Deck 2: Markets and Transactions

Question 1

Shares and bonds are traded in

A) federal trade commissions.
B) capital markets.
C) securities and exchange commissions.
D) money markets.

Answer 1

B

Question 2

Shares purchased in the secondary market are purchased

A) from other investors.
B) from small, little- known brokerages.
C) indirectly through financial institutions.
D) directly from the issuing corporation.

Answer 2

A

Question 3

The price an individual investor will pay to purchase a stock in the OTC market is the

A) bid price.
B) broker price.
C) spread.
D) ask price.

Answer 3

D

Question 4

The governmental agency that oversees the capital markets is the

A) Fair Trade and Banking Agency.
B) Australian Securities and Investments Commission.
C) Reserve Bank.
D) Federal Trade Commission.

Question 5

Joseph bought 100 shares of stock at a price of $24 a share, assuming a margin loan of 30%. Joseph sold his shares after a year for $20 a share. Ignoring margin interest and trading costs, what is Joseph's return on investor's equity for this investment?

A) - 56%.
B) - 17%.
C) 24%.
D) - 24%.

Question 6

Megan bought 200 shares of stock at a price of $10 a share, assuming a margin loan of 30%. Megan sold her shares after a year for $12 a share. Ignoring margin interest and trading costs, what is Megan's return on investor's equity for this investment?

A) 67%
B) 10%
C) 29%
D) 14%

Question 7

Including foreign investments in a portfolio

A) decreases the overall diversification of the portfolio.
B) provides potential benefits from changes in currency values.
C) reduces the potential rate of return.
D) limits the diversification amongst industries.

Question 8

Assume the foreign exchange rate for the euro was A$1.00 = .70 euro last month. This month, the exchange rate is A$1.00 = .72 euro. This information indicates that over the past month the

A) euro appreciated relative to the dollar.
B) euro depreciated relative to the dollar.
C) Australian dollar appreciated relative to all foreign currencies.
D) Australian dollar remained unchanged relative to the euro.

Question 9

Companies offering their stock to the public for the first time usually seek the assistance of

A) prospectors.
B) Australian Securities and Investments Commission.
C) investment bankers.
D) Reserve Bank.

Question 10

The purchase of shares with cash in the hope of earning a capital gain is known as taking a

A) long, margined position in the share.
B) long position in the share.
C) short, margined position in the share.
D) short position in the share.

Question 11

A rights offering is the

A) sale of securities directly to a select group of investors.
B) offering of new securities to current shareholders on a pro- rata basis.
C) sale of newly issued shares of stock to the general public.
D) initial offering of securities to the public.

Question 12

Which one of the following is a major advantage of margin trading?

A) Possibility of increased gains on a dollar basis.
B) Interest free loans.
C) Increase in potential diversification.
D) Increase in potential profits on a percentage basis.

Question 13

Which one of the following statements about foreign investments is true?

A) In general, major foreign markets always tend to underperform the Australian market.
B) Foreign markets include equity securities only.
C) Investing in foreign markets will always produce higher returns because of exchange rate fluctuations.
D) Investing in foreign markets may involve specific risks not encountered with domestic securities.

Question 14

Maintenance margin is the

A) initial amount of equity required for a margin purchase.
B) amount of additional funds that need to be added to an account to meet minimal equity requirements.
C) minimum amount of loan that can be used for margin trading.
D) minimum amount of equity that an investor can have to avoid a margin call.

Question 15

Which of the following practices is prohibited by Section 1043A of the Corporations Act 2001?

A) Private sales of stock between executives of the company.
B) The granting of stock options to corporate executives in lieu of salaries.
C) Selling of stock by officers of the company.
D) The use of nonpublic information to make profitable securities transactions.

Question 16

Assume the foreign exchange rate for the euro was A$1.00 = .70 euro last month. This month, the exchange rate is A$1.00 = .72 euro. All things equal, the dollar value of European shares

A) would vary depending on the country.
B) decreased.
C) stayed the same.
D) increased.

Question 17

Jennifer expects the price of a share to decrease over the next month. Which one of the following strategies would allow Jennifer to earn a profit if the expected decrease actually occurs?

A) Take a long position in the share today.
B) Buy the share on margin today.
C) Take a long position in the share one month from today.
D) Sell the stock share today.

Question 18

Kayla invested A$3,000 and purchased shares of a German corporation when the exchange rate was A$1.00 = .70 euro. After six months, she sold all of the shares for 3,180 euros, when the exchange rate was A$1.00 = .68 euro. No dividends were paid during the time Kayla owned the shares. What is the amount of Kayla's gain or loss on this investment?

A) A$129.60 gain.
B) A$250 loss.
C) A$1676 loss.
D) A$1676 gain.

Question 19

Investment bankers who join together to share the financial risk associated with buying an entire issue of new securities and reselling them to the public is called a(n)

A) underwriting syndicate.
B) tombstone group.
C) primary market group.
D) selling group.

Question 20

Which one of the following statements concerning the primary market is correct?

A) A rights offering is a direct sale of stock to an institution that participates in the primary market.
B) The first public sale of a company's stock is called an IPO.
C) A transaction in the primary market is between two private shareholders.
D) The first public sale of a company's stock in the primary market is called a seasoned new issue.

Question 21

A market where securities are are bought from or sold to a market maker is known as a

A) board of exchange.
B) exchange floor.
C) dealer market.
D) broker market.

Question 22

When a person sells an ordinary share short, she or he is betting that the price of the share will fall.

Question 23

Options allow their holders to sell or to buy another security during a stated period of time at a specified price.

Question 24

Firms that list their stock on an exchange can be delisted for failing to meet the requirements of the exchange.

Question 25

IPOs are relatively safe investments.

Question 26

A market maker brings together buyers and sellers in an auction market.

Question 27

Diversification is the inclusion of a number of different investment vehicles in a portfolio with the goal of increasing returns or reducing risk.

Question 28

It can be argued that an IPO was overpriced when the IPO produces extraordinarily high rates of return on its first day of trading.

Question 29

The ASX and NYSE are examples of dealer markets.

Question 30

The financial markets are becoming more globally integrated.

Question 31

Short- term securities are bought and sold in the

A) capital market.
B) primary market.
C) stock market.
D) money market.

Question 32

Securities that trade in the over- the- counter market are called unlisted securities.

Question 33

Short selling requires the borrowing of securities.

Question 34

Margin trading will magnify losses on a percentage basis.

Question 35

Shares, bonds and mutual fund shares are bought and sold in the capital market.

Question 36

Margin trading requires the borrowing of securities.

Question 37

Underwriters are responsible for promoting and facilitating the sale of securities.

Question 38

Jim purchased 100 shares of stock at a price of $32 a share, assuming a margin loan of 20%. What is Jim's initial equity in this investment?

A) $2,560.
B) - $640.
C) $640.
D) $3,200.

Question 39

Insider trading is the use of nonpublic information about a security to gain a profit.

Question 40

If an investor does not respond to a margin call, the broker will

A) notify Reserve Bank so they can cover the call.
B) sell some of the investor's holdings to cover the margin call.
C) sell all of the investor's holdings and close their brokerage account.
D) sell enough of the investor's holdings that the margin account can be closed.

Question 41

Explain the role of investment bankers and brokerage firms in the issuance of new securities.