Deck 11: Securities Markets

Question 1

A limit order is an order to sell stock at the market price when the price of the stock falls to a specified level.

Answer 1

False

Question 2

Private placement can avoid SEC registration and all SEC regulations.

Answer 2

False

Question 3

The maintenance margin is the minimum margin to which an investment may fall before a margin call is placed.

Answer 3

True

Question 4

The Glass-Steagall Act of 1933 ended the ability of commercial banks to act as underwriters of newly issued securities.

Question 5

The primary market is a market in which securities are traded among investors.

Question 6

All securities must be listed before they may be traded on the American Stock Exchange and regional exchanges.

Question 7

A dealer is a person who assists in the trading process by buying or selling securities in the market for an investor.

Question 8

Specialists are assigned dealers who have the responsibility of making a market in an assigned security.

Question 9

Under a best-effort agreement,investment bankers try to sell the securities of the issuing corporation,but they assume no risk for a possible failure of the flotation.

Question 10

The issuer has no price risk in a firm commitment offering once the offer price is set.

Question 11

Rights offerings among public corporations became infrequent in the United States during the 1980s and 1990s.

Question 12

An important function of the Securities and Exchange Commission is to pass judgment on the investment merit of a security.

Question 13

Floor brokers act as agents to execute customers' orders for securities purchases and sales.

Question 14

The flotation costs of an initial public offering are comprised solely of direct costs and the spread.

Question 15

All public offerings are regulated by the Securities and Exchange Commission (SEC).

Question 16

IPO under pricing occurs only in the United States.

Question 17

Shelf registration allows firms to register only debt issues with the SEC,and have them available to sell for two years.

Question 18

All firms can use shelf registration which saves issuers both time and money.

Question 19

The secondary markets provide pricing information and liquidity to investors.

Question 20

Firm commitment flotation costs are typically lower than those of best efforts.

Question 21

The SEC's definition of "Insiders" is limited to corporate personnel.

Question 22

Churning happens when a broker constantly buys and sells securities from a client's portfolio in an effort to generate commissions.

Question 23

Commissions on stock trades are set by the stock exchanges.

Question 24

A global depository receipt is traded on the American Stock Exchange.

Question 25

The Dow-Jones Industrial Average is made up of 30 large blue-chip stocks.

Question 26

American depository receipts are receipts which represent foreign shares to U.S.investors.

Question 27

If there were no secondary markets for trading between investors,there would be no primary market for the initial sale of securities.

Question 28

A market order is an order for immediate purchase or sale at the best possible price.

Question 29

Under a best-effort agreement,investment bankers try to sell the securities of the issuing corporation,but they assume no risk for a possible failure of the flotation.

Question 30

Existing securities are traded in the primary market.

Question 31

An option contract is a derivative security that obligates the owner to purchase the underlying asset at a specified price on a specified day.

Question 32

Underpricing represents the difference between the aftermarket par value and the offering price.

Question 33

Over the counter markets are organized exchanges for trading securities such as the American Stock Exchange.

Question 34

Insider trading regulation is provided for under the Securities Exchange Act of 1934.

Question 35

The term "Big Board" is another name for the NASDAQ market.

Question 36

The fourth market is a market for large blocks of listed stocks that operate outside the confines of the organized exchanges.

Question 37

The prospectus is a contract outlining the duties,responsibilities and fees between the issuing firm and its underwriter.

Question 38

An odd lot is a trade involving 100 shares or multiples of 100 shares.

Question 39

ADRs are created are traded in dollars and represent share of foreign companies not traded on U.S.exchanges.

Question 40

In a financial context,due diligence refers to the detailed study of a corporation.

Question 41

An order to sell stock at the market price when the price of the stock falls to a specified level is called a:

A)limit order
B)market order
C)short sale
D)stop-loss order

Question 42

A Dutch auction is an offering process in which investors bid on the price and quantity of securities they wish to purchase.

Question 43

A pre-emptive right refers to the right of existing shareholders to sue management in order to head off potential actions by management that would adversely affect the price of the stock.

Question 44

Brokerage firms that not only assist in trades but also have research staffs that analyze firms and make recommendations about which stocks to buy or sell are called:

A)discount brokerage firms
B)full service brokerage firms
C)investment banking firms
D)stock advisory brokers

Question 45

If a limit order is not quite close to the current market price is turned over to the specialist,it is placed into:

A)central limit order book
B)market order book
C)short sale book
D)none of the above

Question 46

An order that remains in effect until the end of the day is called a:

A)good-until-canceled order
B)limit order
C)day order
D)stop-loss order

Question 47

An underwriting agreement is a contract in which the investment banker agrees to underwrite or do its best to sell securities to investors at the highest price it can;the investment banker assumes no risk for the possibility that it may fail to issue all authorized shares .

Question 48

The market for large blocks of listed stocks that operates outside the confines of the organized exchanges is called the:

A)primary market
B)secondary market
C)third market
D)fourth market

Question 49

The aftermarket is the market where securities are subsequently bought and sold after they are initially issued.

Question 50

Underpricing represents the difference between the aftermarket stock price and the initial offering price.

Question 51

Trades between large institutional investors that take place without the benefits of brokers or dealers occur in the:

A)primary market
B)secondary market
C)third market
D)fourth market

Question 52

The document which details the issuer's finances and must be provided to each buyer of the security is called the:

A)indenture
B)prospectus
C)tombstone
D)all the above

Question 53

An underwriting agreement is a contract in which the investment banker agrees to buy securities at a predetermined price and then resell them to investors.

Question 54

Sales of securities that the seller does not own is called a:

A)stop-loss order
B)short sale
C)limit order
D)maintenance margin

Question 55

A syndicate is a group of several investment banking firms that participate in underwriting and distributing a security issue.

Question 56

Organized securities exchanges include the New York Stock Exchange,the American Stock Exchange,and NASDAQ.

Question 57

The maximum buying price or the minimum selling price specified by the investor is called a:

A)stop-loss order
B)market order
C)short sale
D)limit order

Question 58

On average and across countries,underpricing securities issues represents a significant cost to firms that issue securities.

Question 59

Federal regulation of investment banking is administered primarily under the provisions of the Investment Banking Monitoring and Control Act of 1999.

Question 60

Newly created securities are sold in the:

A)primary market
B)secondary market
C)third market
D)fourth market

Question 61

Which of the following statements is most correct?

A)The Dow Jones Industrial Average is market-value weighted.
B)The Dow Jones Industrial Average is a good benchmark by which to measure the performance of investment managers.
C)The 500 stocks comprising the S&P 500 are the largest 500 firms.
D)The 60 largest capitalization stocks in the S&P 500 account for over half of the market value of the index.

Question 62

Which one of the following is not a primary market function of investment bankers?

A)originating
B)underwriting
C)selling
D)making loans

Question 63

An over-the-counter market trade occurs in the:

A)primary market
B)secondary market
C)third market
D)fourth market

Question 64

Which of the following statements is false?

A)The Dow Jones Industrial Average is an example of a price-weighted index.
B)An American depository receipt is a receipt which represents foreign shares to U.S.investors.
C)Index arbitrage occurs when traders buy and sell stocks with offsetting trades in futures and options in order to lock in profits from price differences between these different markets.
D)Each of the above statements is correct.

Question 65

If the value of the securities that you borrowed money from your broker to purchase falls,you may receive a:

A)maintenance margin call
B)margin call
C)limit order call
D)specialist call

Question 66

Independent brokers who handle the commission broker's overflow are called:

A)specialists
B)registered traders
C)floor brokers
D)all the above

Question 67

Which of the following is not a basic type of member of the New York Stock Exchange?

A)commission brokers
B)floor brokers
C)registered traders
D)specialists
E)security regulators

Question 68

The advantage of buying on margin is:

A)larger potential profit
B)using more of your own money
C)deductible loss
D)non-taxable capital gain

Question 69

Which of the following statements is most correct?

A)Because global depository receipts are listed on the London Stock Exchange,U.S.investors cannot buy GDRs through a broker in the United States.
B)Foreign stocks can be traded in the United States if they are registered with the Securities and Exchange Commission.
C)The fourth market is a market for large blocks of listed stocks that operates outside the confines of the organized exchanges.
D)All the above statements are correct.

Question 70

Which of the following statements is most correct?

A)Because a specialist is given the monopoly power to make a market on a particular stock,all trades must pass through the specialist.
B)A specialist can also perform the function of a commission broker.
C)A floor broker acts as an agent to execute customer's orders for securities purchases and sales.
D)Each of the above statements is false.

Question 71

Existing securities are traded:

A)in the primary markets
B)in the secondary markets
C)only on organized exchanges
D)only over-the-counter

Question 72

A person who facilitates market transactions by selling (buying)when other investors wish to buy (sell)is called a:

A)registered trader
B)floor broker
C)market maker
D)commission broker

Question 73

Which one of the following is not a cost to the issuing firm of going public with an initial stock offering?

A)direct costs (legal fees,accounting fees,etc. )
B)underwriter's spread
C)overpricing
D)underpricing

Question 74

A trade in the multiple of 100 shares is called a (n):

A)round lot
B)odd lot
C)block trade
D)none of the above

Question 75

Commercial banks were for many years prohibited from full-fledged investment banking by the:

A)Glass-Steagall Act
B)Garn-St.Germain Depository Institutions Act
C)Securities Act of 1933
D)National Association of Securities Dealers

Question 76

If an investor feels the price of a stock will decline in the future,which trade should the investor undertake?

A)market order
B)buy on margin
C)limit order
D)short sale

Question 77

The price for which the owner is willing to sell the security is called the:

A)bid price
B)spread
C)ask price
D)limit price

Question 78

The regulation of new security sales by individual states is referred to as:

A)the registration process
B)a truth-in-securities requirement
C)the rating of security quality
D)Blue-sky laws

Question 79

The Federal Reserve System and the New York Stock Exchange regulations currently require the short seller to have an initial margin of at least _______ of the price of the stock:

A)10%
B)25%
C)30%
D)50%

Question 80

An agreement whereby an investment banker tries to sell securities of an issuing corporation,but assumes no risk if the flotation is unsuccessful is called a:

A)due diligence agreement
B)best-effort agreement
C)firm commitment price agreement
D)shelf registration agreement