FINRA Series 6 Exam Practice Questions (P. 5)
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Question #41
A preemptive right:
- Ais a call option that is usually attached to a bond as a sweetener.
- Bgives a bond owner the option to sell the bond back to the issuer at a pre-specified price.
- Centitles its owner to buy shares of stock at a specified price within a specified time period in order to maintain his proportionate ownership in the firm.
- Dis a feature on some preferred stock issues that allows the preferred shareholders to exchange their preferred shares for shares of the common stock of the
Correct Answer:
C
A right entitles its owner to buy shares of stock at a specified price within a specified time period in order to retain his proportionate ownership in a firm. As such, it is a call option, but it is not usually attached to a bond as a sweetener; that would be a warrant.
C
A right entitles its owner to buy shares of stock at a specified price within a specified time period in order to retain his proportionate ownership in a firm. As such, it is a call option, but it is not usually attached to a bond as a sweetener; that would be a warrant.
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Question #42
Mr. Investor has purchased 100 shares of the common stock of the Everyman Corporation. As such, which of the following is not a right that Mr. Investor has?
- Athe right to receive dividends, if declared
- Bthe right to vote on the members of Everyman’s board of directors
- Cthe right to vote on any proposed changes to the corporate bylaws
- Dthe right to vote on the purchase of a major piece of property that Everyman is considering
Correct Answer:
D
Mr. Investor does not have the right to vote on the purchase of a major piece of property that Everyman is considering or any decision involving business operations. He does have the right to receive dividends, if dividends are declared, based on his proportionate ownership of the firm. He also has the right to vote on the members of the firms board of directors and to vote on any proposed changes to the corporate by laws.
D
Mr. Investor does not have the right to vote on the purchase of a major piece of property that Everyman is considering or any decision involving business operations. He does have the right to receive dividends, if dividends are declared, based on his proportionate ownership of the firm. He also has the right to vote on the members of the firms board of directors and to vote on any proposed changes to the corporate by laws.
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Question #43
A feature that gives a bondholder or the owner of preferred stock of a corporation the option to exchange his security for shares of the common stock of the firm is called a:
- Acall feature.
- Bwarrant.
- Cconvertible feature.
- Dright.
Correct Answer:
C
A convertible feature on a bond or preferred stock gives the bondholder or the preferred stock owner the option to exchange the security he owns for shares of common stock of the firm.
C
A convertible feature on a bond or preferred stock gives the bondholder or the preferred stock owner the option to exchange the security he owns for shares of common stock of the firm.
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Question #44
The stock of Southwest Airlines (LUV) is selling for $11.77 in mid-September. An October put on the stock is selling for $1.45 and gives the owner the right to sell the stock for $13.00 prior to its expiration. In this example, the option premium is:
- A$13.00.
- B$1.23.
- C$1.45.
- D$11.77.
Correct Answer:
C
The option premium is $1.45, the cost of the option.
C
The option premium is $1.45, the cost of the option.
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Question #45
In mid-September, the stock of Oracle (ORCL) is selling for $25.60 a share. Ms. Hedge owns shares of Oracle and buys a put option on the stock with a strike price of $27 that expires in October for $2.20 per optioned share. Just prior to expiration, Oracles stock is selling for $29. Ms. Hedge should:
- Alet her option expire worthless.
- Bexercise her option and sell Oracle for $29 a share.
- Cexercise her option and buy more shares of Oracle for $27 a share.
- Dexercise her option and sell Oracle for $27 a share.
Correct Answer:
A
If Ms. Hedge owns a put option on Oracle with a strike price of $27 and Oracles price is $29 just prior to expiration, she should let her option expire worthless. Her put option gives her the right to sell Oracle for $27. If she wants to sell her existing shares of Oracle, she is better off doing so on the open market and receiving $29 a share for them.
A
If Ms. Hedge owns a put option on Oracle with a strike price of $27 and Oracles price is $29 just prior to expiration, she should let her option expire worthless. Her put option gives her the right to sell Oracle for $27. If she wants to sell her existing shares of Oracle, she is better off doing so on the open market and receiving $29 a share for them.
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Question #46
In mid-September, the stock of Amazon.com, Inc. (AMZN) is selling for $147.A January call option on the stock is selling for $6.10 and has a strike price of $160.
This call option is:
This call option is:
- Aat the money.
- Bin the money.
- Cout of the money.
- Doverpriced. No one should pay $6.10 for the right to buy a share of stock for $160 when its current market price is only $147.
Correct Answer:
C
If Amazon.com is selling for $147 and the strike price on the option is $160, the call option is said to be out of the money since, even if an investor were given the option free, he would not benefit from exercising it at this time. If he did so, he would be paying $160 for a stock that is selling for only $147 on the open market. Even so, the option is not necessarily overpriced at $6.10 because the option has what is known as "time value" on it. The stock of Amazon.com has several months during which it could rise well above the $160 strike price on the option.
C
If Amazon.com is selling for $147 and the strike price on the option is $160, the call option is said to be out of the money since, even if an investor were given the option free, he would not benefit from exercising it at this time. If he did so, he would be paying $160 for a stock that is selling for only $147 on the open market. Even so, the option is not necessarily overpriced at $6.10 because the option has what is known as "time value" on it. The stock of Amazon.com has several months during which it could rise well above the $160 strike price on the option.
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Question #47
A warrant differs from a standard call option in that:
- Aa standard call option generally has a longer period to expiration than a warrant.
- Bwhen a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised.
- Ca warrant gives the holder the right to sell shares of the underlying stock; a call option gives the holder the right to buy shares of the underlying stock.
- Dwhen a call option is exercised, the outstanding shares of the firm whose stock is being purchased increases; this does not occur when a warrant is exercised.
Correct Answer:
B
A warrant differs from a standard call option in that when a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised. Both the warrant and the call option give the holder the right to purchase shares of a firms stock, but the writer (seller) of a warrant is the firm itself whereas the writer of a standard call option is simply another investor. Upon exercising a warrant, the investor buys the stock from the firm itself, which increases the firms cash account. When a call option is exercised, another investors cash account is increased.
For the same reason, when a call option is exercised, nothing happens to the outstanding shares of the firm; but when a warrant is exercised, the firms outstanding shares will increase.
B
A warrant differs from a standard call option in that when a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised. Both the warrant and the call option give the holder the right to purchase shares of a firms stock, but the writer (seller) of a warrant is the firm itself whereas the writer of a standard call option is simply another investor. Upon exercising a warrant, the investor buys the stock from the firm itself, which increases the firms cash account. When a call option is exercised, another investors cash account is increased.
For the same reason, when a call option is exercised, nothing happens to the outstanding shares of the firm; but when a warrant is exercised, the firms outstanding shares will increase.
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Question #48
A type of preferred stock for which any dividends missed in prior years must be paid before common shareholders may receive any dividends is referred to as:
- Acumulative preferred.
- Bparticipating preferred.
- Cconvertible preferred.
- Dadjustable rate preferred.
Correct Answer:
A
The type of preferred stock that requires that any dividends missed in prior years be paid before common shareholders may receive any dividends is referred to as cumulative preferred stock. Participating preferred stock allows the preferred shareholders to earn extra dividends if the firm has higher than normal earnings. Convertible preferred stock allows the preferred shareholders to convert their shares to common stock. Adjustable rate preferred has a variable dividend rate that is tied to some benchmark.
A
The type of preferred stock that requires that any dividends missed in prior years be paid before common shareholders may receive any dividends is referred to as cumulative preferred stock. Participating preferred stock allows the preferred shareholders to earn extra dividends if the firm has higher than normal earnings. Convertible preferred stock allows the preferred shareholders to convert their shares to common stock. Adjustable rate preferred has a variable dividend rate that is tied to some benchmark.
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Question #49
The stock of Hasbro Corporation (HAS) is selling for $44.50 and pays a dividend of $1.00 a share. What is its dividend yield, rounded to the nearest hundredth of a percent?
- A1.00%
- B2.25%
- C4.45%
- Dnone of the above
Correct Answer:
B
If Hasbro is selling for $44.50 and pays a dividend of $1.00 a share, its dividend yield is 2.25%. The dividend yield is the dividend divided by the market price: $1.00/$44.50 = 2.25%.
B
If Hasbro is selling for $44.50 and pays a dividend of $1.00 a share, its dividend yield is 2.25%. The dividend yield is the dividend divided by the market price: $1.00/$44.50 = 2.25%.
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Question #50
Simple Simon owns 1,000 shares in the Pasty Pie Corporation, which has just declared a stock dividend of 5%. Just prior to this announcement, Pasty Pie was selling for $10 a share. This announcement will:
- Aincrease Pasty’s shares outstanding and reduce Simple’s proportionate ownership in the firm.
- Bincrease the number of shares that Simple owns to 1,050, which will increase the market value of the shares that he owns from $10,000 to $10,500.
- Cincrease the number of shares that Simple owns to 1,050, but this will not affect the market value of Simple’s holdings.
- Dincrease Simple’s cash by the amount of the dividend paid: 0.05 x $10 = $0.50 x 1,000 shares = $500.
Correct Answer:
C
If Simple Simon owns 1,000 shares of Pasty Pie Corporation when Pasty declares a 5% stock dividend, the stock dividend will increase his number of shares to 1,050, but it will not affect the market value of Simples holdings since the market price per share will also decrease proportionately. The aggregate market value of the firm stays the same, but the number of shares outstanding increases, resulting in a lower market value per share. Simples proportionate ownership remains the same because his shares increased in the same percentage as the shares outstanding of the firm did. A stock dividend does not result in any cash payments to the shareholders.
C
If Simple Simon owns 1,000 shares of Pasty Pie Corporation when Pasty declares a 5% stock dividend, the stock dividend will increase his number of shares to 1,050, but it will not affect the market value of Simples holdings since the market price per share will also decrease proportionately. The aggregate market value of the firm stays the same, but the number of shares outstanding increases, resulting in a lower market value per share. Simples proportionate ownership remains the same because his shares increased in the same percentage as the shares outstanding of the firm did. A stock dividend does not result in any cash payments to the shareholders.
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