Deck 2: Securities Markets

Question 1

Market makers guarantee to buy and sell at least one round lot at the prices they quote.

Answer 1

True

Question 2

If a stock is quoted 20.04-20.25, an investor can sell the stock for 20.25.

Answer 2

False

Question 3

If a stock is quoted 12.79-13.02, an investor can buy the stock for 13.02.

Answer 3

True

Question 4

After purchasing stock, an investor may place a stop loss order to sell if the stock's price declines.

Question 5

Once securities are purchased, they are usually registered in the brokerage firm's name.

Question 6

Bid and ask price quotations for over-the-counter stocks are not available through the Internet.

Question 7

The margin requirement sets the maximum cash investment the individual investor must remit.

Question 8

Publicly owned stock that is not listed on an exchange (such as the NYSE)is traded in the over-the-counter markets such as the Nasdaq stock market.

Question 9

A "round lot" is the general unit for trading in a security.

Question 10

The margin requirement is set by the SEC.

Question 11

The spread between the bid and ask prices should be viewed as one of the costs of investing.

Question 12

A major function of organized securities markets is to facilitate the transfers of securities among investors.

Question 13

Investors who are "bearish" purchase securities.

Question 14

Stockbrokers set bid and ask prices.

Question 15

A short sale is a sale that occurs quickly after the stock is purchased.

Question 16

Securities must be paid for by the settlement date.

Question 17

If the investor buys stock on margin and the price subsequently declines, the percentage loss is magnified.

Question 18

The purchase of 53 shares of IBM is an odd lot.

Question 19

The level of securities prices is set by market makers.

Question 20

The New York Stock Exchange is an example of a secondary market.

Question 21

Sarbanes-Oxley created the Public Company Accounting Oversight Board whose task is to regulate securities prices.

Question 22

The primary role of organized securities exchanges is to raise capital (money)for firms.

Question 23

The SEC cannot suspend trading in a firm's stock.

Question 24

The purpose of the federal securities laws is to provide investors with data and facts so they can make informed investment decisions.

Question 25

The Securities Investor Protection Corporation (SIPC)protects individuals from poor investments.

Question 26

The direct sale of new securities to a pension plan is a private placement, and the securities do not have to be registered with the SEC.

Question 27

U. S. citizens may invest in foreign stocks by purchasing American Depository Receipts (ADRs).

Question 28

The syndicate's role in an underwriting is to sell the new issue of securities.

Question 29

The maintenance margin requirement sets the minimum an investor must remit to purchase a stock.

Question 30

In a "best effort" sale of securities, the risk of the sale rests with the investment banker.

Question 31

ADRs pay dividends in foreign currencies.

Question 32

Publicly owned companies must provide the SEC with information that may affect the value of the firm's securities.

Question 33

A short position is premised on securities prices rising.

Question 34

The purpose of the full disclosure laws is so investors will not make poor investments.

Question 35

If an investor buys stock on margin and the price of the stock rises, the investor will not receive a margin call from the broker.

Question 36

Investors are insured against loss from brokerage firm failure by the SEC.

Question 37

Selling short is selling borrowed securities.

Question 38

In an "underwriting" the investment banker guarantees the firm selling the securities a specified amount of funds.

Question 39

A direct transfer of funds from savers to firms occurs when new securities are issued in the primary market.

Question 40

The objective of Sarbanes-Oxley was to create a stronger firewall between investment banking activities and the role of financial analysts.

Question 41

A prospectus is required when a corporation issues new securities that are sold to the general public.

Question 42

The cost of investing includes
1. commissions
2. the spread
3. dividends

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 43

If the price of an initial public offering of stock rises, the windfall gain goes to the firm selling the securities.

Question 44

If the quote on stock is reduced, that implies
1. supply exceeded demand
2. demand exceeded supply
3. the price was too high
4. the price was too low

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question 45

A market maker
1. sells stock at the ask price
2. buys stock at the ask price
3. sells stock at the bid price
4. buys stock at the bid price

A)1 and 2
B)1 and 4
C)2 and 3
D)3 and 4

Question 46

Investors are insured from brokerage firm losses by

A)the SEC
B)the Federal Reserve
C)the SIPC
D)the FDIC

Question 47

Inside information

A)is obtained from inside brokerage firms
B)is reported in a firm's financial statements
C)must be disclosed to the SEC
D)may not be legally used to obtain security profits

Question 48

Securities regulations protect investors by

A)requiring disclosures of information by firms
B)stopping investors from buying overpriced stock
C)reducing competition among brokers
D)establishing commission schedules

Question 49

The spread is the

A)difference between the bid and ask prices
B)commission charged by the broker
C)difference between the purchase and sale prices
D)difference between the commissions charged by full service and discount/online brokers

Question 50

A "lock-up" refers to a security transaction with an assured profit.

Question 51

If a stock is bought on margin,

A)part of the cost of the investment is borrowed
B)the commissions on the investment are increased
C)the cost of the investment is reduced
D)the interest on the borrowed funds is set by the Securities and Exchange Commission (SEC)

Question 52

The cost of an underwriting (to the firm issuing the securities)is the difference between the price of the securities to the public and the proceeds received by the firm.

Question 53

A broker

A)stresses one type of investment
B)makes a market in securities
C)buys securities for customers' accounts
D)underwrites stock but not corporate bonds

Question 54

The SEC establishes the price of a new issue of stock.

Question 55

Daily securities transactions that are reported in the financial media generally include
1. the volume of transactions
2. the high and low prices for the day
3. the net change in price from the previous day

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 56

If the underwriter overprices a new issue, the market price of the securities will rise.

Question 57

The SEC establishes the price of a new stock issue.

Question 58

A shelf registration involves the selling of new securities without having them registered with the SEC.

Question 59

A new issue of corporate securities sold to the general public must be registered with the SEC.

Question 60

A registered representative

A)makes a market
B)buys and sells for customers' accounts
C)represents brokerage firms with the NYSE
D)sets the spread

Question 61

The final prospectus does not include

A)the firm's balance sheet
B)the price of the securities sold to the public
C)the underwriter's profit on the sale
D)the underwriting discount

Question 62

Gains will result from a short sale if

A)stock prices rise
B)stock prices fall
C)stock prices remain stable
D)The answer is indeterminate.

Question 63

Which of the following is not part of the underwriting process?

A)the prospectus
B)the originating house
C)the SIPC
D)the SEC

Question 64

An investor sells 100 shares short at $43. The sale requires a margin deposit equal to 60 percent of the proceeds of the sale. The company paid a cash dividend of $2 per share. If the investor closed the position at $36, what was the percentage earned or lost on the investment?

Question 65

Short selling is

A)selling borrowed securities
B)selling stock owned for less than a year
C)selling an odd lot
D)selling against the advice of the investor's broker

Question 66

The margin requirement is set by the

A)Federal Reserve
B)SEC
C)FDIC
D)SIPC

Question 67

Short selling requires
1. no collateral
2. a margin payment
3. delivering securities owned
4. borrowing securities to deliver

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question 68

The syndicate
1. facilitates the sale of new securities
2. is formed by the originating house
3. creates a secondary market in stocks

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 69

The Sarbanes-Oxley law

A)reduces potential conflicts of interest between securities analysts and investment bankers
B)legalizes the sale of securities by investment bankers
C)requires corporate directors to own stock
D)mandates that securities analysts file their recommendations with the SEC

Question 70

A new issue of corporate securities sold to the general public must be

A)registered with the SEC
B)initially sold through brokers
C)offered initially to existing stockholders
D)bought by specialists in corporate securities

Question 71

An investor purchased Orange Computer on margin for $30 a share. The stock's price subsequently increased to $50 a share at which time the investor sold the stock. If the margin requirement were 60 percent and the interest rate on borrowed funds were 7 percent, what would be the percentage earned on the investor's funds (excluding commissions)? What would have been the return if the investor had not bought the stock on margin?

Question 72

An investor bought 100 shares of Copier Corp. on margin for $85 a share. The firm paid an annual dividend of $4 a share; the margin requirement was 60 percent with an interest rate of 8 percent on borrowed funds, and commissions on the purchase and sale were $75. The price of the stock rose to $120 in one year.
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a. What is the percentage earned on the investment if the stock is bought for cash (i.e., the investor did not use margin)?
​
b. What is the percentage earned on the investment if the stock is bought on margin?

Question 73

An investor sells 100 shares short at $43. The sale requires a margin deposit equal to 60 percent of the proceeds of the sale. If the investor closes the position at $49, what was the percentage earned or lost on the investment? If the position had been closed when the price of the stock was $27, what would have been the percent earned or lost on the position?

Question 74

Concerning a new issue of stock, a lock-up refers to

A)a guaranteed profit on the initial purchase
B)a guaranteed profit to the underwriter
C)the requirement that shares purchased by insiders prior to an initial public offering must retain those shares for a specified period
D)initial buyers of the stock in the IPO must hold the shares for a specified period of time

Question 75

American Depository Receipts represent

A)American stocks traded abroad
B)European stocks traded in Europe
C)foreign stocks traded in the U.S.
D)American and foreign stocks traded OTC

Question 76

Regarding the short-interest ratio,

A)it measures the number of shares sold each day
B)it may be used to forecast subsequent movements in the price of a stock
C)an increase in the ratio suggests short sellers expect the price of the stock to rise
D)a reduction in the ratio may be interpreted that stock prices will be stable

Question 77

If the offer price of a new issue is too low,
1. demand will exceed supply
2. supply will exceed demand
3. the price of the securities will rise
4. the price of the securities will fall

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4