Question 1

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?

Accepted Answer

The answer of Consider the following limit order book of...

Question 2

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

Accepted Answer

The answer of According to SEC Rule 415 regarding shelf...

Question 3

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

Accepted Answer

Transactions that do not involve the original issue of securities take place in secondary markets. Primary markets refer to the market where new securities are issued and sold for the first time. Over-the-counter markets refer to markets where securities are traded directly between two parties without the use of a central exchange. Institutional markets refer to markets where large institutional investors such as pension funds and insurance companies trade securities.

Question 4

The bid-ask spread exists because of _______________.

Accepted Answer

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) in a market. This spread exists because dealers need to cover their expenses and make a profit. It is not necessarily an indication of market inefficiencies, discontinuities in the markets, or lack of trading in thin markets.

Question 5

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

Accepted Answer

The ask price is the price at which a dealer is willing to sell a security. The bid price is the price at which a dealer is willing to buy a security. Clearing price refers to the price at which the supply of a product matches the demand in a market. Settlement price is the final price at which a futures contract is settled at the end of each trading day.

Question 6

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 _________.

Accepted Answer

500($40)(.40) = $8,000

Question 7

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

Accepted Answer

The cost of buying and selling a stock includes broker's commissions, the dealer's bid-asked spread, and any price concessions investors may need to make to complete a trade.

Question 8

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?

Accepted Answer

100(10.30 - 10.25) + 2(25) = $55

Question 9

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

Accepted Answer

A stop-loss order can be placed at a certain price below the current market price to protect gains, ensuring that if the price drops below a certain threshold, the stock is sold to prevent further losses.

Question 10

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

Accepted Answer

The answer of Specialists on the stock exchanges may do...

Question 11

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 ____.

Accepted Answer

To limit the loss to $2,500, we need to calculate the total value of 200 shares i.e. 200*$50 = $10,000. 
Thus, if the price increases and we want to buy back the shares to close the short position, we need to limit our loss to $2,500, which means we can buy back the shares for $7,500. 
The stop-buy order will be triggered when the price reaches $62.50, which means we buy back the 200 shares for $12,500 ($62.50*200) and our loss is $2,500 (($62.50-$50)*200). Therefore, B is the correct answer.

Question 12

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 _________.

Accepted Answer

The bid-ask spread is the difference between the price at which a dealer is willing to buy (bid) and the price at which a dealer is willing to sell (ask) a particular security or asset. It represents the dealer's profit margin and is an important consideration for investors when buying or selling securities. A and C are incorrect because they either do not accurately describe the concept or use non-standard terminology. D is incorrect because the term "market variation" is not commonly used in finance and does not relate specifically to the spread between bid and ask prices.

Question 13

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.)

Accepted Answer

Equity = 200P - 5,000
Margin = (200P - 5,000)/200P = .30
200P - 5,000 = 60P
140P = 5,000
P = 35.71429

Question 14

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

Accepted Answer

The answer of Trades on the __________ are the most...

Question 15

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

Accepted Answer

Tuckerton could go bankrupt, with a share price of $0. You could keep the entire proceeds from the short sale.
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Question 16

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.

Accepted Answer

The total cost of the shares would be 250 x $25 = $6,250. 
With the initial margin, you would need to put up 65% x $6,250 = $4,062.50 of your own money. 
This means you borrowed $2,187.50 ($6,250 - $4,062.50) on margin. 
If you sell the shares for $32 each, you would receive $8,000 ($32 x 250). 
You would need to repay the margin loan of $2,187.50, leaving you with $5,812.50 ($8,000 - $2,187.50). 
Your profit on the investment would be $5,812.50 - $4,062.50 = $1,750. 
Your rate of return would be ($1,750 ÷ $4,062.50) x 100 = 42.94% = 43% (rounded to the nearest whole number).

Question 17

You sold short 300 shares of common stock at $30 per share.The initial margin is 50%.You must put up _________.

Accepted Answer

Investment = 300(30)(.50) = 4,500

Question 18

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

Accepted Answer

The best choice is C because it accurately describes Nasdaq's response to the growth of ECNs in recent years. Nasdaq purchased Instinet, one of the major ECNs, which helped it regain some market share. It also enabled automatic trade execution through its new Market Center, which allowed it to compete more effectively with ECNs. However, it did not switch from stock ownership to mutual ownership, so option III is incorrect.

Question 19

What percentage of NYSE transactions is executed by specialists?

Accepted Answer

The answer of What percentage of NYSE transactions is executed...

Question 20

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

Accepted Answer

When you short-sell a stock, your potential losses are unlimited since there is no cap on how much the stock price can increase. Therefore, the correct answer is D, unlimited.

Quiz 3: Securities Markets