Deck 3: Organization and Functioning of Securities Markets

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

Call markets can also be used at the opening for stocks on any exchange if there is an overnight buildup of buy and/or sell orders.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

In a continuous market, trades occur at any time the market is open and stocks are priced either by auction or by dealers.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Informational efficiency refers to when the cost of acquiring information is very cheap.

Question 18

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

Question 19

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

Question 20

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

Question 21

The individual placing a limit order specifies the buy or sell price.

Question 22

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) Both buyers and sellers benefit from the existence of a market.
E) All of these are correct.

Question 23

Which of the following is an underwriting function?

A) origination
B) risk-bearing
C) distribution
D) putting together an underwriting syndicate.
E) All of these are correct.

Question 24

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

Question 25

When a market is internally efficient, it means that the market has

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

Question 26

The NYSE is a dealer market.

Question 27

Municipal bonds are sold using the following method or methods:

A) competitive bid
B) negotiated sale
C) private placement
D) using an underwriting function.
E) All of these are correct.

Question 28

The Nasdaq National Market System is an order-driven market.

Question 29

Algorithmic trading is basically creating computer programs to make trading decisions.

Question 30

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

Question 31

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

Question 32

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 33

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 34

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 35

The basic distinction between a primary and a secondary market is that

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) primary markets deal exclusively in common stocks; secondary markets deal primarily in bonds.

Question 36

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

Question 37

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

Question 38

The financial market landscape has become a few large holding companies that own global exchanges for stocks, bonds, and derivatives.

Question 39

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

Question 40

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 these are correct.

Question 41

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 42

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 43

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) the proceeds from a sale go to the issuing unit.
E) they prevent price discovery.

Question 44

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) attempts to derive a new equilibrium price using a call-market approach.

Question 45

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 these are correct.

Question 46

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 3.2. How many shares of RC can Heidi buy?

A) 2,500
B) 2,000
C) 1,000
D) 500
E) 250

Question 47

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) call market.

Question 48

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 3.1. 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) $40,000

Question 49

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) takes place on financial futures exchanges.
E) takes place on equity markets.

Question 50

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 51

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 3.1. 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) $25.52

Question 52

All of the following are characteristics of a dealer market EXCEPT that:

A) it is a quote-driven market.
B) the NASDAQ market is a dealer market.
C) individual dealers buy and sell shares for themselves.
D) it has a centralized trading location.
E) All of these are correct.

Question 53

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 3.2. 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 54

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) the NASDAQ market.
B) electronic communications networks (ECN).
C) high frequency trading (HFT).
D) algorithmic trading (AT).
E) intermarket trading system (ITS).

Question 55

All of the following are advantages of secondary markets EXCEPT that they

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 these are correct.

Question 56

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 3.1. How many shares of Turtle can Jackie purchase?

A) 5,000
B) 3,000
C) 1,800
D) 1,200
E) 750

Question 57

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) is priced either by auction or by dealers.
E) None of these are correct.

Question 58

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 3.2. 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) $22.22

Question 59

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 60

The U.S. secondary market with the largest number of issues traded is the

A) AMEX.
B) NASDAQ.
C) NYSE.
D) LSE.
E) TSX.

Question 61

You purchased 100 shares of Highlight Company for $20 a share one year ago with a margin of 50 percent. The stock is currently selling for $28 a share, and no dividends were ever paid. The broker charges an annual interest rate of 8 percent and a $100 commission on both the purchase and sale of these shares. What is your annual rate of return on this investment?

A) 21 percent
B) 47 percent
C) 52 percent
D) 60 percent
E) 72 percent

Question 62

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 3.3. How many shares of Jackson can Kathy buy?

A) 1875
B) 1500
C) 1750
D) 1200
E) 950

Question 63

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent.

-Refer to Exhibit 3.7. At the end of one year, shares of RossCorp stock are selling for $35 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) -33.05 percent
B) -23.42 percent
C) 23.42 percent
D) 33.05 percent
E) -25.35 percent

Question 64

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 3.3. 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) $12.67

Question 65

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent.

-Refer to Exhibit 3.7. At the end of one year, shares of RossCorp stock are selling for $35 per share and the company paid dividends of $0.85 per share. Assuming that you borrowed 25 percent of cost of the purchase, what is your rate of return?

A) 33.05 percent
B) -33.05 percent
C) -23.51 percent
D) -25.35 percent
E) -40.64 percent

Question 66

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent.

-Refer to Exhibit 3.7. 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 borrowed 25 percent of cost of the purchase, what is your rate of return?

A) -23.51 percent
B) 29.35 percent
C) 23.51 percent
D) 5.21 percent
E) 10.06 percent

Question 67

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent.
Refer to Exhibit 3.7. Assume that you purchase 150 shares of RossCorp stock at $45 each by making a margin deposit of 55 percent. At what price would you receive a margin call?

A) $29.39
B) $26.48
C) $50.39
D) $28.93
E) $50.10

Question 68

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 percent. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25 percent per year.

-Refer to Exhibit 3.6. 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 percent. What is your rate of return on the investment?

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

Question 69

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 3.4. What is your rate of return on the investment?

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

Question 70

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 3.4. 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 71

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 percent. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25 percent per year.

-Refer to Exhibit 3.6. 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 percent commission on the purchase.)

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

Question 72

Suppose you buy a round lot of HS Inc. stock on 55 percent 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 percent
B) -21.84 percent
C) 14.74 percent
D) 21.84 percent
E) 35.17 percent

Question 73

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 3.5. What is your dollar return on the investment?

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

Question 74

Suppose you buy a round lot of DG Solutions stock on 60 percent 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 percent
B) -12.84 percent
C) -10.95 percent
D) 21.84 percent
E) 28.38 percent

Question 75

Suppose you buy a round lot of Altman Industries stock on 50 percent 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 percent
B) 11.84 percent
C) 14.74 percent
D) 21.84 percent
E) 28.38 percent

Question 76

You own 50 shares of Auto Corporation that you purchased for $30 a share. The stock is currently selling for $50 a share, and you placed a stop loss order at $45. If the stock price drops to $35 a share what is your return on this investment?

A) -30.0 percent
B) 16.7 percent
C) 50.0 percent
D) 66.7 percent
E) 150.0 percent

Question 77

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You sell 100 shares short of AMF Corporation when it is selling at $45 per share. Your margin requirement is 60 percent and the commission on the sale is $50 and the broker charges 10 percent annual interest. AMF Corporation paid a $0.50 per share dividend while you were short the stock. After one year, you cover your short sale at $35 per share with a $50 commission for the purchase.
Refer to Exhibit 3.8. What is your total dollar return on this investment?

A) $1,000
B) $900
C) $850
D) $670
E) $520

Question 78

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 3.5. What is your rate of return on the investment?

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

Question 79

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent.
Refer to Exhibit 3.7. 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 percent
B) 23.51 percent
C) 22.32 percent
D) 14.96 percent
E) 19.28 percent

Question 80

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 3.3. 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