SIE UNIT 2- UNDERSTANDING
PRODUCTS AND THEIR RISKS
QUESTIONS & VERIFIED ANSWERS
PASSED ALREADY GRADED A+
What do equity securities and debt securities represent? CORRECT ANSWER - equities
represent ownership in an issuing company and debt securities represent a loan
Common stock CORRECT ANSWER - Corporation's basic ownership share; also generically called
capital stock.
Benefits of owning common stock CORRECT ANSWER - 1. voting rights
2. dividends
3. residual claim
4. preemptive rights
Why include common stock in a portfolio CORRECT ANSWER - Potential Capital Appreciation
Hedge against inflation
Risk of owning common stock CORRECT ANSWER - -Market Risk: Chance of stock declining in
price
-Change in Dividend Policy: BOD may decide to retain a portion of dividend to acquire another
Co or research & development, which would have a neg impact on client needing steady income
-Low priority at Dissolution: Debt securities paid out first including prefd stock
,Bankruptcy CORRECT ANSWER - General term for a federal bank procedure where individuals
or businesses attempt to seek relief for their debt either through reorganization or liquidation
reorganization CORRECT ANSWER - bankruptcy in which the creditors and a debtor create a
plan under which the debtor pays a portion of his or her debts and is discharged of the
remainder
Liquidation CORRECT ANSWER - occurs when a business closes and sells its assets to pay
creditors
Order of debt paid after liquidation CORRECT ANSWER - IRS (Taxes), Employees unpaid wages,
secured debt (bonds/mortgages), unsecured liabilities, subordinated debt, equities
preferred stock CORRECT ANSWER - stock that entitles the holder to a fixed dividend, whose
payment takes priority over that of common-stock dividends.
What features do preferred stocks share with debt securities? CORRECT ANSWER - Their Fixed
rate of return (Dividends for example)
What is the assumed par value for a preferred stock? CORRECT ANSWER - Always assumed the
par value is $100 unless otherwise stated
Benefits of owning preferred stock CORRECT ANSWER - 1.Dividend preference- When BOD
declare dividends, preferred stock holders will be paid first.
2. Priority over common stock holders at dissolution
Risks of Owning Preferred Stock CORRECT ANSWER - 1. Purchasing power risk: Due to inflation,
the purchasing power of the stock might decrease.
2. Interest rate sensitivity- If the interest rates go high, the value of the stock might decrease
, 3. Decreased or no dividend payment-
4. Low priority at dissolution
Why include preferred stock in a client's portfolio? CORRECT ANSWER - Fixed income from
dividend,
priority over common stock at dissolution,
convertible preferred sacrificed
straight preferred stock CORRECT ANSWER - a preferred stock whose missed dividends do not
go into arrears, a.k.a. "non-cumulative preferred."
cumulative preferred stock CORRECT ANSWER - Preferred stock on which undeclared dividends
accumulate until paid; common stockholders cannot receive dividends until cumulative
dividends are paid.
callable preferred stock CORRECT ANSWER - Preferred stock that the issuing corporation, at its
option, may retire by paying the call price plus any dividends in arrears.
convertible preferred stock CORRECT ANSWER - Preferred stock with an option to exchange it
for common stock at a specified rate. It usually has a lower stated dividend due to this feature
Adjustable rate preferred stock CORRECT ANSWER - Preferred stock whose dividend is tied to
another rate often the rate paid on a T-Bills and money market
Participating Preferred Stock CORRECT ANSWER - Preferred stock that shares with common
stockholders any dividends paid in excess of the percent stated on preferred stock.
Controlled securities CORRECT ANSWER - Securities that owned by an officer or director or
individual who owns/has 10% or more of the voting stock
PRODUCTS AND THEIR RISKS
QUESTIONS & VERIFIED ANSWERS
PASSED ALREADY GRADED A+
What do equity securities and debt securities represent? CORRECT ANSWER - equities
represent ownership in an issuing company and debt securities represent a loan
Common stock CORRECT ANSWER - Corporation's basic ownership share; also generically called
capital stock.
Benefits of owning common stock CORRECT ANSWER - 1. voting rights
2. dividends
3. residual claim
4. preemptive rights
Why include common stock in a portfolio CORRECT ANSWER - Potential Capital Appreciation
Hedge against inflation
Risk of owning common stock CORRECT ANSWER - -Market Risk: Chance of stock declining in
price
-Change in Dividend Policy: BOD may decide to retain a portion of dividend to acquire another
Co or research & development, which would have a neg impact on client needing steady income
-Low priority at Dissolution: Debt securities paid out first including prefd stock
,Bankruptcy CORRECT ANSWER - General term for a federal bank procedure where individuals
or businesses attempt to seek relief for their debt either through reorganization or liquidation
reorganization CORRECT ANSWER - bankruptcy in which the creditors and a debtor create a
plan under which the debtor pays a portion of his or her debts and is discharged of the
remainder
Liquidation CORRECT ANSWER - occurs when a business closes and sells its assets to pay
creditors
Order of debt paid after liquidation CORRECT ANSWER - IRS (Taxes), Employees unpaid wages,
secured debt (bonds/mortgages), unsecured liabilities, subordinated debt, equities
preferred stock CORRECT ANSWER - stock that entitles the holder to a fixed dividend, whose
payment takes priority over that of common-stock dividends.
What features do preferred stocks share with debt securities? CORRECT ANSWER - Their Fixed
rate of return (Dividends for example)
What is the assumed par value for a preferred stock? CORRECT ANSWER - Always assumed the
par value is $100 unless otherwise stated
Benefits of owning preferred stock CORRECT ANSWER - 1.Dividend preference- When BOD
declare dividends, preferred stock holders will be paid first.
2. Priority over common stock holders at dissolution
Risks of Owning Preferred Stock CORRECT ANSWER - 1. Purchasing power risk: Due to inflation,
the purchasing power of the stock might decrease.
2. Interest rate sensitivity- If the interest rates go high, the value of the stock might decrease
, 3. Decreased or no dividend payment-
4. Low priority at dissolution
Why include preferred stock in a client's portfolio? CORRECT ANSWER - Fixed income from
dividend,
priority over common stock at dissolution,
convertible preferred sacrificed
straight preferred stock CORRECT ANSWER - a preferred stock whose missed dividends do not
go into arrears, a.k.a. "non-cumulative preferred."
cumulative preferred stock CORRECT ANSWER - Preferred stock on which undeclared dividends
accumulate until paid; common stockholders cannot receive dividends until cumulative
dividends are paid.
callable preferred stock CORRECT ANSWER - Preferred stock that the issuing corporation, at its
option, may retire by paying the call price plus any dividends in arrears.
convertible preferred stock CORRECT ANSWER - Preferred stock with an option to exchange it
for common stock at a specified rate. It usually has a lower stated dividend due to this feature
Adjustable rate preferred stock CORRECT ANSWER - Preferred stock whose dividend is tied to
another rate often the rate paid on a T-Bills and money market
Participating Preferred Stock CORRECT ANSWER - Preferred stock that shares with common
stockholders any dividends paid in excess of the percent stated on preferred stock.
Controlled securities CORRECT ANSWER - Securities that owned by an officer or director or
individual who owns/has 10% or more of the voting stock
