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Series 6 Kaplan Financial Education The Exam Series 6 • 100 questions (plus 10 experimental) Kaplan Financial • 2¼ hours Education • 70% to pass ©2015 Kaplan University School of Professional and Continuing Education 1 ©2015 Kaplan University School of Professional and Continuing Education 2 Session One Securities Markets, Investment Securities and Corporate Securities, and Economic Capitalization Factors ©2015 Kaplan University School of Professional and Continuing Education 3 ©2015 Kaplan University School of Professional and Continuing Education 4 Securities and Corporate Securities and Corporate Capitalization Capitalization A. Issue stock B. Issue debt 1. Ownership (equity) 1. Bonds, notes 2. Limited liability 2. Holder of note or bond is creditor of corporation 3. Conservative for issuer a. Senior to equity securities in the event of liquidation Public 3. Conservative for investor Public ©2015 Kaplan University School of Professional and Continuing Education 5 ©2015 Kaplan University School of Professional and Continuing Education 6 1 Common Stock A. Characteristics 1. All corporations issue common stock Common Stock 2. Most junior security a. Has a residual claim to assets if company goes out of business or liquidates 3. Purchased for a. Growth b. Income c. Growth and income ©2015 Kaplan University School of Professional and Continuing Education 7 ©2015 Kaplan University School of Professional and Continuing Education 8 Common Stock (Dates) Common Stock (continued) B. Dates 3. Regulation T—FRB 1. Trade date a. Credit extended from broker/dealer to customer 2. Settlement date b. Two business days after settlement date a. Cash—trade date and settlement date on same c. Time extension day 1.) FINRA or Exchange b. Regular way—three business days d. Sell out e. 90-day freeze ©2015 Kaplan University School of Professional and Continuing Education 9 ©2015 Kaplan University School of Professional and Continuing Education 10 Common Stock Common Stock (Privileges of outstanding common stockholders) (continued) C. Privileges of outstanding common stockholders 1. Dividends a. Cash dividends Directors Board of 1.) Dates concerning cash dividends • Declaration a.) Declaration date b.) Ex-dividend date (set by FINRA or Exchange) • Ex = FINRA/Exchange c.) Record date d.) Payable date • Record 2.) Buyer is not an owner on the company’s books until the settlement date • Payable 3.) Selling dividends b. Stock dividends ©2015 Kaplan University School of Professional and Continuing Education 11 ©2015 Kaplan University School of Professional and Continuing Education 12 2 Common Stock (Privileges of outstanding Common Stock (Privileges of outstanding common stockholders) (continued) common stockholders) (continued) SMTWTFS 2. Voting rights 26 27 28 29 30 31 1 Declaration Date a. Crucial corporate decisions 2 3 4 5 6 7 8 b. Board of directors 1.) Shares × vacancies = number of votes 9 10 11 12 13 14 15 Ex-Dividend Date Record Date 2.) Statutory 16 17 18 19 20 21 22 3.) Cumulative 23 24 25 26 27 28 29 30 31 1 2 3 4 5 Payable Date ©2015 Kaplan University School of Professional and Continuing Education 13 ©2015 Kaplan University School of Professional and Continuing Education 14 Statutory Versus Cumulative Common Stock D. Stock values 1. Par value 2. Book value 100 100 100 3. Market value VOTES VOTES VOTES E. Tracking common stock STATUTORY 1. Trading unit is 100 shares 300 2. Priced in points ($1/share) and 1/100s (cents) VOTES CUMULATIVE ©2015 Kaplan University School of Professional and Continuing Education 15 ©2015 Kaplan University School of Professional and Continuing Education 16 Common Stock (Tracking Test Prep Question #1 common stock) (continued) When trading common stock, either at an 3. Current yield (dividend yield) exchange or over the counter, the standard size of the trading unit is a.) Annual dividend ÷ current market value ABC corporation pays a 0.25 quarterly A. 10 shares dividend and has a CMV of $20. What is B. 50 shares the current yield? C. 100 shares D. There is no standard unit 0.25 × 4 quarters = $1 ÷ $20 = 5% ©2015 Kaplan University School of Professional and Continuing Education 17 ©2015 Kaplan University School of Professional and Continuing Education 18 3 Test Prep Question #2 A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? Preferred Stock A. 1.25% B. 5% C. 10% D. 15% ©2015 Kaplan University School of Professional and Continuing Education 19 ©2015 Kaplan University School of Professional and Continuing Education 20 Preferred Stock Preferred Stock A. Equity security with a fixed/stated dividend D. Par value = $100 (arbitrary number 1. Purchased for income determined by the issuer) 2. Behaves like a debt security (pricing) E. Dividends B. Preference for 1. Percentage of par 1. Dividends 2. Dollar amount 2. Liquidation 3. Dividends not promised and can be missed C. Does not have voting privileges ©2015 Kaplan University School of Professional and Continuing Education 21 ©2015 Kaplan University School of Professional and Continuing Education 22 Preferred Stock Preferred Stock F. Types G. Priority of dividend payment 1. Straight (noncumulative) 1.) Dividends in arrears 2. Cumulative (cumulative preferred only) 3. Convertible 4. Callable 2.) All other preferred dividends 3.) Common Stock ©2015 Kaplan University School of Professional and Continuing Education 23 ©2015 Kaplan University School of Professional and Continuing Education 24 4 Trading Securities A. Securities markets and Trading Securities broker/dealers 1. Exchanges a. Listed securities b. Auction market Public Public ©2015 Kaplan University School of Professional and Continuing Education 25 ©2015 Kaplan University School of Professional and Continuing Education 26 Trading Securities (Securities Markets and Broker/Dealers) (continued) Trading Securities B. Market terms 2. Over-the-counter (OTC) a. Unlisted 1. Dealer/principal/market b. Negotiated market maker c. Market makers 2. Spread: Bid Ask 1.) Dealer/principal (has inventory) 17.00 17.25 d. NASDAQ a. Market maker buys at bid; 1.) Quotation system client sells b. Market maker sells at ask; 3. Third market (NASDAQ Intermarket) client buys a. OTC trading of both listed and unlisted securities 3. Broker/agent 4. Fourth market (Institutional trading) a. Charges a commission ©2015 Kaplan University School of Professional and Continuing Education 27 ©2015 Kaplan University School of Professional and Continuing Education 28 Trading Securities (Market Terms) Trading Securities (Market Terms) (continued) (continued) 4. Confirmation Confirmation of your order: Inter. or Order No. Description Price Amount Reg. Fee Commission a. Date Tax BOT 100 Impression Inc. 28.90 2,890.00 0.00 0.10 40.00 b. Identity Net Amount c. Price Trade Date 1/06/14 Acct. No. RR No. RR Name 2,930.10 d. Quantity Settlement 1/09/14 453-01243-1 27 C. Monet Customer Name and Address: PLEASE NOTE: On odd-lot orders (orders for other than 100 share lots) on all exchanges, purchases are executed at the round-lot price plus a premium (odd lot differential). Sales are executed at the round-lot price Mr. V. van Gogh less a discount. e. Amount of commission 729 Arles Way Chicago, IL 60699-3287 f. Sent to customer by settlement date Payment for securities bought and delivery of securities sold are due promptly and in any event on or before the end of the payment period in order to comply with Federal Regulation T and to avoid interest or premium charges. Please keep a copy of this ALFA Financial Services, Inc. confirmation for your records. ©2015 Kaplan University School of Professional and Continuing Education 29 ©2015 Kaplan University School of Professional and Continuing Education 30 5 Test Prep Question #3 Trading Securities The over-the-counter market could be C. American Depositary Receipts (ADRs) characterized as what type of market? 1. Foreign company issues stock 2. U.S. bank purchases A. Negotiated 3. Bank issues as an ADR B. Exchange 4. Trades in U.S. markets C. Auction 5. No preemptive rights or voting rights for investor D. Primary 6. Investor is subject to currency risk ©2015 Kaplan University School of Professional and Continuing Education 31 ©2015 Kaplan University School of Professional and Continuing Education 32 Debt Securities A. Debt financing—bonds 1. Purchased for income, safety Debt Securities 2. Par value—$1,000 3. Interest paid semiannually B. Tracking corporate bonds 1. Priced in points (1 point = 1% of par or $10) a. Par = 100 points = $1,000 b. Discount c. Premium ©2015 Kaplan University School of Professional and Continuing Education 33 ©2015 Kaplan University School of Professional and Continuing Education 34 Debt Securities (Yields) Debt Securities (continued) C. Yields Nominal Current Yield to 1. Nominal yield (a.k.a. stated yield, coupon) B Yield Yield Maturity (CY) (YTM) Annual interest ÷ par ($1,000) O Premium I N $1,200 N 2. Current yield (CY) R D T A Annual interest ÷ current market price E T P Par R 3. Yield to maturity (YTM, effective yield) E R $1,000 E S a. Includes annual interest and premium or discount I S C Discount T b. Usually the yield quoted in the secondary market E $800 S ©2015 Kaplan University School of Professional and Continuing Education 35 ©2015 Kaplan University School of Professional and Continuing Education 36 6 Characteristics of Corporate Bonds A. Secured bonds Characteristics of 1. Mortgage bond Corporate Bonds 2. Collateral trust certificate 3. Equipment trust certificate ©2015 Kaplan University School of Professional and Continuing Education 37 ©2015 Kaplan University School of Professional and Continuing Education 38 Characteristics of Corporate Characteristics of Corporate Bonds Bonds B. Unsecured bonds C. Convertible bonds 1. Debentures 1.Can be exchanged for common stock 2. Subordinated debentures a. Advantages for issuer 1.) Bond is more marketable 2.) Issuer reduces the cost of debt 3.) If bond is converted, debt obligation disappears ©2015 Kaplan University School of Professional and Continuing Education 39 ©2015 Kaplan University School of Professional and Continuing Education 40 Characteristics of Corporate Bonds Test Prep Question #4 (Convertible Bonds) (continued) b.
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