Deck 3: Securities Markets

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Once a security has been sold,the investor receives a confirmation specifying the amount to be remitted.

Question 8

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

Question 9

The P/E ratio is the price of the stock divided by earnings per share.

Question 10

Investors who are "bearish" purchase securities.

Question 11

Stockbrokers set bid and ask prices.

Question 12

Bid and ask price quotations for many over-the-counter stocks are available through Nasdaq.

Question 13

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

Question 14

The margin requirement is set by the SEC.

Question 15

The level of security prices is set by market makers.

Question 16

If a stock is quoted 20-20.50,an investor can buy the stock for 20.50.

Question 17

Securities must be paid for by the settlement date.

Question 18

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

Question 19

If a stock is quoted 12-13,an investor can sell the stock for 13.

Question 20

The American Stock Exchange is an example of a secondary market.

Question 21

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

Question 22

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 brokers

Question 23

ADRs pay dividends in foreign currencies.

Question 24

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

Question 25

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

Question 26

A specialist

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

The passage of Sarbanes-Oxley created a stronger firewall between investment banking activities and the role of financial analysts.

Question 32

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

Question 33

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

Question 34

State security laws are referred to as "blue sky laws."

Question 35

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

Question 36

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 37

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

Question 38

Selling short is selling borrowed securities.

Question 39

A short position is premised on security prices rising.

Question 40

There is no regulation of investment advisors.

Question 41

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 these choices

Question 42

Daily securities transactions that are reported in the financial press often 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 these choices

Question 43

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 44

The latest important securities law (Sarbanes-Oxley)

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

Question 45

An investor bought on margin 100 shares of Copier Corp.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.
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 46

An investor purchased on margin Orange Computer for $30 a share.The stock's price subsequently rose to $50 a share at which time the investor sold the stock.If the margin requirement is 60 percent and the interest rate on borrowed funds was 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 47

The margin requirement is set by the

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

Question 48

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 49

The value of an ADR will tend to increase if 1.the value of the dollar rises
2)the value of the dollar falls
3)foreign stock markets rise
4)foreign stock markets fall

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

Question 50

If a stock is bought on margin,

A) part of the cost of 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 SEC

Question 51

The advantages of leaving securities with the broker and registered in a street name include

A) avoidance of income taxes on dividends
B) reduction in commissions
C) facilitation of trading
D) better execution of security orders

Question 52

Investors are insured from brokerage firm losses by the

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

Question 53

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 investor's broker's advice

Question 54

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 55

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 56

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 57

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 58

Profits will result from a short sale if
1)interest rates rise so security prices rise
2)interest rates rise so security prices fall
3)inflation causes stock prices to rise
4)inflation causes stock prices to fall

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

Question 59

American Depository Receipts represent

A) American stocks traded abroad
B) European stock traded in Europe
C) foreign stocks traded in the United States
D) American and foreign stocks traded OTC

Question 60

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