LO 1.h And LO 1.i

Question 1

American Deposity Receipt

Answer 1

ADR is a type of equity security designed to simplify foreign investing for Americans. It is created when common shares are purchased in a foreign companys home market. The shares are deposited in a foreign branch of a US bank and a receipt the ADR, is created. The purchasenis madenin US dollars.
Can be on NYSE, NASDAQ or OTC (over the counter)

Question 2

ADR taxation

Answer 2

Dividends paid to US investors may be subject to withholding tax bt foreign govt or foreign stock issuer. This amount can be applied as a credit against the investors US tax liability. Capital gains are only taxable in US.

Question 3

Currency and political risk

Answer 3

The foreign company pays dividends in its home currency and the issuing bank converts to and paysnout those dividends bbn in US dollars. When current excbange rate changes, so will these dividends in US dollar terms. So the value of the ADR will rise and fall in conjunction withtbhe foreign stock. Also if the ADr is in am unstable country there is political risk as well.

Question 4

Perferred stock

Answer 4

An equity security, it represents a class of ownership in the issuing corporation. It has some characteristics of a debt security. The rate of return is fixed. The preferred stocks annual dividend represents its ficed rate of return. Stated as a percenrage of its par value. Preferred par value is $100 unless says different.

Have no voting rights or preemptive rights.

Question 5

Benefits of owning preferred stocks.

Answer 5

Dividend preference- BODdeclares dividends the preferred shares are paid before common shareholders.
Priority at dissolution- if corp goes bancrupt, preferred holders have a prioty claim over commone stockholders on remaining assests after creditors are paid.

Question 6

Risks owning preferred stock

Answer 6

Purchase power risk
Interest rate sensitivity
Decreased or no dividend income
Priority at dissolution

Question 7

Why include preferred stock in client portfolio?

Answer 7

Fixed income from dividend
Priority claim over common stock
Convertible preferred stock sacrifices income in exchange for potential appreciation

Question 8

Types of preferred stock

Answer 8

Straight (non cumulative)- stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.
Cumulative- stock accrues payments due to its shareholders in the event dividends are reduced or suspended.
Callable preferred- stock a company can buy back from investors at a stated price after a specific date.
Convertible preferred- stock the owner can exchange for a fixed # of shares of the issuing corps common stock.
Adjustble rate preferred- stock issued with adjustable or variable dividend rates.
Participating preferred- stock with fixed dividends and offer its owner a share of corp profits that remain after all dividend and interest d ut e other securities are paid.