SERIES 65 EXAM 1 10 CARDS -5 Flashcards
The gift of an assessable security is considered both an offer and a sale under securities law. Why?
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Assessable security: An assessable security is one where the issuer or another party can require the holder to **pay additional money **after the security has been purchased. For example, if you own stock in a company, and the company can ask you to pay more money in the future to maintain your ownership, that stock is assessable.
2. Regulatory Perspective: Under the Uniform Securities Act (USA), the gift of an assessable security is treated as a sale because, by accepting the gift, the recipient could be obligated to make additional payments. This potential obligation constitutes a transfer of value, which is why it is considered a sale.
3. Implications: Since the transaction is considered a sale, it must comply with the securities laws regarding registration, anti-fraud provisions, and other regulations.
A bonus security that is given with the purchase of a car is considered a sale under the securities law. Why?
Definition of a Sale: Under the Uniform Securities Act (USA), a sale includes any contract of sale or disposition of a security or interest in a security for value. When a security is given as a bonus or incentive with the purchase of another item (in this case, a car), it is considered that value is being exchanged.
Bonus Securities: When a security is given as a bonus or an additional benefit with the purchase of something else, such as a car, it is not truly “free.” The buyer is receiving the security as part of the overall transaction,** which involves an exchange of value.
Regulatory Interpretation: Because the security is tied to a transaction where** value is being exchanged (the purchase of the car), this is treated as a sale of the security**, subject to securities regulations.
A rights offering is considered both an offer and a sale under the securities law. Why?
Rights Offering: A rights offering occurs when a company offers its existing shareholders the right to purchase additional shares at a discounted price before the shares are offered to the **general public. **These rights are typically given in proportion to the number of shares the shareholders already own.
Offer and Sale:
Offer: The act of presenting the rights to the shareholders, allowing them the opportunity to purchase additional shares, constitutes an offer.
**Sale: **If the shareholders decide to exercise their rights and purchase the additional shares, this constitutes a sale of securities.
Regulatory Context:
Under the Uniform Securities Act and other securities regulations, both the offer and the sale of securities must comply with applicable laws, including registration requirements and anti-fraud provisions.
The reorganizations of companies, due to takeover, mergers, acquisitions, or spin-offs are not considered offers or sales? why.
The reorganizations of companies due to takeovers, mergers, acquisitions,or spin-offs are not offers or sales since shareholders are not required to pay money to receive shares of new companies that they deserve to receive.
However:
Reorganizations and Securities Law:
Reorganizations can involve mergers, acquisitions, takeovers, spin-offs, and similar transactions where shareholders receive new securities in exchange for their existing ones.
Even if shareholders are not required to pay additional money to receive these new shares, the transaction is still considered both an offer and a sale of securities.
Legal Definition of Sale:
The definition of a “sale” under the Uniform Securities Act and the Securities Act of 1933 includes any disposition of a security for value. In a reorganization, the exchange of old securities for new ones constitutes a transfer of value, even if no money changes hands.
The fact that shareholders receive new securities in exchange for their existing ones means that they are participating in a transaction that legally qualifies as a sale.
**Regulatory Implications:
**
Because these transactions are considered sales, they are subject to securities regulations, including registration and disclosure requirements, unless an exemption applies.
Exemptions may exist for certain types of reorganizations, but the transactions themselves are still legally classified as offers and sales of securities.
At the end of a calendar year, an investor has $10,000 in capital gains and $18,000 of capital losses. How much can The investor claim $3,000 as a tax deduction in the current year. Why?
Although the investor has net capital losses of $8,000, the maximum tax deduction an investor can claim from net capital losses at the end of the calendar year is $3,000. The remaining $5,000 can be carried over into the next year.
Which of the following is issued with the longes expirations?:
1. Right
2. Warrants
3. .Call options
4. Put option
Answer: Warrants. Why?
Warrants give investors the long term ability to buy stock from the issuing company at a fixed price. Warrants usually last several years until expiration and may be perpetual with no expiration. Warrants: Warrants give the holder the right to buy a company’s stock at a specific price until a future date. Warrants can have very long expirations, often lasting several years or even decades. This is significantly longer than rights or options.
**Rights: **These are **short-term securities **typically issued by a company to its existing shareholders, allowing them to purchase additional shares at a discount. Rights usually expire within a few weeks to a couple of months.
Call Options and Put Options: These are standardized contracts traded on options exchanges. The typical expiration for standard options is up to nine months, though some options (LEAPS) can have expirations up to three years. However, this is still shorter than the potential expiration period for warrants.
Behavioral finance examines why prices of securities may not be whre they should based on information about the issuers of securities and the securities markets.
Herd behavior represents an investor following the actions of large groups without making individual decisions.
Regret aversion is making decisions to avoid regret.
Confirmation bias is where investors only examine analysis that confirms their beliefs
The Price-to-Earnings (P/E) ratio is the measure taht calculates the earning multiple of a company.
The **P/E **ratio is a valuation metric that measures the price of a company’s stock reltive to its earnings per share (EPS). It is calculatied by dividing the current market price of the stock by its earning per share (EPS).
Formula:
P/E Ratio = (Price Per Share) / (Earnings Per Share)
The P/E rato indicate how much investors are willing to pay for eachdollar of earnings. A higher P/E ratio might suggest that investors expet higher earnings grownth in the future, while a lower P/E ratio might indicate the opposite.
Earnings Per Share (EPS) is a financial metric that show how much profits a copany makes for each share of its stock. It’s a way to measure a company’s profitability on a per-share basis. How is EPS calculated?
EPS = Net Income - Dividends on Preferred Stock / Avg # of Outstanding Shares
Ex:
EPS = 10 million - 1 million / 1 million = 9.00 per share
Net Income: The total profit of the company after all expenses, taxes, and costs have been subtracted.
Dividends on Preferred Stock: If the compan has preferred shares, the dividends paid to these shareholders are subtracted from the net income.
Average Number of Outstanding Shares: The average number of shares of the company’s stock that are held by shareholders during a specific period.
The Dividend Payout Ratio is a financial metric that shows the percentage of a company’s earnings that is paid out to shareholders in the form of dividends. It helps investors understand how much of the company’s profit is being returned to them and how much is being retained for reinvestment in the business. There are two formulas that can be use to calculate it. What are they?
- Dividend Payout Ratio = Dividends per Share (DPS) / Earnings Per Share (EPS)
- Dividend Payout Ratio = Total Dividends / Net Income
Ex: If a coapny has an EPS of $5 and pays out $2 in dividends per sharae, the Dividend Payout Ratio would be:
Divident Payout Ration = 2 / 5 = 0.4 or 40%
This means the company is paying out 40% of its earnings as dividends an retaining the remaining 60% for other purposes like reinvestment or debt repayment.
Important:
Dividend Payout Ratio provides insigt into a company’s dividend policy and financial health.
- A higher ratio suggests that the company is payoug out a large portion of its earnings as dividends, which might appeal to income-focused investors but could also mean less money is being reinveested into the business.
- A lower ratio indicates taht the company is retaining more earnings, potentially for growth, but this could also mean lower immediate returns to shareholders.
Current Yield is a financial metric that measures the annual income (interstor dividend) generated by an investment, such as a bond or dividend-payng stock, relative to its current market price. It is expressed as a percentage and is commonly used to evaluate the income return of an investment.
There are 2 formulas for calculating, one for bonds and one for stocks. What is the formula for calculating current yield for Bonds?
Current Yield = Annual Coupon Payment / Current Market Price of the Bond
If a bond has a face value of $1,000, pays an annual coupon of $50, and is currently trading at $900, the current yield would be:
CurrentYield = 50 / 900 = 0.0556
or5.56%
Current Yield does not account for potential capital gains or losses if the price of the security changes, nor does it consider the yield to maturity (for bonds), which reflects the total return over the life of the bond.
Current Yield is a tool for comparing the income-generating potential of different investments, especially for income-focused investors.
What is the formula for Current Yield for stocks?
Current Yield = Annual Dividends Per Share** / **Current Market Price Per Share
Example for Stocks:
If a stock pays an annual dividend of $2 per share and is currently priced at $40 per share, the current yield would be:
**CurrentYield **= 2 / 40 = 0.05 or 5%
