Deck 3: Securities Markets

Question 1

________ often accompany short sales.

A)Market buy orders
B)Stop sell orders
C)Stop buy orders
D)Market sell orders

Answer 1

C

Question 2

Placements are generally targeted towards ________.

A)institutional investors
B)individual investors
C)existing shareholders
D)insurance companies

Answer 2

A

Question 3

The over-the-counter securities market is a good example of ________.

A)an auction market
B)a brokered market
C)a dealer market
D)a direct search market

Answer 3

C

Question 4

A ________ is a long-term strategy for raising capital rather than a technique for raising capital quickly.

A)placement
B)rights issue
C)dividend reinvestment plan
D)share purchase plan

Question 5

________ is an example of explicit transaction costs.

A)Market impact
B)Bid-ask spread
C)Missed trade opportunity costs
D)Brokerage

Question 6

An order to buy or sell a security at the current price is a ________.

A)limit order
B)market order
C)stop loss order
D)stop buy order

Question 7

Private placements can be advantageous rather than public issue because ________.
I) private placements are cheaper to market than public issues
II) private placements may still be sold to the general public
III) privately placed securities trade on secondary markets

A)I only
B)I and III only
C)II and III only
D)I, II and III

Question 8

The trading of existing securities is known as ________.

A)the primary market
B)the secondary market
C)the third market
D)the money market

Question 9

The money market is an example of ________.

A)a brokered market
B)a dealer market
C)a continuous auction market
D)a direct search market

Question 10

The drawback of a ________ is that it may take time to organise and complete and may also require the release of a prospectus.

A)placement
B)rights issue
C)share purchase plan
D)dividend reinvestment plan

Question 11

Which one of the following types of markets requires the greatest level of trading activity to be cost effective?

A)Broker market
B)Dealer market
C)Continuous auction market
D)Direct search market

Question 12

Which one of the following statements about IPOs is not true?

A)IPOs generally underperform in the short run.
B)IPOs often provide very good initial returns to investors.
C)IPOs generally provide superior long-term performance as compared to other shares.
D)Shares in IPOs are often primarily allocated to institutional investors.

Question 13

If the bid price is $15.12 and the ask price is $15.14, the bid-ask spread is ________.

A)$0.03
B)$0.01
C)$0.04
D)$0.02

Question 14

Purchases of new issues of share take place ________.

A)at the desk of the Reserve Bank
B)in the primary market
C)in the secondary market
D)in the money markets

Question 15

Linking a/an ________ to a placement can address concerns about ownership dilution that may result from a placement alone.

A)IPO
B)dividend reinvestment plan
C)rights issue
D)share purchase plan

Question 16

________ requires very heavy and frequent trading to cover the expense of maintaining the market.

A)A direct search market
B)A brokered market
C)A dealer market
D)A continuous auction market

Question 17

The Australian Securities Exchange (ASX) is an example of ________.

A)an auction market
B)a brokered market
C)a dealer market
D)a direct search market

Question 18

A company must release a prospectus ________.

A)before listing
B)when the IPO is complete
C)when the offering is seasoned
D)when the lockup period expires

Question 19

As a type of secondary capital raising, ________ can be conducted very quickly and has very few regulatory requirements.

A)rights issue
B)placement
C)share purchase plan
D)dividend reinvestment plan

Question 20

As a type of secondary capital raising, ________ has the largest potential for ownership dilution.

A)dividend reinvestment plan
B)share purchase plan
C)rights issue
D)placement

Question 21

The ________ price is the price at which a dealer is willing to sell a security.

A)bid
B)ask
C)clearing
D)settlement

Question 22

What is the capital raising process referred to in the situation where an investor has been offered the option of buying a number of shares related to the size of his existing holding?

A)share purchase plan
B)placement
C)dividend reinvestment plan
D)rights issue

Question 23

The cost of buying and selling a share include ________.
I) broker's commissions
II) dealer's bid-ask spread
III) price concessions investors may be forced to make

A)I and II only
B)II and III only
C)I and III only
D)I, II and III

Question 24

On a given day a share dealer maintains a bid price of $1000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades which totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

A)$1 375
B)$500
C)$275
D)$1 450

Question 25

You purchased XYZ share at $50 per share. The share is currently selling at $65. Your gains could be protected by placing a ________.

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

Question 26

Margin is the amount contributed by ________.

A)the securities exchange
B)the broker
C)the investor
D)the investment bank

Question 27

The inside quotes on a limit order book would comprise the ________.

A)highest bid price and the lowest ask price
B)lowest bid price and the lowest ask price
C)lowest bid price and the highest ask price
D)highest bid price and the highest ask price

Question 28

The allowable margin depends on ________.

A)the bid-ask spread
B)the brokerage
C)the risk-free interest rate
D)the share or fund being purchased

Question 29

The bid-ask spread exists because of ________.

A)market inefficiencies
B)discontinuities in the markets
C)the need for dealers to cover expenses and make a profit
D)lack of trading in thin markets

Question 30

You want to buy shares of ABC, but the current share price is too high given the firm's prospects. What type of trading order might you give to your broker?

A)limit buy orders
B)market buy orders
C)stop-loss orders
D)stop-buy orders

Question 31

If you want the trade done quickly, which type of trading order might you give to your broker?

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

Question 32

For ________, the share is to be sold if its price falls below a stipulated level.

A)stop-buy orders
B)stop-loss orders
C)market buy orders
D)market sell orders

Question 33

________ is difficult to estimate, even after a trade has occurred.

A)Brokerage
B)Market impact
C)Bid-ask spread
D)Missed trade opportunity costs

Question 34

Consider the following limit order book of a specialist. The last trade in the share occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

A)$39.75
B)$40.25
C)$40.375
D)$40.25 or less

Question 35

Initial public offerings (IPOs) are usually ________ relative to the levels at which their prices stabilise after they begin trading in the secondary market.

A)overpriced
B)correctly priced
C)underpriced
D)mispriced but without any particular bias

Question 36

What is the capital raising process referred to in the situation where an investor has been offered the option of buying a number of shares unrelated to the size of her existing holding?

A)dividend investment plan
B)placement
C)rights issue
D)share purchase plan

Question 37

If an investor places a ________ order the share will be sold if its price falls to the stipulated level. If an investor places a ________ order the share will be bought if its price rises above the stipulated level.

A)stop-buy; stop-loss
B)market; limit
C)stop-loss; stop-buy
D)limit; market

Question 38

In Australia, the allowable margin usually ranges ________.

A)from 10% to 30%
B)from 20% to 40%
C)from 10% to 50%
D)from 20% to 60%

Question 39

The difference between the price at which a dealer is willing to buy, and the price at which a dealer is willing to sell, is called the ________.

A)market spread
B)bid-ask spread
C)bid-ask gap
D)market variation

Question 40

The ________ price is the price at which a dealer is willing to purchase a security.

A)bid
B)ask
C)clearing
D)settlement

Question 41

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transaction costs?

A)$50
B)$150
C)$10 000
D)unlimited

Question 42

You purchased 250 shares on margin for $25 per share. The initial margin is 65% and the share pays no dividend. Your rate of return would be ________ if you sell the share at $32 per share. (Ignore interest on margin.)

A)35%
B)39%
C)43%
D)28%

Question 43

The commission structure on a share purchase is $20 plus $0.02 per share. If you purchase 4 round lots of a share selling for $56, what is your commission?

A)$20
B)$22
C)$26
D)$28

Question 44

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you wish to limit your loss to $2 500, you should place a stop-buy order at ________.

A)$37.50
B)$62.50
C)$56.25
D)$59.75

Question 45

Which of the following are true concerning short sales of exchange listed shares?
I) A short sale is permitted only if the last recorded change in the share's price was positive II. Proceeds from the short sale must be kept on deposit with the broker
III. Short-sellers must post margin with their broker to cover potential losses on the position
IV) The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement

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

Question 46

An investor buys $8 000 worth of a share priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In one year the investor gets a margin call. At the time of the margin call the share's price must have been ________.

A)$20.00
B)$29.77
C)$30.29
D)$32.45

Question 47

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

A)$50
B)$150
C)$10 000
D)unlimited

Question 48

You purchased 200 shares in ABC on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the share drops below ________. (Assume the share pays no dividends and ignore interest on the margin loan.)

A)$26.55
B)$35.71
C)$28.95
D)$30.77

Question 49

The commission structure on a share purchase is $50 plus $0.03 per share. If you purchase 600 shares of a share selling for $65, what is your commission?

A)$35
B)$45
C)$53
D)$68

Question 50

An investor puts up $5 000 but borrows an equal amount of money from their broker to double the amount invested to $10 000. The broker charges 7% on the loan. The shares were originally purchased at $25 per share and in one year the investor sells the shares for $28. The investor's rate of return was ________.

A)17%
B)12%
C)14%
D)19%

Question 51

Transactions that do not involve the original issue of securities take place in ________.

A)primary markets
B)secondary markets
C)over-the-counter markets
D)institutional markets

Question 52

An investor buys $16 000 worth of a share priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The share pays a $0.50 per share dividend in one year and then the share is sold at $23 per share. What was the investor's rate of return?

A)17.50%
B)19.67%
C)23.83%
D)25.75%

Question 53

You sell short 200 shares of Doggie Treats Inc. which are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what share price will you get a margin call?
(You earn no interest on the funds in your margin account and the firm does not pay any dividends.)

A)$28.85
B)$35.71
C)$31.50
D)$32.25

Question 54

If an investor uses the full amount of margin available, the equity in a margin account used for a share purchase can be found as ________.

A)market value of the share - amount owed on the margin loan
B)market value of the share + amount owed on the margin loan
C)market value of the share ÷ margin loan
D)margin loan x market value of the share

Question 55

________ often accompany short sales, and are used to limit potential losses from the short position.

A)Limit orders
B)Restricted orders
C)Limit-loss orders
D)Stop-buy orders

Question 56

You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27?
(Ignore any dividends)

A)10.00%
B)20.00%
C)6.67%
D)15%

Question 57

Assume you purchased 500 of XYZ common shares on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is ________.

A)$20 000
B)$12 000
C)$8 000
D)$15 000

Question 58

You find that the bid and ask prices for a share are $10.25 and $10.30 respectively. If you purchase or sell the share you must pay a flat commission of $25. If you buy 100 shares of the share and immediately sell them, what is your total implied and actual transaction cost in dollars?

A)$50
B)$25
C)$30
D)$55

Question 59

You sold-short 300 shares at $30 per share. The initial margin is 50%. You must put up ________.

A)$4 500
B)$6 000
C)$9 000
D)$10 000

Question 60

The margin requirement on a share purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

A)9%
B)15%
C)48%
D)57%