FIN4504 Chapter 3
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain ignoring transactions cost?
$10,000
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. You also place a stop-buy order at $60. What is your maximum possible loss?
$2,000
Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $70,000. The offering price for the shares was $25, but immediately upon issue, the share price jumped to $41. What is the best estimate of the total cost to Barnegat Light of the equity issue?
$3,270,000
You purchased 100 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below the stock price of __________ you would get a margin call. Assume the stock pays no dividend and ignore interest on margin.
$35.71
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?
$40.25 or less
You sold short 200 shares of common stock at $50 per share. The initial margin is 60%. Your initial investment was __________.
$6,000
Assume you purchased 200 shares of XYZ common stock on margin at $80 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is __________.
$6400
You purchased 300 shares of common stock on margin for $50 per share. The initial margin is 60% and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $40 per share. Ignore interest on margin.
-33%
Trading costs range between ______ and _______.
0.25%; 30%
A block transaction is one where at least __________ shares are traded; these account for approximately __________ of all trading.
10,000; 50%
The average abnormal return earned on investing in IPOs is __________ according to a recent study by Ritter and Weiss.
16%
According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration.
2 years
About ______ of all trades were initiated over the internet in 1999.
20%
A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
3
The shares of approximately __________ firms trade on the New York Stock Exchange.
3,100
A ______ drop in the Dow Jones Industrial Average would stop trading for the day.
30%
According to Ross, Shapiro and Smith, when the spread between the quoted bid and ask price is $0.25 or greater, approximately __________ of the trades taking place on the New York Stock Exchange will be executed "inside the quotes".
50%
The securities of more than _______ firms are listed on the Nasdaq Stock Market.
6,000
Explicit costs of an IPO tend to be around ______ of the funds raised.
7%
Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.
75%
The share of over-the-counter (NASDAQ) market trading volume that is related to trading in New York Stock Exchange (NYSE) listed firms is approximately ________.
8%
The New York Stock Exchange accounts for approximately __________ of total exchange trading in the United States.
85%
__________ is a false statement about the NYSE.
More than 3000 companies are listed on the NYSE
The computer-linked price quotation system for the OTC is called __________.
NASDAQ
The __________ was established to protect investors from losses if their brokerage firms fail.
SIPC
The __________ system enables exchange members to send orders directly to a specialist over computer lines.
SUPERDOT
The ____ requires full disclosure of relevant information relating to the issue of new securities.
Securities Act of 1933
__________ is a false statement regarding specialists.
Specialists can not trade for their own accounts
__________ often accompany short sales, and are used to limit potential losses from the short position.
Stop-buy orders
__________ is called the Big Board.
The New York Stock Exchange
__________ is a false statement about the function of investment bankers.
They are commercial banks that accept deposits from savers and lend them out to companies
__________ do not take place in the secondary market.
Transactions of new issues of stocks
__________ is a false statement regarding best-efforts.
Under the best-effort agreement the investment banker buys the stock issued from the company and resells them to the public
Specialists on the stock exchanges may do all of the following except __________.
Use their privileged information to make investments on behalf of clients of brokerage firms with which they do business
A prospectus is __________.
a description of a firm and the security it is issuing
__________ may be an objective of a stock mutual fund.
a.Growth b.Maximization of capital gain c.Minimization of risk d.All of the above
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 the above
The cost of buying and selling a stock include __________.
a.broker's commissions b.dealer's bid-asked spread c.price concessions investors may be forced to make d.all of the above
Restrictions on trading involving insider information apply to __________.
a.corporate officers and directors b.major stockholders c.relatives of corporate directors and officers d.all of the above
AIMR 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 above
Trading on insider information is _____.
a.prohibited by federal law b.prohibited by AIMR Standards of Professional Conduct c.legal in Japan d.all of the above
Which of the following are sources of competition for the New York Stock Exchange?
a.regional exchanges b.the American Stock Exchange c.foreign exchanges d.all of the above
A fund that invests in real estate or loans secured by real estate is __________.
an REIT
Instinet is _______.
an electronic communications network
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
The market collapse of 1987 prompted __________ as a suggestion for regulatory reform.
circuit breakers to halt trading
provide price continuity in the stocks in which they specialize
dealers trading with their customers at the officially published price even when a better one is available
The fourth market refers to __________.
direct trading between investors in exchange-listed securities without benefit of a broker
In a __________ underwriting arrangement, the underwriter assumes the full risk that shares cannot be sold to the public at the stipulated offering price.
firm commitment
According to Loughran and Ritter, initial public offerings tend to exhibit __________ performance initially, and __________ performance over the long term.
good; bad
Spring Street Brewing Company was the first company to _____.
have an internet IPO
Purchases of new issues of stock take place __________.
in the primary market
The bulk of most initial public offerings (IPOs) of equity securities go to ____________.
institutional investors
Underwriting is one of the services provided by ____.
investment bankers
A recent challenge to traditional intermediary role of brokerage firms has come from __________.
issuing firms offering securities trading in their own shares on the internet
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a __________.
limit-sell order
The largest and most liquid companies trading over-the-counter are ______.
listed on the NASDAQ National Market System
The Nasdaq Stock Market is an example of
more than one of the above
If the Dow Jones Industrial Average falls by 10% by 11 am, trading will be halted for _____.
one hour
An ECN is _______.
part of the fourth market
Specialists are obligated to _____________.
provide price continuity in the stocks in which they specialize
Transactions that do not involve the original issue of securities take place in __________.
secondary markets
Borrowing a security from your broker in order to sell it, with the intention of repurchasing it later when the price is lower, is called ____________.
short-selling
Initial margin requirements on stocks are set by __________.
the Federal Reserve
The bid-ask spread exists because of ________________.
the need for dealers to cover expenses and make a modest profit
A red herring becomes a prospectus when _____.
the preliminary registration statement is approved by the SEC
Many exchange-listed securities are also traded in the over-the-counter market. Trading of this sort is said to take place in the ____________.
third market
Registered traders __________________.
trade on their own account only
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize within a few months.
under priced
Under firm commitment underwriting the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.
underwriter
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
unlimited
Brokerage firms can change margin-loan practices _____.
without notice
