Deck 3: Securities Markets

Question 1

The NYSE recently acquired the ECN _______ and NASDAQ recently acquired the ECN ________.

A) Archipelago; Instinet
B) Instinet; Archipelago
C) Island; Instinet
D) LSE; Euronext

Answer 1

A

Question 2

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 under SEC Rule 144A
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

Answer 2

A

Question 3

Underwriting is one of the services provided by _____.

A) the SEC
B) investment bankers
C) publicly traded companies
D) FDIC

Answer 3

B

Question 4

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 5

Which one of the following is a false statement regarding NYSE specialists?

A) On a stock exchange all buy or sell orders are executed at a specialist's post on the exchange
B) Specialists can not trade for their own accounts
C) Specialists earn income from commissions and spreads in stock prices
D) Specialists stand ready to trade at quoted bid and ask prices

Question 6

Which one of the following is not an example of a brokered market?

A) Residential real estate market
B) Market for large block security transactions
C) Primary market for securities
D) NASDAQ

Question 7

Restrictions on trading involving insider information apply to _________.
I)corporate officers and directors
II)major stockholders
III)relatives of corporate directors and officers

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

Question 8

The issue process where investors submit bids for a new issue and the shares in an IPO are allocated to the highest bidders until the entire issue is sold is called a

A) best efforts offer
B) Dutch auction
C) secondary offering
D) firm commitment offer

Question 9

Purchases of new issues of stock take place _________.

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

Question 10

A level _____ subscriber to the NASDAQ system may enter bid and ask prices.

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

Question 11

Under firm commitment underwriting the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.

A) red herring
B) issuing company
C) initial stockholder
D) underwriter

Question 12

Explicit costs of an IPO tend to be around ______ of the funds raised.

A) 1%
B) 7%
C) 15%
D) 25%

Question 13

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 14

A red herring becomes a prospectus when ____.

A) the preliminary registration statement is approved by the SEC
B) the IPO is complete
C) the offering is seasoned
D) the lockup period expires

Question 15

Initial margin requirements on stocks are set by _________.

A) the Federal Deposit Insurance Corporation
B) the Federal Reserve
C) the New York Stock Exchange
D) the Securities and Exchange Commission

Question 16

Rank the following types of markets from least integrated and organized to most integrated and organized.
I)Brokered markets
II)Continuous auction markets
III)Dealer markets
IV)Direct search markets

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

Question 17

A ______ drop in the Dow Jones Industrial Average would stop trading for the day.

A) 10%
B) 20%
C) 30%
D) 40%

Question 18

Barnegat Light sold 200,000 shares in an initial public offering.The underwriter's explicit fees were $90,000.The offering price for the shares was $35,but immediately upon issue,the share price jumped to $43.What is the best estimate of the total cost to Barnegat Light of the equity issue?

A) $90,000
B) $1,290,000
C) $2,390,000
D) $1,690,000

Question 19

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 stocks.
D) Shares in IPOs are often primarily allocated to institutional investors.

Question 20

Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a minimum of ______ by 2.30 pm.

A) 10%
B) 20%
C) 30%
D) 40%

Question 21

When matching orders from the public a specialist is required to use the _______.

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

Question 22

The bulk of most initial public offerings (IPOs)of equity securities go to ___________.

A) institutional investors
B) individual investors
C) the firm's current shareholders
D) day traders

Question 23

Specialists try to maintain a narrow bid-ask spread because _______.
I)If the spread is too large they will not participate in as many trades,losing commission income
II)The exchange requires specialists to maintain price continuity
III)Specialists are non-profit entities designed to facilitate market transactions rather than make a profit

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

Question 24

According to Loughran and Ritter,initial public offerings tend to exhibit __________ performance initially,and __________ performance over the long term.

A) bad; good
B) bad; bad
C) good; good
D) good; bad

Question 25

On a given day a stock 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 26

The __________ was established to protect investors from losses if their brokerage firms fail.

A) CFTC
B) SEC
C) SIPC
D) AIMR

Question 27

The __________ system enables exchange members to send orders directly to a specialist over computer lines.

A) FAX
B) Direct Plus
C) NASDAQ
D) SUPERDOT

Question 28

The fully automated trade-execution system installed on the NYSE is called

A) FAX
B) Direct Plus
C) NASDAQ
D) SUPERDOT

Question 29

If an investor places a _________ order the stock will be sold if its price falls to the stipulated level.If an investor places a __________ order the stock 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 30

The market collapse of 1987 prompted ________________________.

A) Blue Sky laws
B) circuit breakers to halt trading during market crises
C) the Securities Investor Protection Act
D) the National Securities Market Act

Question 31

Advantages of ECNs over traditional markets include all but which one of the following?

A) Lower transactions costs
B) Anonymity of the participants
C) Small amount of time needed to execute and order
D) Ability to handle very large orders

Question 32

Nasdaq now offers three listing options.The largest,most actively traded firms are on the

A) Nasdaq Global Market
B) Nasdaq Global Select Market
C) Nasdaq Capital Market
D) Nasdaq Pink Sheet Stocks

Question 33

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

A) over priced
B) correctly priced
C) under priced
D) mispriced but without any particular bias

Question 34

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO)is called ________.

A) interest building
B) book building
C) market analysis
D) customer identification

Question 35

Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.

A) 50%
B) 75%
C) 80%
D) 95%

Question 36

When U.S.stock prices were converted from fractions to decimals in 2001 the minimum bid-ask spread charged by dealers ________.

A) increased
B) decreased
C) remained the same
D) fell at first, but then increased

Question 37

The ______________ is the most important dealer market in the U.S.and the ______________ is the most important auction market.

A) NYSE; NASDAQ
B) NASDAQ; NYSE
C) CME; OTC
D) AMEX; NYSE

Question 38

In a __________ underwriting arrangement,the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

A) best efforts
B) firm commitment
C) private placement
D) none of the above

Question 39

The inside quotes on a limit order book would be comprised of 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 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

Consider the following limit order book of a specialist.The last trade in the stock 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 42

According to SEC Rule 415 regarding shelf registration,firms can gradually sell securities to the public for __________ following initial registration.

A) 1 year
B) 2 years
C) 3 years
D) 4 years

Question 43

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 44

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 45

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

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

Question 46

Assume you purchased 500 shares of XYZ common stock 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 47

The cost of buying and selling a stock include _________.
I)broker's commissions
II)dealer's bid-asked 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 48

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

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

Question 49

You purchased XYZ stock at $50 per share.The stock 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 50

Specialists on the stock exchanges may do all of the following except _________.

A) They make a market in shares of the firms for which they specialize
B) They keep the limit order book
C) Use their privileged information to make speculative investments on their own account
D) Use their privileged information to make investments on behalf of clients of brokerage firms with which they do business

Question 51

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 52

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 53

You purchased 200 shares of ABC common stock 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 stock drops below ________.(Assume the stock pays no dividends and ignore interest on the margin loan.)

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

Question 54

Trades on the __________ are the most likely to trade inside the inside quotes than in other markets.

A) NYSE
B) NASDAQ market
C) OTC market
D) Pink sheet market

Question 55

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

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

Question 56

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

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

Question 57

You sold short 300 shares of common stock 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 58

Both the NYSE and Nasdaq have lost market share to ECNs in recent years.Part of Nasdaq's response to the growth of ECNs has been to _______.
I)Purchase Instinet,a major ECN
II)Enable automatic trade execution through its new Market Center
III)Switch from stock ownership to mutual ownership

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

Question 59

What percentage of NYSE transactions is executed by specialists?

A) 10%
B) 25%
C) 50%
D) 75%

Question 60

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 61

In ________ markets participants post bid and ask prices at which they are willing to trade,but orders are not automatically executed by computer.____________ execute trades for people other than themselves and in _______________ markets a computer matches orders with an existing limit order book and executes the trades automatically.

A) electronic; Dealers; brokers
B) dealer; Brokers; electronic
C) direct search; Brokers; electronic
D) brokered; Dealers; direct search

Question 62

If the Dow Jones Industrial Average falls by 10% by 11 am,trading will ______.

A) continue unchanged
B) will be halted for one hour
C) will be halted for one-half hour
D) will be halted for the rest of the day

Question 63

Brokerage firms can change margin-loan practices ____.

A) without notice
B) only after 72 hours notice
C) only on new orders
D) only with permission from the SEC

Question 64

Many exchange-listed securities are also traded in the over-the-counter market.Trading of this sort is said to take place in the ___________.

A) third market
B) fourth market
C) after-market
D) block market

Question 65

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 stock was originally purchased at $25 per share and in one year the investor sells the stock for $28.The investor's rate of return was ____.

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

Question 66

The approximate dollar value of trades on the NYSE in 2008 was

A) $75 billion
B) $100 billion
C) $125 billion
D) $150 billion

Question 67

The term "paying for order flow" refers to the practice of ________________.

A) paying more than one broker to execute your order
B) dealers trading with their customers at an outdated price
C) paying a broker a rebate for directing the trade to a particular stock dealer rather than directing the order to the NYSE
D) allocating shares in an IPO to preferred customers who agree to buy more shares in the aftermarket

Question 68

Which of the following statements about Saitoris in Japanese stock markets is incorrect?

A) Saitoris maintain the limit order book but may not trade for their own account
B) Saitoris have more responsibilities than NYSE specialists
C) Saitoris act as dealers in the Japanese markets
D) Saitoris are the principle source of liquidity in Japanese markets

Question 69

The SIPC was established by the ____.

A) Insider Trading Act of 1931
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) none of these acts established the SIPC

Question 70

An investor buys $8,000 worth of a stock 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 stock's price must have been ____.

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

Question 71

Registered traders _________________.

A) trade on their own account only
B) perform trades for brokerage firms
C) perform retail trades for the public
D) trade for the government

Question 72

Which Congressional action directed the SEC to implement a national competitive securities market?

A) Securities Act of 1933
B) SEC Act of 1934
C) Securities Act Amendments of 1975
D) Financial Services Modernization Act of 1999

Question 73

Day to day regulation of the New York Stock Exchange and enforcement of exchange rules and federal securities laws is conducted by the

A) SEC.
B) CFTC.
C) NYSE Regulation, Inc.
D) U.S. Department of the Treasury.

Question 74

The ____ requires full disclosure of relevant information relating to the issue of new securities.

A) Insider Trading Act of 1931
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) Investment Company Act of 1940

Question 75

Which of the following are true concerning short sales of exchange listed stocks?
I)A short sale is permitted only if the last recorded change in the stock'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 76

Most European markets,including Euronext,use a/an _____________________.

A) specialist trading system
B) electronic trading system
C) continuous auction market
D) direct search market

Question 77

Trading on insider information is ____.
I)prohibited by federal law
II)prohibited by the CFA Institute Standards of Professional Conduct
III)legal in Japan

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

Question 78

The CFA Institute Standards of Professional Conduct require that members _____.

A) place their clients interests before their own
B) disclose conflicts of interest to clients
C) inform their employers that they are obligated to comply with the Standards of Professional Conduct
D) The AIMR Standard require all three

Question 79

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

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

Question 80

__________ 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