Deck 2: Securities Markets and Transactions

Question 1

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

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

Answer 1

C

Question 2

Describe the initial public offering (IPO)process and explain the role of the underwriter, the Securities and Exchange Commission (SEC), and the red herring.

Answer 2

The underwriter is responsible for promoting the stock and facilitating the sale of the company's IPO shares.The SEC approves the registration statement including the prospectus.This statement includes the key aspects of the issue, the issuer, the company management, and the financial position of the company.The SEC does NOT recommend the investment nor offer an opinion on the value of the stock.The red herring is the preliminary prospectus issued on tentative offerings.The prospectus has red lettering on the front cover.

Question 3

Members of a selling group receive compensation in the form of a discount on the selling price of the security.

Answer 3

True

Question 4

The governmental agency that oversees the capital markets is the

A) Federal Trade Commission.
B) Federal Reserve.
C) Securities and Exchange Commission.
D) Fair Trade and Banking Agency.

Question 5

Stocks and bonds are traded in

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

Question 6

The preliminary version of a prospectus is called a red herring.

Question 7

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

A) investment bankers.
B) the Securities and Exchange Commission.
C) the Federal Reserve Bank.
D) prospectors.

Question 8

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

Question 9

Only U.S.corporations can list their stocks on the NYSE.

Question 10

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 11

IPOs are relatively safe investments.

Question 12

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

Question 13

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

Question 14

Short-term securities are bought and sold in the

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

Question 15

Stocks purchased in the secondary market are purchased

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

Question 16

A company must observe a quiet period from the time it files a registration statement with the SEC until at least one month after an IPO is complete.

Question 17

A rights offering is the

A) initial offering of securities to the public.
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) sale of securities directly to a select group of investors.

Question 18

The NYSE and AMEX are examples of dealer markets.

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

Question 20

The document that describes the issuer of a security's management and financial position is known as a

A) balance sheet.
B) 10-K report.
C) prospectus.
D) red herring.

Question 21

The majority of bonds trade in the OTC market.

Question 22

The dominant options exchange is the

A) Chicago Board Options Exchange.
B) American Stock Exchange.
C) Pacific Stock Exchange.
D) Philadelphia Options Exchange.

Question 23

Exchange traded funds are

A) mutual funds that trade on the Big Board.
B) baskets of securities that trade like a single stock.
C) index funds that trade on the NYSE.
D) groups of securities that trade only on regional exchanges.

Question 24

The primary market for futures is the

A) Kansas City Board of Trade.
B) New York Mercantile Exchange.
C) Chicago Board of Trade.
D) Chicago Board Options Exchange.

Question 25

Which of the following are correct statements concerning the NYSE?
I)Each stock has a designated location, called a post, at which its shares are traded.
II)The NYSE is a dealer market.
III)Supply and demand determines the price of each security.
IV)A specialist buys and sells to maintain a market for a particular security.

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

Question 26

Most commodity futures are traded on the NYSE Amex.

Question 27

The income paid to a market maker is referred to as the spread.

Question 28

If a security is traded on the New York Stock Exchange and on a regional exchange, the security is said to be

A) dual listed.
B) multiple listed.
C) traded in the second and third markets.
D) geographically diversified.

Question 29

Federal securities laws are designed to protect financial institutions.

Question 30

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

Question 31

Which of the following are true concerning the NYSE Amex:
I)Many exchange traded funds are listed there.
II)Its listing requirements are stricter than the New York Stock Exchange.
III)It is a major market for exchange traded funds.
IV)It is a broker rather than a dealer exchange.

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

Question 32

Which of the following are functions of the secondary market?
I)Provide liquidity for current stockholders
II)Equate the demand and supply of securities
III)Provide a market for the dale of new stock by companies that are already public.
IV)Provide continuous pricing of securities

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

Question 33

Federal laws that control the sale of securities are called blue sky laws.

Question 34

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

Question 35

Exchange traded funds (ETFs)perform like a broad market index but trade are bought and sold like individual stocks.

Question 36

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

Question 37

Which one of the following statements about the NYSE is correct?

A) Each member of the exchange owns a trading post.
B) Any listed stock may be traded at any of 20 trading posts.
C) Brokerage firms are only permitted to have one individual trading on the floor of the exchange.
D) Buy orders are filled at the lowest price and sell orders are filled at the highest price.

Question 38

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

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

Question 39

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

Question 40

The NYSE has listing requirements that include a minimum
I)number of outstanding shares.
II)amount of pre-tax earnings.
III)market value of publicly held shares.
IV)number of shareholders owning 100 shares or more.

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

Question 41

Which of the following can be encountered when investing in foreign markets?
I)Foreign taxation of dividends
II)Different accounting standards for financial disclosure
III)Restrictions on types of investments
IV)Illiquid markets

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

Question 42

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

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

Question 43

ECNs are

A) publicly-owned auction markets for listed stocks.
B) privately-owned networks that transact trades between institutional investors.
C) facilities used by market makers for trading unlisted securities.
D) part of the third market which trades listed securities between individual investors.

Question 44

Which of the following are associated with bear markets?
I)investor pessimism
II)rising profits
III)economic slowdown
IV)rising security prices

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

Question 45

Including foreign investments in a portfolio

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

Question 46

The automated system for trading highly active OTC securities is the

A) Big Board.
B) Kansas City Board.
C) Chicago Board of Trade.
D) Nasdaq.

Question 47

The effects of fluctuating foreign exchange rates may
I)Increase a U.S.investor's rate of return.
II)Decrease a U.S.investor's rate of return.
III)Can be avoided by investing in ADRs.
IV)Can be avoided by investing in mutual funds that specialize in foreign stocks.

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

Question 48

An investment in which of the following represents an direct foreign investment?
I)Global mutual fund
II)U.S.multinational firm
III)ADR
IV)Foreign security

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

Question 49

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

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

Question 50

The over-the-counter (OTC)market is a

A) centrally located auction market.
B) telecommunications network connecting dealers.
C) market solely for institutional traders.
D) geographically dispersed auction market.

Question 51

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

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

Question 52

Dollar-denominated debt securities issued by foreign corporations and traded in U.S.markets are called

A) ADRs.
B) Yankee bonds.
C) ETFs.
D) Global bonds.

Question 53

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

Question 54

There are many differences between broker markets and dealer markets.These differences include such things as membership, location, regulation, and several other characteristics.Discuss at least five key differences between these two markets.

Question 55

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

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

Question 56

The financial markets are becoming more globally integrated.

Question 57

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

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

Question 58

After hours markets tend to be less volatile and more liquid than the regular trading sessions.

Question 59

Which of the following are associated with bull markets?
I)investor pessimism
II)government stimulus
III)economic recovery
IV)low inflation

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

Question 60

The U.S.stock markets tend to produce the highest rate of return each year.

Question 61

Which of the following practices is prohibited by the Insider Trading and Fraud Act of 1988.

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

Question 62

Which of the following characteristics apply to trading before and after regular hours?
I)Stock prices can vary from one ECN to another ECN.
II)Most brokerage firms require individual investors to place only market orders for after-hours trades.
III)The NYSE offers after-hours trading at that day's closing prices.
IV)After-hours markets tend to be more volatile and less liquid than the regular trading sessions.

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

Question 63

The Sarbanes-Oxley Act of 2002 focuses on

A) insider trading.
B) IPOs.
C) accounting and other public disclosures of information.
D) regulation of the OTC markets.

Question 64

When a person sells a common stock short, she or he is betting that the price of the stock will fall.

Question 65

Megan bought 200 shares of stock at a price of $10 a share.She used her 70% margin account to make the purchase.Megan sold her stock 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) 29%
C) 14%
D) 10%

Question 66

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

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

Question 67

A brokerage firm may set a lower margin requirement than that set by the Federal Reserve Board.

Question 68

Short selling requires the borrowing of securities.

Question 69

Which of the following are provisions of the Sarbanes-Oxley Act of 2002?
I)An oversight board to monitor the accounting industry.
II)Tougher penalties for executives who commit corporate fraud.
III)Stricter prohibitions against insider trading.
IV)Guidelines for analysts conflicts of interest.

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

Question 70

Margin trading requires the borrowing of securities.

Question 71

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

Question 72

Short selling involves the sale of depreciated stock at a price below the amount borrowed on margin.

Question 73

SEC regulations strictly prohibit trading outside the normal hours of 9:30 A.m.to 4:00 P.M.EST.

Question 74

Crossing markets are those that

A) trade foreign securities.
B) conduct transactions between institutional and individual traders.
C) fill only the orders which have opposing orders at identical prices.
D) conduct business at locations in varying time zones.

Question 75

Which one of the following statements about margin trading is correct?

A) The Federal Reserve sets the minimum margin requirement for margin trading.
B) If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $400 in cash to make the purchase.
C) Purchasing stocks on margin is less risky than purchasing stocks by paying cash for the entire purchase.
D) Margin trading increases the potential profits while lowering the potential losses on a percentage basis.

Question 76

The law that requires investment advisers to register with the SEC is the

A) Investment Company Act of 1940.
B) Investment Advisers Act of 1940.
C) Maloney Act of 1938.
D) Securities Act of 1933.

Question 77

The Sarbanes-Oxley Act of 2002 strengthens accounting disclosure requirements and ethical guidelines for financial officers.

Question 78

Margin trading will magnify losses on a percentage basis.

Question 79

The Securities Exchange Act of 1934

A) requires full disclosure of information on all new security issues.
B) authorized the SEC to regulate mutual funds.
C) established trade associations such as the NASD.
D) created the SEC as the regulator of the securities exchanges.

Question 80

The Securities Act of 1933 deals mostly with primary markets.