Series 7 STC Equity Securities (Ch. 4) Flashcards
When engaged in penny stock transactions, a member firm must disclose all of the following, EXCEPT:
The stock’s current quote
The total number of penny stock transactions the firm has executed during the day
The compensation that the broker-dealer will receive for the transaction
The compensation that the registered representative will receive for the transaction
The total number of penny stock transactions the firm has executed during the day
For each penny stock transaction, the executing broker-dealer must disclose:
-The current quote for the security
-The compensation that the broker-dealer will receive for the transaction
-The compensation that the registered representative will receive for the transaction
There’s no requirement for the broker-dealer to disclose the total number of penny stock transactions it executed during the day.
This year, as the result of a series of trades, an investor has amassed $7,000 in net capital losses. If the investor’s ordinary income for the year is $112,000, she is able to:
Reduce her taxable income to $105,000
Carry forward the $7,000 in losses to the following year
Carry forward a maximum of $3,000 in losses to the following year
Reduce her taxable income to $109,000
Reduce her taxable income to $109,000
An individual is permitted use net capital losses to reduce his ordinary income by up to $3,000 each year. Without limitation, any losses that exceed this limit may be carried forward to the following year. In this example, the investor is able to reduce her taxable income to $109,000 ($112,000 - $3,000) and carry forward the remaining $4,000 of losses.
An investor has realized a $17,000 long-term capital loss and a $10,000 long-term capital gain. The investor also has reported income of $110,000. All of the following statements are TRUE regarding the investor’s tax implications, EXCEPT:
The investor’s long-term capital loss will be used to offset the long-term capital gain.
After reducing her ordinary income by $3,000, the investor will report $107,000 of ordinary income.
The investor may reduce her income by the full $17,000 long-term capital loss.
The investor will have a net capital loss of $4,000 to carried forward.
The investor may reduce her income by the full $17,000 long-term capital loss.
Capital losses are netted against capital gains for tax purposes. However, taxpayers must first net the same type of gains and losses before netting against another type. In this question, the $17,000 of long-term losses will be used to reduce the long-term capital gains to zero. This leaves the investor with $7,000 in long-term losses ($17,000 long-term loss - $10,000 long-term gain). However, a maximum of $3,000 of those remaining losses can be used to reduce ordinary income annually (reducing it to $107,000), thereby leaving a capital loss carry forward of $4,000.
Which of the following securities will MOST likely be subject to a withholding tax?
An initial public offering (IPO)
A real estate investment trust (REIT)
A bond issued by a U.S. company that earns income overseas
Stock issued by a foreign company that earns income in the United States
Stock issued by a foreign company that earns income in the United States
Stock issued by a foreign company that earns income in the United States is an example of an American depositary receipt (ADR). Dividends that are received by a U.S. investor on foreign securities (e.g., an ADR) may be subject to a withholding tax by the country from which they were paid. If the investor has securities that paid dividends which were subject to a foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest and the amount of tax withheld by the foreign government. The fact that the company earns income in the U.S. is irrelevant.
An investor sold short 1,000 shares of ABC stock. ABC subsequently pays a 5% stock dividend. When the investor later covers the short position, how many shares will he need to deliver?
5 shares of ABC
1,000 shares of ABC
1,050 shares of ABC
Any shares that have an equal or greater value
1,050 shares of ABC
When an investor sells stock short, the executing brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends paid on the stock are the responsibility of the investor who sold the stock short. In this example, since ABC paid a 5% stock dividend, the investor who sold short 1,000 shares of ABC would need to deliver 1,050 shares (1,000 shares x 5% = 50 additional shares) to cover the short sale.
A client sells short 1,000 shares of GHI at $50 per share. Then, 14 months later, the client covers the short and, on the same day, delivers the stock to close out the short position at $37 per share. For tax purposes, the client will report:
A short-term capital gain
A long-term capital gain
Neither a gain nor a loss since the trade involved a short sale
A short-term capital loss
A short-term capital gain
The gain or loss on a short sale is typically treated as a short-term capital gain or loss since a holding period for the security is never established. The customer closed out the short position on the same day that the stock was purchased; therefore, the holding period was less than one day. In this example, the client has a short-term capital gain that’s taxable in the year in which the short sale was covered and the stock was delivered.
An investor purchases a bond that’s been offered by XYZ Corporation. The bond has a warrant attached to the bond which allows the investor to purchase XYZ common stock at $23. If the current market value of XYZ’s common stock is $15, which of the following statements is TRUE?
The warrant has intrinsic value of $8 per share.
The warrant has intrinsic value of $23 per share.
The warrant has intrinsic value of $15 per share.
The warrant has no intrinsic value.
The warrant has no intrinsic value.
A warrant is a derivative instrument which is typically attached to another security. When attached to a bond offering, the warrant is used to allow the issuer to reduce the amount of interest stated on the face of the bond. A warrant will have intrinsic value if the subscription price of the warrant is lower than the current market value of the underlying common stock. In this question, since the warrant’s subscription price ($23) is higher than the market price of the stock ($15), the warrant has no intrinsic value. On the other hand, if the warrant’s subscription price is $23 and the stock’s current market price is $25, then the warrant will have intrinsic value of $2 per share.
A company that’s based in Europe has offices in New Jersey and wants to have its stock traded on the NYSE. This is MOST likely accomplished through the issuance of:
Yankee bonds
Eurodollar bonds
Bankers’ acceptances
American depositary receipts
American depositary receipts
American depositary receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank that’s based in that country, a receipt for those securities is issued and traded in the United States as if it were the foreign security itself.
Which of the following statements is NOT TRUE regarding preemptive rights?
Rights allow the holder to acquire the underlying stock at a fixed price.
Rights have a long-term maturity.
Rights have a short-term maturity.
Rights allow existing stockholders to maintain their percentage of ownership.
Rights have a long-term maturity.
When a corporation intends to raise additional capital, it may offer preemptive rights as a means for existing stockholders to maintain their percentage of ownership. In most cases, the offer is good only for a limited number of days(short-term) and the preset purchase price is below the current market value of the stock.
A corporation is authorized to issue 10 million shares. It issued 4 million shares, but currently has only 3.7 million shares outstanding. What’s the likely reason for the difference between issued and outstanding shares?
The shares declined in value.
The shares increased in value.
Private investors entered the market and purchased the shares.
The corporation repurchased the shares.
The corporation repurchased the shares.
When a corporation issues shares, but subsequently repurchases the shares, they become treasury stock. Therefore, issued shares MINUS treasury stock represents the company’s outstanding shares. Treasury stock has no vote and doesn’t receive dividends.
Over time, an investor has acquired a large number of shares of MNO Industries’ common stock. He intends to sells some of the shares and will choose the shares being sold rather than letting the IRS decide. What method will he be using?
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average cost
Specific identification
Specific identification
Which of the following is considered a penny stock?
An OTC Pink Open Market stock with a bid price of $2.12
A mutual fund share with a net asset value of $3.74
An NYSE-listed equity security with a bid price of $4.86
D
An OTC Pink Open Market stock with a bid price of $5.15
An OTC Pink Open Market stock with a bid price of $2.12
According to SEC rules, a penny stock is defined as an unlisted equity security that has a bid price below $5.00 per share. Exceptions to the penny stock definition are made for:
-Exchange-traded equities (e.g., NYSE or Nasdaq) regardless of the price at which they’re quoted
-Investment company securities (e.g., mutual fund shares)
-OCC-listed calls and puts
-Securities with a market value of at least $5.00 per share.
An investor has owned a non-cumulative preferred stock for five years. The stated dividend on the stock is $4. The investor has never received any dividend payments. In year six, if the issuing corporation intends to pay common stock dividends this year, how much will the preferred stockholder receive?
$0
$4
$20
$24
$4
Since the investor owns non-cumulative preferred stock, if a dividend is not paid, it doesn’t accumulate to the next year. For that reason, the preferred stockholder will receive only $4 for the current year. The corporation is not responsible for any previous dividend payments that were not made.
A company uses the statutory voting method for its stock. Which of the following statements is NOT TRUE?
The more shares owned, the greater the voting power.
This method is more beneficial for larger (more substantial) stockholders.
Stockholders have one vote for every share owned for every voting issue.
The stockholders’ votes are based on the number of shares owned multiplied by the number of voting issues.
The stockholders’ votes are based on the number of shares owned multiplied by the number of voting issues.
With statutory voting, a shareholder is given one vote for every one share owned for every voting issue. Therefore, the more shares a person owns, the greater her voting power. For that reason, statutory voting is considered to be beneficial for the larger, more substantial (majority) shareholders. On the other hand, with cumulative voting, shareholders are able to multiply the number of shares that they own by the number of voting issues.
With no history of the issuer failing to make dividend payments, if an owner of preferred stock receives an additional dividend payment beyond the stated amount, what type of preferred stock is owned?
Participating
Callable
Vintage
Cumulative
Participating
In certain circumstances (e.g., increased corporate profits), participating preferred stockholders are entitled to receive an additional dividend payment beyond the stated amount. Although cumulative preferred stock may also receive more than the stated dividend, this only occurs if the issuer has failed to make previous dividend payments (not the case in this question).
Which of the following derivatives are NOT created by an issuer of securities?
Options
Warrants
Rights
Convertible preferred stock
Options
Call options are issued by the Options Clearing Corporation (OCC) rather than by an issuer of securities. Each of the other products are created by an issuer of securities.
All of the following statements are TRUE regarding the dividends on Series K preferred stock, EXCEPT:
The dividends begin at a fixed rate.
The dividends are cumulative, but non-qualified for tax purposes.
The dividends will subsequently switch to a floating rate.
The dividends are non-cumulative, but qualified for tax purposes.
The dividends are cumulative, but non-qualified for tax purposes.
Series K preferred stocks have no maturity date, they initially pay dividends at a fixed rate which then switches to a floating rate. The dividends are non-cumulative, but are qualified for tax purposes (i.e., taxed at a maximum rate of 20%).
An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what’s the client’s cost basis per share?
$63.25
$55.00
$47.83
$47.75
$47.83
Since no stock is being sold, the receipt of a stock dividend is not a taxable event. Instead, the individual must simply adjust her cost basis per share. The investor’s original cost basis was $55 per share and her total investment was $44,000. After the 15% stock dividend, she would own 920 shares (800 shares x 15% = an additional 120 shares). As a result, the new cost basis per share would be $47.83 (original cost of $44,000 divided by 920 shares).
Which of the following is true of Series K preferred stocks?
I. They have no maturity date
II. They initially pay dividends at a fixed rate which then switches to a floating rate
III. Dividends are non-cumulative, but are qualified for tax purposes (i.e., taxed at a maximum rate of 20%)
All are true
All of the following statements are TRUE regarding a corporation’s common stock, EXCEPT:
It’s the basic form of corporate ownership.
It’s the most widely issued type of stock.
It’s the first type of stock that a corporation issues.
It’s paid prior to other forms of stock at liquidation.
It’s paid prior to other forms of stock at liquidation.
Common stock is the basic unit of corporate ownership, the most widely issued type of stock, and the first type of stock that a corporation issues. However, if a corporation declares bankruptcy, common stockholders are after all other security owners are paid. Bondholders are paid first, preferred stockholders are paid second, and common stockholders are paid last.
Under the Penny Stock Rules, which of the following persons is NOT considered an established customer?
A customer who agreed to execute penny stock transactions at a level that will increase the broker-dealer’s commissions by 5%.
A customer who executed a securities transaction or deposited funds into his account more than one year prior to the penny stock transaction.
A customer who has an existing account and made three purchases of penny stocks which occurred on three separate days and involved three separate issues.
A customer who has an existing account with the broker-dealer.
A customer who agreed to execute penny stock transactions at a level that will increase the broker-dealer’s commissions by 5%.
According to the Penny Stock Rules, an established customer is a person for whom the broker-dealer (or its clearing firm) carries an account (i.e., an existing customer) and who has:
-Executed a securities transaction or deposited funds into his account more than one year prior to the penny stock transaction, or
-Made three purchases of penny stocks which occurred on three separate days and involved three separate issues
All of the following statements are TRUE regarding a sponsored American depositary receipt (ADR), EXCEPT:
It’s listed on the NYSE or Nasdaq.
The company whose stock underlies the ADR pays a depositary bank to issue ADR shares in the United States.
It’s generally traded in the Pink Open Market.
The sponsorship permits the company to raise capital in the United States.
It’s generally traded in the Pink Open Market.
With a sponsored ADR, the company whose stock underlies the ADR pays a depositary bank to issue ADR shares in the United States. This sponsorship permits the company to raise capital in the U.S. and list the ADR on the NYSE or Nasdaq. Today, many of the largest ADRs are sponsored. On the other hand, unsponsored ADRs are typically traded on the OTC Pink Open Market.
Which of the following is NOT required for a broker-dealer to approve a customer’s account for penny stock transactions?
To determine that penny stock transactions are suitable for the customer based on his investment profile.
To deliver a written statement regarding the suitability determination to the customer.
To obtain a manually signed and dated copy of the suitability determination statement from the customer.
To ensure that the customer has a net worth of at least $1.5 million.
To ensure that the customer has a net worth of at least $1.5 million.
To approve a customer’s account for transactions in penny stocks, the broker-dealer must:
-Determine that penny stock transactions are suitable for the customer based on information about the customer’s financial situation and investment objectives
-Deliver to the customer a written statement regarding this suitability determination
-Obtain from the customer a manually signed and dated copy of the statement
There’s no specific net worth requirement to engage in penny stock transactions.
A high-frequency trader wants a system that conceals quotes from the public and allows for trading with minimal market impact and low transaction costs. What type of system should be used?
A shallow pool
A dark pool
An electronic communication network (ECN)
The Consolidated Quotations System (CQS)
A dark pool
A dark pool is a system that provides liquidity for large institutional investors and high-frequency traders, but it doesn’t disseminate quotes. The name is derived from the fact that the details of the quotes are concealed from the public. The objective is to allow these investors to trade with the least amount of market impact and with low transaction costs.
