Deck 3: How Securities Are Traded

Question 1

You purchased 100 shares of IBM common stock on margin at $130 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

A) $21.24
B) $92.86
C) $49.52
D) $80.33

Answer 1

B

Question 2

You sold AAPL stock short at $190 per share. Your losses could be minimized by placing a

A) limit-sell order.
B) limit-buy order.
C) stop-buy order.
D) day-order.
E) None of the options are correct.

Answer 2

C

Question 3

In a "firm commitment," the investment banker

A) buys the stock from the company and resells the issue to the public.
B) agrees to help the firm sell the stock at a favorable price.
C) finds the best marketing arrangement for the investment-banking firm.
D) agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment-banking firm.

Answer 3

A

Question 4

You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was

A) $4,800.
B) $12,000.
C) $5,600.
D) $7,200.

Question 5

A purchase of a new issue of stock takes place

A) in the secondary market.
B) in the primary market.
C) usually with the assistance of an investment banker.
D) in the secondary and primary markets.
E) in the primary market and usually with the assistance of an investment banker.

Question 6

You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.

A) 25.00%
B) -33.33%
C) 44.31%
D) -41.67%
E) -54.22%

Question 7

The cost of buying and selling a stock consists of

A) broker's commissions.
B) dealer's bid-asked spread.
C) a price concession an investor may be forced to make.
D) broker's commissions and dealer's bid-asked spread.
E) broker's commissions, dealer's bid-asked spread, and a price concession an investor may be forced to make.

Question 8

You purchased JNJ stock at $130 per share. The stock is currently selling at $145. Your gains may be protected by placing a

A) stop-buy order.
B) limit-buy order.
C) market order.
D) limit-sell order.
E) None of these options are correct.

Question 9

You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. At what stock price would you receive a margin call if the maintenance margin is 35%?

A) $51.00
B) $65.19
C) $35.22
D) $40.36

Question 10

Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintenance margin if a margin call is made at a stock price of $60?

A) 40%
B) 33%
C) 35%
D) 25%

Question 11

Initial margin requirements are determined by

A) the Securities and Exchange Commission.
B) the Federal Reserve System.
C) the New York Stock Exchange.
D) the Federal Reserve System and the New York Stock Exchange.

Question 12

Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

A) 20.03%
B) 25.67%
C) 22.22%
D) 77.46%

Question 13

Which of the following statements regarding the specialist are true?

A) Specialists maintain a book listing outstanding, unexecuted limit orders.
B) Specialists earn income from commissions and spreads in stock prices.
C) Specialists stand ready to trade at quoted bid and ask prices.
D) Specialists cannot trade in their own accounts.
E) Specialists maintain a book listing outstanding, unexecuted limit orders, earn income from commissions and spreads in stock prices, and stand ready to trade at quoted bid and ask prices.

Question 14

Restrictions on trading involving insider information apply to the following, except

A) corporate officers.
B) corporate directors.
C) major stockholders.
D) All of the individuals.
E) None of the options.

Question 15

The secondary market consists of

A) transactions on the AMEX.
B) transactions in the OTC market.
C) transactions through the investment banker.
D) transactions on the AMEX and in the OTC market.
E) transactions on the AMEX, through the investment banker, and in the OTC market.

Question 16

Which one of the following statements regarding orders is false?

A) A market order is simply an order to buy or sell a stock immediately at the prevailing market price.
B) A limit-sell order is where investors specify prices at which they are willing to sell a security.
C) If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45.
D) A market order is an order to buy or sell a stock on a specific exchange (market).

Question 17

You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin.

A) 0.33
B) 0.55
C) 0.43
D) 0.23
E) 0.25

Question 18

Firms raise capital by issuing stock

A) in the secondary market.
B) in the primary market.
C) to unwary investors.
D) only on days when the market is up.

Question 19

Investment bankers

A) act as intermediaries between issuers of stocks and investors.
B) act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.
C) accept deposits from savers and lend them out to companies.
D) act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.

Question 20

Assume you purchased 200 shares of KO common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow from the broker?

A) $6,000
B) $4,000
C) $7,700
D) $7,000
E) $6,300

Question 21

You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. You would most likely place a

A) stop-loss order.
B) stop-buy order.
C) market order.
D) limit-sell order.
E) limit-buy order.

Question 22

You want to purchase KO stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy?

A) 100 shares
B) 200 shares
C) 50 shares
D) 500 shares
E) 25 shares

Question 23

Which of the following orders instructs the broker to buy at or below a specified price?

A) Limit-loss order
B) Discretionary order
C) Limit-buy order
D) Stop-buy order
E) Market order

Question 24

Which of the following orders instructs the broker to sell at or below a specified price?

A) Limit-sell order
B) Stop-loss
C) Limit-buy order
D) Stop-buy order
E) Market order

Question 25

Shelf registration

A) is a way of placing issues in the primary market.
B) allows firms to register securities for sale over a two-year period.
C) increases transaction costs to the issuing firm.
D) is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period.
E) is a way of placing issues in the primary market and increases transaction costs to the issuing firm.

Question 26

Which of the following orders instructs the broker to buy at or above a specified price?

A) Limit-buy order
B) Discretionary order
C) Limit-sell order
D) Stop-buy order
E) Market order

Question 27

Specialists on stock exchanges perform which of the following functions?

A) Act as dealers in their own accounts
B) Analyze the securities in which they specialize
C) Provide liquidity to the market
D) Act as dealers in their own accounts and analyze the securities in which they specialize
E) Act as dealers in their own accounts and provide liquidity to the market

Question 28

When stocks are held in street name,

A) the investor receives a stock certificate with the owner's street address.
B) the investor receives a stock certificate without the owner's street address.
C) the investor does not receive a stock certificate.
D) the broker holds the stock in the brokerage firm's name on behalf of the client.
E) the investor does not receive a stock certificate, and the broker holds the stock in the brokerage firm's name on behalf of the client.

Question 29

The finalized registration statement for new securities approved by the SEC is called

A) a red herring.
B) the preliminary statement.
C) the prospectus.
D) a best-efforts agreement.
E) a firm commitment.

Question 30

Which of the following orders instructs the broker to sell at or above a specified price?

A) Limit-buy order
B) Discretionary order
C) Limit-sell order
D) Stop-buy order
E) Market order

Question 31

A program trade is

A) a trade of 10,000 (or more) shares of a stock.
B) a trade of many shares of one stock for one other stock.
C) a trade of analytic programs between financial analysts.
D) a coordinated purchase or sale of an entire portfolio of stocks.
E) not feasible with current technology but is expected to be popular in the near future.

Question 32

A sale by IBM of new stock to the public would be a(n)

A) short sale.
B) seasoned equity offering.
C) private placement.
D) secondary-market transaction.
E) initial public offering.

Question 33

Block transactions are transactions for more than _______ shares, and they account for about _____ percent of all trading on the NYSE.

A) 1,000; 5
B) 500; 10
C) 100,000; 50
D) 10,000; 30
E) 5,000; 23

Question 34

Which of the following orders is most useful to short sellers who want to limit their potential losses?

A) Limit order
B) Discretionary order
C) Limit-loss order
D) Stop-buy order

Question 35

NASDAQ subscriber levels

A) permit those with the highest level, 3, to "make a market" in the security.
B) permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes.
C) permit level 1 subscribers to receive general information about prices.
D) include all OTC stocks.
E) permit those with the highest level, 3, to "make a market" in the security; permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes; and permit level 1 subscribers to receive general information about prices.

Question 36

All of the following are considered new trading strategies, except

A) high frequency trading.
B) algorithmic trading.
C) dark pools.
D) short selling.

Question 37

Which of the following orders instructs the broker to buy at the current market price?

A) Limit order
B) Discretionary order
C) Limit-loss order
D) Stop-buy order
E) Market order

Question 38

You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is

A) $4,500.
B) unlimited.
C) zero.
D) $9,000.
E) Cannot be determined from the information given.

Question 39

Shares for short transactions

A) are usually borrowed from other brokers.
B) are typically shares held by the short seller's broker in street name.
C) are borrowed from commercial banks.
D) are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.

Question 40

One outcome from the SEC investigation of the "Flash Crash of 2010" was

A) a prohibition of short selling.
B) higher margin requirements.
C) approval of new circuit breakers.
D) establishment of electronic communications networks (ECNs).
E) passage of the Sarbanes-Oxley Act.

Question 41

Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

A) 20.47%
B) 25.63%
C) 57.14%
D) 77.23%

Question 42

You want to purchase IBM stock at $130 from your broker using as little of your own money as possible. If initial margin is 50% and you have $19,500 to invest, how many shares can you buy?

A) 150 shares
B) 200 shares
C) 300 shares
D) 500 shares
E) 25 shares

Question 43

You want to purchase GM stock at $40 from your broker using as little of your own money as possible. If initial margin is 50% and you have $4,000 to invest, how many shares can you buy?

A) 100 shares
B) 200 shares
C) 50 shares
D) 500 shares
E) 25 shares

Question 44

Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?

A) 40.5%
B) 20.5%
C) 35.5%
D) 23.5%

Question 45

You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?

A) $90.23
B) $88.52
C) $86.54
D) $87.12

Question 46

Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $50?

A) 40%
B) 20%
C) 35%
D) 25%

Question 47

Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

A) −33.33%
B) −25.63%
C) −57.14%
D) −77.23%

Question 48

You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was

A) $4,800.60.
B) $12,000.25.
C) $2,250.75.
D) $1,822.50.

Question 49

You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was

A) $4,800.
B) $12,000.
C) $2,250.
D) $7,200.

Question 50

You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The next day, Qualitycorp's price drops to $25 per share. What is your actual margin?

A) 50%
B) 40%
C) 33%
D) 60%
E) 25%

Question 51

In a typical underwriting arrangement, the investment-banking firm I) sells shares to the public via an underwriting syndicate.
II) purchases the securities from the issuing company.
III) assumes the full risk that the shares may not be sold at the offering price.
IV) agrees to help the firm sell the issue to the public but does not actually purchase the securities.

A) I, II, and III
B) I, III, and IV
C) I and IV
D) II and III
E) I and II

Question 52

You purchased 1,000 shares of PINS common stock on margin at $19 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

A) $12.86
B) $15.75
C) $19.67
D) $13.57

Question 53

You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.

A) 28%
B) 33%
C) 14%
D) 42%
E) 24%

Question 54

You purchased 1,000 shares of common stock on margin at $30 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin.

A) 0.33
B) 0.375
C) 0.20
D) 0.23
E) 0.25

Question 55

You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 35%?

A) $50
B) $65
C) $35
D) $40

Question 56

You purchased 100 shares of common stock on margin at $40 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.

A) 0.33
B) 0.55
C) 0.20
D) 0.23
E) 0.25

Question 57

When a firm markets new securities, a preliminary registration statement must be filed with

A) the exchange on which the security will be listed.
B) the Securities and Exchange Commission.
C) the Federal Reserve.
D) all other companies in the same line of business.
E) the Federal Deposit Insurance Corporation.

Question 58

You purchased 100 shares of common stock on margin for $60 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $72 per share? Ignore interest on margin.

A) 28%
B) 33%
C) 14%
D) 40%
E) 24%

Question 59

You purchased 100 shares of KO common stock on margin at $60 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

A) $42.86
B) $50.75
C) $49.67
D) $80.34

Question 60

Which of the following is true regarding private placements of primary security offerings?

A) Extensive and costly registration statements are required by the SEC.
B) For very large issues, they are better suited than public offerings.
C) They trade in secondary markets.
D) The shares are sold directly to a small group of institutional or wealthy investors.
E) They have greater liquidity than public offerings.

Question 61

What was the name of the system that introduced the NYSE to electronic trading?

A) International Exchange
B) NYSE Hybrid Market
C) Designated Order Turnaround
D) NYSE Euronext

Question 62

The Securities Act of 1934 I) requires full disclosure of relevant information relating to the issue of new securities.
II) requires registration of new securities.
III) requires issuance of a prospectus detailing financial prospects of the firm.
IV) established the SEC.
V) requires periodic disclosure of relevant financial information.
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.

A) I, II, and III
B) I, II, III, IV, V, and VI
C) I, II, and V
D) I, II, and IV
E) IV, V, and VI

Question 63

The process of marketing a public offering is usually referred to as ____________.

A) Underwriting
B) Investment banking
C) Brokerage
D) Discounting
E) IPO

Question 64

Which of the following is not required under the CFA Institute Standards of Professional Conduct?

A) Knowledge of all applicable laws, rules, and regulations
B) Disclosure of all personal investments, whether or not they may conflict with a client's investments
C) Disclosure of all conflicts to clients and prospects
D) Reasonable inquiry into a client's financial situation
E) All of the options are required under the CFA Institute standards.

Question 65

Who purchased the NYSE in 2013?

A) International Exchange
B) NYSE Hybrid Market
C) Designated Order Turnaround
D) NYSE Euronext

Question 66

The preliminary prospectus is referred to as a(n)

A) red herring.
B) indenture.
C) greenmail.
D) tombstone.
E) headstone.

Question 67

The introduction of the ___________________allowed brokers to send orders either for immediate electronic execution or to the specialist, who could seek price improvement from another trader.

A) International Exchange
B) NYSE Hybrid Market
C) Designated Order Turnaround
D) NYSE Euronext

Question 68

What kind of entity will often sell a company via an initial public offering, when the firm gets too big for similar entities to purchase?

A) Underwriter
B) Investment banking
C) Private Equity
D) Broker

Question 69

The securities act of 1933 I) requires full disclosure of relevant information relating to the issue of new securities.
II) requires registration of new securities.
III) requires issuance of a prospectus detailing financial prospects of the firm.
IV) established the SEC.
V) requires periodic disclosure of relevant financial information.
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.

A) I, II, and III
B) I, II, III, IV, V, and VI
C) I, II, and V
D) I, II, and IV
E) IV only

Question 70

According to the CFA Institute Standards of Professional Conduct, CFA Institute members have responsibilities to all of the following, except

A) the government.
B) the profession.
C) the public.
D) the employer.
E) clients and prospective clients.