Question 1

A short seller

Accepted Answer

A) anticipates that the price of the stock sold short will increase. 
B) earns the difference between what they initially paid for the stock versus what they later sell the stock for. 
C) makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made. 
D) is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. 
E) none of the above 
A) anticipates that the price of the stock sold short will increase. 
B) earns the difference between what they initially paid for the stock versus what they later sell the stock for. 
C) makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made. 
D) is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. 
E) none of the above C

Question 2

To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap evidence.

Accepted Answer

A) dark pool trading 
B) naked short selling 
C) insider trading 
D) accounting fraud 
A) dark pool trading 
B) naked short selling 
C) insider trading 
D) accounting fraud C

Question 3

The short-interest ratio is the shares sold short divided by the

Accepted Answer

A) average shares purchased over a recent period. 
B) average daily trading volume over a recent period. 
C) interest rate paid on the short sale. 
D) average daily trading volume on other stocks from the same industry. 
A) average shares purchased over a recent period. 
B) average daily trading volume over a recent period. 
C) interest rate paid on the short sale. 
D) average daily trading volume on other stocks from the same industry. B

Question 4

A short-interest ratio of 20 or more indicates that many investors

Accepted Answer

A) believe that the stock price is currently overvalued. 
B) believe that the stock price is currently undervalued. 
C) are selling the stock short. 
D) both A and C 
A) believe that the stock price is currently overvalued. 
B) believe that the stock price is currently undervalued. 
C) are selling the stock short. 
D) both A and C

Question 5

Marziano Co. stock is quoted by a broker as bid $21.20, ask $21.40. The bid-ask spread is ____ percent.

Accepted Answer

A) 0.94 
B) 0.93 
C) 0.20 
D) none of the above 
A) 0.94 
B) 0.93 
C) 0.20 
D) none of the above

Question 6

The Division of ____ of the SEC assesses possible violations of regulations imposed by the SEC, and can take action against individuals or firms.

Accepted Answer

A) Corporate Finance 
B) Enforcement 
C) Administration 
D) Market Regulation 
A) Corporate Finance 
B) Enforcement 
C) Administration 
D) Market Regulation

Question 7

An advantage of trading in dark pools is that:

Accepted Answer

A) the bid or ask prices offered can be more favorable than those available in the public stock exchanges. 
B) an investor can accumulate a large number of shares of a particular stock without putting excessive upward pressure on the stock price. 
C) they are convenient for high-frequency traders using computer algorithms to catch price discrepancies. 
D) all of the above 
A) the bid or ask prices offered can be more favorable than those available in the public stock exchanges. 
B) an investor can accumulate a large number of shares of a particular stock without putting excessive upward pressure on the stock price. 
C) they are convenient for high-frequency traders using computer algorithms to catch price discrepancies. 
D) all of the above

Question 8

When the price of a company's stock increases or decreases significantly in advance of a public announcement of an event affecting the company, there are suspicions that __________ may have occurred.

Accepted Answer

A) bid rigging 
B) default inversion 
C) insider trading 
D) an increase in margin requirements 
A) bid rigging 
B) default inversion 
C) insider trading 
D) an increase in margin requirements

Question 9

Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?

Accepted Answer

A) It required firms to disclose relevant information broadly to investors at the same time. 
B) It restricts firms from providing analysts with information that they could use before the market is aware of the information. 
C) It requires firms to announce a change in expected earnings to all investors and other interested parties at the same time. 
D) It prohibits firms from communicating with analysts after a news announcement is made to all investors. 
E) All of the above are correct with respect to Regulation FD. 
A) It required firms to disclose relevant information broadly to investors at the same time. 
B) It restricts firms from providing analysts with information that they could use before the market is aware of the information. 
C) It requires firms to announce a change in expected earnings to all investors and other interested parties at the same time. 
D) It prohibits firms from communicating with analysts after a news announcement is made to all investors. 
E) All of the above are correct with respect to Regulation FD.

Question 10

A short seller

Accepted Answer

A) anticipates that the price of the stock sold short will increase. 
B) earns the difference between what he initially paid for the stock versus what he later sell the stock for. 
C) makes a profit equal to the difference between the original selling price and the price paid for the stock, after subtracting any dividend payments made. 
D) is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. 
E) none of the above 
A) anticipates that the price of the stock sold short will increase. 
B) earns the difference between what he initially paid for the stock versus what he later sell the stock for. 
C) makes a profit equal to the difference between the original selling price and the price paid for the stock, after subtracting any dividend payments made. 
D) is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. 
E) none of the above

Question 11

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a

Accepted Answer

A) stop-loss order with a specified selling price of $55 per share. 
B) stop-buy order with a specified purchase price of $55 per share. 
C) stop-loss order with a specified selling price of $45 per share. 
D) stop-buy order with a specified purchase price of $45 per share. 
A) stop-loss order with a specified selling price of $55 per share. 
B) stop-buy order with a specified purchase price of $55 per share. 
C) stop-loss order with a specified selling price of $45 per share. 
D) stop-buy order with a specified purchase price of $45 per share.

Question 12

Lisa would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. She can either put up the entire amount and purchase the stock, or borrow $35 from her brokerage firm at an annual interest rate of 12 percent and put up the remainder. She thinks she can sell the stock for $100 after one year. If she borrows from her brokerage firm, her estimated return on the stock would be ____ percent.

Accepted Answer

A) 42.86 
B) 85.71 
C) 73.71 
D) 30.00 
A) 42.86 
B) 85.71 
C) 73.71 
D) 30.00

Question 13

Which of the following statements is incorrect with respect to the structure of the SEC?

Accepted Answer

A) It is composed of seven commissioners appointed by the president of the United States. 
B) The president selects one commissioner to chair the commission. 
C) Each commissioner serves a five-year term. 
D) Commissioners' terms are staggered. 
E) Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the regulations as needed. 
A) It is composed of seven commissioners appointed by the president of the United States. 
B) The president selects one commissioner to chair the commission. 
C) Each commissioner serves a five-year term. 
D) Commissioners' terms are staggered. 
E) Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the regulations as needed.

Question 14

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.

Accepted Answer

A) True 
 B)False

Question 15

Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent.

Accepted Answer

A) 42.86 
B) 85.71 
C) 73.71 
D) 30.00 
A) 42.86 
B) 85.71 
C) 73.71 
D) 30.00

Question 16

____ offer advice to customers on stocks to buy or sell.

Accepted Answer

A) Full-service brokers 
B) Discount brokers 
C) Floor brokers 
D) Specialists 
E) Market-makers 
A) Full-service brokers 
B) Discount brokers 
C) Floor brokers 
D) Specialists 
E) Market-makers

Question 17

____ facilitate transactions on a stock exchange by executing stock transactions for their clients.

Accepted Answer

A) Board members 
B) Capstone members 
C) Floor brokers 
D) None of the above 
A) Board members 
B) Capstone members 
C) Floor brokers 
D) None of the above

Question 18

You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been

Accepted Answer

A) positive. 
B) more negative than if you had covered the entire investment with cash. 
C) negative, but more favorable than if you had covered the entire investment with cash. 
D) zero. 
A) positive. 
B) more negative than if you had covered the entire investment with cash. 
C) negative, but more favorable than if you had covered the entire investment with cash. 
D) zero.

Question 19

A trading halt prevents a stock from experiencing a loss in response to news.

Accepted Answer

A) True 
 B)False

Question 20

In naked short selling, short-sellers sell a stock short that they presently own.

Accepted Answer

A) True 
 B)False

Exam 12: Market Microstructure and Strategies

A short seller

To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap evidence.

The short-interest ratio is the shares sold short divided by the

A short-interest ratio of 20 or more indicates that many investors

Marziano Co. stock is quoted by a broker as bid $21.20, ask $21.40. The bid-ask spread is ____ percent.

The Division of ____ of the SEC assesses possible violations of regulations imposed by the SEC, and can take action against individuals or firms.

An advantage of trading in dark pools is that:

When the price of a company's stock increases or decreases significantly in advance of a public announcement of an event affecting the company, there are suspicions that __________ may have occurred.

Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?

A short seller

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a

Which of the following statements is incorrect with respect to the structure of the SEC?

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.

____ offer advice to customers on stocks to buy or sell.

____ facilitate transactions on a stock exchange by executing stock transactions for their clients.

You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been

A trading halt prevents a stock from experiencing a loss in response to news.

In naked short selling, short-sellers sell a stock short that they presently own.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

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