Deck 3: Securities Markets

Question 1

Rank the following types of markets from least integrated and organized to most integrated and organized:
I) Brokered markets
II) Continuous auction markets
III) Dealer markets
IV) Direct search markets

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

Answer 1

D

Question 2

Purchases of new issues of stock take place ________.

A) at the desk of the Fed
B) in the primary market
C) in the secondary market
D) in the money markets

Answer 2

B

Question 3

More than ________ of all trading is believed to be initiated by computer algorithms.

A) 25%
B) 40%
C) 50%
D) 75%

Answer 3

C

Question 4

When a firm decides to sell securities it must first ensure ________.

A) the preliminary registration statement is approved by the SEC
B) the IPO is complete
C) the offering is seasoned
D) the lockup period expires

Question 5

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 herring
B) issuing company
C) initial stockholder
D) underwriter

Question 6

A level ________ subscriber to the NASDAQ system may enter bid and ask prices.

A) 1
B) 2
C) 3
D) 4

Question 7

Underwriting is one of the services provided by ________.

A) the SEC
B) investment bankers
C) publicly traded companies
D) FDIC

Question 8

Which one of the following statements about IPOs is not true?

A) IPOs generally have been poor long-term investments.
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.

Question 9

The NYSE acquired the ECN ________, and NASDAQ recently acquired the ECN ________.

A) Archipelago; Instinet
B) Instinet; Archipelago
C) Island; Instinet
D) LSE; Euronext

Question 10

Explicit costs of a stock IPO tend to be around ________ of the funds raised.

A) 1%
B) 7%
C) 15%
D) 25%

Question 11

Which one of the following is not an example of a brokered market?

A) residential real estate market
B) market for large block security transactions
C) primary market for securities
D) NASDAQ

Question 12

An order to buy or sell a security at the current price is a ________.

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

Question 13

Initial margin requirements on stocks are set by ________.

A) the Federal Deposit Insurance Corporation
B) the Federal Reserve
C) the New York Stock Exchange
D) the Securities and Exchange Commission

Question 14

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%

Question 15

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

Question 16

Which one of the following is a false statement regarding NYSE specialists?

A) On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists.
B) Specialists cannot trade for their own accounts.
C) Specialists maintain limit order books, which contain the outstanding unexecuted limit orders.
D) Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

Question 17

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 only
B) I and II only
C) II and III only
D) I, II, and III

Question 18

Which one of the following types of markets requires the greatest level of trading activity to be cost-effective?

A) broker market
B) dealer market
C) continuous auction market
D) direct search market

Question 19

Private placements can be advantageous, compared to public issue, because:
I) Private placements are cheaper to market than public issues.
II) Private placements may still be sold to the general public under SEC Rule 144A.
III) Privately placed securities trade on secondary markets.

A) I only
B) I and III only
C) II and III only
D) I, II, and III

Question 20

As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks' prices change by more than ________ in a 5-minute period.

A) 10%
B) 20%
C) 30%
D) 40%

Question 21

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) 25%
C) 60%
D) 75%

Question 22

The term inside quotes refers to ________.

A) the difference between the lowest bid price and the highest ask price in the limit order book.
B) the difference between the highest bid price and the lowest ask price in the limit order book.
C) the difference between the lowest bid price and the lowest ask price in the limit order book.
D) the difference between the highest bid price and the highest ask price in the limit order book.

Question 23

The bulk of most initial public offerings (IPOs) of equity securities goes to ________.

A) institutional investors
B) individual investors
C) the firm's current shareholders
D) day traders

Question 24

The fully automated trade-execution system installed on the NYSE is called ________.

A) FAX
B) Direct +
C) NASDAQ
D) SUPERDOT

Question 25

When matching orders from the public, a specialist is required to use the ________.

A) lowest outstanding bid price and highest outstanding ask price
B) highest outstanding bid price and highest outstanding ask price
C) lowest outstanding bid price and lowest outstanding ask price
D) highest outstanding bid price and lowest outstanding ask price

Question 26

The ________ was established to protect investors from losses if their brokerage firms fail.

A) CFTC
B) SEC
C) SIPC
D) AIMR

Question 27

The term latency refers to ________.

A) the lag between when an order is placed on the NYSE and when it is executed.
B) the amount of time it takes to accept, process, and deliver a trading order.
C) the time it takes to implement new rules and procedures for stock exchanges and computer trading systems.
D) the lag between when an order is executed and when the investor takes possession of the securities.

Question 28

The ________ system enables exchange members to send orders directly to a specialist over computer lines.

A) FAX
B) Direct Plus
C) NASDAQ
D) SUPERDOT

Question 29

The NYSE Hybrid Market allows ________.

A) individuals to send orders directly to a specialist
B) individuals to send orders directly to an electronic system
C) brokers to send orders directly to a specialist
D) brokers to send orders either to an electronic system or to a specialist

Question 30

The ________ is the most important dealer market in the United States, and the ________ is the most important auction market.

A) NYSE; NASDAQ
B) NASDAQ; NYSE
C) CME; OTC
D) AMEX; NYSE

Question 31

According to multiple studies by Ritter, initial public offerings tend to exhibit ________ performance initially and ________ performance over the long term.

A) bad; good
B) bad; bad
C) good; good
D) good; bad

Question 32

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

A) interest building
B) book building
C) market analysis
D) customer identification

Question 33

On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

A) $1,375
B) $500
C) $275
D) $1,450

Question 34

The inside quotes on a limit order book can be found ________.

A) at the top of the list
B) at the bottom of the list
C) by taking the averages of the bid and ask prices on the list
D) only by direct contact with the specialist who maintains the book

Question 35

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 income.
II) The exchange requires specialists to maintain price continuity.
III) Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 36

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) buy stop; stop-loss
B) market; limit
C) stop-loss; buy stop
D) limit; market

Question 37

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-efforts
B) firm-commitment
C) private placement
D) none of these options

Question 38

The ________ price is the price at which a dealer is willing to purchase a security.

A) bid
B) ask
C) clearing
D) settlement

Question 39

Initial public offerings (IPOs) are usually ________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

A) overpriced
B) correctly priced
C) underpriced
D) mispriced, but without any particular bias

Question 40

Advantages of ECNs over traditional markets include all but which one of the following?

A) lower transactions costs
B) anonymity of the participants
C) small amount of time needed to execute and order
D) ability to handle very large orders

Question 41

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%

Question 42

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

A) $4,500
B) $6,000
C) $9,000
D) $10,000

Question 43

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 spread
B) bid-ask spread
C) bid-ask gap
D) market variation

Question 44

The cost of buying and selling a stock includes:
I) Broker's commissions
II) Dealer's bid-asked spread
III) Price concessions that investors may be forced to make

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 45

What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

A) The effective spread increased in 1997 but decreased in 2001.
B) The effective spread increased in both cases.
C) The effective spread decreased in 1997 but increased in 2001.
D) The effective spread decreased in both cases.

Question 46

The bid-ask spread exists because of ________.

A) market inefficiencies
B) discontinuities in the markets
C) the need for dealers to cover expenses and make a profit
D) lack of trading in thin markets

Question 47

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

A) bid
B) ask
C) clearing
D) settlement

Question 48

Which of the following is (are) true about dark pools?
I) They allow anonymity in trading.
II) They often involve large blocks of stocks.
III) Trades made through them might not be reported.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 49

The NYSE has lost market share to ECNs in recent years. Part of the NYSE's response to the growth of ECNs has been to:
I) Purchase Archipelago, a major ECN, and rename it NYSE Arca
II) Enable automatic trade execution through its new Market Center
III) Impose a tighter limit on bid-ask spreads

A) I only
B) II and III only
C) I and II only
D) I, II, and III

Question 50

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 order
B) limit sell order
C) market order
D) stop-loss order

Question 51

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

Question 52

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

A) 1 year
B) 2 years
C) 3 years
D) 4 years

Question 53

You sell short 200 shares of Doggie Treats Inc. that 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) $28.85
B) $35.71
C) $31.50
D) $32.25

Question 54

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

A) primary markets
B) secondary markets
C) over-the-counter markets
D) institutional markets

Question 55

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) $26.55
B) $35.71
C) $28.95
D) $30.77

Question 56

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

A) $50
B) $150
C) $10,000
D) unlimited

Question 57

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) $20,000
B) $12,000
C) $8,000
D) $15,000

Question 58

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ________.

A) $37.50
B) $62.50
C) $56.25
D) $59.75

Question 59

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) $50
B) $25
C) $30
D) $55

Question 60

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) $39.75
B) $40.25
C) $40.375
D) $40.25 or less

Question 61

The average depth of the limit order book is ________.

A) lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index
B) higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index
C) about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index
D) unrelated to the sizes of the stocks in the indexes

Question 62

An investor puts up $5,000 but borrows an equal amount of money from his 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 1 year the investor sells the stock for $28. The investor's rate of return was ________.

A) 17%
B) 12%
C) 14%
D) 19%

Question 63

The largest nongovernmental regulator of securities firms in the United States is ________.

A) the CFA Institute
B) the Public Company Accounting Oversight Board
C) the Financial Industry Regulatory Authority
D) the Board of Directors of NYSE Euronext

Question 64

________ often accompany short sales and are used to limit potential losses from the short position.

A) Limit orders
B) Restricted orders
C) Limit loss orders
D) Stop-buy orders

Question 65

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 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been less than ________.

A) $20
B) $29.77
C) $30.29
D) $32.45

Question 66

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; brokers
B) dealer; Brokers; electronic
C) direct search; Brokers; electronic
D) brokered; Dealers; direct search

Question 67

In 2007, the NASDAQ stock market merged with ________.

A) Euronext
B) OMX, which operates seven Nordic and Baltic stock exchanges
C) the International Securities Exchange (ISE)
D) BATS

Question 68

The ________ requires full disclosure of relevant information relating to the issue of new securities.

A) Insider Trading Act of 1931
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) Investment Company Act of 1940

Question 69

All major stock markets today are effectively ________.

A) specialist trading systems
B) electronic trading systems
C) continuous auction markets
D) direct search markets

Question 70

What was the result of high-frequency traders' leaving the market during the flash crash of 2010?

A) Market liquidity decreased.
B) Market liquidity increased.
C) Market volatility decreased.
D) Trading frequency increased.

Question 71

You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called ________.

A) an advanced equity offering
B) a weathered equity offering
C) a seasoned equity offering
D) a veteran equity offering

Question 72

The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission?

A) $35
B) $45
C) $53
D) $68

Question 73

Trading on inside information is:
I) Prohibited by federal law
II) Prohibited by the CFA Institute Standards of Professional Conduct
III) Monitored by the SEC

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 74

The SIPC was established by the ________.

A) Insider Trading Act of 1931
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) none of these options

Question 75

The market share held by the NYSE Arca system in February 2011 was approximately ________.

A) 65%
B) 45%
C) 25%
D) 10%

Question 76

The CFA Institute Standards of Professional Conduct require that members ________.

A) place their clients' interests before their own
B) disclose conflicts of interest to clients
C) inform their employers that they are obligated to comply with the Standards of Professional Conduct
D) all of these options

Question 77

Which of the following are true concerning short sales of exchange-listed stocks?
I) Proceeds from the short sale must be kept on deposit with the broker.
II) Short-sellers must post margin with their broker to cover potential losses on the position.
III) The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

A) I only
B) I and III only
C) I and II only
D) I, II, and III

Question 78

Regulation NMS:
I) Supports the goal of integrating financial markets
II) Requires the use of specialists to execute trades
III) Requires that exchanges honor quotes of other exchanges when they can be executed automatically

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question 79

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 loan
B) market value of the stock + amount owed on the margin loan
C) market value of the stock ÷ margin loan
D) margin loan × market value of the stock

Question 80

Maintenance requirements for margin accounts are set by ________.

A) brokerage firms
B) the SEC
C) the Federal Reserve System's Board of Governors
D) the Supreme Court