Finance Chapter 11
If the initial margin requirement is 50% and you have $5,000 in your brokerage account, you may purchase a total of _____ worth of securities on margin. a) $2,000 b) $2,500 c) $10,000 d) $12,500
$5,000= (0.500) (TOTAL)--> TOTAL =$5,000/0.50=$10,000
A global depository receipt is traded on the American Stock Exchange.
False
An odd lot is a trade involving 100 shares or multiples of 100 shares.
False
Existing securities are traded in the primary markey
False
IPO underpricing occurs only in the United States
False
Over the counter markets are organized exchanges for trading securities such as the New York Stock Exchange.
False
Shelf registration allows firms to register only debt issues with the SEC, and have them available to sell for two years.
False
The primary market is a market in which securities are traded among investors.
False
Organized securities include the New York Stock Exchange, the American Stock Exchange, and NASDAQ
False NASDAQ is not an organized exchange it is an Over The Counter exchnage
New York Stock Exchange is an example of a primary markey
False NYSE is a secondary market where existing securities are traded among investors.
A dealer is a person who assists in the trading process by buying or selling securities in the market for an investor
False broker
Commissions on stock trades are set by the stock exchanges.
False commissions vary from brokerage firm to brokerage firm
A pre-emptive right refers to the of existing shareholders to sue management in order to head off potential actions by management that would adversely affect the price of the stock.
False existing common stock shareholders have the first right purchase newly issued common stock so they can maintain their proportional share of ownership if they choose to do so
Private placement can avoid SEC registration and all SEC regulations.
False subject to certain SEC-regulated guidelines for wealth and investment knowledge
An important function of the Securities and Exchange Commission is to pass judgment on the investment merit of a security.
False SEC does not pass judgment on the investment merit of a security
The flotation costs of an initial public offering are comprrised solely of direct costs and the spread.
False also underpricing
The term "Big Board" is another name for the NASDAQ market.
False it is another name for the New York Stock Exchange
The prospectus is a contract outlining the duties, responsiblities and fees between the issuing firm and its underwriter.
False it is not a contract, it is a document that details the issuer's operations and finances
All firms can use shelf-registration which saves issuers both time and money.
False only firms that meet size, credit, quality and ethics requirements can use this
The fourth market is a market for large blocks of listed stocks that operate outside the confines of the organized exchanges.
False third
Federal regulation of investment banking is administered primarily under the provisions of the Investment Banking Monitoring and Control Act of 1999
False under the Securities Act of 1933
An underwriting agreement is a contract in which the investment banker agrees to do its best to sell securities to investors at the highest price it can; the investment banker assumes no risk for the possibility that it may fail to issue all authorized shares.
False, this is a best-effort agreement
A Dutch auction is an offering process in which investors bid on the price and quantity of securities they wish to purchase.
True
A market order is an order for immediate purchase or sale at the best possible price.
True
A syndicate is a group of several investment banking firms that participate in underwriting and distributing a security issue.
True
ADRs are created and traded in dollars on US exchanges. They represent a given number of shares of a foreign firm's stock
True
All public offerings are regulated by the securities and Exchange Commission (SEC)
True
All securities must be listed before they may be traded on the New York Stock Exchange.
True
American depository receipts are receipts which represent foreign shares to U.S. investors
True
An underwriting agreement is a contract in which the investment banker agrees to buy securities at a predetermined price and then resell them to investors.
True
Churning happens when a broker constantly buys and sells securities from a client's portfolio in an effort to generate commissions.
True
Designated Market Makers are dealers who have the responsibility of making a market in an assigned security.
True
Firm commitment flotation costs, relative to the amount raised are typically lower than those best efforts.
True
Floor brokers act as agents to execute customers' orders for securities purchases and sales.
True
If there were no secondary markets for trading between investors, there would be no primary market fir the initial sale of securities.
True
In a financial context, due diligence refers to the detailed study of a corporation
True
Insider trading regulation provided for under the Securities Exchange Act of 1934
True
Rights offerings among public corporations became infrequent in the United States during the 1980s and 1990s
True
The Dow-Jones Industrial Average is made up of 30 large blue-chip stocks.
True
The Glass-Steagall Act of 1933 ended the ability of commercial banks to act as underwriters of newly issued securities
True
The issuer has almost no price risk in a firm commitment offering once the offer price is set
True
The maintenance margin is the minimum margin to which an investment may fall before a margin call is placed.
True
The secondary markets provide pricing information and liquidity to investors.
True
Under a best-effort agreement, investment bankers try to sell the securities of the issuing corporations, but they assume no risk for a possible failure of the flotation.
True
Under pricing represents the difference between the aftermarket price and the offering price
True
The aftermarket is a period of time after an IPO
True IPO is Initial Public Offering members of the syndicated may not sell the securities for less than the offering price
________ is a highly regulated document which details the issuers operations and finances and must be provided to each buyer of a newly issued security. a) A prospectus b) An underwriting agreement c) A best efforts agreement d) A private placement agreement
a) A prospectus
The purpose of pre-emptive rights is to allow shareholder to: a) buy enough of a new securities offering to maintain their present proportional share of ownership b) buy an unlimited amount of a new issue at a discount c) pre-empt other stockholders from selling securities in a company d) sell their shares of stock in the primary market
a) buy enough of a new securities offering to maintain their present proportional share of ownership
A contract that gives the owner the choice of buying a particular good at a specified price on or before a specified date is called a(n): a) call option b) put option c) futures contract d) derivative option
a) call option
Which of the following is not a characteristic of a good market? a) central location b) quick and accurate trade execution c) low cost of trading c) all of the above are characteristics of a good market
a) central location
A market has _____ if it can absorb large orders without disrupting prices; it has _____ if it has many trades. a) depth, breadth b) breadth, depth c) liquidity, quick execution d) quick execution, liquidity
a) depth, breadth depth: can absorb large orders without disrupting prices breadth: attracts many traders--> many trades
Secondary markets are where: a) existing securities are traded among investors b) securities are initially sold c) debt securities with maturities of one year or less are issued and traded d) debt securities with maturities longer than one year and equity securities are issued and traded
a) existing securities are traded among investors
If a Microsoft January call option with a strike price of $20 had a premium of $2.00 and the market price of the underlying Microsoft stock was $25.62, the call option would be ______. a) in-the-money b) out-of-the-money c) at-the-money d) not enough information to tell
a) in-the-money option with a positive intrinsic value (can profit by exercising the call) option with zero intrinsic value (can't profit by exercising the call) call option is the right to buy the stock at the strike price of $20-->if you buy the call for $2--> exercise call to buy stock for $20-->total cost $20+$2=$22 sell stock in market for $25.62-->profit=$25.62-$22=$3.62
The capital markets are successful in allocating capital because of their a) integrity b) size c) location in New York d) large number of employees
a) integrity
The advantage of buying on margin is: a) larger potential profit b) using more of your own money c) deductible loss d) non-taxable capital gain
a) larger potential profit
An order for immediate purchase or sale at the best possible price is called a: a) market order b) limit order c) stop loss order d) margin order
a) market order
The process whereby an underwriting syndicate steps in to buy back securities to prevent a larger price drop than that which has already occurred is called. a) market stabilization b) price normalization c) dollar cost averaging d) a Dutch auction
a) market stabilization
Newly created securities are sold in the: a) primary market b) secondary market c) money market d) capital market
a) primary market
A trade in the multiple of 100 shares is called a(n): a) round lot b) odd lot c) block trade d) margin trade
a) round lot
If you buy stock certificates and keep them at the brokerage firm rather than taking personal possession of them, your stock is in: a) street name b) a short sale c) a limit order d) a round lot
a) street name
A good market has the following characteristics: a) trades are executed quickly at a price close to fair market value b) market prices fluctuate sharply on successive trades c) listing requirements are unreasonable d) fees are high
a) trades are executed quickly at a price close to fair market value
Commercial banks were for many years prohibited from full-fledged investment banking by the: a)Glass-Steagall Act b) Garn-St. Germain Depository Institutions Act c) Dodd-Frank Wall Street Reform and Consumer Protection Act d) National Association of Securities Dealers
a)Glass-Steagall Act
If a Microsoft January call option with a strike price of $20 were about to expire and the market price of the underlying Microsoft sock was $25.62, the premium of the call option would have to be _______ or higher to eliminate arbitrage opportunities. a) $31.24 b) $5.26 c) $15.62 d) $25.62 e) $14.38
b) $5.26 arbitrage= make a profit with no risk, simultaneously buy low sell high, call option is the right to buy the stock at the strike price of $20-->to prevent arbitrage, premium must be >$25.62-$20=$5.62 otherwise--> for example if the premium is $5.00, buy the call with strike price of $20--> exercise the call to buy the stock of $20--> total cost $20+$5=$25-->sell the stock in the market for $25.62--> profit= $25.62-$25=0.62 per share of stock
__________ is an order to sell stock at the market price when the price of the stock falls to a specified level. a) A short sale b) A stop-loss order c) A limit order d) Buying on margin
b) A stop-loss order
A receipt that represents foreign shares owned and traded by US investors is called a(n) a) global depositor receipt b) American depository receipt c) representative depository reveipt d) Asian depository receipt e) Foreign depository receipt f) European depository receipt
b) American depository receipt
__________ are comprised of direct costs, the spread, and under pricing. a) Commission costs b) Flotation costs c) Brokerage commissions d) SEC fees
b) Flotation costs
Which of the following statements is correct? a) Because global depository receipts are listed on the London Stock Exchange, US investors cannot buy GDRs through a broker in the United States b) Foreign stocks can be traded in the United States if they are registered with the Securities and Exchange Commission c) The fourth market is a market for large blocks of listed stocks that operates outside the confines of the organized exchanges d) all the statements are correct
b) Foreign stocks can be traded in the United States if they are registered with the Securities and Exchange Commission
A syndicate is: a) a firm that assists in specialist transactions b) a group of several investment banking firms that participate in the underwriting and distribution of a security issue c) the largest group of members on the NYSE d) composed of direct costs, the spread, the udnerpricing
b) a group of several investment banking firms that participate in the underwriting and distribution of a security issue
An agreement whereby an investment banker tries to sell securities of an issuing corporation, but assumes no risk if the flotation if unsuccessful is called a: a) due diligence agreement b) best-effort agreement c) firm commitment price agreement d) shelf registration agreement
b) best-effort agreement
Arbitrage refers to: a) selling securities you don't own b) buying and selling stocks with offsetting trades to lock in profits from price differences between difference markets c) buying IPO's d) selling IPO's
b) buying and selling stocks with offsetting trades to lock in profits from price differences between difference markets arbitrage involves the simultaneous buying and selling of a security to make a profit
A security whose value is determined by the value of another investment vehicle is referred to as a(n) a) underlying security b) derivative security c) debenture security d) at-the-money security
b) derivative security
Brokerage firms that not only assist in trades but also have research staffs that analyze firms and make recommendations about which stocks to buy or sell are called: a) discount brokerage firms b) full service brokerage firms c) investment saving firms d) stock advisory brokers
b) full service brokerage firms
The ________, the greater the change of the options becoming ________. a) shorter the time to expiration, in-the-money b) longer the time to expiration, in-the-money c) less the volatility, in-the-money d) two of the above are correct e) none of the above are correct
b) longer the time to expiration, in-the-money the more time to expiration, the greater the changes the fluctuations in the asset's price will make the option profitable (in-the-money)
If a market has "price pressure: this is a sign of a) good liquidity in the market b) low liquidity in the market c) high listing fees d) high brokerage commissions
b) low liquidity in the market this is another hidden cost, it indicates the market lacks good liquidity
If the value of the securities that you borrowed money from your broker to purchase falls, you may receive a: a) call option b) margin call c) limit order call d) specialist call
b) margin call you bought the security on margin
Under a _______, if any additional shares of common stock, or any security that may be converted into common stock, are to be issued, the securities must be offered for sale first to existing common stockholders. a) private placement b) pre-emptive rights offering c) seasoned offering d) shelf registration
b) pre-emptive rights offering
The document which details the issuer's finances and must be provided to each buyer of the security is called the: a) indenture b) prospecturs c) tombstone d) initial public offering
b) prospectus
A contract that gives the owner the choice of selling a particular food at a specified price on or before a specified date is called a(n): a) call option b) put option c) futures contract d) derivative option
b) put option
A market in which existing securities are traded among investors is called a: a) primary market b) secondary market c) third market d) fourth market
b) secondary market
Sale of securities that the seller does not own is called a: a) stop-loss order b) short sale c) limit order d) maintenance margin
b) short sale
Market stabilization is: a) disallowed under the Securities Act of 1934 b) the intervention of the syndicate to buy back securities to prevent a larger price drop c) prohibited by the Securities Exchange Commission d) the announcement of securities offerings to be placed in newspapers and other publications
b) the intervention of the syndicate to buy back securities to prevent a larger price drop
__________ is an agreement by the investment banker to sell securities of the issuing corporation whereby the investment banker assumes no risk for the possible failure of the flotation. a) A prospectus b) An underwriting agreement c) A best-effort agreement d) A syndicate agreement
c) A best-effort agreement
__________ is the maximum purchase price or minimum selling price specified by an investor. a) A short sale b) A stop-loss order c) A limit order d) Buying on margin
c) A limit order
An over-the-counter market trade ovvurs in the: a) DIJA b) NYSE c) NASDAQ d) SEC
c) NASDAQ
Federal regulation of investment banking is administered primarily under the provisions of the ________. a) Investment Banking Act b) Garn-St. Germain Act c) Securities Act d) Federal Reseve Act
c) Securities Act
Insider trading laws regulate the behavior of a) corporate officers only b) investment bankers only c) anyone with nonpublic information about a firm d) anyone with public information about a firm
c) anyone with nonpublic information about a firm
The price for wihch the owner is willing to sell the security is called the: a) bid price b) spread c) ask price d) limit price
c) ask price
Which of the following is not an advantage of shelf registration? a) saving time on issuing securities b) allows issuer to determine which investment bank offers the best service c) eliminates filing fees d) all three (a,b,c) is an advantage of shelf registration
c) eliminates filing fees
A contract that obligates the owner to purchase or sell the underlying asset at a specified price on a specified day is called a a) put option contract b) call option contract c) futures contract d) money market contract
c) futures contract
The brokers who handle the house broker's overflow are called: a) specialist b) registered traders c) independent brokers d) designated market makers
c) independent brokers
A stop-loss order: a) sets a price a broker may not violate b) stops losses for one trading day c) is executed at the market price when the price of the stock falls to a specified level d) stops losses for 30 days
c) is executed at the market price when the price of the stock falls to a specified level may be placed to expire at the end of one day, one week, one month, or on a good until-cancelled basis
Which of the following activities is not an activity of registered traders? a) buy and sell stocks for their own account b) pay no commissions c) match up buy and sell orders d) all the above
c) match up buy and sell orders responsibility of house (commission) brokers
The seller of an option contract is called a(n) ______ and the price paid for the option itself is called the _______. a) option broker, option price b) sales agent, option premium c) option writer, option premium d) option writer, option price e) none of the above
c) option writer, option premium
The lead investment banker: a) is elected by members of the syndicate b) is appointed by the SEC c) originates and handles a flotation d) is typically the Fed
c) originates and handles a flotation
Which one of the following sin ot a cost to the issuing firm of going public with an inital stock offering? a) direct costs (legal fees, accounting fees, etc) b) underwriter's spread c) overpricing d) underpricing
c) overpricing underpricing is a cost
The aftermarket is: a) the over-the-counter market b) the foreign exchange market c) the period after a new issue is initially sold to the public d) the difference between the offer price and the price paid by the investment bank
c) the period after a new issue is initially sold to the public
A private placement is: a) a bidding process which allows smaller firms and individual investors to purchase securities b) a group of several investment banking firms that participate in underwriting and distributing a security issue c) the sale of securities to a small group of private investors d) an initial sale of equity to the public
c) the sale of securities to a small group of private investors
The market for large blocks of listed stocks that operates outside the confines of the organized exchanges is called the: a) primary market b) secondary market c) third market d) fourth market
c) third market
The syndicate dissolves: a) when members elect to do so b) 30 days after securities issue c) when the lead investment banker decides to do so d) the syndicate never dissolves
c) when the lead investment banker decides to do so
The Federal Reserve System and the New York Stock Exchange regulations currently require the short seller to have an initial margin of at least _______ of the price of the stock: a) 10% b) 25% c) 30% d) 50% e) they do not require the short seller to have any initial margin
d) 50%
The regulation of new security sales by individual states is referred to as: a) the registration process b) a truth-in securities requirement c) the rating of security quality d) Blue-sky laws
d) Blue-sky laws They protectinvestors from fraudulent security offerings, state laws differ
________ is when an investor borrows money and invests the borrowed funds along with his or her own funds in securities. a) A short sale b) A stop-loss order c) A limit order d) Buying on margin
d) Buying on margin
________ is when a broker constantly buys and sells securities from a client's portfolio in an effort to generate commissions. a) Blending b) Flipping c) Swapping d) Churning
d) Churning
_______ is a technique for trading stocks as a group rather than individually, defined as a minimum o fat least 15 different stocks with a maximum value of $1 million. a) A short sale b) A stop-loss order c) Margin trading d) Program trading
d) Program trading
A firm may decide to list its shares on another exchange besides the NYSE because a) costs are lower b) listing requirements are easier to satisfy c) investors can get faster trade execution in another exchange d) all of the above
d) all of the above
A limit order, if not executed, will expire at the end of a) the day b) the week c) the month d) all three are possibilities
d) all three
Investment banks engage in teh following activities; a) underwrite corporate securities b) buy and sell commercial paper c) mergers and acquisitions d) all three (a,b,c) e) none of the three (a,b,c)
d) all three
The flotation costs of an IPO depend on a) the size of the offering b) the issuing firm's earnings c) the condition of the stock market d) all three (a,b,c) e) none of the three (a,b,c)
d) all three
Which of the following securities issues do not usually require competitive bidding? a) state government bond issues b) local government bond issues c) Federal government bond issues d) corporate bond issues
d) corporate bond issues applies to state, local, Federal bond issues and those of governmental agencies
A market in which large institutional investors arrange the purchase and sale of securities among themselves without the benefit of brokers or dealers is called a: a) primary market b) secondary market c) third market d) fourth market
d) fourth market
Hedging is similar to the concept of _________. a) gambling b) juggling c) hiding d) insurance
d) insurance protects investors from large adverse price fluctuations in the value of an asset
The maximum buying price or the minimum selling price specified by the investor is called a: a) stop-loss order b) market order c) short sale d) limit order
d) limit order (maximum buying price is minimum selling price specified by the investor) a) stop-loss order (order to sell stock at market price when price of the stock falls to specified level) b) market order (order for immediate purchases or sale at the best price possible) c) short sale (sale of securities that the seller does not own)
Which one of the following is not a primary market function of investment bankers? a) originating b) underwriting c) selling d) making loans
d) making loans primary market: original issue market in which securities are initially sold
Over-the-counter (OTC) trades must take place: a) on the floor of the New York Stock Exchange b) on the floor of the American Stock Exchange c) on the floor of the NASDAQ Stock Exchange d) none of the above
d) none of the above OTC is a telecommunications network linking brokers and dealers to trade OTC stocks
If an investor feels the price of a stock will decline in the future, which trade should the investor undertake a) market order b) buy on margin c) limit order d) short sale
d) short sale sale of securities the seller does not own investor plans to buy the stock at the lower price in the future
An order to sell stock at the market price when the price of the stock falls to a specified level is called a: a) limit order b) market order c) short sale d) stop-loss order
d) stop-loss order
In reality, an option's value will equal its intrinsic value only at expiration. At all other times, the option's premium or price will exceed its intrinsic value. A major reason for this is ______. a) marketability b) price c) trade restrictions d) time e) none of the above
d) time the longer the time to expiration the more likely it will become profitable to exercise the option
Exchange-traded options are liquid because they are standardized in terms of: a) expiration dates b) exercised prices c) quantity of the underlying asset d) quality of the underlying asset e) all of the above
e) all of the above
While the Chicago Board Options Exchange remains the main market for exchange traded options, the ________ exchange also deals in option contracts. a) New York b) American c) Pacific d) Philidelphia e) all of the above
e) all of the above
Floor brokers include: a) house brokers b) independent brokers c) designated market makers d) all the above e) both a and b
e) both a (house brokers) and b (independent brokers) designated market makers- one of 3 types of members of NYSE but not a floor broker
Exchange-traded options are liquid because they are standardized in terms of: a) diversity in the location of the underlying assets b) diversity of the underlying assets c) diversity of the timing of the underlying assets d) all three (a,b, and c) e) non of the three (a,b, and c)
e) non of the three (a,b, and c)
In reality, an option's value will equal its intrinsic value only at expiration. At all other times, the option's premium or price will exceed its intrinsic value. A major reason for this is ___________. a) marketability b) price c) trade restrictions d) time e) none of the above
e) none of the above
The seller of an option contrct is called a(n) ______ and the price paif for the option itself is called the ______. a) option broker, option price b) sales agent, call option c) sales agent, option premium d) option writer, option price e) none of the above
e) none of the above
While Chicago Board Options Exchange remains the main market for exchange traded options, the ______ exchange also deals in option contracts. a) Miami b) Indianapolis c) San Grancisco d) all three (a,b, and c) e) none of the three
e) none of the three
Which of the following is not a basic type of member of the New York Stock Exchange? a) independent brokers b) floor brokers c) registered traders d) designated market makers e) security regulators
e) security regulators they are not part of the NYSE, they work for the government
Future contracts are traded on all of the following EXCEPT a) agricultural goods b) currencies c) oil d) interest rates e) the winner of the Super Bowl
e) the winner of the Super Bowl
A limit order is an order to sell stock at the market price when the price of the stock falls to a specified level.
false maximum buying price (limit buy) or the minimum selling price (limit sell) specified by the investor