SIE Chapter 1

Question 1

Blue Sky Laws

Answer 1

state securities laws and regulations, most are exempt from these becuase they fall under federal regulations. offerings of OTC securities fall under Blue sky

Question 2

OTC securities

Answer 2

market is a decentralized market where the participants trade with one another directly, without the oversight of an exchange.

Question 3

statutory voting

Answer 3

shareholders may vote their shares for or against a candidate for each open position.

Question 4

cumulative voting

Answer 4

shareholders may vote up to their total voting shares (number of shares multiplied by number of open positions) for a single candidate

Question 5

Shareholder Preemptive Right

Answer 5

 Prior to a secondary offering, the right to maintain their share of ownership by purchasing a proportionate amount of the new issue before it is offered to the public

Question 6

Rules for Penny Stocks

Answer 6

 Risk disclosures, broker dealer disclosures quoting prices accurately
 Suitability analysis: broker-dealer must conduct an analysis on investor and write a report on why the stock is suitable

Question 7

preferred dividend characteristics (4)

Answer 7

 Determined when the stock is issued
 Typically higher than CS dividends

 Can be fixed or floating rate
Mostly Held by corps

Question 8

Why do corporations prefer preferred shares?

Answer 8

can write of 50% of dividends of taxable income

Question 9

Cumulative Preferred Stock

Answer 9

dividends accumulate when they are not paid. Corp will have to pay the accrued dividend the next time it offers a dividend, before it pays common stockholders.

Question 10

Participating Preferred Stock

Answer 10

allows investors to receive extra dividends when the company exceeds some predetermined financial goals. rare

Question 11

Callable Preferred Stock

Answer 11

gives the issuing company the right to call its shares after some set date and at a set price.
An issuer will usually choose to call the stock if interest rates drop and the issuer can issue new preferred stock at a lower rate.
tend to pay higher dividends

Question 12

Convertible Preferred Stock

Answer 12

offers investors the right to convert their preferred shares to common stock at a set conversion ratio
Allows company to bargain for a lower initial dividend payment

Question 13

parity price of preferred shares

Answer 13

The market value of the preferred shares, if converted

=Market price X conversion ratio

Question 14

conversion ratio

Answer 14

face value/conversion price

Question 15

face value of preferred share

Answer 15

the arbitrarily designated value generated by the issuing corporation that must be repaid at maturity

Question 16

Protective Positions def

Answer 16

permit preferred shareholders to veto certain actions by the company, such as the sale or merger of the company and the issuing of new shares
designed to protect preferred stockholders, often from other classes of preferred shareholders

Question 17

Protective Positions veto examples

Answer 17

• Any sale or dissolution of the company
• The issue of new shares of stock
• The issue of new debt beyond some stated amount
• A change to the certificate of incorporation or bylaws
• Changes that give better rights to shares other than their preferred shares

Question 18

Warrants

Answer 18

a security that gives you the right to purchase shares an company at a specific price (strike price) in the future. When executed, it increases the number of shares outstanding in the market, thereby diluting the holdings of existing shareholders. Used to entice debt or equity investors and sweeten the pot.

Question 19

Warrant Premium

Answer 19

Cost to buy warrants on the secondary market

Question 20

Rights Offering

Answer 20

Gives existing shareholder ability to buy more stock at a price lower than market value
short term 2-4 weeks and when a company is strapped for cash. o Rights can benefit shareholders but if they don’t use them. There shares lose value, they are also authorized to sell there rights on the secondary market.

Question 21

Subscription price

Answer 21

the discounted price at which shareholders are offered right to buy

Question 22

ADRs

Answer 22

receipts issued by a U.S. bank that represent shares of a foreign stock
allow for international investing without directly investing in foreign stocks

Question 23

ADR Depository bank

Answer 23

 A bank in the U.S. purchases the issuing company’s shares in the issuer’s home country.

Question 24

the custodian bank

Answer 24

the seller of shares in a bank located in the issuer’s country, called the custodian bank