Question 1

Who issues common stock?

Accepted Answer

a Corporation.

Question 2

What does a share of common stock represent?

Accepted Answer

Represents equity ownership of a corporation.

Question 3

Can common stock pay dividends?

Accepted Answer

Yes.

Question 4

Are dividends mandatory for common stock?

Accepted Answer

No. Dividends are not mandatory.

Question 5

Who declares dividends on common stock?

Accepted Answer

the Board of Directors of the Corporation.

Question 6

Does common stock generally have voting rights?

Accepted Answer

Yes.

Question 7

What do shareholders of common stock vote on?

Accepted Answer

All shareholders vote on members of the Board of Directors and matters like stock splits, regardless of when or how the common stock was acquired.

Question 8

Is common stock considered to carry a high level of risk?

Accepted Answer

Yes.

Question 9

Are common stockholders the last to be paid if the corporation goes out of business and has to go into liquidation?

Accepted Answer

Yes.

Question 10

Is common stock highly susceptible to market risk (systematic risk)?

Accepted Answer

Yes.

Question 11

Who issues preferred stock?

Accepted Answer

a Corporation.

Question 12

What does a share of preferred stock represent?

Accepted Answer

Represents equity ownership of a corporation.

Question 13

Is preferred stock a fixed income security? Why?

Accepted Answer

Yes, since it pays a fixed dividend rate.

Question 14

Are dividends mandatory for preferred stock?

Accepted Answer

No.

Question 15

Are dividends mandatory on any equity security (common or preferred stock)?

Accepted Answer

No, but dividends are expected to be paid on preferred stocks.

Question 16

Does preferred stock have voting privileges?

Accepted Answer

No.

Question 17

How does the potential for appreciation of preferred stock compare to common stock?

Accepted Answer

Preferred stock offers less potential for appreciation than common stock since it's classified as a fixed income security.

Question 18

Are cash dividends paid on common or preferred stock fully taxable to the investor?

Accepted Answer

Yes.

Question 19

What rate are cash dividends from common or preferred stock generally taxed?

Accepted Answer

15%.

Question 20

Will common and preferred stock generally be registered at the federal (SEC) -OR- at the state level (under the Uniform Securities Act)?

Accepted Answer

Yes. Without additional info, neither type of security would qualify for exemptions from registration.

Question 21

If a common or preferred stock is traded on a stock exchange or on NASDAQ, these securities will be highly

Accepted Answer

liquid. if its traded on an exchange or NASDAQ you can enter orders to buy or sell that security any business day.

Question 22

If a shareholder of a common or preferred stock no longer wishes to own that stock, what do they do?

Accepted Answer

Sell their securities at the current market price to another investor.

Question 23

Is the issuer obligated to buy back their shares of common stock or preferred stock from investors who no longer wish to own them?

Accepted Answer

No. The issuer has no such obligation.

Question 24

Will the sale of the security result in a capital gain or capital loss, depending on the purchase and sale price?

Accepted Answer

Yes.

Question 25

When an investor buys and sells a security, they have a holding period — which is measured from

Accepted Answer

the day they bought the security to the day they sold the security.

Question 26

What are the two types of holding periods?

Accepted Answer

long-term or short-term.

Question 27

What are Long-term Capital Gains ?

Accepted Answer

Capital gains where the security was held for 1 year plus 1 day or longer.

Question 28

What are Short-term Capital Gains?

Accepted Answer

Capital gains where the security was held for 1 year or less, trade date to trade date.

Question 29

What are bonds?

Accepted Answer

Bonds are a debt security that pay interest to investors semi-annually at the stated rate.

Question 30

What are other names for the stated rate?

Accepted Answer

Nominal yield, coupon rate, and interest rate on the face of the bond are interchangeable terms.

Question 31

Are bonds considered “fixed-income” securities?

Accepted Answer

Yes. You know you’re going to get that stated rate of interest semi-annually.

Question 32

What is the par value of a bond?

Accepted Answer

$1,000.

Question 33

What are other names for the par value?

Accepted Answer

face value, principal value

Question 34

If you hold a bond to its maturity date, what will you receive?

Accepted Answer

$1,000.

Question 35

Bonds trade in the secondary market at

Accepted Answer

a). Premium b). Par c). Discount

Question 36

Bonds trading at a premium have a market value that is

Accepted Answer

above par of $1,000.

Question 37

Why would the market value of a bond be worth more than what you’re going to get paid at maturity?

Accepted Answer

the bond is paying an interest rate (or coupon rate) that is higher than the current prevailing rate in the market.

Question 38

If current rates are 5% and a bond pays 10%, that bond will be trading at a

Accepted Answer

premium.

Question 39

Bonds trading at par have a market value that is

Accepted Answer

equal to par of $1,000.

Question 40

Why would a bond be trading at par?

Accepted Answer

Because it’s offering a coupon of 5% and current rates are also at 5%.

Question 41

Are bonds trading at par typically paying interest rates equal to those in the prevailing market?

Accepted Answer

Yes.

Question 42

If current rates are 5% and a bond pays 5%, that bond will be trading at

Accepted Answer

par.

Question 43

Bonds trading at a discount have a market value that is

Accepted Answer

BELOW the par value of $1,000.

Question 44

Why would a bond be trading at a discount?

Accepted Answer

the bond is paying an interest rate that is LOWER than the current prevailing rate in the market.

Question 45

If current rates are 5% and a bond pays 2%, that bond will be trading at a

Accepted Answer

discount.

Question 46

Why does the bond have to trade at a discount if its' coupon rate is less than the prevailing rate?

Accepted Answer

For the bond to be able to yield approximately the prevailing rate.

Question 47

What is nominal yield?

Accepted Answer

Same as coupon rate Interest rate on face of the bond

Question 48

What is the formula for current yield on a bond?

Accepted Answer

Current Yield = Annual Interest / Market Price

Question 49

When is interest rate paid on a bond?

Accepted Answer

Semi-annually.

Question 50

What is yield to maturity / basis?

Accepted Answer

the yield of the bond if held to maturity.

Question 51

Are preferred stock and bonds both fixed income securities?

Accepted Answer

Yes.

Question 52

Are preferred stock and bond prices sensitive to interest rate movements?

Accepted Answer

Yes.

Question 53

What direction do preferred stock and bond prices move in relation to interest rates?

Accepted Answer

The opposite direction.

Question 54

What is the inverse reaction?

Accepted Answer

As interest rates go up, the prices of outstanding bonds will fall. And as interest rates go down, the prices of outstanding bonds will rise.

Question 55

When a bond is trading at a discount, where will the basis be in relation to the coupon rate?

Accepted Answer

When a bond is trading a discount, the basis will always be higher than the coupon rate.

Question 56

When a bond is trading at a premium, where will the basis be in relation to the coupon rate?

Accepted Answer

When a bond is trading at a premium, the basis will always be lower than the coupon rate.

Question 57

When a bond is trading at par, where will the basis be in relation to the coupon rate?

Accepted Answer

If the seesaw is perfectly balanced, then basis will be exactly the same as the coupon rate.

Question 58

Where is current yield in relation to basis?

Accepted Answer

Always before basis on the seesaw. Current Yield and basis move in the same direction.

Question 59

When price goes up or down on a bond, which makes the biggest move -- Current Yield or Basis?

Accepted Answer

Basis.

Question 60

Why does basis always make the biggest move when the bond price moves up or down?

Accepted Answer

Because basis considers the amount of time remaining until the bond reaches maturity. The LONGER the time until the maturity of a bond, the MORE its price will decline when interest rates go up.

Question 61

Does current yield consider the amount of time remaining until maturity?

Accepted Answer

No.

Question 62

When bonds are trading at a discount, where is basis (YTM) in relation to the coupon rate?

Accepted Answer

Bonds trading at a discount will always have a basis (YTM) which is higher than the coupon rate.

Question 63

When bonds are trading at a premium, where is basis (YTM) in relation to the coupon rate?

Accepted Answer

Bonds trading at a premium will always have a basis (YTM) which is lower than the coupon rate.

Question 64

When bonds are trading at par, where is basis (YTM) in relation to the coupon rate?

Accepted Answer

Bonds trading at par will always have a basis which is the same as the coupon rate.

Ch 07(1) Inv Vehicle Characteristics | General Securities Information Flashcards

Detail some General Securities Information.

Brainscape's Knowledge GenomeTM

Ch 07(1) Inv Vehicle Characteristics | General Securities Information Flashcards

Detail some General Securities Information.

Brainscape's Knowledge Genome^TM