Ch 3
Advantages of ECNs over traditional markets include
(a) lower transactions costs (b) anonymity of the participants (c) small amount of time needed to execute and order they do not have ability to handle very large orders
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?
1,375 (work out problem and add when you come back to this)
Restrictions on trading involving insider information apply to:
1.Corporate officers and directors 2.Major stockholders 3.Relatives of corporate directors and officers
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.
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
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?
100(10.30 - 10.25) + 2(25) = $55
Privately held firms may have only _______ shareholders
2,000
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.)
30-27/0.5(30) = 20%
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
4,1,3,2
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 _________.
500($40)(.40) = $8,000
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?
Tuckerton could go bankrupt, with a share price of $0. You could keep the entire proceeds from the short sale. 200*50 = 10,000
The primary market where new security issues are offered to the public is a good example of _________.
a brokered market
The New York Stock Exchange is a good example of
an auction market
The _________ price is the price at which a dealer is willing to sell a security
ask
The _________ price is the price at which a dealer is willing to purchase a security
bid
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 _________.
bid ask spread
The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called
book building
Which one of the following types of markets requires the greatest level of trading activity to be cost-effective
continuous auction market
The over-the-counter securities market is a good example of
dealer market
All major stock markets today are effectively
electronic trading systems
In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price
firm commitment
Purchases of new issues of stock take place
in the primary market
The bulk of most initial public offerings (IPOs) of equity securities goes to
institutional investors
Underwriting is one of the services provided by
investment bankers
An order to buy or sell a security at the current price is a
market order
Transactions that do not involve the original issue of securities take place in
secondary markets
often accompany short sales and are used to limit potential losses from the short position.
stop-buy orders
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.
stop-loss; buy stop
The term latency refers to
the amount of time it takes to accept, process, and deliver a trading order
Initial margin requirements on stocks are set by
the federal reserve
The term "underwriting syndicate" describes
the investment banks that participate in the underwriting
The bid-ask spread exists because of
the need for dealers to cover expenses and make a profit
When a firm decides to sell securities it must first ensure
the preliminary registration statement is approved by the SEC
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.
underpriced
Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price
underwriter
1. You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
unlimited; There is no upper limit to the price of a share of stock and, therefore, no upper limit to the price you will have to pay to replace the 200 shares of Tuckerton.
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
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
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.
IPOs generally provide superior long-term performance as compared to other stocks is false
you sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.
Investment = 300(30)(.50) = 4,500
The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.
NASDAQ; NYSE
Private placements can be advantageous, compared to public issue, because
Private placements are cheaper to market than public issues