Student name:__________
1)
Underwriting is one of the services provided by _______.
A)
B)
C)
D)
the SEC
investment bankers
publicly traded companies
FDIC
2)
Under firm-commitment underwriting, the _______ assumes the full risk that the shares
cannot be sold to the public at the stipulated offering price.
A)
B)
C)
D)
3)
red herring
issuing company
initial stockholder
underwriter
Explicit costs of a stock IPO tend to be around _______ of the funds raised.
A)
B)
C)
D)
1%
7%
15%
25%
4)
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)
B)
C)
D)
5)
$90,000
$1,290,000
$2,390,000
$1,690,000
When a firm decides to sell securities it must first ensure _______.
A)
B)
C)
D)
the preliminary registration statement is approved by the SEC
the IPO is complete
the offering is seasoned
the lockup period expires
6)
Private placements can be advantageous, compared to public issue, because:
1. Private placements are cheaper to market than public issues.
2. Private placements may still be sold to the general public under SEC Rule 144A.
3. Privately placed securities trade on secondary markets.
A)
B)
C)
D)
1 only
1 and 3 only
2 and 3 only
1, 2, and 3
7)
A level _______ subscriber to the NASDAQ system may enter bid and ask prices.
A)
B)
C)
D)
8)
1
2
3
4
Which one of the following statements about IPOs is not true?
A)
B)
C)
D)
IPOs generally have been poor long-term investments.
IPOs often provide very good initial returns to investors.
IPOs generally provide superior long-term performance as compared to other stocks.
Shares in IPOs are often primarily allocated to institutional investors.
9)
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)
B)
C)
D)
9%
15%
48%
57%
10)
The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN
_______.
A)
B)
C)
D)
Archipelago; Instinet
Instinet; Archipelago
Island; Instinet
LSE; Euronext
11)
Rank the following types of markets from least integrated and organized to most
integrated and organized:
1. Brokered markets
2. Continuous auction markets
3. Dealer markets
4. Direct search markets
A)
B)
C)
D)
4, 2, 1, 3
1, 3, 4, 2
2, 3, 4, 1
4, 1, 3, 2
12)
The largest nongovernmental regulator of securities firms in the United States is
_______.
A)
B)
C)
D)
13)
Which one of the following is not an example of a brokered market?
A)
B)
C)
D)
14)
Residential real estate market
Market for large block security transactions
Primary market for securities
NASDAQ
More than _______ of all trading is believed to be initiated by computer algorithms.
A)
B)
C)
D)
15)
the CFA Institute
the Public Company Accounting Oversight Board
the Financial Industry Regulatory Authority
the Board of Directors of NYSE Euronext
25%
40%
50%
75%
Purchases of new issues of stock take place _______.
A)
B)
C)
D)
16)
at the desk of the Fed
in the primary market
in the secondary market
in the tertiary markets
Initial margin requirements on stocks are set by _______.
A)
B)
C)
D)
the Federal Deposit Insurance Corporation
the Federal Reserve
the New York Stock Exchange
the Securities and Exchange Commission
17)
Which one of the following types of markets requires the greatest level of trading activity
to be cost-effective?
A)
B)
C)
D)
18)
Broker market
Dealer market
Continuous auction market
Direct search market
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.
19)
Restrictions on trading involving insider information apply to:
1. Corporate officers and directors
2. Major stockholders
3. Relatives of corporate directors and officers
A)
B)
C)
D)
20)
1 only
1 and 2 only
2 and 3 only
1, 2, and 3
An order to buy or sell a security at the current price is a _______.
A)
B)
C)
D)
limit order
market order
stop-loss order
stop-buy order
21)
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.
22)
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.
23)
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)
B)
C)
D)
buy stop; stop-loss
market; limit
stop-loss; buy stop
limit; market
24)
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)
B)
C)
D)
25)
Advantages of ECNs over traditional markets include all but which one of the following?
A)
B)
C)
D)
26)
$1,375
$500
$275
$1,450
Lower transactions costs
Anonymity of the participants
Small amount of time needed to execute and order
Ability to handle very large complex orders
The _______ was established to protect investors from losses if their brokerage firms fail.
A)
B)
C)
D)
27)
CFTC
SEC
SIPC
AIMR
When matching orders from the public, a specialist is required to use the _______.
A)
B)
C)
D)
lowest outstanding bid price and highest outstanding ask price
highest outstanding bid price and highest outstanding ask price
lowest outstanding bid price and lowest outstanding ask price
highest outstanding bid price and lowest outstanding ask price
28)
The process of polling potential investors regarding their interest in a forthcoming initial
public offering (IPO) is called ______.
A)
B)
C)
D)
29)
interest building
book building
market analysis
customer identification
The bulk of most initial public offerings (IPOs) of equity securities goes to _______.
A)
B)
C)
D)
institutional investors
individual investors
the firm's current shareholders
day traders
30)
Initial public offerings (IPOs) are usually _______ relative to the levels at which their
prices stabilize after they begin trading in the secondary market.
A)
B)
C)
D)
overpriced
correctly priced
underpriced
mispriced, but without any particular bias
31)
According to multiple studies by Ritter, initial public offerings tend to exhibit _______
performance initially and _______ performance over the long term.
A)
B)
C)
D)
bad; good
bad; bad
good; good
good; bad
32)
Specialists try to maintain a narrow bid-ask spread because:
1. If the spread is too large, they will not participate in as many trades, losing commission
income.
2. The exchange requires specialists to maintain price continuity.
3. Specialists are nonprofit entities designed to facilitate market transactions rather than make a
profit.
A)
B)
C)
D)
1 only
1 and 2 only
2 and 3 only
1, 2, and 3
33)
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)
B)
C)
D)
best-efforts
firm-commitment
private placement
None of the choices are correct.
34)
The _______ is the most important dealer market in the United States, and the _______ is
the most important auction market.
A)
B)
C)
D)
35)
NYSE; NASDAQ
NASDAQ; NYSE
CME; OTC
AMEX; NYSE
The inside quotes on a limit order book can be found _______.
A)
B)
C)
D)
at the top of the list
at the bottom of the list
by taking the averages of the bid and ask prices on the list
only by direct contact with the specialist who maintains the book
36)
The _______ system enables exchange members to send orders directly to a specialist
over computer lines.
A)
B)
C)
D)
37)
FAX
Direct Plus
NASDAQ
SUPERDOT
The fully automated trade-execution system installed on the NYSE is called _______.
A)
B)
C)
D)
38)
The NYSE Hybrid Market allows _______.
A)
B)
C)
D)
39)
individuals to send orders directly to a specialist
individuals to send orders directly to an electronic system
brokers to send orders directly to a specialist
brokers to send orders either to an electronic system or to a specialist
The _______ price is the price at which a dealer is willing to purchase a security.
A)
B)
C)
D)
40)
FAX
Direct +
NASDAQ
SUPERDOT
bid
ask
clearing
settlement
The _______ price is the price at which a dealer is willing to sell a security.
A)
B)
C)
D)
bid
ask
clearing
settlement
41)
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)
B)
C)
D)
42)
market spread
bid-ask spread
bid-ask gap
market variation
The bid-ask spread exists because of _______.
A)
B)
C)
D)
market inefficiencies
discontinuities in the markets
the need for dealers to cover expenses and make a profit
lack of trading in thin markets
43)
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:
1. Purchase Archipelago, a major ECN, and rename it NYSE Arca
2. Enable automatic trade execution through its new Market Center
3. Impose a tighter limit on bid-ask spreads
A)
B)
C)
D)
1 only
2 and 3 only
1 and 2 only
1, 2, and 3
44)
The cost of buying and selling a stock includes:
1. Broker's commissions
2. Dealer's bid-asked spread
3. Price concessions that investors may be forced to make
A)
B)
C)
D)
1 and 2 only
2 and 3 only
1 and 3 only
1, 2, and 3
45)
Which of the following is (are) true about dark pools?
1. They allow anonymity in trading.
2. They often involve large blocks of stocks.
3. Trades made through them might not be reported.
A)
B)
C)
D)
1 and 2 only
2 and 3 only
1 and 3 only
1, 2, and 3
46)
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your
gains could be protected by placing a _______.
A)
B)
C)
D)
limit buy order
limit sell order
market order
stop-loss order
47)
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?
Limit Buy Price
$ 39.75
$ 39.50
A)
B)
C)
D)
$39.75
$40.25
$40.375
$40.25 or less
Orders
Shares
100
100
Limit Sell
Orders
$ 40.25
$ 40.50
Orders
Shares
100
100
48)
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)
B)
C)
D)
$50
$25
$30
$55
49)
According to SEC Rule 415 regarding shelf registration, firms can gradually sell
securities to the public for _______ following initial registration.
A)
B)
C)
D)
1 year
2 years
3 years
4 years
50)
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)
B)
C)
D)
The effective spread increased in 1997 but decreased in 2001.
The effective spread increased in both cases.
The effective spread decreased in 1997 but increased in 2001.
The effective spread decreased in both cases.
51)
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)
B)
C)
D)
$20,000
$12,000
$8,000
$15,000
52)
You sold short 300 shares of common stock at $30 per share. The initial margin is 50%.
You must put up _________.
A)
B)
C)
D)
$4,500
$6,000
$9,000
$10,000
53)
You short-sell 200 shares of Tuckerton Trading Company, now selling for $50 per share.
What is your maximum possible loss?
A)
B)
C)
D)
$50
$150
$10,000
Unlimited
54)
You short-sell 200 shares of Tuckerton Trading Company, now selling for $50 per share.
What is your maximum possible gain, ignoring transactions cost?
A)
B)
C)
D)
$50
$150
$10,000
Unlimited
55)
You short-sell 200 shares of Rock Creek Fly Fishing Company, 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)
B)
C)
D)
$37.50
$62.50
$56.25
$59.75
56)
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)
B)
C)
D)
$26.55
$35.71
$28.95
$30.77
57)
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)
B)
C)
D)
35%
39%
43%
28%
58)
You sell short 200 shares of Doggie Treats Incorporated 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)
B)
C)
D)
59)
$28.85
$35.71
$31.50
$32.25
Transactions that do not involve the original issue of securities take place in _______.
A)
B)
C)
D)
primary markets
secondary markets
over-the-counter markets
institutional markets
60)
What was the result of high-frequency traders' leaving the market during the flash crash
of 2010?
A)
B)
C)
D)
Market liquidity decreased.
Market liquidity increased.
Market volatility decreased.
Trading frequency increased.
61)
_______ often accompany short sales and are used to limit potential losses from the short
position.
A)
B)
C)
D)
Limit orders
Restricted orders
Limit loss orders
Stop-buy orders
62)
The market share held by the NYSE Arca system in February 2011 was approximately
_______.
A)
B)
C)
D)
65%
45%
25%
10%
63)
Regulation NMS:
1. Supports the goal of integrating financial markets
2. Requires the use of specialists to execute trades
3. Requires that exchanges honor quotes of other exchanges when they can be executed
automatically
A)
B)
C)
D)
1 only
1 and 2 only
1 and 3 only
1, 2, and 3
64)
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)
B)
C)
D)
65)
All major stock markets today are effectively _______.
A)
B)
C)
D)
66)
$35
$45
$53
$68
specialist trading systems
electronic trading systems
continuous auction markets
direct search markets
In 2007, the NASDAQ stock market merged with ______.
A)
B)
C)
D)
Euronext
OMX, which operates seven Nordic and Baltic stock exchanges
the International Securities Exchange (ISE)
BATS
67)
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)
B)
C)
D)
an advanced equity offering
a weathered equity offering
a seasoned equity offering
a veteran equity offering
68)
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)
B)
C)
D)
69)
market value of the stock − amount owed on the margin loan
market value of the stock + amount owed on the margin loan
market value of the stock ÷ margin loan
margin loan × market value of the stock
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
70)
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 the choices are correct.
71)
Trading on inside information is:
1. Prohibited by federal law
2. Prohibited by the CFA Institute Standards of Professional Conduct
3. Monitored by the SEC
A)
B)
C)
D)
1 and 2 only
2 and 3 only
1 and 3 only
1, 2, and 3
72)
The _______ requires full disclosure of relevant information relating to the issue of new
securities.
A)
B)
C)
D)
73)
The SIPC was established by the _______.
A)
B)
C)
D)
74)
Insider Trading Act of 1931
Securities Act of 1933
Securities Exchange Act of 1934
Investment Company Act of 1940
Insider Trading Act of 1931
Securities Act of 1933
Securities Exchange Act of 1934
None of the choices are correct.
Maintenance requirements for margin accounts are set by _______.
A)
B)
C)
D)
brokerage firms
the SEC
the Federal Reserve System's Board of Governors
the Supreme Court
75)
Which of the following are true concerning short sales of exchange-listed stocks?
1. Proceeds from the short sale must be kept on deposit with the broker.
2. Short-sellers must post margin with their broker to cover potential losses on the position.
3. The short-seller earns interest on any cash deposited with the broker that is used to meet the
margin requirement.
A)
B)
C)
D)
1 only
1 and 3 only
1 and 2 only
1, 2, and 3
76)
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)
B)
C)
D)
electronic; Dealers; brokers
dealer; Brokers; electronic
direct search; Brokers; electronic
brokered; Dealers; direct search
77)
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)
B)
C)
D)
17%
12%
14%
19%
78)
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)
B)
C)
D)
79)
$20
$29.77
$30.29
$32.45
The New York Stock Exchange is a good example of _______.
A)
B)
C)
D)
an auction market
a brokered market
a dealer market
a direct search market
80)
The primary market where new security issues are offered to the public is a good example
of _______.
A)
B)
C)
D)
81)
an auction market
a brokered market
a dealer market
a direct search market
The over-the-counter securities market is a good example of ______.
A)
B)
C)
D)
an auction market
a brokered market
a dealer market
a direct search market
82)
An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial
margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The
stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What
was the investor's rate of return?
A)
B)
C)
D)
17.50%
19.67%
23.83%
25.75%
83)
Level 3 NASDAQ subscribers _______.
A)
B)
C)
D)
are registered market makers
can post bid and ask prices
have the fastest execution of trades
All of the choices are correct.
84)
You sell short 300 shares of Microsoft that are currently selling at $30 per share. You post
the 50% margin required on the short sale. If you earn no interest on the funds in your margin
account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any
dividends.)
A)
B)
C)
D)
10.00%
20.00%
6.67%
15.50%
85)
The commission structure on a stock purchase is $20 plus $0.02 per share. If you
purchase four round lots of a stock selling for $56, what is your commission?
A)
B)
C)
D)
$20
$22
$26
$28
86)
BATS advertised average latency times of approximately _______.
A)
B)
C)
D)
100 microseconds
200 microseconds
1 second
5 seconds
87)
The market share held by the "Other" category (which includes dark pools) constitutes
roughly _______% of trading volume in NYSE-listed shares.
A)
B)
C)
D)
88)
5%
10%
30%
50%
In 2013, NYSE Euronext was acquired by _______.
A)
B)
C)
D)
DOT
ICE
BATS
It was not acquired.
89)
SIPC ensures investors against failure of a brokerage firm up to a limit of _______.
A)
B)
C)
D)
90)
Privately held firms may have only _______ shareholders.
A)
B)
C)
D)
91)
$100,000
$250,000
$500,000
$1,000,000
10
99
250
2,000
The term "underwriting syndicate" describes _______.
A)
B)
C)
D)
the issuing firm
the lead underwriter only
the investment banks that participate in the underwriting
the private investors that purchase the shares
92)
The year with highest average first-day returns for U.S. IPOs was _______ and the year
with the highest number of IPOs was _______.
A)
B)
C)
D)
1996; 1999
1985, 2017
1999; 1996
2000; 2000
Answer Key
Test name: Chapter 03 Test Bank - Static
1) B
2) D
3) B
4) D
5) A
6) A
7) C
8) C
9) C
10) A
11) D
12) C
13) D
14) C
15) B
16) B
17) C
18) B
19) D
20) B
21) B
22) B
23) C
24) A
25) D
26) C
27) D
28) B
29) A
30) C
31) D
32) B
33) B
34) B
35) A
36) D
37) B
38) D
39) A
40) B
41) B
42) C
43) A
44) D
45) D
46) D
47) D
48) D
49) B
50) D
51) C
52) A
53) D
54) C
55) B
56) B
57) C
58) A
59) B
60) A
61) D
62) D
63) C
64) D
65) B
66) B
67) C
68) A
69) B
70) D
71) D
72) B
73) D
74) A
75) C
76) B
77) A
78) C
79) A
80) B
81) C
82) C
83) D
84) B
85) D
86) A
87) C
88) B
89) C
90) D
91) C
92) C