Chapter 11
Securities Markets

TRUE-FALSE QUESTIONS

1. The primary market is a market in which securities are traded among investors.

Difficulty Level: Easy

Subject Heading: Cost of Going Public: Primary Securities Markets

L.O. 11.1

2. The issuer has no price risk in a firm commitment offering once the offer price is set.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

3. All public offerings are regulated by the Securities and Exchange Commission (SEC).

Difficulty Level: Easy

Subject Heading: Cost of Going Public: Primary Securities Markets

L.O. 11.1

4. Under a best-effort agreement, investment bankers try to sell the securities of the issuing corporation, but they assume no risk for a possible failure of the flotation.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

5. In a financial context, due diligence refers to the detailed study of a corporation.

Difficulty Level: Easy

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

6. An underwriting agreement is a contract in which the investment banker agrees to buy securities at a predetermined price and then resell them to investors.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

7. An underwriting agreement is a contract in which the investment banker agrees to do its best to sell securities to investors at the highest price it can; the investment banker assumes no risk for the possibility that it may fail to issue all authorized shares .

Difficulty Level: Medium

Subject Heading: Cost of Going Public

L.O. 11.1

8. The aftermarket is a period of time after an IPO.

Difficulty Level: Easy

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

9. A syndicate is a group of several investment banking firms that participate in underwriting and distributing a security issue.

Difficulty Level: Easy

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

10. Private placement can avoid SEC registration and all SEC regulations.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

11. Firm commitment flotation costs are typically lower than those of best efforts.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

12. Existing securities are traded in the primary market.

Difficulty Level: Easy

Subject Heading: Issuing Securities: Primary Securities Markets

L.O. 11.1

13. An IPO is the initial sale of an equity to brokers.

Difficulty Level: Medium

Subject Heading: Issuing Securities: Primary Securities Markets

L.O. 11.1

14. Only brokers can purchase an equity during an IPO.

Difficulty Level: Medium

Subject Heading: Issuing Securities: Primary Securities Markets

L.O. 11.1

15. A prospectus is highly specific to each company. Only minimal general information is required.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

16. The spread is the difference between the price paid by the investment bank and the price paid by the public.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

17. Tombstones are announcements of securities offerings placed in newspapers and other publications.

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

18. The Facebook IPO was the second largest IPO in history by a U.S. firm.

Difficulty Level: Easy

Subject Heading: The Facebook IPO

L.O. 11.2

19. The time when investment bankers were discussing the firm’s risk and return potential, the preliminary price range is called a “dog-and-pony” show.

Difficulty Level: Easy

Subject Heading: The Facebook IPO

L.O. 11.2

20. Typically in an IPO, investors request to purchase more shares than they expect to receive, hoping to receive about 25 percent of their order.

Difficulty Level: Easy

Subject Heading: The Facebook IPO

L.O. 11.2

21. Facebook ended its first full day of trading down from its offerring price.

Difficulty Level: Easy

Subject Heading: The Facebook IPO

L.O. 11.2

22. Shelf registration allows firms to register only debt issues with the SEC, and have them available to sell for two years.

Difficulty Level: Medium

Subject Heading: Shelf Registration

L.O. 11.3

23. All firms can use shelf registration which saves issuers both time and money.

Difficulty Level: Medium

Subject Heading: Shelf Registration

L.O. 11.3

24. Rights offerings among public corporations became infrequent in the United States during the 1980s and 1990s.

Difficulty Level: Medium

Subject Heading: Rights Offerings

L.O. 11.3

25. A Dutch auction is an offering process in which investors bid on the price and quantity of securities they wish to purchase.

Difficulty Level: Medium

Subject Heading: Competitive Bidding

L.O. 11.3

26. A pre-emptive right refers to the right of existing shareholders to sue management in order to head off potential actions by management that would adversely affect the price of the stock.

Difficulty Level: Medium

Subject Heading: Rights Offerings

L.O. 11.3

27. The flotation costs of an initial public offering are comprised solely of direct costs and the spread.

Difficulty Level: Medium

Subject Heading: Cost of Going Public

L.O. 11.4

28. IPO underpricing occurs only in the United States.

Difficulty Level: Medium

Subject Heading: Cost of Going Public

L.O. 11.4

29. On average and across countries, underpricing securities issues represents a significant cost to firms that issue securities.

Difficulty Level: Medium

Subject Heading: Cost of Going Public

L.O. 11.4

30. Underpricing represents the difference between the aftermarket price and the offering price.

Difficulty Level: Medium

Subject Heading: Cost of Going Public

L.O. 11.4

31. Underpricing represents the difference between the aftermarket price and the initial offering price.

Difficulty Level: Easy

Subject Heading: Cost of Going Public

L.O. 11.4

32. The flotation costs, relative to the amount raised, are usually lower for a firm commitment offering than a best-eff ort offering.

Difficulty Level: Medium

Subject Heading: Cost of Going Public

L.O. 11.4

33. An important function of the Securities and Exchange Commission is to pass judgment on the investment merit of a security.

Difficulty Level: Medium

Subject Heading: Market Regulation

L.O. 11.5

34. Federal regulation of investment banking is administered primarily under the provisions of the Investment Banking Monitoring and Control Act of 1999.

Difficulty Level: Easy

Subject Heading: Investment Banking Regulation

L.O. 11.5

35. A dealer is a person who assists in the trading process by buying or selling securities in the market for an investor.

Difficulty Level: Easy

Subject Heading: Investment Banking Regulation

L.O. 11.5

36. The Glass-Steagall Act of 1933 ended the ability of commercial banks to act as underwriters of newly issued securities.

Difficulty Level: Medium

Subject Heading: Investment Banking Regulation

L.O. 11.5

37. All securities must be listed before they may be traded on the New York Stock Exchange.

Difficulty Level: Medium

Subject Heading: Investment Banking Regulation

L.O. 11.5

38. A broker satisfies the investor’s trades by buying and selling securities from his or her own inventory.

Difficulty Level: Easy

Subject Heading: Investment Banking Regulation

L.O. 11.5

39. A dealer is one who assists the trading process by buying or selling securities in the market for an investor.

Difficulty Level: Easy

Subject Heading: Investment Banking Regulation

L.O. 11.5

40. The secondary markets provide pricing information and liquidity to investors.

Difficulty Level: Easy

Subject Heading: Trading Securities—Secondary Securities Markets

L.O. 11.6

41. The secondary markets provides a means to evaluate a firm’s management.

Difficulty Level: Easy

Subject Heading: Trading Securities—Secondary Securities Markets

L.O. 11.6

42. Floor brokers act as agents to execute customers’ orders for securities purchases and sales.

Difficulty Level: Medium

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

43. Specialists are dealers who have the responsibility of making a market in an assigned security.

Difficulty Level: Medium

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

44. If there were no secondary markets for trading between investors, there would be no primary market for the initial sale of securities.

Difficulty Level: Medium

Subject Heading: Trading Securities—Secondary Securities Markets

L.O. 11.6

45. Organized securities exchanges include the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

Difficulty Level: Easy

Subject Heading: Organized Security Exchanges

L.O. 11.6

46. The American Stock Exchange is also known as Amex.

Difficulty Level: Easy

Subject Heading: Organized Security Exchanges

L.O. 11.6

47. A commission broker and an independent broker are the same thing.

Difficulty Level: Medium

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

48. A house broker handle the commission brokers’ overflow.

Difficulty Level: Easy

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

49. DMMs are assigned dealers who have the responsibility of making a market in an assigned security.

Difficulty Level: Medium

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

50. SLPs are assigned dealers who have the responsibility of making a market in an assigned security.

Difficulty Level: Medium

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

51. The term “Big Board” is another name for the NASDAQ market.

Difficulty Level: Easy

Subject Heading: Organized Security Exchanges

L.O. 11.6

52. A limit order is an order to sell stock at the market price when the price of the stock falls to a specified level.

Difficulty Level: Medium

Subject Heading: Limit Order

L.O. 11.7

53. The maintenance margin is the minimum margin to which an investment may fall before a margin call is placed.

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

54. A market order is an order for immediate purchase or sale at the best possible price.

Difficulty Level: Easy

Subject Heading: Market Order

L.O. 11.7

55. An odd lot is a trade involving 100 shares or multiples of 100 shares.

Difficulty Level: Easy

Subject Heading: Record Keeping

L.O. 11.7

56. Ask – Bid = Spread.

Difficulty Level: Easy

Subject Heading: Security Transactions

L.O. 11.7

57. The bid is always higher than the ask.

Difficulty Level: Hard

Subject Heading: Security Transactions

L.O. 11.7

58. A buy-stop order is an order to sell stock at the market price when the price of the stock falls to a specified level.

Difficulty Level: Hard

Subject Heading: Stop-Loss Order

L.O. 11.7

59. A short sale is the sale of securities that the seller does not own.

Difficulty Level: Easy

Subject Heading: Short Sale

L.O. 11.7

60. Selling more shares than you own is illegal.

Difficulty Level: Medium

Subject Heading: Short Sale

L.O. 11.7

61. A brokerage name is when an investor’s stock certificates are kept at the brokerage firm rather than taking personal possession of them.

Difficulty Level: Medium

Subject Heading: Short Sale

L.O. 11.7

62. The margin is the price of purchasing one more share of stock.

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

63. The margin is the profit made from selling a share of stock.

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

64. Buying on margin is when investors borrow money and invest it along with their own funds in securities.

Difficulty Level: Easy

Subject Heading: Buying on Margin

L.O. 11.7

65. Investors can purchase stocks with no money down.

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

66. Margin trading is safe.

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

67. During a margin call, the investor is required to invest addition cash to increase the position’s equity..

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

68. Trades can be for a round lot of 1,000 shares or an odd lot, a trade of fewer than 1,000 shares.

Difficulty Level: Hard

Subject Heading: Record Keeping

L.O. 11.7

69. The fourth market is a market for large blocks of listed stocks that operate outside the confines of the organized exchanges.

Difficulty Level: Medium

Subject Heading: Third and Fourth Security Markets

L.O. 11.8

70. Over the counter markets are organized exchanges for trading securities such as the New York Stock Exchange.

Difficulty Level: Easy

Subject Heading: Over-The-Counter Market

L.O. 11.8

71. Commissions on stock trades are set by the stock exchanges.

Difficulty Level: Medium

Subject Heading: A Word on Commissions

L.O. 11.9

72. Stock commissions vary from brokerage firm to brokerage fi rm.

Difficulty Level: Easy

Subject Heading: A Word on Commissions

L.O. 11.9

73. A good market will have four characteristics: liquidity, quick and accurate trade execution, reasonable listing requirements, and safety.

Difficulty Level: Medium

Subject Heading: What Makes a Good Market?

L.O. 11.9

74. A market is liquid if trades are executed quickly at a price close to fair market value.

Difficulty Level: Easy

Subject Heading: What Makes a Good Market?

L.O. 11.9

75. Reasonable listing requirements allow investors to know the quality of the listing broker.

Difficulty Level: Medium

Subject Heading: What Makes a Good Market?

L.O. 11.9

76. In most years, about 5 to 10 stocks are replaced in the S&P 500 index.

Difficulty Level: Easy

Subject Heading: Indexes

L.O. 11.10

77. American depository receipts are receipts which represent foreign shares to U.S. investors.

Difficulty Level: Easy

Subject Heading: Foreign Securities

L.O. 11.10

78. A global depository receipt is traded on the American Stock Exchange.

Difficulty Level: Easy

Subject Heading: Foreign Securities

L.O. 11.10

79. The Dow-Jones Industrial Average is made up of 30 large blue-chip stocks.

Difficulty Level: Easy

Subject Heading: Indexes

L.O. 11.10

80. ADRs are created and traded in dollars on U.S. exchanges. They represent a given number of shares of a foreign firm’s stock.

Difficulty Level: Easy

Subject Heading: Foreign Securities

L.O. 11.10

81. Insider trading regulation is provided for under the Securities Exchange Act of 1934.

Difficulty Level: Easy

Subject Heading: Inside Information and Other Ethical Issues

L.O. 11.11

82. The SEC’s definition of “Insiders” is limited to corporate personnel.

Difficulty Level: Easy

Subject Heading: Inside Information and Other Ethical Issues

L.O. 11.11

83. Churning happens when a broker constantly buys and sells securities from a client’s portfolio in an effort to generate commissions.

Difficulty Level: Easy

Subject Heading: Ethics and Job Opportunities in Investments

L.O. 11.11

MULTIPLE-CHOICE QUESTIONS

84. Newly created securities are sold in the:

a. primary market

b. secondary market

c. third market

d. fourth market

Difficulty Level: Easy

Subject Heading: Issuing Securities: Primary Securities Markets

L.O. 11.1

85. Existing securities are sold in the:

a. primary market

b. secondary market

c. third market

d. fourth market

Difficulty Level: Easy

Subject Heading: Issuing Securities: Primary Securities Markets

L.O. 11.1

86. The document which details the issuer’s finances and must be provided to each buyer of the security is called the:

a. indenture

b. prospectus

c. tombstone

d. all the above

Difficulty Level: Easy

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

87. ___________________ is a highly regulated document which details the issuers operations and finances and must be provided to each buyer of a newly issued security.

a. A prospectus

b. An underwriting agreement

c. A best efforts agreement

d. none of the above

Difficulty Level: Easy

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

88. An agreement whereby an investment banker tries to sell securities of an issuing corporation, but assumes no risk if the flotation is unsuccessful is called a:

a. due diligence agreement

b. best-effort agreement

c. firm commitment price agreement

d. shelf registration agreement

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

89. The syndicate dissolves:

a. when members elect to do so

b. 30 days after securities issue

c. when the lead investment banker decides

d. the syndicate never dissolves

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

90. ___________________ is an agreement by the investment banker to sell securities of the issuing corporation whereby the investment banker assumes no risk for the possible failure of the flotation.

a. A prospectus

b. An underwriting agreement

c. A best-effort agreement

d. A shelf registration

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

91. Which of the following is not a reason to sell securities in a private placement?

a. to keep current shareholders from suspecting “sweetheart deals”

b. to forestall a hostile takeover

c. to fulfill a need for an emergency infusion of equity

d. to reduce dividend payouts to shareholders

Difficulty Level: Hard

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

92. Which one of the following is not a primary market function of investment bankers?

a. originating

b. underwriting

c. selling

d. making loans

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

93. The lead investment banker:

a. is elected by members of the syndicate

b. is appointed by the SEC

c. originates and handles a flotation

d. cannot participate in future offerings by the issuing company

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

94. A syndicate is:

a. a firm that assists in specialist transactions

b. an organization of market makers

c. the largest group of members on the NYSE

d. a group of investment banks all working together to place an offering

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

95. Existing firms that are already public and wish to raise additional funds may:

a. sell additional securities by using the underwriting process

b. not sell securities to a private party

c. require existing shareholders to buy additional shares

d. have the SEC buy up to 10% of the new shares

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

96. Which one of the following is not a cost to the issuing firm of going public with an initial stock offering?

a. direct costs (legal fees, accounting fees, etc.)

b. underwriter’s spread

c. overpricing

d. underpricing

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

97. Market stabilization is:

a. disallowed under the Securities Act of 1934

b. permitted for underwriters if the market price falls below the offering price

c. prohibited by the Securities Exchange Commission

d. required by the Securities Act of 1948

Difficulty Level: Hard

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

98. The process whereby an underwriting syndicate steps in to buy back securities to prevent a larger price drop than that which has already occurred is called:

a. market stabilization

b. price normalization

c. dollar cost averaging

d. best efforts

Difficulty Level: Hard

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

99. Existing securities are traded:

a. in the primary markets

b. in the secondary markets

c. only on organized exchanges

d. only over-the-counter

Difficulty Level: Easy

Subject Heading: Issuing Securities: Primary Securities Markets

L.O. 11.1

100. The aftermarket is:

a. the over-the-counter market

b. the foreign exchange market

c. the period after a new issue is initially sold to the public

d. the time required for a security to sell

Difficulty Level: Medium

Subject Heading: Primary Market Functions of Investment Bankers

L.O. 11.1

101. Which of the following securities issues do not require competitive bidding?

a. state government bond issues

b. public utility security issues

c. Federal government bond issues

d. corporate bond issues

Difficulty Level: Medium

Subject Heading: Competitive Bidding

L.O. 11.3

102. Which of the following is not an advantage of shelf registration?

a. saving time on issuing securities

b. allows issuer to determine which investment bank offers the best service

c. eliminates filing fees

d. allows issuing new securities multiple times

Difficulty Level: Medium

Subject Heading: Shelf Registration

L.O. 11.3

112. Under a ______________, if any additional shares of common stock, or any security that may be converted into common stock, are to be issued, the securities must be offered for sale first to the existing common stockholders.

a. red herring

b. rights offering

c. seasoned offering

d. shelf registration

Difficulty Level: Medium

Subject Heading: Rights Offerings

L.O. 11.3

113. The purpose of pre-emptive rights is to allow shareholders to:

a. buy enough of a new securities offering to maintain their present proportional share of ownership

b. buy an unlimited amount of the new issue at a discount

c. pre-empt other stockholders from selling securities in a company

d. require the issuing company to also sell them bonds

Difficulty Level: Medium

Subject Heading: Rights Offerings

L.O. 11.3

106. The flotation costs of an IPO depend on

a. the size of the offering

b. current interest rates

c. the limits set by the SEC

d. the Federal Reserve discount rate

Difficulty Level: Hard

Subject Heading: Cost of Going Public

L.O. 11.4

107. ___________________ are comprised of direct costs, the spread, and underpricing.

a. Commission costs

b. Flotation costs

c. Brokerage commissions

d. Registration costs

Difficulty Level: Easy

Subject Heading: Cost of Going Public

L.O. 11.4

103. Investment banks engage in which of the following activities?

a. trading securities for investors in the secondary market

b. selling insurance

c. mergers and acquisitions

d. setting SEC fees

Difficulty Level: Medium

Subject Heading: Investment Banking Firms: Other Functions, Innovations, Regulations

L.O. 11.5

110. The regulation of new security sales by individual states is referred to as:

a. the registration process

b. a truth-in-securities requirement

c. the rating of security quality

d. Blue-sky laws

Difficulty Level: Medium

Subject Heading: Investment Banking Regulation

L.O. 11.5

111. Commercial banks were for many years prohibited from full-fledged investment banking by the:

a. Glass-Steagall Act

b. Garn-St. Germain Depository Institutions Act

c. Securities Act of 1933

d. National Association of Securities Dealers

Difficulty Level: Medium

Subject Heading: Investment Banking Regulation

L.O. 11.5

114. Federal regulation of investment banking is administered primarily under the provisions of the ___________________.

a. Investment Banking Act of 1977

b. The Garn-St. Germain Act of 1997

c. The Securities Act of 1933

d. FINRA

Difficulty Level: Medium

Subject Heading: Investment Banking Regulation

L.O. 11.5

128. Which of the following is not a basic type of member of the New York Stock Exchange?

a. independent brokers

b. floor brokers

c. registered traders

d. specialists

e. security regulators

Difficulty Level: Medium

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

159. Which of the following activities is not the responsibility of registered traders?

a. buy and sell stocks for their own accounts

b. pay no commissions

c. match up buy and sell orders

d. place orders for customers on exchanges

Difficulty Level: Hard

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

160. Floor brokers:

a. act as agents to execute customers’ orders for securities purchases and sales

b. assist specialists in executing orders

c. trade for their own accounts

d. are employed by the exchanges

Difficulty Level: Hard

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

161. A person who facilitates market transactions by selling (buying) when other investors wish to buy (sell) is called a:

a. registered trader

b. floor broker

c. market maker

d. commission broker

Difficulty Level: Medium

Subject Heading: market makers,

L.O. 11.6

163. The brokers who handle the house broker’s overflow are called:

a. specialists

b. registered traders

c. independent brokers

d. all the above

Difficulty Level: Medium

Subject Heading: Structure of The New York Stock Exchange

L.O. 11.6

109. The Federal Reserve System and the New York Stock Exchange regulations currently require the short seller to have an initial margin of at least _______ of the price of the stock:

a. 10%

b. 25%

c. 30%

d. 50%

Difficulty Level: Medium

Subject Heading: Short Sale

L.O. 11.7

133. Sales of securities that the seller does not own is called a:

a. stop-loss order

b. short sale

c. limit order

d. maintenance margin

Difficulty Level: Easy

Subject Heading: Short Sale

L.O. 11.7

134. The maximum buying price or the minimum selling price specified by the investor is called a:

a. stop-loss order

b. market order

c. short sale

d. limit order

Difficulty Level: Medium

Subject Heading: Limit Order

L.O. 11.7

135. ___________________ is the maximum purchase price or minimum selling price specified by an investor.

a. A short sale

b. A stop-loss order

c. A limit order

d. Buying on margin

Difficulty Level: Easy

Subject Heading: Limit Order

L.O. 11.7

136. A limit order, if not executed, will expire at the end of

a. the day.

b. the week.

c. the month.

d. all of the above are possibilities as the trader will decide the expiration date.

Difficulty Level: Easy

Subject Heading: Limit Order

L.O. 11.7

137. An order to sell stock at the market price when the price of the stock falls to a specified level is called a:

a. limit order

b. market order

c. short sale

d. stop-loss order

Difficulty Level: Easy

Subject Heading: Stop-Loss Order

L.O. 11.7

138. If the value of the securities that you borrowed money from your broker to purchase falls, you may receive a:

a. maintenance margin call

b. margin call

c. limit order call

d. specialist call

Difficulty Level: Easy

Subject Heading: Buying on Margin

L.O. 11.7

139. The price for which the owner is willing to sell the security is called the:

a. bid price

b. spread

c. ask price

d. limit price

Difficulty Level: Easy

Subject Heading: Security Transactions

L.O. 11.7

140. The advantage of buying on margin is:

a. larger potential profit

b. using more of your own money

c. deductible loss

d. non-taxable capital gain

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

141. If an investor feels the price of a stock will decline in the future, which trade should the investor undertake?

a. market order

b. buy on margin

c. limit order

d. short sale

Difficulty Level: Medium

Subject Heading: Short Sale

L.O. 11.7

142. A trade in the multiple of 100 shares is called a (n):

a. round lot

b. odd lot

c. block trade

d. none of the above

Difficulty Level: Medium

Subject Heading: Record Keeping

L.O. 11.7

143. An order for immediate purchase or sale at the best possible price is called a:

a. market order

b. limit order

c. stop loss order

d. margin order

Difficulty Level: Easy

Subject Heading: Market Order

L.O. 11.7

144. A stop-loss order:

a. sets a price a broker may not violate

b. stops losses for one trading day

c. is executed at the market once the stop-price loss or a price below it is reached

d. stops losses for 30 days

Difficulty Level: Easy

Subject Heading: Stop-Loss Order

L.O. 11.7

145. If you buy stock certificates and keep them at the brokerage firm rather than taking personal possession of them, your stock is in:

a. street name

b. a short sale

c. a limit order

d. listed name

Difficulty Level: Easy

Subject Heading: Short Sale

L.O. 11.7

146. If the initial margin requirement is 50% and you have $5,000 in your brokerage account, you may purchase an additional __________ worth of securities on margin.

a. $2,000

b. $2,500

c. $10,000

d. $5,000

Difficulty Level: Medium

Subject Heading: Buying on Margin

L.O. 11.7

147. ___________________ is when an investor borrows money and invests t he borrowed funds along with his or her own funds in securities.

a. A short sale

b. A stop-loss order

c. A limit order

d. Buying on margin

Difficulty Level: Easy

Subject Heading: Buying on Margin

L.O. 11.7

148. ___________________ is an order to sell stock at the market price when the price of the stock falls to a specified level.

a. A short sale

b. A stop-loss order

c. A limit order

d. Buying on margin

Difficulty Level: Easy

Subject Heading: Stop-Loss Order

L.O. 11.7

149. __________________ is a technique for trading stocks as a group rather than individually, defined as a minimum of at least 15 different stocks with a maximum value of $1 million.

a. A short sale

b. A stop-loss order

c. Margin trading

d. Program trading

Difficulty Level: Medium

Subject Heading: Program Trading

L.O. 11.7

150. The seller of an option contract is called a (n) ____________ and the price paid for the option itself is the called the ___________.

a. option broker, option price

b. sales agent, option premium

c. option writer, option premium

d. option writer, option price

Difficulty Level: Hard

Subject Heading: Derivatives

L.O. 11.7

167. Index arbitrage refers to:

a. selling securities you don’t own

b. buying and selling stocks with offsetting trades to lock in profits from price differences between different markets

c. buying IPO’s

d. borrowing to purchase securities

Difficulty Level: Medium

Subject Heading: Program Trading

L.O. 11.7

155. Over-the-counter (OTC) trades take place:

a. on the floor of the New York Stock Exchange

b. on the floor of the American Stock Exchange

c. on the floor of the NASDAQ Stock Exchange

d. between brokerage firms

Difficulty Level: Medium

Subject Heading: Over-The-Counter Market

L.O. 11.8

156. Trades between large institutional investors that take place without the benefits of brokers or dealers occur in the:

a. primary market

b. secondary market

c. third market

d. fourth market

Difficulty Level: Easy

Subject Heading: Third and Fourth Security Markets

L.O. 11.8

157. A market whereby large institutional investors arrange purchases and sales of securities among themselves without the benefit of a broker or dealer is referred to as the:

a. primary market

b. secondary market

c. third market

d. fourth market

Difficulty Level: Easy

Subject Heading: Third and Fourth Security Markets

L.O. 11.8

158. The market for large blocks of listed stocks that operates outside the confines of the organized exchanges is called the:

a. primary market

b. secondary market

c. third market

d. fourth market

Difficulty Level: Easy

Subject Heading: Third and Fourth Security Markets

L.O. 11.8

123. A market has ________ if it can absorb large orders without disrupting prices; it has ___________ if it has many trades.

a. depth, breadth

b. breadth, depth

c. liquidity, quick execution

d. quick execution, liquidity

Difficulty Level: Hard

Subject: What Makes a Good Market?

L.O. 11.9

124. Which of the following is not a characteristic of a good market?

a. central location

b. quick and accurate trade execution

c. low cost of trading

d. all of the above are characteristics of a good market

Difficulty Level: Easy

Subject: What Makes a Good Market?

L.O. 11.9

125. A market is liquid if

a. trades are executed quickly.

b. market prices don’t fluctuate sharply on successive trades

c. both a) and b) are correct.

d. if fees are low.

Difficulty Level: Medium

Subject: What Makes a Good Market?

L.O. 11.9

126. A firm may decide to list its shares on another exchange besides the NYSE because

a. costs are lower.

b. listing requirements are easier to satisfy.

c. investors can get faster trade execution in another exchange.

d. all of the above.

Difficulty Level: Easy

Subject: What Makes a Good Market?

L.O. 11.9

127. If a market has “price pressure” this is a sign of

a. good liquidity in the market.

b. low liquidity in the market.

c. high listing fees.

d. high brokerage commissions

Difficulty Level: Medium

Subject: What Makes a Good Market?

L.O. 11.9

162. Brokerage firms that not only assist in trades but also have research staffs that analyze firms and make recommendations about which stocks to buy or sell are called:

a. discount brokerage firms

b. full service brokerage firms

c. investment banking firms

d. stock advisory brokers

Difficulty Level: Medium

Subject Heading: A Word on Commissions

L.O. 11.9

164. Which of the following statements is most correct?

a. Because global depository receipts are listed on the London Stock Exchange, U.S. investors cannot buy GDRs through a broker in the United States.

b. Foreign stocks can be traded in the United States if they are registered with the Securities and Exchange Commission.

c. The fourth market is a market for large blocks of listed stocks that operates outside the confines of the organized exchanges.

d. Foreign stocks cannot be traded in the U.S. by U.S. citizens.

Difficulty Level: Hard

Subject Heading: Foreign Securities

L.O. 11.10

165. Which of the following statements is most correct?

a. The Dow Jones Industrial Average is market-value weighted.

b. The Dow Jones Industrial Average is a good benchmark by which to measure the performance of investment managers.

c. The 500 stocks comprising the S&P 500 are the largest 500 firms.

d. Indexes exist for the bond market.

Difficulty Level: Hard

Subject Heading: Indexes

L.O. 11.10

166. Which of the following statements is false?

a. The Dow Jones Industrial Average is not a price-weighted index.

b. An American depository receipt is a receipt which represents foreign shares to U.S. investors.

c. Index arbitrage occurs when traders buy and sell stocks with offsetting trades in futures and options in order to lock in profits from price differences between these different markets.

d. New shares of stock are sold in the Primary Market.

Difficulty Level: Hard

Subject Heading: Multiple Topics

L.O. 11.10

168. A receipt that represents foreign shares owned and traded by U.S. investors is called a(n):

a. global depository receipt

b. American depository receipt

c. representative depository receipt

d. Exchange traded fund

Difficulty Level: Medium

Subject Heading: Foreign Securities

L.O. 11.10

108. Insider trading laws regulate the behavior of

a. corporate officers only

b. investment bankers only

c. anyone with nonpublic information about a firm

d. none of the above.

Difficulty Level: Medium

Subject Heading: Inside Information and Other Ethical Issues

L.O. 11.11

169. _____________ is when a broker constantly buys and sells securities from a client’s portfolio in an effort to generate commissions. Rather than making decisions that are in the client’s best interest, frequent commission-generating trades may be made by brokers with selfish motives.

a. Blending

b. Flipping

c. Swapping

d. Churning

Difficulty Level: Medium

Subject Heading: Ethics and Job Opportunities in Investments

L.O. 11.11

129. Which exchange remains the main market for exchange traded options?

a. New York Exchange Board

b. American Options Exchange

c. Chicago Board Options Exchange

d. Philadelphia Board of Options

Difficulty Level: Medium

Subject Heading: Options

L.O. 11.12

130. While the Chicago Board Options Exchange remains the main market for exchange traded options, the ______________ exchange also deals in option contracts.

a. Miami

b. New York

c. San Francisco

d. Phoenix

Difficulty Level: Medium

Subject Heading: Options

L.O. 11.12

131. The ___________________ Exchange (ICE) serves the global markets for agricultural, credit, currency, emissions, energy and equity index markets.

a. Intercontinental

b. Indianapolis

c. Istanbul

d. International

Difficulty Level: Medium

Subject Heading: Futures Contracts

L.O. 11.12

132. The prudent use of derivatives to reduce investment risk, is not similar to the concept of ________________.

a. gambling

b. risk aversion

c. insurance

d. hedging

Difficulty Level: Easy

Subject Heading: Why Do Derivatives Exist?

L.O. 11.12

151. The seller of an option contract is called a (n) ____________ and the purchaser of the option itself is the called the ___________.

a. option broker, option price

b. sales agent, call option

c. sales agent, option premium

d. option writer, option buyer

e. none of the above

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

152. Exchange-traded options are liquid because they are standardized in terms of:

a. expiration dates

b. exercise prices

c. documentation

d. quality of the underlying asset

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

153. Purchasers and sellers of futures are generally required to deposit an initial margin in the range of ___________ with the exchange’s clearinghouse to reduce credit risk.

a. 3 to 6 percent

b. 3 to 6 dollars

c. 10 to 15 percent

d. 10 to 15 dollars

Difficulty Level: Medium

Subject Heading: Futures Contracts

L.O. 11.12

154. Purchasers and sellers of futures are generally required to deposit an initial margin in the range of ___________ with the exchange’s clearinghouse to reduce credit risk.

a. 25 to 50 dollars

b. 15 to 20 dollars

c. generally more than 10%

d. generally less than 10%

Difficulty Level: Medium

Subject Heading: Futures Contracts

L.O. 11.12

170. In reality, an option’s value will equal its intrinsic value only at expiration. At all other times, the option’s premium or price will exceed its intrinsic value. A major reason for this is/are _____________.

a. marketability

b. future expectations

c. trade restrictions

d. brand

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

171. The ________________________, the greater the chance of the option becoming _____________________.

a. shorter the time to expiration, in-the-money

b. longer the time to expiration, in-the-money

c. less the volatility, in-the-money

d. longer the time to expiration, out of the money

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

104. If a Microsoft January 20 call option with a strike price of $20 were about to expire and the market price of the underlying Microsoft stock was $25.62, the price of the call option would have to be __________ to eliminate arbitrage opportunities.

a. $0.62

b. $5.62

c. $15.62

d. $25.62

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

105. If a General Electric January 20 call option with a strike price of $45 were about to expire and the market price of the underlying GE stock was $51.17, the price of the call option would have to be __________ to eliminate arbitrage opportunities.

a. $11.17

b. $33.83

c. $45.00

d. $51.17

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

115. If a Microsoft January 20 call option with a strike price of $20 was selling for $2.00 and the market price of the underlying Microsoft stock was $25.62, the call option would be _______________.

a. in-the-money

b. out-of-the-money

c. fairly priced

d. flat priced

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

116. If a Microsoft January 20 call option had a strike price of $20 and the market price of the underlying Microsoft stock was $25.62, the call option would be _______________.

a. in-the-money

b. out-of-the-money

c. fairly priced

d. called by the Microsoft

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

117. If a Microsoft January 20 put option had a strike price of $20 and the market price of the underlying Microsoft stock was $15.00, the put option would be _______________.

a. in-the-money

b. out-of-the-money

c. fairly priced

d. flat priced

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

118. If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00 and the market price of the underlying Microsoft stock was $10.00, the price of the put option would be _______________.

a. in-the-money

b. out-of-the-money

c. fairly priced

d. frozen

Difficulty Level: Medium

Subject Heading: Options

L.O. 11.12

119. If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00 and the market price of the underlying Microsoft stock was $18.00, the price of the put option would be _______________.

a. in-the-money

b. out-of-the-money

c. fairly priced

d. flat priced

Difficulty Level: Medium

Subject Heading: Options

L.O. 11.12

120. If a Microsoft January 20 put option with a strike price of $20 were about to expire and the market price of the underlying Microsoft stock was $15.00, the price of the put option would have to be __________ to eliminate arbitrage opportunities.

a. $1.00

b. $2.00

c. $4.00

d. $5.00

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

121. If a General Electric January 20 put option with a strike price of $50 were about to expire and the market price of the underlying GE stock was $55.00, the price of the put option would have to be __________.

a. $0.00

b. $10.00

c. $15.00

d. $25.00

Difficulty Level: Hard

Subject Heading: Options

L.O. 11.12

122. The prudent use of derivatives to hedge, or reduce risk, is similar to the concept of ________________.

a. gambling

b. juggling

c. hiding

d. insurance

Difficulty Level: Easy

Subject Heading: Why Do Derivatives Exist?

L.O. 11.12