 100 fixed/floating rate preferred shares from XYZ Company and held the shares for five years until they became callable. However, XYZ Company chose not to call the shares. What two options does Tom have?

Answer 26

1. Continue receiving fixed rate dividends that have been reset.
2. Receive floating rate preferred shares

Question 27

How much of a capital gain is subject to tax?

Answer 27

Half of capital gain is subject to tax

Question 28

What are the two types of fixed-reset preferred shares?

Answer 28

1. Rate-reset preferred shares

2. Fixed/Floating rate preferred shares

Question 29

What type of preferred shares has a fixed dividend for the first five years that is determined by the issuer of the shares, subject to certain minimum conditions?

Answer 29

Fixed/Floating rate preferred shares

Question 30

“Responsible investment” (previously know as “ethical” or “socially responsible investing”) involves considering environmental, social, and governance (ESG) factors. What are some examples of governance factors?

Answer 30

• Corruption and Bribery
• Executive compensation
• Risk and crisis management
• Supply chain management

Question 31

“Responsible investment “ involves considering what three factor when selecting and managing investment ?

Answer 31

Environmental, Social and Governance (ESG) factors

Question 32

What is a “straight preferred share”?

Answer 32

A preferred share that has no special features attached to it.

Question 33

Sarah purchased 100 rate-reset preferred shares from ABC Company and heal the shares for the first five years until they became callable. However, ABC company chose not to call the shares. What two options does Sarah have?

Answer 33

1. Keep the preferred shares with their newly reset dividend rate based on the new yield to maturity on the five-year benchmark Government of Canada bond plus a spread
2. Exchange the fixed rate preferred shares for floating rate preferred shares

Question 34

Stocks are classified by industry or sector, based on the Global Industry Classification Standard (GICs). What are the eleven sectors that are used?

Answer 34

1. Financials
2. Energy
3. Materials
4. Industrials
5. Consumer Discretionary
6. Communication Services
7. Consumer Staples
8. Utilities
9. Information Technology
10. Heath care
11. Real Estate

Question 35

What is a “soft retractable preferred share”?

Answer 35

A retractable preferred shares for which the redemption value maybe paid either in cash or in the form of the issuer’s common shares.

Question 36

What are the two key features of “fixed rate perpetual shares “?

Answer 36

Fixed Rate: they pay a fixed quarterly dividend (which is typically an annual percentage of the issue price)

Perpetual: they have no stated maturity date

Question 37

What are they regulations regarding restricted share?

Answer 37

• The restrictions of voting rights must be described in the various disclosures documents (prospectus, information circular, annual report, etc.)
• The restrictions must be identified in the financial press with a specific code
• Dealer literature must also describe restricted voting rights
• Trade confirmations must disclose when shares are restricted
• Even though non-voting common shareholders do not have voting rights, they have the right to attend meetings and to participate to an unlimited degree un dividend
• Minority approval is required for the creation if new restrictions shares

Question 38

How is interest income treated for tax purposes?

Answer 38

Interest income is fully taxable and therefore attracts more tax than a capital gain

Question 39

What are the three key reasons that investors buy preferred shares?

Answer 39

1. Higher yields
2. Preferential tax treatment
3. Portfolio diversification

Question 40

What is meant by the term “cum dividend “?

Answer 40

With dividends

Learning point: When an investor purchases shares that settle on or before the record date, it is said to be trading “cum dividend” In other words, the purchaser will be entitled to the upcoming dividend.

Question 41

Why is a convertible preferred share often referred to as a “two-way securities”?

Answer 41

It has the safety of a preferred share, but it can also realize a significant capital gain if the price of the common shares increases

Question 42

What are two examples of circumstances in which a company would issue a preferred share rather than a common share?

Answer 42

• The stock market is falling or inactive

- Business prospects may be uncertain

Question 43

A callable preferred share is callable by whom?

Answer 43

The issuer

Question 44

What phrase is used to describe two classes of preferred shares from the same issuer that rank equally in terms of dividends entitlement?

Answer 44

Pari Passu