Master Special Securities for Series 7 Success

### What is the main purpose of an American Depositary Receipt (ADR)? - [x] To simplify the purchase of foreign stocks for U.S. investors - [ ] To provide dividends directly from foreign companies - [ ] To act as collateral against foreign investments - [ ] To prevent currency fluctuations in foreign markets > **Explanation:** ADRs make it easier for U.S. investors to buy shares in foreign companies by providing them in a U.S. financial product. ### Warrants give the holder the right to purchase: - [x] The issuer's stock at a specific price before expiration - [ ] Bonds at a discounted rate - [x] Options in foreign markets - [ ] Mutual fund shares without front-end load > **Explanation:** Warrants provide leverage and potential high returns by allowing the purchase of stock at a set price in the future. ### Rights offerings are primarily: - [x] An opportunity for existing shareholders to purchase additional shares - [ ] A tool to reduce overall company equity - [ ] An efficient way to liquidate assets - [ ] An incentive program for new investors > **Explanation:** Rights offerings help existing investors maintain percentage ownership and buy additional shares, often at a discount. ### What is a significant risk of holding warrants? - [x] The underlying stock may not exceed the exercise price before expiration - [ ] Immediate requirement to buy stock - [ ] It's only exercisable with institutional approval - [ ] Fixed returns regardless of market condition > **Explanation:** The risk with warrants is if the stock price doesn’t increase past the strike price, the warrant loses value. ### Which statement about ADRs is accurate? - [x] ADRs allow U.S. investors to reduce forex risk - [ ] ADRs pay dividends in the foreign company’s currency - [x] ADRs are considered direct investments in foreign companies - [ ] ADRs lower exchange rate transactional fees > **Explanation:** ADRs help investors by denominating dividends and stock prices in U.S. dollars, reducing currency risk related to forex. ### Warrants differ from options in that they are: - [x] Issued by the company itself rather than written by a third party - [ ] Short-term instruments typically expiring in less than a year - [ ] Restricted to stock purchases on secondary markets - [ ] Insured by the FDIC > **Explanation:** Warrants are long-term and issued directly by the company, unlike options, which are often short-term and provided by third-party entities. ### The primary advantage of rights offerings includes: - [x] Allowing current shareholders to purchase new shares at a discount - [ ] Increasing liquidity by encouraging institutional investment - [x] Supporting strategic acquisitions by rising involved equity - [ ] Diluting existing shareholder value > **Explanation:** Shareholders can purchase discounted shares, preserving equity percentage and capital growth. ### How do rights impact existing shareholders if they do not act? - [x] Potential dilution of their existing shareholding - [ ] Automatic conversion to warrants - [ ] Lock-in restrictions for existing shares - [ ] No tangible effect on holdings > **Explanation:** Failing to purchase under rights-offering can dilute the previous percentage of ownership in the company. ### What is a key benefit of investing in ADRs over directly investing in foreign stocks? - [x] Simplified tax treatment and reduced paperwork - [ ] Exposure to different interest rates globally - [ ] Higher guaranteed returns due to diversified holdings - [ ] Enhanced political control over foreign markets > **Explanation:** ADRs simplify the investing process by managing foreign tax issues and accounting in U.S. dollars, easing investor burdens. ### ADRs provide a method for U.S. investors to invest in foreign stocks while avoiding complications due to direct foreign investment. - [x] True - [ ] False > **Explanation:** ADRs simplify foreign investment by allowing transactions in U.S.-based accounts in U.S. currency, mitigating several complexities of direct investments.