FINC 409 - Chapter 11 Practice Problems
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 satify. c. investors can get faster trade execution in another exchange. d. all of the above
D
A limit order, if not executed, will expire at the end of a. the day. b. the week. c. the month. d. all of the above are possibilities as the trader will decide the expiration date
D
A market whereby large institutional investors arrange purchases and sales of securities among themselves without the benefit of a broker or dealer is referred to as the: a. primary market b. secondary market c. third market d. fourth market
D
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
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
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
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%
D
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 of the above e. none of the above
D
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
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
Trades between large institutional investors that take place without the benefits of brokers or dealers occur in the: a. primary market b. secondary market c. third market d. fourth market
D
Which of the following is not a reason to sell securities in a private placement? a. to keep current shareholders from suspecting "sweetheart deals" b. to forestall a hostile takeover c. to fulfill a need for an emergency infusion of equity d. to reduce dividend payouts to shareholders e. none of the above
D
Which of the following securities issues do not require competitive bidding? a. state government bond issues b. public utility security issues governmental agency c. Federal government bond issues d. corporate bond issues
D
Which one of the following is not a primary market function of investment bankers? a. originating b. underwriting c. selling d. making loans
D
Federal regulation of investment banking is administered primarily under the provisions of the Investment Banking Monitoring and Control Act of l999
F p 287 under the Securities Act of 1933
Organized securities exchanges include the New York Stock Exchange, the American Stock Exchange, and NASDAQ
F p 288, 293 NASDAQ is not an organized exchange, it is an Over The Counter exchange
The term "Big Board" is another name for the NASDAQ market
F p 289 it is another name for the New York Stock Exchange
The fourth market is a market for large blocks of listed stocks that operate outside the confines of the organized exchanges
F p 294 third
Commissions on stock trades are set by the stock exchanges.
F p 296 commissions vary from brokerage firm to brokerage firm
The maintenance margin is the minimum margin to which an investment may fall before a margin call is placed
T
The secondary markets provide pricing information and liquidity to investors.
T
Under a best-effort agreement, investment bankers try to sell the securities of the issuing corporation, but they assume no risk for a possible failure of the flotation
T
In a financial context, due diligence refers to the detailed study of a corporation
T 276
The issuer has almost no price risk in a firm commitment offering once the offer price is set
T 277
A Dutch auction is an offering process in which investors bid on the price and quantity of securities they wish to purchase
T 279
A syndicate is a group of several investment banking firms that participate in underwriting and distributing a security issue
T 281
Underpricing represents the difference between the aftermarket price and the offering price.
T 281
If there were no secondary markets for trading between investors, there would be no primary market for the initial sale of securities
T 288
The Glass-Steagall Act of l933 ended the ability of commercial banks to act as underwriters of newly issued securities
T 288
A market order is an order for immediate purchase or sale at the best possible price.
T 290
The Dow-Jones Industrial Average is made up of 30 large blue-chip stocks
T 296
ADRs are created and traded in dollars on U.S. exchanges. They represent a given number of shares of a foreign firm's stock
T 297
Churning happens when a broker constantly buys and sells securities from a client's portfolio in an effort to generate commissions
T 299
The aftermarket is a period of time after an IPO. IPO is the Initial Public Offering
T p 28l members of the syndicated may not sell the securities for less than the offering price
Which of the following statements is most correct? a. Because global depository receipts are listed on the London Stock Exchange, U.S. 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 above statements are correct
B
A market is liquid if a. trades are executed quickly. b. market prices don't fluctuate sharply on successive trades c. both a) and b) are correct. d. if fees are low
C
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 once the stop-price loss or a price below it is reached d. stops losses for 30 days
C
An over-the-counter market trade occurs in the: a. primary market b. NYSE c. third market d. SEC
C
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. (Pick the closest answer.) a. $2,000 b. $2,500 c. $10,000 d. $12,500
C
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. none of the above
C
The brokers who handle the house broker's overflow are called: a. specialists b. registered traders c. independent brokers d. all the above
C
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. none of the above
C
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
The price for which the owner is willing to sell the security is called the: a. bid price b. spread c. ask price d. limit price
C
The syndicate dissolves: a. when members elect to do so b. 30 days after securities issue c. when the lead investment banker decides d. the syndicate never dissolves
C
Which of the following activities is not the responsibility of registered traders? a. buy and sell stocks for their own accounts b. pay no commissions c. match up buy and sell orders d. all the above e. none of the above
C
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 the above e. none of the above
C
Which one of the following is not a cost to the issuing firm of going public with an initial stock offering? a. direct costs (legal fees, accounting fees, etc.) b. underwriter's spread c. overpricing d. underpricing
C
________ 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
Floor brokers act as agents to execute customers' orders for securities purchases and sales.
T
Insider trading regulation is provided for under the Securities Exchange Act of l934
T
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
Rights offerings among public corporations became infrequent in the United States during the l980s and l990s
T
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. all the above e. none of the above
A
An important function of the Securities and Exchange Commission is to pass judgment on the investment merit of a security
F p 287 SEC does not pass judgment on the investment merit of a security
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
A trade in the multiple of 100 shares is called a (n): a. round lot b. odd lot c. block trade d. none of the above
A
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
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. Securities Act of 1933 d. National Association of Securities Dealers
A
Floor brokers: a. act as agents to execute customers' orders for securities purchases and sales b. assist specialists in executing orders c. trade for their own accounts d. all the above e. none of the above
A
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. none of the above
A
Newly created securities are sold in the: a. primary market b. secondary market c. third market d. fourth market
A
The purpose of pre-emptive rights is to allow shareholders to: a. buy enough of a new securities offering to maintain their present proportional share of ownership b. buy an unlimited amount of the new issue at a discount c. pre-empt other stockholders from selling securities in a company d. none of the above
A
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 d. all of the above are characteristics of a good market
A
_________ 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. none of the above
A
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 the existing common stockholders. a. red herring b. pre-emptive rights offering c. seasoned offering d. shelf registration
B
An agreement whereby an investment banker tries to sell securities of an issuing corporation, but assumes no risk if the flotation is unsuccessful is called a: a. due diligence agreement b. best-effort agreement c. firm commitment price agreement d. shelf registration agreement
B
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 banking firms d. stock advisory brokers
B
Existing securities are traded: a. in the primary markets b. in the secondary markets c. only on organized exchanges d. only over-the-counter
B
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
If the value of the securities that you borrowed money from your broker to purchase falls, you may receive a: a. maintenance margin call b. margin call c. limit order call d. specialist call
B
Index 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 different markets c. buying IPO's d. all the above e. none of the above
B
Market stabilization is: a. disallowed under the Securities Act of 1934 b. permitted for underwriters if the market price falls below the offering price c. prohibited by the Securities Exchange Commission d. none of the above
B
Sales 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
The document which details the issuer's finances and must be provided to each buyer of the security is called the: a. indenture b. prospectus c. tombstone d. all the above
B
A syndicate is: a. a firm that assists in specialist transactions b. an organization of market makers c. the largest group of members on the NYSE d. all the above e. none of the above
E
Investment banks engage in all of the following activities EXCEPT: a. underwrite corporate securities b. buy and sell commercial paper c. mergers and acquisitions d. all of the above e. none of the above
E
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. specialists e. security regulators
E
The primary market is a market in which securities are traded among investors
F 276
Existing securities are traded in the primary market
F 276, 288
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
F 277
Shelf registration allows firms to register only debt issues with the SEC, and have them available to sell for two years
F 278 Debt AND Equity issues
IPO underpricing occurs only in the United States
F 281-282
A limit order is an order to sell stock at the market price when the price of the stock falls to a specified level
F 291 - Max buying or Min selling price specified by investor
An odd lot is a trade involving l00 shares or multiples of l00 shares
F 292
Over the counter markets are organized exchanges for trading securities such as the New York Stock Exchange
F 293
A global depository receipt is traded on the American Stock Exchange
F 298
New York Stock Exchange is an example of a primary market
F p 276 NYSE is a secondary market where existing securities are traded among investors
The prospectus is a contract outlining the duties, responsibilities and fees between the issuing firm and its underwriter
F p 276 it is not a contract, it is a document that details the issuer's operations and finances
Private placement can avoid SEC registration and all SEC regulations.
F p 276 subject to certain SEC-regulated guidelines for wealth and investment knowledge
A pre-emptive right refers to the right of existing shareholders to sue management in order to head off potential actions by management that would adversely affect the price of the stock
F p 278 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
All firms can use shelf registration which saves issuers both time and money.
F p 278 only firms that meet size, credit, quality & ethics requirements can use this
The flotation costs of an initial public offering are comprised solely of direct costs and the spread
F p 283 also underpricing
A dealer is a person who assists in the trading process by buying or selling securities in the market for an investor
F p 287 broker
American depository receipts are receipts which represent foreign shares to U.S. investors
T
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
T
Designated Market Makers are dealers who have the responsibility of making a market in an assigned security
T
Firm commitment flotation costs are typically lower than those of best efforts.
T
All public offerings are regulated by the Securities and Exchange Commission (SEC
T
All securities must be listed before they may be traded on the New York Stock Exchange
T
