Midterm Quiz Flashcards
Rank the following government–issued securities from shortest to longest maturity.
A) Treasury bills, notes, and bonds
B) Treasury bills, bonds, and notes
C) Treasury notes, bills, and bonds
D) Treasury bonds, notes, and bills
A) Treasury bills, notes, and bonds
For U.S.-government–issued securities, T-bills have the shortest maturities (one year or less), T-notes have longer maturities (2–10 years), and T-bonds have the longest maturities (greater than 10 years, up to 30 years).
A final prospectus must include certain information. Which of the following is not required to be included?
A) A history of the business including any risks to purchasers that might be unique to that business or industry
B) The underwriting contract and a list of all underwriters named in the contract
C) The intended use of the proceeds for such corporate actions including expansion, mergers, or acquisitions
D) A statement by the SEC that the offering is neither approved or disapproved
B) The underwriting contract and a list of all underwriters named in the contract
While a description of the underwriting is required (this would include a list of the underwriters provided in the preliminary prospectus) the actual underwriting contract is not required in a final prospectus.
Which of the following funds would most likely fall the most in a rising interest rate environment?
A) A T-bond fund
B) A money market fund
C) A T-note fund
D) A T-bill fund
A) A T-bond fund
Interest rate risk is defined as a potential change in bond prices caused by change in market interest rates after an issuer offers its bonds. If interest rates rise post issuance, existing bonds (with a lower coupon) will be viewed as less attractive and will be priced in the market at a discount. Conversely, if rates fall, the existing bonds (with their higher coupons) will be viewed as desirable and will trade in the market at a premium. The prices of bonds with longer maturities will fluctuate more than bonds with shorter maturities as this interest rate differential is potentially longer-lived. In this question the T-Bond is the longest maturity security so it will have the greatest price fluctuation. Duration is a word that is often used to express a bond’s price sensitivity to interest rate swings. The T-bond fund has the longest duration of the choices offered.
The business cycle is best characterized as
A) inflation, stagflation, deflation, and stagnation.
B) depression, recovery, prosperity, and peak.
C) expansion, peak, contraction, and trough.
D) expansion, prosperity, contraction, and depression
C) expansion, peak, contraction, and trough.
The business cycle is recognized as having four components: expansion, peak, contraction, and trough. Because it is a cycle, there is no standard beginning point or ending point, but there is a logical order to the components.
To facilitate a public offering where securities are offered and sold to the investing public, issuers will utilize the services of all of the following except
A) U.S. stock exchanges.
B) investment bankers.
C) broker-dealers.
D) underwriters.
A) U.S. stock exchanges.
To facilitate a public offering, issuers will utilize the services of investment bankers and broker-dealers known as underwriters of the securities.
BBB Corporation is liquidating under a Chapter 7 bankruptcy. What is the order of payout?
A) Secured, not Senior bond holders, general creditors, preferred stock holders, and common shareholders
B) Senior bond holders, preferred shareholders, common shareholders, and general creditors
C) Common shareholders, preferred shareholders, general creditors, and senior bond holders
D) General creditors, senior bond holders, preferred shareholders, and common shareholders
A) Secured, not Senior bond holders, general creditors, preferred stock holders, and common shareholders
The corporation’s secured bondholders get paid first in bankruptcy. Next come the debentures and general creditors. The preferred holders are senior to the common, making them third in line and the common holders are the most junior, making them the last to be paid out.
Which of the following common stock characteristics would not be considered a benefit for common stock shareholders?
A) Limited access to the corporations books and records
B) Liability to the extent of one’s entire investment in the case of corporate failure
C) The opportunity to collect income from the distribution of corporate profits
D) Priority of claims against a company should it dissolve or be forced to liquidate assets
D) Priority of claims against a company should it dissolve or be forced to liquidate assets
Because common shareholders are paid back last of all claimants in the case of liquidation, priority of claims is not considered a benefit. The possibility of collecting income via dividend distributions, the fact that investors can lose every dollar invested but no more than invested, and having some access to the corporation’s books and records are all considered benefits of common stock shareholders.
Which of the following direct participation programs (DPPs) is most likely to be associated with intangible costs and depletion allowances?
A) Oil and gas income program
B) Real estate raw land program
C) Real estate existing property program
D) Equipment leasing program
A) Oil and gas income program
Intangible drilling costs (IDCs) are those that are associated with items that have no resale or recoverable value when the program ends. Examples of intangible costs would be wages and insurance premiums. Tangible or recoverable costs are those associated with items like equipment that can be sold when the program ends. Depletion allowances can only be associated with programs where natural resources might be depleted such as oil, gas, or even timber.
One of your new clients explains that she prefers investments paying income with a fixed rate of return, but also allows for the possibility of realizing greater gain potential. She would likely favor investments in
A) adjustable rate preferred shares.
B) corporate bonds.
C) convertible preferred shares.
D) common shares.
C) convertible preferred shares.
Preferred dividends, though not guaranteed, are calculated as a fixed percentage of PAR value rather than fluctuating with amounts to be paid contingent upon the approval of the board of directors like common dividends are. Convertible preferred shares allow the owner to exchange the shares for a fixed number of shares of the issuing corporation’s common stock. Common shares enjoy a greater gain potential than preferred shares. Therefore, convertible preferred shares have both of the features favored by this investor.
Which of the following option contracts is in the money if ABC stock is currently trading at $45 per share?
A) Mar. 40 put
B) Jan. 50 call
C) Jan. 55 put
D) Feb. 45 call
C) Jan. 55 put
In, at, or out of the money has only to do with the option contract’s strike price and the current market value of the stock. A call is in the money when the price of the stock exceeds the strike price of the call. A put is in the money when the price of the stock (45) is lower than the strike price of the put (55). Therefore, a Jan. 55 put is in the money when the stock is trading at 45.
A corporation deposits T-bonds it owns into a trust in order to secure a loan. The loan for this type of arrangement would be facilitated by the corporation issuing
A) equipment trust certificates.
B) collateral trust bonds.
C) mortgage bonds.
D) treasury guaranteed bonds
B) collateral trust bonds.
When issuing collateral trust bonds or certificates, an issuing corporation deposits marketable securities it owns into a trust in order to secure the loan. The securities it deposits can be securities in other corporations or those of partially or fully owned subsidiaries as long as the securities are marketable. The securities become the lender’s (bondholder’s) collateral.
Which of the following statements regarding open-end and closed-end funds is true?
A) Both issue equity and debt securities.
B) Both pay dividends when declared.
C) Both are priced using the same method.
D) Both issue full and fractional shares.
B) Both pay dividends when declared.
Both open- and closed-end funds can pay dividends to shareholders when declared by the fund’s board of directors. Only open-end funds can issue fractional shares and only closed-end funds can issue debt securities. Open-end fund shares are priced by formula (NAV + sales charge = POP) and closed-end fund shares are priced by supply and demand.
An issuer files a registration statement with the SEC for the sale of new securities on May 1. While reviewing the registration statement, the SEC determines that it has not been filed properly and issues a deficiency letter on May 5. The issuer submits a corrected registration statement on May 8. Which of the following is true regarding the 20-day cooling-off period?
A) It is halted on the day the deficiency letter is issued and must begin anew from that same date once the corrected registration is received.
B) It continues and is not impacted by the issuance of the deficiency letter by the SE.
C) It is halted on the day the deficiency letter is issued and resumes where it left off on the day the corrected registration is received.
D) It is halted and does not resume until 20 days following the corrected registration is received.
D) It is halted and does not resume until 20 days following the corrected registration is received.
When a deficiency letter is issued by the SEC to an issuer, the 20-day cooling-off period is halted. It resumes where it left off when the corrected registration statement is filed. In other words, the days that the cooling-off period are suspended do not count toward the 20 days.
If the U.S. balance of payments is currently running at a surplus, all of the following are likely to be occurring except
A) exports are currently exceeding imports.
B) more dollars are flowing out of the United States than into the United States.
C) the balance of trade shows a credit.
D) the value of the U.S. dollar is currently down against other currencies.
B) more dollars are flowing out of the United States than into the United States.
When the U.S. balance of payments is running at a surplus, the balance of trade shows a credit; that is, exports are greater than imports, meaning more dollars are flowing into the U.S. economy than out. When the value of the U.S. dollar is down, foreign goods become more expensive to U.S. buyers, but U.S. goods become more attractive to those with foreign currency in hand. This also leads to more exports of U.S. goods.
Regarding a tombstone advertisement, all of the following are accurate statements except
A) they are required by and filed with the SEC in order to announce a new issue to the investing public.
B) all such advertisements must contain an advisory stating that the ad is neither an offer to sell nor a solicitation of an offer.
C) they are limited to the information that may be contained in them.
D) it is the only type of advertisement permitted between the time the registration statement is filed with the SEC and the effective date.
A) they are required by and filed with the SEC in order to announce a new issue to the investing public.
While tombstone ads are the only type of advertisement that may run to announce a new issue during the cooling-off period, they are not required and do not need to be filed with the SEC. When they are used, they are neither an offer to sell nor a solicitation of an offer and must state so and are limited to the information that may be contained in them.
For a fully disclosed firm, which of the following is true?
A) It can accept checks from customers made out to fully disclosed form or the clearing firm.
B) It can clear transactions (accept cash and securities for delivery) for its customers.
C) It can hold funds and securities for a customer.
D) It can execute both buy and sell orders for a customer.
D) It can execute both buy and sell orders for a customer.
Fully disclosed firms (introducing BDs) introduce their customer’s business to clearing firms. While the fully disclosed firm can execute transactions for its customers, all functions associated with clearing the transactions, such as accepting cash and securities for delivery, are handled by the clearing firm. In addition, the clearing firm acts as custodian for the customers of the introducing BD, holding their assets.
A registration statement disclosing material information about a new issue must be filed with the Securities Exchange Commission. The accuracy and adequacy of the registration statement is the responsibility of
A) the issuer.
B) the Securities Exchange Commission (SEC).
C) the exchanges where the shares will trade.
D) the underwriters.
A) the issuer.
Even though the underwriters assist the issuer in preparing the registration statement that must be filed with the SEC, the issuers are ultimately responsible for the accuracy and adequacy of these documents. Remember that the SEC neither approves nor disapproves of anything within the registration statement.
An affiliate of a corporation has purchased shares of restricted securities (fully paid for) in a private placement. Under Rule 144 the affiliate can
A) not divest of the shares until the affiliation with the issuer ceases.
B) sell shares immediately but is subject to volume restrictions.
C) sell shares immediately with no restrictions.
D) sell shares after a six-month holding period but is subject to volume restrictions.
D) sell shares after a six-month holding period but is subject to volume restrictions.
In accordance with Rule 144 affiliates of a corporation who are in possession of fully paid for restricted shares must wait six months before selling those shares. They must abide by the volume restrictions mandated by Rule 144 for as long as they are affiliates.
