Types of Securities Flashcards
A client has a 4% interest in a company, which is a Subchapter S Corporation. A distribution is made that reduces the client's basis, but not below zero. The distribution is: Taxable as a capital gain Taxable as ordinary income Taxable as a dividend A nontaxable return of capital
D: For most businesses, the major advantage of forming an S Corporation rather than a regular C Corporation is that an S Corporation may elect to be taxed like partnerships under Subchapter S of the Internal Revenue Code. Distributions that reduce the client’s basis are considered a nontaxable return of capital. Distributions in excess of a client’s basis are treated as capital gains. If a minority shareholder buys a stake in an S Corporation and sells her shares, the gain would be taxable as a capital gain, based on the amount above her basis. If the shares were held for more than one year, the capital gain would be long-term. The gain would be taxable immediately in the year of the distribution or sale. (79523)
A customer owns 500 shares of Oakleaf Corporation. The corporation is engaging in a rights offering. The terms of the offering are 10 rights plus $20 to buy one new share of stock. If the customer wants to subscribe to the rights offering, how many additional rights would he need to buy 100 shares of stock? 50 100 500 1,000
C: The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wants to subscribe to 100 shares of stock, the investor would need 1,000 rights (10 rights x 100 shares = 1,000 rights). The investor owns 500 shares of stock and will receive 500 rights from the corporation (one right for each share owned). If the customer wants to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 500 rights.
Python Industries has previously issued 5.0% bonds ($1,000 par value). The bonds mature in 12 years and are selling at a 20% discount to par. What is the current yield on the Python bonds?
- 00%
- 60%
- 25%
- 50%
C: The current yield is found by dividing the annual interest payment by the current market price. The bonds pay interest of $50 per year. The bonds are currently trading at a 20% discount to par; therefore, the bonds are priced at 80% of par, or $800 ($1,000 x .8). The current yield is 6.25% ($50 / $800). The fact that the bond will mature in 12 years is not necessary to find the current yield, although it is needed to find the yield to maturity.
A corporation's long-term debt would most likely be called when interest rates: Rise above the bond's nominal yield Rise above the bond's yield to maturity Fall below the bond's nominal yield Fall below the bond's yield to maturity
C: The indenture between the issuer and bondholder for long-term debt often contains a call provision that allows the issuer, at its option, to redeem the bonds before maturity. Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline. The issuer may then refinance the debt at a lower rate of interest. For instance, if an issuer’s outstanding bond is paying a coupon rate (nominal yield) of 9% at a time when similar bonds are paying only 5%, it can reduce its interest costs by calling in the 9% bonds and issuing new ones at 5%. As rates decline, the bond’s yield to maturity, or yield to call, also would decline. [60698]
Which of the following statements is TRUE concerning the tax treatment of CMOs?
The interest is fully taxable
The principal is fully taxable
The interest is exempt from federal tax but subject to state and local taxes
The interest and principal are exempt from state and local taxes
A: The interest received from collateralized mortgage obligations (CMOs) is fully taxable (federal, state, and local taxes). The principal payments are considered a return of capital and are not taxable. Investors receive their principal payments each month instead of receiving the entire amount of principal at maturity. [60713]
Which of the following securities is NOT backed by the credit of the U.S. government?
Treasury bills
Treasury STRIPS
Government National Mortgage Association (GNMA) bonds
Federal National Mortgage Association (FNMA) bonds
D: Federal National Mortgage Association (FNMA) bonds are issued by a privately owned organization and are not backed by the U.S. government. All of the other choices are directly backed by the U.S. government. [60711]
A U.S. government bond has a par value of $1,000 and is selling in the market at 95.28. The dollar value of this T-bond is: $950.87 $952.80 $958.75 $9,528.00
C: U.S. government Treasury notes and Treasury bonds are quoted on a percentage of par plus a fraction basis. The fraction used to quote T-notes and T-bonds is 1/32 of a point. A quote of 95.28 is equivalent to 95 28/32. If the fractional quote is converted to a decimal quote, it equates to 95.875. To calculate the price, the par value of $1,000 is multiplied by 95.875%, which equals $958.75.
What is the correct order of dates, from earliest to latest, relating to the payment of a cash dividend to a shareholder of a public company? The record date The declared date The payment date The ex-dividend date I, II, III, IV II, I, IV, III II, IV, I, III IV, II, I, III
C: The board of directors of a company determines the declaration, record, and payable dates. The ex-dividend date is determined by the appropriate regulator and is a function of the settlement date. First the board declares a dividend, to shareholders of record as of a later date, which is payable on a certain date after the record date. The ex-dividend date is two business days prior to the record date. [99870]
Glass Houses, Inc. is planning to raise money through the issuance of 20-year debentures. Which of the following events may reduce the price of the issue? An infusion of money supply by the FRB A steepening of the yield curve A reduction of the credit rating of the issuer High anticipated demand from investors I and III only I and IV only II and III only II and IV only
C: A steepening of the yield curve is an indication of higher long-term interest rates. A decline in the credit rating of an issuer would increase the risk of investing in the debt of that issuer. Both events would increase the yield of a new issue of bonds, or reduce the price of the issue. An infusion of money supply indicates an easing of credit conditions. Lower yields would be expected. Higher anticipated demand from investors would likely lower the bond’s yield, or increase the bond’s price. [60847]
In easy money periods, bonds of similar quality will generally have:
Short-term yields lower than long-term yields
Long-term yields lower than short-term yields
Both short-term and long-term yields below normal
Both short-term and long-term yields higher than normal
I and III only
I and IV only
II and III only
II and IV only
A: In periods of easy money, there is availability of money. Therefore, interest rates will decline (be lower). In these periods of easy money, bonds of similar quality will generally have short-term yields lower than long-term yields. Both short-term and long-term yields will be below normal. This situation would create a positively sloped yield curve where yields rise from short- to long-term. [60686]
Which of the following is included when calculating a company’s public float?
The number of shares held by institutional and retail investors
The number of shares held by institutional investors, retail investors, and company insiders
The number of shares of restricted stock only
The number of shares of treasury stock only
A: The public float of a company is the number of shares held by public investors, both retail and institutional. It excludes stock owned by affiliated persons of a company and is found by subtracting restricted stock from the number of outstanding shares. By contrast, market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, restricted shares, and shares held by insiders, but do not include treasury stock (shares repurchased by the company). (71280)
If a company issues a PIK bond, where does the PIK accrued interest show up on its income statement? It is added to other income It is subtracted from other income It is subtracted from interest expense It is added to interest expense
D: A Payment In Kind (PIK) bond pays interest in both a cash coupon and additional principal. It is usually a type of mezzanine financing that allows the issuer to conserve cash and pay bondholders additional principal instead of a higher cash coupon rate. Although the PIK interest is not paid in cash, the accrued interest is added to the interest expense on the income statement. Subject to certain limitations, this allows the issuer to claim an interest deduction on the payments, therefore reducing its taxes. [61335]
As yields decline, the prices of long-term maturity bonds increase at a faster rate than the prices of intermediate maturity, or short-term maturity bonds. This condition is known as: Duration Positive convexity Negative convexity Laddering a portfolio
B: For a given yield change, the prices of long-term bonds are more volatile than short-term bonds. The relationship between yield and price is not linear; the term that describes this phenomenon is convexity. Positive convexity describes the condition where, as yields decline, prices increase at a faster rate for long-term bonds as compared to intermediate or short-term bonds. Duration measures price sensitivity for fixed-income securities given changes in interest rates. [60943]
If a bond is selling at a premium and is callable at par, how is the yield calculated?
As a percentage of the par value
By dividing the annual income by the current price
To the final maturity date
To the call date
D: The yield for a bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that would be earned if the bonds were called at the call price, rather than held to the maturity date. Industry rules require broker-dealers to quote the lower estimate of the yield to call or the yield to maturity. If the bond had been selling at a discount, it would have been quoted on a yield to maturity basis. If a bond is selling at a premium and callable at a premium, the yield may be to the final maturity or the call date, whichever is less. In each case, the investor would receive a quote based on the most conservative scenario. This is referred to as the yield to worst. [60942]
One of your clients is seeking an investment in a tax-advantaged investment. Which of the following investments would qualify to pass through both income and losses?
A real estate investment trust
A hedge fund
A regulated investment company
A company that is subject to SEC Section 12 reporting requirements
B: Most hedge funds are structured as limited partnerships and raise capital by selling units or interests in the partnership to investors. A limited partnership is permitted to pass through both income and losses to investors. A REIT and a regulated investment company (for example, a mutual fund) must pass through a minimum percentage (90%) of their income, but are NOT permitted to pass through losses. A company that is subject to SEC Section 12 reporting requirements is one that, due to the number of its shareholders and value of its outstanding securities, is required to file reports with the SEC. This type of company would distribute cash dividends to shareholders and would not be permitted to pass through losses. [60644]
