SIE Equity Securities 2 — Questions and Answers
Question 1: Cumulative preferred stock means that if a dividend is missed, it must be:
- Waived permanently
- Paid before any common dividends in the future (Correct answer)
- Converted to common stock
- Paid immediately by law
Correct answer: Paid before any common dividends in the future
Cumulative preferred dividends that are skipped accumulate as arrears and must be paid before any common dividends.
Question 2: A rights offering allows existing shareholders to:
- Sell their shares at a premium
- Receive extra dividends
- Purchase additional shares at a discount before new investors (Correct answer)
- Convert preferred shares to common shares
Correct answer: Purchase additional shares at a discount before new investors
A rights offering gives existing shareholders the privilege to buy new shares at a discount to maintain their ownership percentage.
Question 3: Which market is known as the secondary market for trading existing shares among investors?
- Primary market
- Over-the-counter market (Correct answer)
- New issue market
- IPO market
Correct answer: Over-the-counter market
The over-the-counter (OTC) market is a secondary market where existing securities are traded between investors.
Question 4: Callable preferred stock allows the issuer to:
- Convert shares into bonds
- Force conversion into common stock at any time
- Redeem the shares at a specified price (Correct answer)
- Suspend dividends indefinitely
Correct answer: Redeem the shares at a specified price
Callable preferred stock can be redeemed (bought back) by the issuer at a predetermined call price.
Question 5: What is a warrant in the context of securities?
- A guarantee of dividend payment
- A long-term option to buy shares at a fixed price (Correct answer)
- A court order to freeze assets
- A type of bond coupon
Correct answer: A long-term option to buy shares at a fixed price
A warrant is a long-term security giving the holder the right to purchase shares at a set price before expiration.
Question 6: In a company liquidation, which security holders are paid LAST?
- Secured bondholders
- General creditors
- Preferred stockholders
- Common stockholders (Correct answer)
Correct answer: Common stockholders
In liquidation, common stockholders have the lowest priority and are paid only after all creditors and preferred shareholders.
SIE Equity Securities 2
Cumulative preferred stock means that if a dividend is missed, it must be: