Equities

Question 1

In the event that a corporation is liquidated, when would a person that owns common stock be paid?

Answer 1

After claims of secured and unsecured creditors

After owners of bonds

After preferred stock

Basically, common stock holders are low man on totem poll.

Question 2

What is a preferred stock?

Answer 2

Resembles both equity and fixed income investments.

Question 3

What are similarities between a preferred stock and a bond?

Answer 3

They typically pay a fixed dividend rate

Question 4

When it comes to interest rate movement, does it preferred stock or bond have more volatility?

Answer 4

Preferred stock has the greatest interest rate risk

Question 5

Who would typically be the main purchaser of preferred stock and why?

Answer 5

Corporations

Corporations typically receive a tax break on stock dividends received (usually 50% of dividends are excluded from tax)

Question 6

Are bond payments and preferred stock payments tax deductible by a C corporation?

Answer 6

No

Question 7

Why do preferred stocks typically have a longer duration than bonds?

Answer 7

Preferred stock is often perpetual meaning it’s maturity infinite

Question 8

What would be the best way for a US citizen to invest in one foreign company?

Answer 8

American Depository Receipt - ADR

Question 9

What are the characteristics of an ADR?

Answer 9

Quoted in US dollars

Dividends PAID in US dollars

Dividends are DECLARED in foreign currency

Eligible for foreign tax credit

Question 10

What would be the best way for a US citizen to invest in one foreign company?

Answer 10

American Depository Receipt - ADR

Question 11

Describe a closed-end investment company?

Answer 11

Publicly traded funds that have a one-time stock Insurance

Trades on an exchange and valued like any other negotiable security

These are marketable because they trade

Question 12

Our mutual funds marketable?

Answer 12

No, because the individual securities cannot be sold

Question 13

What are the tax treatment to the holder of a call option that expires?

Answer 13

Short term gain or loss

Question 14

Would it make a difference if an option is sold rather than exercised?

Answer 14

No, sold and expire are considered the same in terms of tax treatment.

Short term loss or gain

Question 15

If the writer of a call, has an option that is not exercised by the holder, what would be the tax treatment?

Answer 15

Premium received creates a short term gain.

Question 16

What is the tax treatment to the writer if the holder of the call option exercises it?

Answer 16

Premium receive is added to the sales price.

Either long term gain or short term gain.