Fin 3013 Chapter 3

Chapter 03 - Securities Markets

Chapter 03 Securities Markets Answer Key1. Underwriting is one of the services provided by _____. A. the SECB. investment bankersC. publicly traded companiesD. FDIC

Difficulty: Easy

2. 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 herringB. issuing companyC. initial stockholderD. underwriter

Difficulty: Medium

3. Explicit costs of an IPO tend to be around ______ of the funds raised. A. 1%B. 7%C. 15%D. 25%

Difficulty: Medium

3-1


4. 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. $90,000B. $1,290,000C. $2,390,000D. $1,690,000

Total Cost = 90,000 + (43 - 35)200,000 = $1,690,000

Difficulty: Hard

5. A red herring becomes a prospectus when ____. A. the preliminary registration statement is approved by the SECB. the IPO is completeC. the offering is seasonedD. the lockup period expires

Difficulty: Medium

6. Private placements can be advantageous rather than public issue because ______.I. private placements are cheaper to market than public issuesII. private placements may still be sold to the general public under SEC Rule 144AIII. privately placed securities trade on secondary markets A. I onlyB. I and III onlyC. II and III onlyD. I, II and III

Difficulty: Medium

3-2


7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices. A. 1B. 2C. 3D. 4

Difficulty: Easy

8. 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.

Difficulty: Medium

9. 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 offerB. Dutch auctionC. secondary offeringD. firm commitment offer

Difficulty: Medium

10. The NYSE recently acquired the ECN _______ and NASDAQ recently acquired the ECN ________. A. Archipelago; InstinetB. Instinet; ArchipelagoC. Island; InstinetD. LSE; Euronext

Difficulty: Medium

3-3


11. Rank the following types of markets from least integrated and organized to most integrated and organized.I. Brokered marketsII. Continuous auction marketsIII. Dealer marketsIV. Direct search markets A. IV, II, I, IIIB. I, III, IV, IIC. II, III, IV, ID. IV, I, III, II

Difficulty: Hard

12. A ______ drop in the Dow Jones Industrial Average would stop trading for the day. A. 10%B. 20%C. 30%D. 40%

Difficulty: Medium

13. Which one of the following is not an example of a brokered market? A. Residential real estate marketB. Market for large block security transactionsC. Primary market for securitiesD. NASDAQ

Difficulty: Medium

3-4


14. 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%

Difficulty: Medium

15. Purchases of new issues of stock take place _________. A. at the desk of the FedB. in the primary marketC. in the secondary marketD. in the money markets

Difficulty: Easy

16. Initial margin requirements on stocks are set by _________. A. the Federal Deposit Insurance CorporationB. the Federal ReserveC. the New York Stock ExchangeD. the Securities and Exchange Commission

Difficulty: Easy

17. Which one of the following types of markets requires the greatest level of trading activity to be cost effective? A. Broker marketB. Dealer marketC. Continuous auction marketD. Direct search market

Difficulty: Easy

3-5


18. 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 exchangeB. Specialists can not trade for their own accountsC. Specialists earn income from commissions and spreads in stock pricesD. Specialists stand ready to trade at quoted bid and ask prices

Difficulty: Easy

19. 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 onlyB. I and II onlyC. II and III onlyD. I, II, and III.

Difficulty: Hard

20. An order to buy or sell a security at the current price is a ______________. A. limit orderB. market orderC. stop loss orderD. stop buy order

Difficulty: Easy

21. When U.S. stock prices were converted from fractions to decimals in 2001 the minimum bid-ask spread charged by dealers ________. A. increasedB. decreasedC. remained the sameD. fell at first, but then increased

Difficulty: Medium

3-6


22. The market collapse of 1987 prompted ________________________. A. Blue Sky lawsB. circuit breakers to halt trading during market crisesC. the Securities Investor Protection ActD. the National Securities Market Act

Difficulty: Easy

23. 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-lossB. market; limitC. stop-loss; stop-buyD. limit; market

Difficulty: Easy

24. 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. $1,375B. $500C. $275D. $1,450

(1003.15 - 1000.50)500 = $1,375

Difficulty: Easy

3-7


25. Advantages of ECNs over traditional markets include all but which one of the following? A. Lower transactions costsB. Anonymity of the participantsC. Small amount of time needed to execute and orderD. Ability to handle very large orders

Difficulty: Medium

26. The __________ was established to protect investors from losses if their brokerage firms fail. A. CFTCB. SECC. SIPCD. AIMR

Difficulty: Easy

27. When matching orders from the public a specialist is required to use the _______. A. lowest outstanding bid price and highest outstanding ask priceB. highest outstanding bid price and highest outstanding ask priceC. lowest outstanding bid price and lowest outstanding ask priceD. highest outstanding bid price and lowest outstanding ask price

Difficulty: Hard

28. The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. A. interest buildingB. book buildingC. market analysisD. customer identification

Difficulty: Easy

3-8


29. The bulk of most initial public offerings (IPOs) of equity securities go to ___________. A. institutional investorsB. individual investorsC. the firm's current shareholdersD. day traders

Difficulty: Easy

30. 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 pricedB. correctly pricedC. under pricedD. mispriced but without any particular bias

Difficulty: Easy

31. According to Loughran and Ritter, initial public offerings tend to exhibit __________ performance initially, and __________ performance over the long term. A. bad; goodB. bad; badC. good; goodD. good; bad

Difficulty: Medium

3-9


32. 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 incomeII. The exchange requires specialists to maintain price continuityIII. Specialists are non-profit entities designed to facilitate market transactions rather than make a profit A. I onlyB. I and II onlyC. II and III onlyD. I, II and III

Difficulty: Easy

33. 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 effortsB. firm commitmentC. private placementD. none of the above

Difficulty: Easy

34. The ______________ is the most important dealer market in the U.S. and the ______________ is the most important auction market. A. NYSE; NASDAQB. NASDAQ; NYSEC. CME; OTCD. AMEX; NYSE

Difficulty: Easy

3-10


35. The inside quotes on a limit order book would be comprised of the ______. A. highest bid price and the lowest ask priceB. lowest bid price and the lowest ask priceC. lowest bid price and the highest ask priceD. highest bid price and the highest ask price

Difficulty: Medium

36. The __________ system enables exchange members to send orders directly to a specialist over computer lines. A. FAXB. Direct PlusC. NASDAQD. SUPERDOT

Difficulty: Easy

37. The fully automated trade-execution system installed on the NYSE is called A. FAXB. Direct PlusC. NASDAQD. SUPERDOT

Difficulty: Easy

38. Nasdaq now offers three listing options. The largest, most actively traded firms are on the A. Nasdaq Global MarketB. Nasdaq Global Select MarketC. Nasdaq Capital MarketD. Nasdaq Pink Sheet Stocks

Difficulty: Medium

3-11


39. 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%

Difficulty: Medium

40. The _________ price is the price at which a dealer is willing to purchase a security. A. bidB. askC. clearingD. settlement

Difficulty: Easy

41. The _________ price is the price at which a dealer is willing to sell a security. A. bidB. askC. clearingD. settlement

Difficulty: Easy

42. 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 spreadB. bid-ask spreadC. bid-ask gapD. market variation

Difficulty: Easy

3-12


43. The bid-ask spread exists because of _______________. A. market inefficienciesB. discontinuities in the marketsC. the need for dealers to cover expenses and make a profitD. lack of trading in thin markets

Difficulty: Easy

44. 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 ECNII. Enable automatic trade execution through its new Market CenterIII. Switch from stock ownership to mutual ownership A. I onlyB. II and III onlyC. I and II onlyD. I, II and III

Difficulty: Medium

45. 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 onlyB. II and III onlyC. I and III onlyD. I, II and III

Difficulty: Medium

3-13


46. Trades on the __________ are the most likely to trade inside the inside quotes than in other markets. A. NYSEB. NASDAQ marketC. OTC marketD. Pink sheet market

Difficulty: Medium

47. 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 orderB. limit-sell orderC. market orderD. stop-loss order

Difficulty: Medium

48. 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. $39.75B. $40.25C. $40.375D. $40.25 or less

In this case the specialist would have the option of matching the buy order with the lowest limit sell order ($40.25) or set an ask price lower than $40.25 ($40 for example) and trade the order from his own stock.

Difficulty: Medium

3-14


49. 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. $50B. $25C. $30D. $55

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

Difficulty: Medium

50. According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration. A. 1 yearB. 2 yearsC. 3 yearsD. 4 years

Difficulty: Medium

51. What percentage of NYSE transactions is executed by specialists? A. 10%B. 25%C. 50%D. 75%

Difficulty: Medium

3-15


52. 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. $20,000B. $12,000C. $8,000D. $15,000

500($40)(0.40) = $8,000

Difficulty: Medium

53. You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. A. $4,500B. $6,000C. $9,000D. $10,000

Investment = 300(30)(.50) = 4500

Difficulty: Medium

54. You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss? A. $50B. $150C. $10,000D. unlimited

There is no upper limit to the price of a share of stock; therefore no upper limit the price you will have to pay to replace the 200 shares of Tuckerton.

Difficulty: Easy

3-16


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. $50B. $150C. $10,000D. unlimited

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

Difficulty: Medium

56. 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. $37.50B. $62.50C. $56.25D. $59.75

50 + (2500/200) = $62.50

Difficulty: Medium

3-17


57. 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. $26.55B. $35.71C. $28.95D. $30.77

Difficulty: Hard

58. 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%

Difficulty: Hard

59. 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 specializeB. They keep the limit order bookC. Use their privileged information to make speculative investments on their own accountD. Use their privileged information to make investments on behalf of clients of brokerage firms with which they do business

Difficulty: Medium

3-18


60. Transactions that do not involve the original issue of securities take place in _________. A. primary marketsB. secondary marketsC. over-the-counter marketsD. institutional markets

Difficulty: Easy

61. 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 marketB. fourth marketC. after-marketD. block market

Difficulty: Easy

62. __________ often accompany short sales, and are used to limit potential losses from the short position. A. Limit ordersB. Restricted ordersC. Limit-loss ordersD. Stop-buy orders

Difficulty: Medium

63. The approximate dollar value of trades on the NYSE in 2008 was A. $75 billionB. $100 billionC. $125 billionD. $150 billion

Difficulty: Medium

3-19


64. Registered traders _________________. A. trade on their own account onlyB. perform trades for brokerage firmsC. perform retail trades for the publicD. trade for the government

Difficulty: Easy

65. Which Congressional action directed the SEC to implement a national competitive securities market? A. Securities Act of 1933B. SEC Act of 1934C. Securities Act Amendments of 1975D. Financial Services Modernization Act of 1999

Difficulty: Medium

66. Most European markets, including Euronext, use a/an _____________________. A. specialist trading systemB. electronic trading systemC. continuous auction marketD. direct search market

Difficulty: Medium

67. 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 accountB. Saitoris have more responsibilities than NYSE specialistsC. Saitoris act as dealers in the Japanese marketsD. Saitoris are the principle source of liquidity in Japanese markets

Difficulty: Medium

3-20


68. The term "paying for order flow" refers to the practice of ________________. A. paying more than one broker to execute your orderB. dealers trading with their customers at an outdated priceC. paying a broker a rebate for directing the trade to a particular stock dealer rather than directing the order to the NYSED. allocating shares in an IPO to preferred customers who agree to buy more shares in the aftermarket

Difficulty: Medium

69. 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 loanB. market value of the stock + amount owed on the margin loanC. market value of the stock margin loanD. margin loan x market value of the stock

Difficulty: Medium

70. If the Dow Jones Industrial Average falls by 10% by 11 am, trading will ______. A. continue unchangedB. will be halted for one hourC. will be halted for one-half hourD. will be halted for the rest of the day

Difficulty: Medium

71. The CFA Institute Standards of Professional Conduct require that members _____. A. place their clients interests before their ownB. disclose conflicts of interest to clientsC. inform their employers that they are obligated to comply with the Standards of Professional ConductD. The AIMR Standard require all three

Difficulty: Medium

3-21


72. Trading on insider information is ____. I. prohibited by federal law II. prohibited by the CFA Institute Standards of Professional ConductIII. legal in Japan A. I and II onlyB. II and III onlyC. I and III onlyD. I, II and III

Difficulty: Medium

73. The ____ requires full disclosure of relevant information relating to the issue of new securities. A. Insider Trading Act of 1931B. Securities Act of 1933C. Securities Exchange Act of 1934D. Investment Company Act of 1940

Difficulty: Easy

74. The SIPC was established by the ____. A. Insider Trading Act of 1931B. Securities Act of 1933C. Securities Exchange Act of 1934D. none of these acts established the SIPC

Difficulty: Easy

75. Brokerage firms can change margin-loan practices ____. A. without noticeB. only after 72 hours noticeC. only on new ordersD. only with permission from the SEC

Difficulty: Easy

3-22


76. 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 positiveII. Proceeds from the short sale must be kept on deposit with the brokerIII. Short-sellers must post margin with their broker to cover potential losses on the positionIV. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement A. I and II onlyB. I, III and IV onlyC. II and III onlyD. I, II, III and IV

Difficulty: Hard

77. 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.

Difficulty: Hard

78. 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; brokersB. dealer; Brokers; electronicC. direct search; Brokers; electronicD. brokered; Dealers; direct search

Difficulty: Hard

3-23


79. 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%

Difficulty: Hard

80. 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. $20.00B. $29.77C. $30.29D. $32.45

Difficulty: Hard

81. The New York Stock Exchange is a good example of _________. A. an auction marketB. a brokered marketC. a dealer marketD. a direct search market

Difficulty: Easy

3-24


82. The primary market where new security issues are offered to the public is a good example of _________. A. an auction marketB. a brokered marketC. a dealer marketD. a direct search market

Difficulty: Easy

83. The over-the-counter securities market is a good example of _________. A. an auction marketB. a brokered marketC. a dealer marketD. a direct search market

Difficulty: Easy

84. An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $0.50 per share dividend in one year and then the stock is sold at $23 per share. What was the investor's rate of return? A. 17.50%B. 19.67%C. 23.83%D. 25.75%

Difficulty: Hard

3-25


85. IBM is listed on the NYSE. If a share of IBM is sold via the NASDAQ exchange in which market is it thought to have traded? A. Primary marketB. Secondary marketC. Third marketD. Fourth market

Difficulty: Easy

86. You sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends) A. 10.00%B. 20.00%C. 6.67%D. 15%

Difficulty: Hard

87. The commission structure on a stock purchase is $20 plus $0.02 per share. If you purchase 4 round lots of a stock selling for $56, what is your commission? A. $20B. $22C. $26D. $28

Commission = 20 + (400 x .02) = $28.00

Difficulty: Medium

3-26


88. The commission structure on a stock purchase is $50 plus $0.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission? A. $35B. $45C. $53D. $68

Commission = 50 + (600 x .03) = $68.00

Difficulty: Medium

89. You sell short 200 shares of Doggie Treats Inc. which are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account and the firm does not pay any dividends) A. $28.85B. $35.71C. $31.50D. $32.25

Difficulty: Hard

90. The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss? A. 9%B. 15%C. 48%D. 57%

Difficulty: Medium

3-27

Documents

Fin 3013 Chapter 3