Question 1

George has heard a rumor that a major pet food company will be forced to recall millions of cans of pet food due to contamination. If the rumors are true, the company's stock price will decline sharply. Which one of the following strategies would allow George to earn a profit if the rumor proves to be true?

Accepted Answer

A)  Sell the stock short today. 
B)  Take a long position in the stock today. 
C)  Buy the stock on margin today. 
D)  Take a long position in the stock one month from today.

Question 2

IPOs are typically underpriced so that the price rises during the first few days of trading.

Accepted Answer

A) True 
 B)False

Question 3

When a person sells a common stock short, she or he is betting that the price of the stock will fall.

Accepted Answer

A) True 
 B)False

Question 4

Market makers in dealer markets

Accepted Answer

A)  bring sellers and buyers together by matching offers. 
B)  earn commissions paid by the sellers of securities. 
C)  buy securities at a bid price and hope to resell them at a higher offer price. 
D)  all of the above.

Question 5

Short-term securities are bought and sold in the

Accepted Answer

A)  capital market. 
B)  primary market. 
C)  money market. 
D)  stock market.

Question 6

A market maker brings together buyers and sellers in an auction market.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements about short selling is (are) true?
I. Short selling requires an initial margin deposit.
II. Short sellers begin a transaction with a sale and end it with a purchase.
III. Short sellers profit when the stock prices rises.
IV. Short selling can be a risky strategy.

Accepted Answer

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

Question 8

Margin trading requires the borrowing of securities.

Accepted Answer

A) True 
 B)False

Question 9

Gerry bought 100 shares of stock for $30.00 per share on 70% margin. Assume Gerry holds the stock for one year and that his interest costs will be $45 over the holding period. Gerry also received dividends amounting to $0.30 per share. Ignoring commissions, what is his percentage return on invested capital if he sells the stock for $34 a share?

Accepted Answer

A)  106.17% 
B)  20.48% 
C)  18.33 
D)  9.16%

Question 10

Justin just made a margin purchase of 100 shares of DEF Corp. for $22.50 per share. The initial margin is 70%. The maintenance margin is 30%. How low can the price of each share of DEF be before Justin will have to add equity to his account?

Accepted Answer

A)  $4.73 
B)  $5.25 
C)  $6.75 
D)  $9.64

Question 11

Federal laws that control the sale of securities are called blue sky laws.

Accepted Answer

A) True 
 B)False

Question 12

At the market close on June 13, 2019 Apple Inc. (AAPL) common stock was trading at an ask price of $191.10 and a bid price of $190.35. Apple's previous closing price was $194.19. What is the bid/ask spread of Apple?

Accepted Answer

A)  $0.75 
B)  $3.84 
C)  $3.09 
D)  -$0.75

Question 13

Which of the following are provisions of the Sarbanes-Oxley Act of 2002?
I. an oversight board to monitor the accounting industry
II. tougher penalties for executives who commit corporate fraud
III. stricter prohibitions against insider trading
IV. guidelines for analysts conflicts of interest

Accepted Answer

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

Question 14

The dominant options exchange is the

Accepted Answer

A)  Chicago Board Options Exchange. 
B)  American Stock Exchange. 
C)  Pacific Stock Exchange. 
D)  Philadelphia Options Exchange.

Question 15

The Consumer Financial Protection Agency was established by

Accepted Answer

A)  Investment Company Act of 1940. 
B)  The Securities Acts Amendments of 1975. 
C)  The Sarbanes-Oxley Act of 2002. 
D)  The Dodd-Frank Act of 2010.

Question 16

Short selling requires the borrowing of securities.

Accepted Answer

A) True 
 B)False

Question 17

A restricted account is defined as a margin account wherein the equity is

Accepted Answer

A)  less than the initial margin amount. 
B)  greater than the initial margin amount. 
C)  less than the maintenance margin amount. 
D)  greater than the maintenance margin amount.

Question 18

Which one of the following statements about margin trading is correct?

Accepted Answer

A)  The Securities Exchange Commission sets the minimum margin requirement for margin trading. 
B)  If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $600 in cash to make the purchase. 
C)  Margin traders are willing to accept lower return to reduce their risk. 
D)  Margin traders are pessimistic about the future price of the stock.

Question 19

The primary market tends to be more active when

Accepted Answer

A)  the economy is slowing and stock prices are falling. 
B)  the economy is expanding and stock prices are rising. 
C)  interest rates are rising. 
D)  early in the calendar year.

Question 20

Underwriters are responsible for promoting and facilitating the sale of securities.

Accepted Answer

A) True 
 B)False

Exam 2: Securities Markets and Transactions

IPOs are typically underpriced so that the price rises during the first few days of trading.

When a person sells a common stock short, she or he is betting that the price of the stock will fall.

Market makers in dealer markets

Short-term securities are bought and sold in the

A market maker brings together buyers and sellers in an auction market.

Which of the following statements about short selling is (are) true? I. Short selling requires an initial margin deposit. II. Short sellers begin a transaction with a sale and end it with a purchase. III. Short sellers profit when the stock prices rises. IV. Short selling can be a risky strategy.

Margin trading requires the borrowing of securities.

Justin just made a margin purchase of 100 shares of DEF Corp. for $22.50 per share. The initial margin is 70%. The maintenance margin is 30%. How low can the price of each share of DEF be before Justin will have to add equity to his account?

Federal laws that control the sale of securities are called blue sky laws.

At the market close on June 13, 2019 Apple Inc. (AAPL) common stock was trading at an ask price of $191.10 and a bid price of $190.35. Apple's previous closing price was $194.19. What is the bid/ask spread of Apple?

Which of the following are provisions of the Sarbanes-Oxley Act of 2002? I. an oversight board to monitor the accounting industry II. tougher penalties for executives who commit corporate fraud III. stricter prohibitions against insider trading IV. guidelines for analysts conflicts of interest

The dominant options exchange is the

The Consumer Financial Protection Agency was established by

Short selling requires the borrowing of securities.

A restricted account is defined as a margin account wherein the equity is

Which one of the following statements about margin trading is correct?

The primary market tends to be more active when

Underwriters are responsible for promoting and facilitating the sale of securities.