Deck 3: How Securities are Traded

Question 1

Investment bankers

A)act as intermediaries between issuers of stocks and investors.
B)act as advisors to companies in helping them analyze their financial needs and find buyers for newly issued securities.
C)accept deposits from savers and lend them out to companies.
D)A and B.
E)A,B,and C.

Answer 1

D

Question 2

Assume you sell short 100 shares of common stock at $45 per share,with initial margin at 50%.What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period,and you did not remove any money from the account before making the offsetting transaction.

A)20.03%
B)25.67%
C)22.22%
D)77.46%
E)none of the above

Answer 2

C

Question 3

The secondary market consists of

A)transactions on the AMEX.
B)transactions in the OTC market.
C)transactions through the investment banker.
D)A and B.
E)A,B,and C.

Answer 3

D

Question 4

You purchased JNJ stock at $50 per share.The stock is currently selling at $65.Your gains may be protected by placing a __________.

A)stop-buy order.
B)limit-buy order.
C)market order.
D)limit-sell order.
E)none of the above.

Question 5

Firms raise capital by issuing stock

A)in the secondary market.
B)in the primary market.
C)to unwary investors.
D)only on days when the market is up.
E)C and D.

Question 6

A purchase of a new issue of stock takes place

A)in the secondary market.
B)in the primary market.
C)usually with the assistance of an investment banker.
D)A and B.
E)B and C.

Question 7

Which one of the following statements regarding orders is false?

A)A market order is simply an order to buy or sell a stock immediately at the prevailing market price.
B)A limit sell order is where investors specify prices at which they are willing to sell a security.
C)If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45.
D)A market order is an order to buy or sell a stock on a specific exchange (market).
E)None of the above.

Question 8

You sold short 300 shares of common stock at $55 per share.The initial margin is 60%.At what stock price would you receive a margin call if the maintenance margin is 35%?

A)$51.00
B)$65.18
C)$35.22
D)$40.36
E)none of the above

Question 9

Restrictions on trading involving insider information apply to the following except

A)corporate officers.
B)corporate directors.
C)major stockholders.
D)All of the above are subject to insider trading restrictions.
E)None of the above is subject to insider trading restrictions.

Question 10

You sold short 200 shares of common stock at $60 per share.The initial margin is 60%.Your initial investment was

A)$4,800.
B)$12,000.
C)$5,600.
D)$7,200.
E)none of the above.

Question 11

You purchased 100 shares of IBM common stock on margin at $70 per share.Assume the initial margin is 50% and the maintenance margin is 30%.Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

A)$21
B)$50
C)$49
D)$80
E)none of the above

Question 12

The cost of buying and selling a stock consists of __________.

A)broker's commissions
B)dealer's bid-asked spread
C)a price concession an investor may be forced to make
D)A and B.
E)A,B,and C.

Question 13

The following statements regarding the specialist are true:

A)Specialists maintain a book listing outstanding unexecuted limit orders.
B)Specialists earn income from commissions and spreads in stock prices.
C)Specialists stand ready to trade at quoted bid and ask prices.
D)Specialists cannot trade in their own accounts.
E)A,B,and C are all true.

Question 14

You sold JCP stock short at $80 per share.Your losses could be minimized by placing a __________.

A)limit-sell order
B)limit-buy order
C)stop-buy order
D)day-order
E)none of the above.

Question 15

Initial margin requirements are determined by

A)the Securities and Exchange Commission.
B)the Federal Reserve System.
C)the New York Stock Exchange.
D)B and C.
E)A and B.

Question 16

Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker.If the initial margin is 55%,how much did you borrow from the broker?

A)$6,000
B)$4,000
C)$7,700
D)$7,000
E)$6,300

Question 17

You purchased 100 shares of common stock on margin at $45 per share.Assume the initial margin is 50% and the stock pays no dividend.What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin.

A)0.33
B)0.55
C)0.43
D)0.23
E)0.25

Question 18

You purchased 300 shares of common stock on margin for $60 per share.The initial margin is 60% and the stock pays no dividend.What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.

A)25.00%
B)-33.33%
C)44.31%
D)-41.67%
E)-54.22%

Question 19

The trading of stock that was previously issued takes place

A)in the secondary market.
B)in the primary market.
C)usually with the assistance of an investment banker.
D)A and B.
E)B and C.

Question 20

In a "firm commitment"

A)the investment banker buys the stock from the company and resells the issue to the public.
B)the investment banker agrees to help the firm sell the stock at a favorable price.
C)the investment banker finds the best marketing arrangement for the investment banking firm.
D)B and C.
E)A and B.

Question 21

Which of the following orders instructs the broker to sell at or below a specified price?

A)Limit-sell order
B)Stop-loss
C)Limit-buy order
D)Stop-buy order
E)Market order

Question 22

Shares for short transactions

A)are usually borrowed from other brokers.
B)are typically shares held by the short seller's broker in street name.
C)are borrowed from commercial banks.
D)B and C.
E)none of the above.

Question 23

Which of the following orders instructs the broker to buy at or below a specified price?

A)Limit-loss order
B)Discretionary order
C)Limit-buy order
D)Stop-buy order
E)Market order

Question 24

When stocks are held in street name

A)the investor receives a stock certificate with the owner's street address.
B)the investor receives a stock certificate without the owner's street address.
C)the investor does not receive a stock certificate.
D)the broker holds the stock in the brokerage firms' name on behalf of the client.
E)C and D.

Question 25

Shelf registration

A)is a way of placing issues in the primary market.
B)allows firms to register securities for sale over a two-year period.
C)increases transaction costs to the issuing firm.
D)A and B.
E)A and C.

Question 26

Block transactions are transactions for more than _______ shares and they account for about _____ percent of all trading on the NYSE.

A)1,000; 5
B)500: 10
C)100,000; 50
D)10,000; 30
E)5,000; 23

Question 27

Assume you sold short 100 shares of common stock at $50 per share.The initial margin is 60%.What would be the maintenance margin if a margin call is made at a stock price of $60?

A)40%
B)33%
C)35%
D)25%
E)none of the above

Question 28

You want to purchase XON stock at $60 from your broker using as little of your own money as possible.If initial margin is 50% and you have $3000 to invest,how many shares can you buy?

A)100 shares
B)200 shares
C)50 shares
D)500 shares
E)25 shares

Question 29

A sale by IBM of new stock to the public would be a(n)

A)short sale.
B)seasoned equity offering.
C)private placement.
D)secondary market transaction.
E)initial public offering.

Question 30

The minimum market value required for an initial listing on the New York Stock Exchange is

A)$2,000,000
B)$2,500,000
C)$1,100,000
D)$60,000,000
E)100,000,000

Question 31

You want to buy 100 shares of Hotstock Inc.at the best possible price as quickly as possible.You would most likely place a

A)stop-loss order
B)stop-buy order
C)market order
D)limit-sell order
E)limit-buy order

Question 32

Which of the following orders instructs the broker to sell at or above a specified price?

A)Limit-buy order
B)Discretionary order
C)Limit-sell order
D)Stop-buy order
E)Market order

Question 33

The finalized registration statement for new securities approved by the SEC is called

A)a red herring
B)the preliminary statement
C)the prospectus
D)a best-efforts agreement
E)a firm commitment

Question 34

Specialists on stock exchanges perform the following functions

A)Act as dealers in their own accounts.
B)Analyze the securities in which they specialize.
C)Provide liquidity to the market.
D)A and B.
E)A and C.

Question 35

A program trade is

A)a trade of 10,000 (or more) shares of a stock.
B)a trade of many shares of one stock for one other stock.
C)a trade of analytic programs between financial analysts.
D)a coordinated purchase or sale of an entire portfolio of stocks.
E)not feasible with current technology but is expected to be popular in the near future.

Question 36

Which of the following orders instructs the broker to buy at the current market price?

A)Limit order
B)Discretionary order
C)Limit-loss order
D)Stop-buy order
E)Market order

Question 37

Which of the following orders is most useful to short sellers who want to limit their potential losses?

A)Limit order
B)Discretionary order
C)Limit-loss order
D)Stop-buy order
E)None of the above

Question 38

In 2005,the price of a seat on the NYSE reached a high of

A)$1,000,000
B)$4,000,000
C)$1,750,000
D)$2,225,000
E)$3,000,000

Question 39

Which of the following orders instructs the broker to buy at or above a specified price?

A)Limit-buy order
B)Discretionary order
C)Limit-sell order
D)Stop-buy order
E)Market order

Question 40

NASDAQ subscriber levels

A)permit those with the highest level,3,to "make a market" in the security.
B)permit those with a level 2 subscription to receive all bid and ask quotes,but not to enter their own quotes.
C)permit level 1 subscribers to receive general information about prices.
D)include all OTC stocks.
E)A,B,and C.

Question 41

When a firm markets new securities,a preliminary registration statement must be filed with

A)the exchange on which the security will be listed.
B)the Securities and Exchange Commission.
C)the Federal Reserve.
D)all other companies in the same line of business.
E)the Federal Deposit Insurance Corporation.

Question 42

Assume you sold short 100 shares of common stock at $70 per share.The initial margin is 50%.What would be the maintenance margin if a margin call is made at a stock price of $85?

A)40.5%
B)20.5%
C)35.5%
D)23.5%
E)none of the above

Question 43

You want to purchase IBM stock at $80 from your broker using as little of your own money as possible.If initial margin is 50% and you have $2000 to invest,how many shares can you buy?

A)100 shares
B)200 shares
C)50 shares
D)500 shares
E)25 shares

Question 44

You purchased 1000 shares of common stock on margin at $30 per share.Assume the initial margin is 50% and the stock pays no dividend.What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin.

A)0.33
B)0.375
C)0.20
D)0.23
E)0.25

Question 45

You purchased 100 shares of common stock on margin at $40 per share.Assume the initial margin is 50% and the stock pays no dividend.What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.

A)0.33
B)0.55
C)0.20
D)0.23
E)0.25

Question 46

You purchased 100 shares of XON common stock on margin at $60 per share.Assume the initial margin is 50% and the maintenance margin is 30%.Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

A)$42.86
B)$50.75
C)$49.67
D)$80.34
E)none of the above

Question 47

In a typical underwriting arrangement the investment banking firm
I)sells shares to the public via an underwriting syndicate.
II)purchases the securities from the issuing company.
III)assumes the full risk that the shares may not be sold at the offering price.
IV)agrees to help the firm sell the issue to the public but does not actually purchase the securities.

A)I, II, and III
B)I, III, and IV
C)I and IV
D)II and III
E)I and II

Question 48

You purchased 100 shares of common stock on margin for $50 per share.The initial margin is 50% and the stock pays no dividend.What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.

A)28%
B)33%
C)14%
D)42%
E)24%

Question 49

You sell short 100 shares of Loser Co.at a market price of $45 per share.Your maximum possible loss is

A)$4500
B)unlimited
C)zero
D)$9000
E)cannot tell from the information given

Question 50

Assume you sell short 100 shares of common stock at $30 per share,with initial margin at 50%.What would be your rate of return if you repurchase the stock at $35/share? The stock paid no dividends during the period,and you did not remove any money from the account before making the offsetting transaction.

A)-33.33%
B)-25.63%
C)-57.14%
D)-77.23%
E)none of the above

Question 51

You purchased 100 shares of common stock on margin for $35 per share.The initial margin is 50% and the stock pays no dividend.What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin.

A)28%
B)33%
C)14%
D)40%
E)24%

Question 52

You want to purchase GM stock at $40 from your broker using as little of your own money as possible.If initial margin is 50% and you have $4000 to invest,how many shares can you buy?

A)100 shares
B)200 shares
C)50 shares
D)500 shares
E)25 shares

Question 53

Assume you sell short 1000 shares of common stock at $35 per share,with initial margin at 50%.What would be your rate of return if you repurchase the stock at $25/share? The stock paid no dividends during the period,and you did not remove any money from the account before making the offsetting transaction.

A)20.47%
B)25.63%
C)57.14%
D)77.23%
E)none of the above

Question 54

You sold short 100 shares of common stock at $45 per share.The initial margin is 50%.Your initial investment was

A)$4,800.
B)$12,000.
C)$2,250.
D)$7,200.
E)none of the above.

Question 55

Which of the following is true regarding private placements of primary security offerings?

A)Extensive and costly registration statements are required by the SEC.
B)For very large issues, they are better suited than public offerings.
C)They trade in secondary markets.
D)The shares are sold directly to a small group of institutional or wealthy investors.
E)They have greater liquidity than public offerings.

Question 56

Assume you sold short 100 shares of common stock at $40 per share.The initial margin is 50%.What would be the maintenance margin if a margin call is made at a stock price of $50?

A)40%
B)20%
C)35%
D)25%
E)none of the above

Question 57

A specialist on the AMEX Stock Exchange is offering to buy a security for $37.50.A broker in Oklahoma City wants to sell the security for his client.The Intermarket Trading System shows a bid price of $37.375 on the NYSE.What should the broker do?

A)Route the order to the AMEX Stock Exchange.
B)Route the order to the NYSE.
C)Call the client to see if she has a preference.
D)Route half of the order to AMEX and the other half to the NYSE.
E)It doesn't matter-he should flip a coin and go with it.

Question 58

You sold short 150 shares of common stock at $27 per share.The initial margin is 45%.Your initial investment was

A)$4,800.60.
B)$12,000.25.
C)$2,250.75.
D)$1,822.50.
E)none of the above.

Question 59

You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%.The next day Qualitycorp's price drops to $25 per share.What is your actual margin?

A)50%
B)40%
C)33%
D)60%
E)25%

Question 60

You purchased 1000 shares of CSCO common stock on margin at $19 per share.Assume the initial margin is 50% and the maintenance margin is 30%.Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.

A)$12.86
B)$15.75
C)$19.67
D)$13.57
E)none of the above

Question 61

The minimum revenue required for an initial listing on the New York Stock Exchange is

A)$2,000,000
B)$25,000,000
C)$50,000,000
D)$75,000,000
E)100,000,000

Question 62

Despite large first-day IPO returns,average first-year returns in the US are approximately ____________ percent.

A)7.2
B)18.2
C)26.4
D)4.8
E)9.1

Question 63

The securities act of 1933 ____________.
I)requires full disclosure of relevant information relating to the issue of new securities
II)requires registration of new securities
III)requires issuance of a prospectus detailing financial prospects of the firm
IV)established the SEC
V)requires periodic disclosure of relevant financial information
VI)empowers SEC to regulate exchanges,OTC trading,brokers,and dealers

A)I, II and III
B)I, II, III, IV, V, and VI
C)I, II and V
D)I, II and IV
E)IV only

Question 64

Discuss margin buying of common stocks.Include in your discussion the advantages and disadvantages,the types of margin requirements,how these requirements are met,and who determines these requirements.

Question 65

According to the CFA Institute Standards of Professional Conduct,CFA Institute members have responsibilities to all of the following except:

A)the government
B)the profession
C)the public
D)the employer
E)clients and prospective clients

Question 66

Average third-year IPO returns in the US are approximately ____________ percent.

A)6.7
B)18.2
C)26.4
D)5.3
E)10.4

Question 67

You sold short 100 shares of common stock at $75 per share.The initial margin is 50%.At what stock price would you receive a margin call if the maintenance margin is 30%?

A)$90.23
B)$88.52
C)$86.54
D)$87.12
E)none of the above

Question 68

The securities act of 1934 ____________.
I)requires full disclosure of relevant information relating to the issue of new securities
II)requires registration of new securities
III)requires issuance of a prospectus detailing financial prospects of the firm
IV)established the SEC
V)requires periodic disclosure of relevant financial information
VI)empowers SEC to regulate exchanges,OTC trading,brokers,and dealers

A)I, II and III
B)I, II, III, IV, V, and VI
C)I, II and V
D)I, II and IV
E)IV,V,and VI

Question 69

The minimum annual pretax income in the previous two years required for an initial listing on the New York Stock Exchange is

A)$2,000,000
B)$25,000,000
C)$50,000,000
D)$75,000,000
E)100,000,000

Question 70

The average daily number of shares traded on the NYSE in 2008 was approximately ____________ dollars.

A)over 3 billion
B)1.8 trillion
C)12 billion
D)4 trillion
E)none of the above

Question 71

Average second-year IPO returns in the US are approximately ____________ percent.

A)6.7
B)18.2
C)26.4
D)7.0
E)9.1

Question 72

Which of the following is not required under the CFA Institute Standards of Professional Conduct?

A)knowledge of all applicable laws, rules and regulations
B)disclosure of all personal investments whether or not they may conflict with a client's investments
C)disclosure of all conflicts to clients and prospects
D)reasonable inquiry into a client's financial situation
E)All of the above are required under the CFA Institute standards.

Question 73

You sold short 100 shares of common stock at $45 per share.The initial margin is 50%.At what stock price would you receive a margin call if the maintenance margin is 35%?

A)$50
B)$65
C)$35
D)$40
E)none of the above

Question 74

The preliminary prospectus is referred to as a ____________.

A)red herring
B)indenture
C)green mail
D)tombstone
E)headstone