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10 Cards in this Set
- Front
- Back
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A fund whose shares are selling below NAV is:
a. an open-end fund b. likely to receive scrutiny from the SEC c. a closed-end fund d. ex-dividend |
Answer: a closed-end fund
A closed-end fund can sell at a discount or premium to its NAV depending on investor perception of the fund. |
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A company concerned about a hostile takeover may issue what kind of stock shares in an attempt to prevent it?
a. Non-transferable common stock b. Static common stock c. Non-voting common stock d. Common stock |
Answer: Non-voting common stock
Non-voting common stock provides a shareholder with all the rights as a regular common stock shareholder except for the right to vote. Companies attempting to prevent a hostile takeover may issue non-voting common stock to the public in order to keep the potential acquirer from gaining a majority of voting rights. |
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Possible reasons an investor might prefer an ETF to an open-end investment company include
I. ETFs can be purchased on margin. II. ETFs do not involve a sales commission. III. ETFs can be sold short. IV. ETFs can facilitate intra-day trading. Choose one answer. a. I and II. b. IV only c. I, II, III and IV. d. I, III and IV. |
Answer: I, III and IV.
While mutual funds are marginable (they can be used as collateral in a margin account), they cannot be bought on margin, so purchasing on margin is a reason to prefer an ETF. ETFs are sold on exchanges and incur sales commissions. ETFs can be sold short and facilitate same-day trading. |
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In the event a publicly-traded company goes bankrupt, what is the order in which investors get paid?
a. Preferred stock holders bond holders, common stock holders b. Preferred stock holders, common stock holders, bond holders c. Common stock holders, preferred stock holders bond holders d. Bond holders, preferred stock holders, common stock holders |
Answer: Bond holders, preferred stock holders, common stock holders
Investors who assume the least amount of risk are the investors who are paid first. Bonds are debt that an issuer promises to repay with interest. Stocks represent ownership in a company and are subject to the success or failure of the company, and stock holders therefore assume greater risk than bond holders. As implied by their name, preferred stock holders get paid before common stock holders. |
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Jack would like to bid on T-Bonds and was informed by his broker that they can be acquired through a process known as a Dutch auction. Which of the following best describes a Dutch auction?
a. Bids are accepted starting from the highest on down until all the bonds are sold. The accepted bids are then reduced to the lowest accepted bid resulting in all accepted bidders paying this reduced amount. b. All bidders are flown to Holland and place their ballots in large wooden clogs c. The bids are averaged to establish the price all bidders will receive d. A price is established before the auction begins, but not revealed to bidders. All bidders above the established price will receive shares |
Answer: Bids are accepted starting from the highest on down until all the bonds are sold. The accepted bids are then reduced to the lowest accepted bid resulting in all accepted bidders paying this reduced amount.
A Dutch auction is used most commonly when issuing government securities. In a Dutch Auction the issuance is filled first by the highest bids, proceeding down until the issuance is filled. The lowest bid at which the issuance is filled is the price at which all bidders will pay. For example, if the highest bid is at $1000/bond, the Treasury will accept that bid first. If all bonds are not sold at that price, the Treasury will move on to the second highest price. If all the bonds can be sold at the second highest price, then this is the price that all the bonds will be sold at. |
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A customer wants to buy shares in a foreign corporation on a U.S. exchange. Which NASDAQ listed securities would you suggest:
a. Bank Certificate of Foreign Corporation b. American Depositary Receipt (ADR) c. NASDAQ Foreign Trade Memo d. Broker's Foreign Guarantee |
Answer: American Depositary Receipt (ADR)
The SEC writes "the stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs). U.S. depositary banks issue these stocks. Each ADR represents one or more shares of foreign stock or a fraction of a share. If you own an ADR, you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of the foreign stock in its home market, adjusted to the ratio of the ADRs to foreign company shares." |
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Which of the following statements about ADRs are true?
I. ADRs facilitate the trading of foreign equity securities on U.S. exchanges II. ADR dividends are paid in foreign currency III. ADRs facilitate the trading of U.S. equity securities on foreign exchanges IV. ADR dividends are paid in U.S. currency a. I, II, and IV b. II and IV c. I and IV d. II and III |
Answer: I and IV
ADRs are issued to investors by banks and they facilitate the trading of foreign equity securities on U.S. exchanges, but don't get the foreign and U.S. terms confused! Additionally, while ADR dividends are declared in foreign currency, they are then converted into U.S. currency by the bank and paid to the investor in U.S. dollars. |
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Dennis bought a stock for $75. He thinks it has good upside potential, but he wants to hedge his downside risk. Which of the following strategies would be most appropriate for Dennis?
a. sell a call $80 b. sell a put at $70 c. buy a call at $80 d. buy a put at $70 |
Answer: buy a put at $70
A put gives the owner the option to sell a stock at a specified price. Buying a put at $70 gives Dennis the right to sell the stock for $70, even if the trading price goes below $70. This would provide a hedge to his downside. The other answers do not provide such a hedge. Selling a put would mean Dennis would have the obligation to buy at $70, even if the stock is trading at a lower price. Purchasing the $80 call means Dennis has the right to buy the stock at $80, even if the stock is trading above $80. Selling a call means he would have the obligation to sell the stock at $80, even if it is trading above $80. |
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The advantages of zero-coupon bonds are:
I. they don't require a large up-front investment II. they pay tangible interest III. their interest is tax-deferred IV. Their prices fluctuate around the same amount as other bonds with changes in market interest rates a. I and IV b. I only c. I, II, III, IV d. II and III |
Answer: I only
Zeros are bought at a deep discount often as low as $100 or $200 so they don't require a large initial investment. Zeros do not pay tangible interest, but investors must pay taxes each year based on the amount that the bonds have accreted. Therefore investors are essentially paying tax on interest that they do not materially receive. The prices of zeros fluctuate more than other types of bonds with changes in interest rates. |
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The following is true about convertible securities:
I. they offer both safety and upside potential II. convertible security holders have priority over common stockholders if the company is liquidated III. their market price tends to decline if the stock price rises. IV. their conversion into stock is a taxable event. a. I and III b. I, II and III c. I, II, III and IV d. I and II |
Answer: I and II
I and II are true. III and IV are incorrect because convertible securities tend to rise in price along with the stock price, and their conversion is not considered to be a taxable event. |
