UNIT 1 QBANK

Question 1

A CONVERTIBLE FEATURE for PREFERRED SHARES allows the OWNER to EXCHANGE THE SHARES

A) for a fixed number of shares of the issuing corporation’s common stock.

B) for as many bonds as the issuer is willing to issue at that point in time.

C) for a fixed number of bonds issued by the corporation.

D) for the preferred shares of another issuer.

Answer 1

A) for a FIXED NUMBER OF SHARES of the ISSUING CORPORATION’S COMMON STOCK.

The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares.

Question 2

What is the PRIMARY BENEFIT for an AMERICAN INVESTOR when purchasing an AMERICAN DEPOSITARY RECEIPT (ADR)?

A) Diversification

B) Tax-deferred dividends

C) Hedging currency risk

D) Exemption from U.S. taxation

Answer 2

A) Diversification

ADRs are a type of equity security designed to simplify foreign investing for Americans. ADRs provide Americans with an easy way to invest in foreign companies that might otherwise be difficult or impossible to own. This overseas exposure provides investors with additional diversification within their portfolio.

Question 3

A corporation is issuing a bond with an interest rate below that which is commonly being offered for this type of bond. To improve the bond’s marketability without reducing the capital to be obtained, which of the following actions might the corporation take?

A) Offer a stock dividend to the current shareholders
B) Conduct a rights offering for potential bond buyers
C) Offer the bond at a discount
D) Offer a warrant on the stock with each bond

Answer 3

D) Offer a warrant on the stock with each bond

Warrants are sometimes offered as sweeteners attached to bond issues to improve the marketability of bond. Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn’t be able to raise the needed capital.

Question 4

Under penny stock rules, what is required for a broker-dealer to consider an investor an established customer?

A) Open cash account for six months or more
B) At least three separate penny stock purchases
C) Signed risk disclosure statement
D) Signed transaction agreement

Answer 4

B) At least THREE SEPARATE penny stock purchases

Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least ONE YEAR BEFORE the penny stock transaction, or have purchased at least THREE different penny stocks from the SAME broker-dealer.

Question 5

A preferred stock dividend is stated as a percentage of

A) par value.
B) the company’s net worth.
C) the 52-week average share price.
D) current market value.

Answer 5

A) par value.

A preferred stock dividend is stated as a percentage of its par value, which is assumed as $100 for preferred shares, unless it has been stated differently.

Question 6

Once a dividend is initially declared by the board of directors (BODs), any future dividend payments

A) carry no guarantee of payment in any amount.
B) are not guaranteed to be paid, but if they are paid, they must be at least equal to the initial declaration.
C) are guaranteed to be paid in at least the same amount as the initial declaration.
D) are guaranteed to be paid, but no amount is stipulated.

Answer 6

A) carry no guarantee of payment in any amount.

While the potential to share in the company’s profits by receiving dividends is considered one of the benefits of equity ownership, one of the risks is the possibility of dividend income decreasing or ceasing entirely. Dividends are not guaranteed in any way.

Question 7

An officer of a public company buys 1,000 shares of the company’s registered stock in the open market. Regarding the sale of these shares, the officer may sell

A) only after leaving (becoming unaffiliated with) the company.
B) immediately, with no volume restrictions.
C) under Rule 144 only after a six-month holding period.
D) immediately, subject to Rule 144 volume limitations.

Answer 7

D) immediately, subject to Rule 144 volume limitations.

Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

Question 8

Which of the following is an example of an EQUITY security?

A) Equipment trust certificates
B) Debentures
C) Preferred shares
D) Mortgage bonds

Answer 8

C) Preferred shares

Both COMMON AND PREFERRED SHARES are EQUITY SECURITIES. Each of the other choices represents a DEBT INSTRUMENT.

Question 9

Which of the following sell transactions is NOT SUBJECT to the HOLDING PERIOD RESTRICTIONspecified in SEC Rule 144?

A) Unregistered stock acquired by a nonaffiliate under an investment letter
B) Stock acquired on the NYSE by a corporate affiliate
C) Stock acquired by a corporate affiliate in a private placement
D) Unregistered stock acquired by a corporate affiliate in a stock option program

Answer 9

NOT SUBJECT:
B) Stock acquired on the NYSE by a corporate affiliate

SUBJECT TO:
A) UNREGISTERED STOCK acquired by a NONAFFILIATE under an INVESTMENT LETTER

C) STOCK acquired by a CORPORATE AFFILIATE in a PRIVATE PLACEMENT

D) UNREGISTERED STOCK acquired by a CORPORATE AFFILIATE in a STOCK OPTION PROGRAM

The holding period rule applies only to UNREGISTERED STOCK, which may or may not be control stock.

Unregistered stock results from either private placements or the exercise of a corporate stock option.

Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer.

However, the affiliated person is subject to volume restrictions.

Question 10

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?

A) Unregistered stock acquired by a nonaffiliate under an investment letter
B) Stock acquired in the OTC market by a corporate affiliate
C) Stock acquired by a corporate affiliate in a private placement
D) Unregistered stock acquired by a corporate affiliate in a stock option program

Answer 10

B) Stock acquired in the OTC market by a corporate affiliate

The holding period rule applies only to unregistered stock, which may or may not be control stock.

Unregistered stock results from either private placements or the exercise of a corporate stock option.

Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired in the OTC market by a corporate affiliate is the correct answer.

However, the affiliated person is subject to volume restrictions.

Question 11

MJS Corporation has called in its 6% preferred shares. Owners of these shares should expect that

A) the shares will be resold to new investors.
B) dividend payments will continue until the owner chooses to turn in the shares.
C) dividend payments will cease on the call date.
D) the shares will continue to trade in the open market.

Answer 11

C) DIVIDEND PAYMENTS will CEASE on the CALL DATE.

When a corporation calls in preferred shares, the shares stop trading and dividend payments cease on the call date.

Question 12

Rules to protect the public during initial public offerings (IPOs) include all of the following except

A) shares must be offered to the public at the public offering price.
B) members may not withhold shares for their own benefit.
C) members cannot take advantage of their insider status to gain access to shares for their own benefit.
D) shares may be held to reward others who can direct business to the member.

Answer 12

NOT INCLUDED
D) shares may be held to reward others who can direct business to the member.

INCLUDED
A) shares must be offered to the public at the public offering price.
B) members may not withhold shares for their own benefit.
C) members cannot take advantage of their insider status to gain access to shares for their own benefit.

Designed to protect the integrity of the public offering process, the rules ensure that members make a bona fide public offering of securities at the public offering price, do not withhold securities in a public offering for their own benefit or use shares to reward others in a position to direct future business to the member and that members and their associated persons do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers.

Note that this is an “except” question. “Shares may be held to reward . . .” is not only not in the rule, it is expressly prohibited.

Question 13

The holders of which of the following securities are considered owners of the issuing corporation?

I. Mortgage bonds
II. Debentures
III. Preferred stock
IV. Common stock

A) I and II
B) I and III
C) II and IV
D) III and IV

Answer 13

D) III and IV

Persons who own stock in a company are considered owners; thus, both common and preferred shareholders have ownership (equity) in a corporation. Mortgage bonds and debentures are two types of debt securities offered by corporations. Debtholders are creditors of the corporation, not owners.

Question 14

Characteristics common to penny stocks would include which of the following?

A) Market price greater than or equal to $5 per share and unlisted
B) Market price less than $5 per share and listed on an exchange or Nasdaq
C) Market price greater than or equal to $5 per share and listed on an exchange or Nasdaq
D) Market price less than $5 per share and unlisted

Answer 14

D) Market price less than $5 per share and unlisted

Penny stocks are generally defined as those with a market price below $5 per share that are not listed (traded) on any exchange or Nasdaq.

Question 15

Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own

A) callable preferred stock.
B) cumulative preferred stock.
C) convertible preferred stock.
D) straight preferred stock.

Answer 15

B) cumulative preferred stock.

Cumulative preferred stock accrues payments due its shareholders that have been missed in the event dividends are reduced or suspended.

Question 16

An investor owns 3% preferred stock participating to 6%. This means the investor

A) could receive an additional 6% over the stated 3% dividend.
B) must receive a total of 9% in any year the board declares the 6% participating be paid.
C) must receive at least 6% each year.
D) could receive an additional 3% over the stated 3% dividend if the board declares it.

Answer 16

D) could receive an additional 3% over the stated 3% dividend if the board declares it.

If a preferred stock is described as 3% preferred participating to 6%, the company pays its holders up to 3% in additional dividends in profitable years if the board of directors declares it.

Question 17

Of the following stocks, which would be defined as penny stocks?

I. Nasdaq-listed stock trading at $4 per share
II. Bulletin Board stock trading at $4 per share
III. Exchange-listed stock trading at $4 per share
IV. OTC Pink stock trading at $4 per share

A) II and IV
B) II and III
C) I and III
D) I and IV

Answer 17

A) II and IV

A penny stock is a non-Nasdaq listed (therefore, Bulletin Board or OTC Pink) stock trading under $5 per share. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price.

Question 18

A company has distributed profits to its shareholders. This type of distribution would most likely be in the form of

A) options.
B) dividends.
C) warrants.
D) bonds.

Answer 18

B) dividends.

The distribution of profits to shareholders would generally be in the form of dividends to be received at the discretion of the board of directors (BOD). Bonds and warrants are other types of securities a company might issue, while options are a derivative product that would not be issued by the company.

Question 19

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at

A) par value or lower.
B) par value or higher.
C) par value.
D) current market value.

Answer 19

B) par value or higher.

In return for the call privilege, the corporation may pay a premium exceeding the stock’s par value at the time of the call. It’s reasonable that a shareholder would expect to receive at least par value or higher in the event of a call.

Question 20

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be

A) callable.
B) participating.
C) adjustable rate.
D) convertible.

Answer 20

C) adjustable rate.

Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price.

Question 21

Straight preferred shares

I. are noncumulative.
II. are cumulative.
III. allow for missed dividends to be paid later.
IV. have no provision for paying missed dividends later.

A) I and IV
B) II and IV
C) II and III
D) I and III

Answer 21

A) I and IV

Straight preferred shares have no special features beyond the stated dividend payment. Any missed dividends are not paid to the holder, thus they are noncumulative; missed dividend payments do not accumulate.

Question 22

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past three years but now is in a position to resume paying them again. Before paying common shareholders a dividend, the company would be required to pay the preferred shareholders

A) $2.50.
B) $4.00.
C) $1.00.
D) nothing.

Answer 22

B) $4.00.

With noncumulative preferred stock, missed or skipped dividends need not be paid or made up. However, in order to pay common shareholders in any year, preferred shareholders must receive their full dividend for that year. While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. 4% × $100 par value = $4.00.

Question 23

Regarding investment products, which of the following is true?

A) Equity securities represent ownership in an issuing company.
B) Debt securities represent ownership in an issuing company.
C) Derivative securities represent ownership in an issuing company.
D) Both derivatives and debt represent ownership in an issuing company.

Answer 23

A) Equity securities represent ownership in an issuing company.

Equity securities represent ownership in an issuing company and debt securities represent a loan to the issuing company, but derivative products, such as options, represent neither.

Question 24

The growth potential in the price of preferred shares is generally considered to be

A) no different than that of the issuer’s common shares.
B) greater than that of the issuer’s common shares.
C) less than that of the issuer’s common shares.
D) unrelated to the financial well-being of the issuer.

Answer 24

C) less than that of the issuer’s common shares.

While the growth potential of both common and preferred shares can be tied to a company’s financial well-being, preferred share growth is generally less than that of the common shares. The trade-off is that the preferred shares have preference with dividends received, enjoy a fixed rate of return via those dividends, and have a priority claim over common shareholders in the event of bankruptcy and the dissolution of assets.

Question 25

Voting rights are a privilege generally afforded to

A) neither common nor preferred shareholders.
B) both common and preferred shareholders.
C) common shareholders only.
D) preferred shareholders only.

Answer 25

C) common shareholders only.

One of the differences between common and preferred shareholders is that preferred shareholders generally have (with few rare exceptions) no voting rights.

Question 26

All of the following could be characterized as benefits to owning common stock except

A) capital gains via increases in share price.
B) limited liability.
C) income potential via the receipt of dividends.
D) low dissolution priority.

Answer 26

D) low dissolution priority.

Low dissolution priority refers to being paid last in the event of a corporate dissolution (bankruptcy). Obviously, this is not a benefit. However, price appreciation and the receipt of dividends are potential benefits and limited liability is guaranteed, only being able to lose what one has invested.

Question 27

For restricted stock (unregistered) held by an affiliate (insider), which of the following applies?

A) No holding period, but volume limits always apply
B) Six-month holding period, with volume limits thereafter
C) No holding period or any volume restrictions
D) Six-month holding period, with sales allowed freely thereafter

Answer 27

B) Six-month holding period, with volume limits thereafter

For restricted stock (unregistered) held by an affiliate (insider), there is a six-month holding period, with volume limits applicable thereafter. The volume limits would remain in effect for as long as the individual is an affiliate.

Question 28

An individual owning shares of a corporation’s common stock would have all of the following rights except

A) to vote when unable to be present at a shareholder meeting.
B) to vote for those who will serve on the board of directors (BOD).
C) to review a list of stockholders.
D) to declare dividends.

Answer 28

D) to declare dividends.

Common shareholders have a number of rights. While they may receive dividends, declaring dividends is a function of the BOD.

Question 29

All of the following are considered control persons (owning control stock) except

A) a director on the board of directors (BOD) owning 2% of the outstanding shares.
B) an officer of the corporation owning less than 1% the outstanding shares.
C) the corporation’s CFO owning 1% of the outstanding shares.
D) an unaffiliated shareholder owning 8% of the outstanding shares.

Answer 29

D) an unaffiliated shareholder owning 8% of the outstanding shares.

By virtue of their positions, directors and officers are considered control persons and any stock they own, no matter how little, is considered control stock. To be considered a control person, an unaffiliated person would have to own 10% or more of the voting (outstanding) shares.

Question 30

Priority at dissolution for preferred shareholders means that they are paid

I. before all creditors.
II. after all creditors.
III. before common shareholders.
IV. after common shareholders.

A) I and IV
B) I and III
C) II and III
D) II and IV

Answer 30

C) II and III

While preferred shareholders would not be paid until all creditors debts have been satisfied, they are paid first of the equity securities, which means they are paid before common shareholders.

Question 31

Mrs. Davidson owns 8% of Copper Mountain Metals Corporation and her husband, Mr. Davidson, owns 4%.

Mr. Davidson would like to sell some of his shares.

When he files Form 144, he discovers that Copper Mountain has 2,400,000 outstanding shares.

The recent trading volume of the company is as follows:

WEEK ENDING	VOLUME
April 7			23,000
March 31		25,000
March 24		26,000
March 17		24,000
March 10		30,000

How many shares may Mr. Davidson sell in the next 90 days under Rule 144?

A. 24,000 shares
B. 24,500 shares
C. 32,000 shares
D. 26,250 shares

Answer 31

B. 24,500 shares

The answer is 24,500 shares and is found by first determining 1% of 2.4 million shares (2,400,00 x 0.01) 24,000 shares. The next step is to find the simple mean (average) of the MOST RECENT four weeks.

In this question, you would not use the week of March 10 information.

The average is 24,500 shares
(23K + 25K + 26K + 24K = 98K
98K / 4 = 24,500 shares)

The volume limit is the HIGHER of these two numbers, or 24,500 shares.