Deck 4: Organization and Functioning of Securities Markets

Question 1

Listed stocks traded on the over-the-counter market are being traded in the third market.

Answer 1

True

Question 2

A corporation wishing to raise funds will normally want the investment banker to use a "best efforts" arrangement rather than a negotiated basis.

Answer 2

False

Question 3

A good secondary market is important to the efficiency of the primary market.

Answer 3

True

Question 4

The Nasdaq National Market System is an order driven market.

Question 5

It is required by law that a stock market must have a physical location.

Question 6

Informational efficiency is where the cost of acquiring information is very cheap.

Question 7

A market where prices adjust rapidly to new information is considered to be internally efficient.

Question 8

In recent years there has been a trend toward the consolidation of existing exchanges in developed markets, such as London, Frankfurt and Paris.

Question 9

Only the stocks of large companies are traded in the primary market.

Question 10

Negotiation, competitive bids, and best efforts are three forms of underwriting arrangements.

Question 11

If transaction prices are volatile, but long-term prices are stable, this is referred to as price continuity.

Question 12

The primary market is where issues are traded between current and potential owners.

Question 13

The over-the-counter market includes all stocks not listed on one of the major exchanges but constitutes a lesser of a dollar value than the New York and American Exchanges combined.

Question 14

The value of the stocks traded in the over-the-counter market is greater than the combined values of the stocks traded on the New York Stock Exchange and the American Stock Exchange combined.

Question 15

Rule 415, shelf registration, allows large firms to register ten years worth of financing needs all at one time.

Question 16

A continuous market that has price continuity requires depth of buyers and sellers.

Question 17

A market is a means through which buyers and sellers are brought together to aid in the transfer of goods and/or services.

Question 18

The NYSE has dominated the other U.S. exchanges in trading volume.

Question 19

Margin transaction involves borrowing part of the cost of an investment.

Question 20

The over-the-counter market lists more stocks than the New York Stock Exchange and the American Stock Exchange combined.

Question 21

Secondary equity issues are new shares offered by firms that already have stock outstanding.

Question 22

Initial public offerings (IPOs) involve selling of bonds to the public for the first time.

Question 23

In a dealer market trading system shares of stock are sold to the investor with the highest bid price and bought from the seller with the lowest offering price.

Question 24

Which of the following statements about a market is true?

A)It is not necessary for the market to have a physical location.
B)The market does not necessarily own the goods or services involved.
C)A market can deal in any variety of goods and services.
D)All of the above
E)None of the above

Question 25

Super DOT is an electronic order-routing system through which member firms can transmit market and limit orders directly to the posts where the securities are traded.

Question 26

When an investor borrows part of the investment cost it is known as

A)A short sale.
B)A fill or kill order.
C)A margin transaction.
D)A limit order.
E)Going long.

Question 27

An order that specifies the highest buy or lowest sell price is a

A)Limit order.
B)Short sale.
C)Market order.
D)Margin call.
E)Stop loss.

Question 28

Which of the following is not a characteristic of a good market for goods and services?

A)Timely and accurate information
B)Liquidity
C)Low transaction costs
D)External efficiency
E)All of the above are characteristics of a good market.

Question 29

Short selling is practiced when an investor borrows part of the cost of the investment,e.g., they are "short" on cash.

Question 30

Which of the following is not a function of the specialist?

A)Assists the Federal Reserve in controlling the money supply
B)Acts as a broker who handles the limit orders or special orders placed with member brokers
C)Buys and sells securities in order to stabilize the market
D)Acts as a dealer in assigned stocks to maintain a fair and orderly market
E)All of the above are functions of a specialist

Question 31

Specialists provide added liquidity in the Nasdaq market.

Question 32

Which of the following is not a secondary equity market?

A)Treasury market
B)National exchanges
C)Regional exchanges
D)Over-the-counter market
E)All of the above are secondary equity markets.

Question 33

Global trading has eroded the NYSE's share of the market for NYSE-listed stocks.

Question 34

A pure auction market is also referred to as a quote-driven market.

Question 35

Rule 415 allows corporations to place securities privately with large, sophisticated institutional investors without extensive registration documents.

Question 36

Rule 144A reduced registration documentation requirements for placing securities privately with large institutional investors.

Question 37

A block house is a brokerage firm that buys and sells blocks of stock for institutions.

Question 38

The member of the New York Stock Exchange who acts as a dealer on assigned stocks is known as a

A)Registered trader.
B)Commission broker.
C)Registered broker.
D)Floor broker.
E)Specialist.

Question 39

The NYSE is a dealer market.

Question 40

In a pure auction market buyers and sellers submit bid-and-ask prices for a given stock to a central location.

Question 41

In a call market, trading for individual stocks

A)Occurs anytime the market is open.
B)Takes place at specific times.
C)Takes place at the open and close of the trading day.
D)All of the above.
E)None of the above.

Question 42

All of the following are advantages of secondary markets except

A)Provide liquidity to individuals holding the securities.
B)Support the primary market by reducing the required rate of return due to the lower liquidity risk for securities.
C)Provide price discovery for corporations selling seasoned securities.
D)Impact market efficiency and price volatility.
E)All of the above are advantages of secondary markets.

Question 43

Floor brokers on the New York Stock Exchange

A)Use their membership to buy and sell for their own account.
B)Are employees of a member firm and buy and sell for customers of the firm.
C)Handle limit and other orders placed by other brokers.
D)Act as brokers for other members.
E)Maintain a fair and orderly market.

Question 44

When a market is internally efficient, it means that

A)The market has price continuity.
B)The market has minimal transactions costs
C)The market has good depth
D)The market has more buyers than sellers
E)The market has more sellers than buyers

Question 45

With a best effort offering, the investment banker performs all of the following roles except:

A)determines the fee paid to themselves for handling the issue.
B)manages the selling group for the new issue.
C)evaluates market conditions and determines the characteristics of the security.
D)guarantees the selling price for the entire issue to the firm issuing the securities.
E)All of the above are true.

Question 46

Secondary markets are important because

A)The prevailing market price of securities is determined in the secondary market
B)It has an impact on price stability
C)It has an impact on price continuity
D)All of the above
E)None of the above

Question 47

The US secondary market with the largest number of issues traded is the:

A)AMEX
B)NASDAQ
C)NYSE
D)LSE
E)Both a and c

Question 48

Which of the following is not a major category of membership in stock exchanges?

A)Specialist
B)Commission broker
C)Floor broker
D)Financial analyst
E)Registered trader

Question 49

Which of the following is not a characteristic of shelf registrations? Shelf registrations:

A)Were introduced by Rule 415.
B)Allow large firms to register security issues and sell them piecemeal during the following six years.
C)Provide flexibility and reduce registration fees and expenses.
D)Are typically used for the sale of straight debentures rather than common stock or convertible issues.
E)All of the above are characteristics of shelf registrations.

Question 50

A pure auction market is one in which

A)Dealers provide liquidity by buying and selling shares of stock for themselves.
B)Dealers compete against each other to provide the highest bid and lowest asking prices.
C)Buyers submit bid prices to sellers.
D)Sellers submit ask prices to buyers.
E)Buyers and sellers submit bid and ask prices to a central location to be matched.

Question 51

Investors can leverage their stock transactions with the use of

A)Margin orders
B)Stop loss orders
C)Limit orders
D)Market orders
E)Specialists

Question 52

Which of the following is an underwriting function?

A)Origination
B)Risk-bearing
C)Distribution
D)Choices b and c
E)All of the above

Question 53

Trading in the secondary markets for Corporate bonds

A)Takes place through a network of primary dealers
B)Takes place over the counter by dealers who buy and sell on their own account
C)Takes place on the NYSE bond annex
D)All of the above
E)None of the above

Question 54

In a negotiated bid, the underwriter carries out the following service(s)

A)Origination, risk-bearing, and distribution.
B)Origination and risk-bearing.
C)Risk-bearing and distribution.
D)Origination and distribution.
E)Risk-bearing and distribution.

Question 55

The basic distinction between a primary and a secondary market is

A)proceeds from sales in the primary market go to the current owner of a security; proceeds in secondary market go to the original owner.
B)primary markets involve direct dealings within regional exchanges.
C)only new securities are sold in the primary market; only outstanding securities are bought and sold in the secondary market.
D)primary markets deal exclusively in bonds; secondary markets deal primarily in common stock.
E)None of the above.

Question 56

When a market is externally efficient, it means that

A)Timely and accurate information is available
B)The market is liquid
C)Transaction costs are low
D)Prices adjust rapidly to new information
E)The number of buyers and sellers are the same

Question 57

Municipal bonds are sold using the following method or methods:

A)Competitive bid
B)Negotiated sale
C)Private placement
D)All of the above
E)None of the above

Question 58

A block trade is one which involves a minimum of

A)1,000 shares.
B)5,000 shares.
C)10,000 shares.
D)100,000 shares.
E)1,000,000 shares.

Question 59

Trading in the secondary markets for U.S. Government and municipal bonds

A)Takes place through a network of primary dealers
B)Takes place over the counter by dealers who buy and sell on their own account
C)Takes place on the NYSE bond annex
D)All of the above
E)None of the above

Question 60

All of the following are characteristics of a dealer market except:

A)Also referred to as a quote-driven market
B)NASDAQ market is a dealer market
C)Individual dealers buy and sell shares for themselves
D)Centralized trading location
E)All of the above are characteristics of a dealer market

Question 61

A 1994 study concluded dealers were colluding to maintain wide bid/ask spreads by concentrating market quotes in quarters instead of eighths. This study eventually led to new order handling rules that required quotes to be available to the public through:

A)NASDAQ market
B)Electronic communications networks (ECN)
C)High frequency trading (HFT)
D)Algorithmic trading (AT)
E)Intermarket trading system (ITS)

Question 62

Suppose you buy a round lot of HS Inc. stock on 55% margin when it is selling at $40 a share. The broker charges a 10 percent annual interest rate and commissions are 4 percent of the total stock value on both the purchase and the sale. If at year end you receive a $0.90 per share dividend and sell the stock for 35 5/8, what is your rate of return on the investment?

A)-35.17%
B)-21.84%
C)14.74%
D)21.84%
E)35.17%

Question 63

Exhibit 4.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80 percent, and Jackson Industries is currently selling at $40 per share.
Refer to Exhibit 4.3. How many shares of Jackson can Kathy buy?

A)1875
B)1500
C)1750
D)1200
E)None of the above

Question 64

Exhibit 4.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80 percent, and Jackson Industries is currently selling at $40 per share.
Refer to Exhibit 4.3. What is Kathy's profit if Jackson's price rises to $50?

A)$18,750
B)$15,750
C)$55,000
D)$37,750
E)$28,570

Question 65

Exhibit 4.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60 percent and Turtle Industries is currently selling at $50 per share.

-Refer to Exhibit 4.1. What is Jackie's profit/loss if Turtle's price after one year is $40?

A)$50,000
B)-$50,000
C)$100,000
D)-$100,000
E)None of the above

Question 66

Suppose you buy a round lot of DG Solutions stock on 60% margin when it is selling at $55 a share. The broker charges a 10 percent annual interest rate and commissions are 3 percent of the total stock value on both the purchase and the sale. If at year end you receive a $1.10 per share dividend and sell the stock for 55 5/8, what is your rate of return on the investment?

A)-10.38%
B)-12.84%
C)-10.95%
D)21.84%
E)28.38%

Question 67

Exhibit 4.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80 percent, and Jackson Industries is currently selling at $40 per share.
Refer to Exhibit 4.3. If the maintenance margin is 25 percent, to what price can Jackson Industries fall before Kathy receives a margin call?

A)$21.75
B)$23.00
C)$10.67
D)$15.93
E)None of the above

Question 68

Exhibit 4.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin deposit is 65 percent. Commission on the sale is 1.25%. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25% per year.

-Refer to Exhibit 4.6. At the end of one year you close out your short position by purchasing share of XCorp at $45 per share. The commission is 1.25%. What is your rate of return on the investment?

A)-55.92%
B)10.31%
C)51.06%
D)23.1%
E)-33.05%

Question 69

Exhibit 4.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60 percent and Turtle Industries is currently selling at $50 per share.
Refer to Exhibit 4.1. How many shares of Turtle can Jackie purchase?

A)5,000
B)3,000
C)1,800
D)1,200
E)None of the above

Question 70

Exhibit 4.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share.
Refer to Exhibit 4.2. How many shares of RC can Heidi buy?

A)2,500
B)2,000
C)1,000
D)500
E)None of the above

Question 71

Exhibit 4.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell 100 shares of Davis Industries short when it is selling at its yearly high of $35. Your broker tells you that your margin requirement is 55 percent and that the commission on the sale is $15. While you are short, Davis pays a $0.75 per share dividend. At the end of one year you buy your Davis shares (cover your short sale) at $30 and are charged a commission of $15 and a 6 percent interest rate.
Refer to Exhibit 4.4. What is your rate of return on the investment?

A)10.48%
B)12.87%
C)13.98%
D)15.49%
E)18.87%

Question 72

Suppose you buy a round lot of Altman Industries stock on 50% margin when it is selling at $35 a share. The broker charges a 10 percent annual interest rate and commissions are 5 percent of the total stock value on both the purchase and the sale. If at year end you receive a $1.00 per share dividend and sell the stock for $42.63, what is your rate of return on the investment?

A)15.58%
B)11.84%
C)14.74%
D)21.84%
E)28.38%

Question 73

Exhibit 4.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share.
Refer to Exhibit 4.2. What is Heidi's profit if RC's price rises to $80?

A)$55,000
B)$50,000
C)$60,000
D)$68,270
E)$28,570

Question 74

Exhibit 4.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share.
Refer to Exhibit 4.2. If the maintenance margin is 25 percent, to what price can RC Industries stock price fall before Heidi receives a margin call?

A)$21.75
B)$23.33
C)$32.00
D)$33.33
E)None of the above

Question 75

Exhibit 4.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its yearly high of $42.25. Your broker tells you that your margin requirement is 60 percent and that the commission on the sale is $20. While you are short, Topgun pays a $0.85 per share dividend. At the end of one year you buy your Topgun shares (cover your short sale) at $44 and are charged a commission of $20 and a 5 percent interest rate.

-Refer to Exhibit 4.5. What is your rate of return on the investment?

A)10.48%
B)12.87%
C)-13.98%
D)-24.49%
E)-15.05%

Question 76

Exhibit 4.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%.
Refer to Exhibit 4.7. At the end of one year shares of RossCorp stock are selling for $55 per share and the company paid dividends of $0.85 per share. Assuming that you paid the full cost of the purchase, what is your rate of return if you sell RossCorp stock?

A)18.08%
B)23.51%
C)22.32%
D)14.96%
E)19.28%

Question 77

Exhibit 4.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin deposit is 65 percent. Commission on the sale is 1.25%. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25% per year.

-Refer to Exhibit 4.6. Suppose at the end of one year XCorp is selling at $90 per share and you cover your short position at this price. What is your rate of return on the investment? (Assume a 1.25% commission on the purchase.)

A)-40.64%
B)-25.53%
C)5.21%
D)72.7%
E)-71.2%

Question 78

Exhibit 4.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60 percent and Turtle Industries is currently selling at $50 per share.
Refer to Exhibit 4.1. If the maintenance margin is 25 percent, to what price can Turtle Industries fall before Jackie receives a margin call?

A)$14.56
B)$23.17
C)$32.42
D)$26.67
E)None of the above

Question 79

Exhibit 4.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell 100 shares of Davis Industries short when it is selling at its yearly high of $35. Your broker tells you that your margin requirement is 55 percent and that the commission on the sale is $15. While you are short, Davis pays a $0.75 per share dividend. At the end of one year you buy your Davis shares (cover your short sale) at $30 and are charged a commission of $15 and a 6 percent interest rate.
Refer to Exhibit 4.4. What is your dollar return on the investment?

A)$130.50
B)$300.50
C)$100.00
D)$1,773.75
E)$3,500.00

Question 80

Exhibit 4.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its yearly high of $42.25. Your broker tells you that your margin requirement is 60 percent and that the commission on the sale is $20. While you are short, Topgun pays a $0.85 per share dividend. At the end of one year you buy your Topgun shares (cover your short sale) at $44 and are charged a commission of $20 and a 5 percent interest rate.

-Refer to Exhibit 4.5. What is your dollar return on the investment?

A)$384.50
B)$432.88
C)-$432.88
D)-$384.50
E)-$950.55