172A CH.3 Review

87. The commission structure on a stock purchase is $20 plus $.02 per share. If you purchase four round lots of a stock selling for $56, what is your commission?

$28 Commission = 20 + (400 × .02) = $28

You sell short 200 shares of Doggie Treats Inc. 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.)

$28.85

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 ____.

$30.29 A margin call will occur if Equity/Market value = .30 or less .3 = (200P - 4,000 - 240)/200P 60P = 200P - 4,240 -140P = -4,240 P = $30.29

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.)

$35.71 Equity = 200P - 5,000 Margin = (200P - 5,000)/200P = .30 200P - 5,000 = 60P 140P = 5,000 P = 35.71429

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.

$4,500 Investment = 300(30)(.50) = 4,500

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 In this case the specialist would have the option of matching the buy order with the lowest limit sell order ($40.25) or setting an ask price lower than $40.25 ($40 for example) and trading the order from her own stock.

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?

$55 100(10.30 - 10.25) + 2(25) = $55

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.

$62.50 Amount received from short sale = 200 × $50 = $10,000 Loss = $2,500 = 200P - 10,000 $12,500 = 200P, so P = $62.50

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?

$68 Commission = 50 + (600 × .03) = $68

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 _________.

$8,000 500($40)(.40) = $8,000

The CFA Institute Standards of Professional Conduct require that members _____. -place their clients' interests before their own -disclose conflicts of interest to clients -inform their employers that they are obligated to comply with the Standards of Professional Conduct -all of these options

-all of these options: place their clients' interests before their own -disclose conflicts of interest to clients -inform their employers that they are obligated to comply with the Standards of Professional Conduct

As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks' prices change by more than _____ in a 5-minute period.

10%

The market share held by the NYSE Arca system in February 2011 was approximately ____.

10%

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 ____.

17% (28-25)*400-0.07(5000)/5000= 0.17

According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration.

2 years

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.)

20% (30-27)/0.5(30)= 20%

Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.

25%

A level _____ subscriber to the NASDAQ system may enter bid and ask prices.

3

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.

43% (32-25)/26*(0.65)=0.43

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?

48% Loss=(22-25)*100= -300 Amount invested=0.25*25*100 = 625 Return= -300/625 =-48%

More than ______ of all trading is believed to be initiated by computer algorithms.

50%

Explicit costs of an IPO tend to be around ______ of the funds raised.

7%

10. The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________.

Archipelago; Instinet

Regulation NMS: I. Supports the goal of integrating financial markets II. Requires the use of specialists to execute trades III. Requires that exchanges honor quotes of other exchanges when they can be executed automatically

C. I and III only

Which one of the following types of markets requires the greatest level of trading activity to be cost-effective? -Broker market -Dealer market -Continuous auction market -Direct search market

Continuous auction market

The fully automated trade-execution system installed on the NYSE is called _____.

Direct +

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 primary market where new security issues are offered to the public is a good example of _________.

a brokered market

The over-the-counter securities market is a good example of _________.

a dealer market

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 seasoned equity offering

Level 3 NASDAQ subscribers _____. -are registered market makers. -can post bid and ask prices. -have the fastest execution of trades. -all of these options.

all of these options. are registered market makers. -can post bid and ask prices. -have the fastest execution of trades.

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 inside quotes on a limit order book can be found ______.

at the top of the list

In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

best-efforts

40. 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

Maintenance requirements for margin accounts are set by ____.

brokerage firms

The NYSE Hybrid Market allows _____.

brokers to send orders either to an electronic system or to a specialist

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.

dealer; Brokers; electronic

All major stock markets today are effectively _______________.

electronic trading systems

According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term.

good; bad

The average depth of the limit order book is _____.

higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

When matching orders from the public, a specialist is required to use the _______.

highest outstanding bid price and lowest outstanding ask price

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

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 ________.

market value of the stock - amount owed on the margin loan

The SIPC was established by the ____. -Insider Trading Act of 1931 -Securities Act of 1933 -Securities Exchange Act of 1934 -none of these options

none

Transactions that do not involve the original issue of securities take place in _________.

secondary markets

You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.

stop-loss order

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; stop-buy

Initial margin requirements on stocks are set by _________.

the Federal Reserve

The largest nongovernmental regulator of securities firms in the United States is ________.

the Financial Industry Regulatory Authority

The term latency refers to _____.

the amount of time it takes to accept, process, and deliver a trading order.

The term inside quotes refers to _____.

the difference between the highest bid price and the lowest ask price in the limit order book

The bid-ask spread exists because of _______________.

the need for dealers to cover expenses and make a profit

A red herring becomes a prospectus when ____.

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

76. Which of the following are true concerning short sales of exchange-listed stocks? I. Proceeds from the short sale must be kept on deposit with the broker. II. Short-sellers must post margin with their broker to cover potential losses on the position. III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

I and II only

Specialists try to maintain a narrow bid-ask spread because: I. If the spread is too large, they will not participate in as many trades, losing commission income. II. The exchange requires specialists to maintain price continuity. III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

I and II only -I.If the spread is too large, they will not participate in as many trades, losing commission income. -II. The exchange requires specialists to maintain price continuity.

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: I. Purchase Archipelago, a major ECN, and rename it NYSE Arca II. Enable automatic trade execution through its new Market Center III. Impose a tighter limit on bid-ask spreads

I only -I. Purchase Archipelago, a major ECN, and rename it NYSE Arca

Private placements can be advantageous, compared to public issue, because: I. Private placements are cheaper to market than public issues. II. Private placements may still be sold to the general public under SEC Rule 144A. III. Privately placed securities trade on secondary markets.

I only I. Private placements are cheaper to market than public issues.

Trading on inside information is: I. Prohibited by federal law II. Prohibited by the CFA Institute Standards of Professional Conduct III. Monitored by the SEC

I, II, and III I. Prohibited by federal law II. Prohibited by the CFA Institute Standards of Professional Conduct III. Monitored by the SEC

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.

I, II, and III -They allow anonymity in trading. -They often involve large blocks of stocks. -Trades made through them might not be reported.

Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers

I, II, and III I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers

Which one of the following statements about IPOs is not true? -IPOs generally underperform in the short run. -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.

IPOs generally provide superior long-term performance as compared to other stocks.

Rank the following types of markets from least integrated and organized to most integrated and organized: I. Brokered markets II. Continuous auction markets III. Dealer markets IV. Direct search markets

IV, I, III, II

What was the result of high-frequency traders' leaving the market during the flash crash of 2010?

Market liquidity decreased.

Which one of the following is not an example of a brokered market? -Residential real estate market -Market for large block security transactions -Primary market for securities -NASDAQ

NASDAQ

The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.

NASDAQ; NYSE

In 2008, the NASDAQ stock market merged with _____.

OMX, which operates seven Nordic and Baltic stock exchanges

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

73. The ____ requires full disclosure of relevant information relating to the issue of new securities.

Securities Act of 1933

18. Which one of the following is a false statement regarding NYSE specialists? -On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists. -Specialists cannot trade for their own accounts. -Specialists maintain limit order books, which contain the outstanding unexecuted limit orders. -Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

Specialists cannot trade for their own accounts.

__________ often accompany short sales and are used to limit potential losses from the short position.

Stop-buy orders

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?

The tick size decreased in both cases.

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?

$1,690,000 Total cost = 90,000 + (43 - 35)200,000 = $1,690,000

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?

$10,000 Maximum gain:Proceeds- minimum possible replacement cost 220*(50)-200*(0)= 10,000

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 (1,003.25 - 1,000.50)500 = $1,375

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

All three of them I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make

Advantages of ECNs over traditional markets include all but which one of the following? -Lower transactions costs -Anonymity of the participants -Small amount of time needed to execute and order -Ability to handle very large orders

Ability to handle very large orders