Chapter 2 FI 414

Which one of the following statements about the NYSE is correct? A) Each member of the exchange owns a trading post. B) Any listed stock may be traded at any of 20 trading posts. C) Brokerage firms are only permitted to have one individual trading on the floor of the exchange. D) Buy orders are filled at the lowest price and sell orders are filled at the highest price.

D) Buy orders are filled at the lowest price and sell orders are filled at the highest price.

Stocks and bonds are traded in... A) securities and exchange commissions. B) money markets. C) federal trade commissions. D) capital markets.

D) Capital markets

Which of the following are provisions of the Sarbanes-Oxley Act of 2002? I. an oversight board to monitor the accounting industry II. tougher penalties for executives who commit corporate fraud III. stricter prohibitions against insider trading IV. guidelines for analysts conflicts of interest A) II and IV only B) I, II and III only C) I and IV only D) I, II and IV only

D) I, II and IV only

Which of the following can be encountered when investing in foreign markets? I. foreign taxation of dividends II. different accounting standards for financial disclosure III. restrictions on types of investments IV. illiquid markets A) II and III only B) II and IV only C) I, II and IV only D) I, II, III and IV

D) I, II, III and IV

Which of the following characteristics apply to trading before and after regular hours? I. Most after hours trades match a bid price to a corresponding offer price. II. Most brokerage firms require individual investors to place only market orders for after- hours trades. III. Electronic Communications Networks (ECNs) play a key role in after hours trading. IV. After-hours trading begins at 4:00 P.M. and ends at 9:30 A.M. eastern time. A) II and IV only B) I, II and III only C) I and IV only D) I, III and IV only

D) I, III and IV only

Which of the following are associated with bull markets? I. investor pessimism II. government stimulus III. economic recovery IV. low inflation A) I and II only B) II and III only C) I, II and III only D) II, III and IV only

D) II, III and IV only

The automated system for trading highly active OTC securities is the... A) Big Board. B) Kansas City Board. C) Chicago Board of Trade. D) NASDAQ.

D) NASDAQ

The Consumer Financial Protection Agency was established by A) Investment Company Act of 1940. B) The Securities Acts Amendments of 1975. C) The Sarbanes-Oxley Act of 2002. D) The Dodd-Frank Act of 2010.

D) The Dodd-Frank Act of 2010.

The NYSE Euronext includes exchanges in all of the following cities EXCEPT... A) Amsterdam. B) Brussels. C) Paris. D) Tokyo.

D) Tokyo

Which of the following is currently a requirement for a stock to be listed on the NYSE? A) A price of at least $10 per share. B) Three consecutive years of profitable operations. C) Gross revenue of at least $15,000,000. D) Total value of shares available for public trading (float) of $15,000,000.

D) Total value of shares available for public trading (float) of $15,000,000.

American investors can participate in international stock markets by.. A) purchasing shares in a mutual fund that invests in foreign companies. B) purchasing shares of a U.S. based company such as Coca Cola or McDonald's with extensive international operations. C) purchasing ADSs (American Depositary shares). D) all of the above.

D) all the above

In recent years, trading in secondary markets has increasingly become a function of... A) securities exchanges. B) dealer markets. C) technology that by-passes both brokers and dealers. D) broker-dealer markets using consolidated venues and technologies.

D) broker-dealer markets using consolidated venues and technologies.

The Securities Exchange Act of 1934 A) requires full disclosure of information on all new security issues. B) authorized the SEC to regulate mutual funds. C) established trade associations such as the NASD. D) created the SEC as the regulator of the securities exchanges.

D) created the SEC as the regulator of the securities exchanges.

Jessica purchased 200 shares of stock at $38 using her 70% margin account. Her maintenance margin is 40%. Jessica has no other securities in her account. At what price will she receive a margin call? A) $26.60 B) $19.00 C) $11.40 D) $7.60

B) $19.00

Kayla invested $3,000 and purchased shares of a German corporation when the exchange rate was $1.00 = .91 euro. After six months, she sold all of the shares for 3,180 euros, when the exchange rate was $1.00 = .88 euro. No dividends were paid during the time Heidi owned the shares of stock. What is the amount of Kayla's gain or loss on this investment? A) $613.64 loss B) $613.64 gain C) $497.60 loss D) $497.60 gain

B) $613.64 gain

Emily bought 200 shares of ABC Co. stock for $29.00 per share on 60% margin. Assume she holds the stock for one year and that her interest costs will be $80 over the holding period. Ignoring commissions, what is her percentage return (loss) on invested capital if the stock price went down 10%? A) -32% B) -19% C) -16% D) -10%

B) -19%

Joseph bought 100 shares of stock at a price of $24 a share. He used his 70% margin account to make the purchase. Joseph sold his stock after a year for $20 a share. Ignoring margin interest and trading costs, what is Joseph's return on investor's equity for this investment? A) -17% B) -24% C) 24% D) -56%

B) -24%

Megan bought 200 shares of stock at a price of $10 a share. She used her 70% margin account to make the purchase. Megan sold her stock after a year for $12 a share. Ignoring margin interest and trading costs, what is Megan's return on investor's equity for this investment? A) 67% B) 29% C) 14% D) 10%

B) 29%

Which one of the following statements about margin trading is correct? A) The Securities Exchange Commission sets the minimum margin requirement for margin trading. B) If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $600 in cash to make the purchase. C) Margin traders are willing to accept lower return to reduce their risk. D) Margin traders are pessimistic about the future price of the stock.

B) If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $600 in cash to make the purchase.

Which one of the following statements about foreign investments is true? A) In general, major foreign markets always tend to underperform the U.S. market. B) Investing in foreign markets may involve specific risks not encountered with domestic securities. C) Investing in foreign markets will always produce higher returns because of exchange rate fluctuations. D) Foreign markets include equity securities only.

B) Investing in foreign markets may involve specific risks not encountered with domestic securities.

Aria has heard a rumor that a major food company will be forced to recall millions of jars of peanut butter. due to contamination If the rumors are true, the company's stock price will decline sharply. Which one of the following strategies would allow Jennifer to earn a profit if the rumor proves to be true? A) Take a long position in the stock today. B) Sell the stock short today. C) Buy the stock on margin today. D) Take a long position in the stock one month from today.

B) Sell the stock short today.

Dollar-denominated debt securities issued by foreign corporations and traded in U.S. markets are called... A) ADRs. B) Yankee bonds. C) ETFs. D) global bonds.

B) Yankee bonds.

The purpose of the Intermarket Trading System is to link major exchanges and dealer markets to... A) eliminate competition between brokers and dealers. B) allow brokers and dealers to make transactions at the best price. C) allow individual to compare the prices offered by various dealers and brokers. D) allow individual investors to traded directly with each other.

B) allow brokers and dealers to make transactions at the best price.

The price an individual investor will pay to purchase a stock in the OTC market is the... A) spread. B) ask price. C) bid price. D) broker price.

B) ask price

Exchange traded funds are... A) mutual funds that trade on the Big Board. B) baskets of securities that trade like a single stock. C) index funds that trade on the NYSE. D) groups of securities that trade only on regional exchanges.

B) baskets of securities that trade like a single stock.

A market where securities are are bought from or sold to a market maker is known as a... A) broker market. B) dealer market. C) exchange floor. D) board of exchange.

B) dealer market.

IPO activity tends to peak when stock prices.... A) have fallen sharply. B) have risen sharply. C) are volatile and unstable. D) Stock prices have relatively little influence on IPO activity.

B) have risen sharply.

Which one of the following is a major advantage of margin trading? A) increase in potential diversification B) increase in potential profits on a percentage basis C) possibility of increased gains on a dollar basis D) interest free loans

B) increase in potential profits on a percentage basis

Assume the foreign exchange rate for the euro was U.S. $1.00 = .91 euro last month. This month, the exchange rate is U.S. $1.00 = .88 euro. All things equal, the dollar value of European stocks.. A) decreased. B) increased. C) stayed the same. D) would vary depending on the country.

B) increased.

A rights offering is the... A) initial offering of securities to the public. B) offering of new securities to current shareholders on a pro-rata basis. C) sale of newly issued shares of stock to the general public. D) sale of securities directly to a select group of investors.

B) offering of new securities to current shareholders on a pro-rata basis

ECNs are... A) publicly owned auction markets for listed stocks. B) privately owned networks that transact trades between institutional investors. C) facilities used by market makers for trading unlisted securities. D) part of the third market which trades listed securities between individual investors.

B) privately owned networks that transact trades between institutional investors.

If an investor does not respond to a margin call, the broker will.. A) sell enough of the investor's holdings that the margin account can be closed. B) sell some of the investor's holdings to cover the margin call. C) notify the Federal Reserve so they can cover the call. D) sell all of the investor's holdings and close their brokerage account.

B) sell some of the investor's holdings to cover the margin call.

The over-the-counter (OTC) market is a... A) centrally located auction market. B) telecommunications network connecting dealers. C) market solely for institutional traders. D) geographically dispersed auction market.

B) telecommunications network connecting dealers.

The primary market tends to be more active when... A) the economy is slowing and stock prices are falling. B) the economy is expanding and stock prices are rising. C) interest rates are rising. D) early in the calendar year.

B) the economy is expanding and stock prices are rising.

Gerry bought 100 shares of stock for $30.00 per share on 70% margin. Assume Gerry holds the stock for one year and that his interest costs will be $45 over the holding period. Gerry also received dividends amounting to $0.30 per share. Ignoring commissions, what is his percentage return on invested capital if he sells the stock for $34 a share? A) 106.17% B) 20.48% C) 18.33% D) 9.16%

C) 18.33%

An act explicitly defining and prohibiting insider trading was passed in... A) 1934. B) 1975. C) 1988. D) 2002.

C) 1988.

The dominant exchange for trading options contracts is the ________. The dominant player in the trading of futures contracts is ________. A) NYSE; Nasdaq OMX BX B) PHLX; CBOE C) CBOE; CME Group D) ISE; CBOT

C) CBOE; CME Group

Which of the following statements about short selling is (are) true? I. Short selling requires an initial margin deposit. II. Short sellers begin a transaction with a sale and end it with a purchase. III. Short sellers profit when the stock prices rises. IV. Short selling can be a risky strategy. A) IV only B) I and II only C) I, II and IV only D) I, II, III and IV

C) I, II and IV only

Which of the following are correct statements concerning the NYSE? I. Each stock has a designated location, called a post, at which its shares are traded. II. The NYSE is a dealer market. III. Supply and demand determines the price of each security. IV. A specialist buys and sells to maintain a market for a particular security. A) I and II only B) I and III only C) I, III and IV only D) I, II, III and IV

C) I, III and IV only

Which of the following acts abolished fixed commission schedules? A) Investment Advisers Act of 1940 B) Investment Company Act of 1940 C) Securities Acts Amendments of 1975 D) Insider Trading and Fraud Act of 1988

C) Securities Acts Amendments of 1975

Last week, Seward Company stock was selling at $66 a share when Ryan sold 300 shares of the stock short. Today Ryan bought 300 shares of the same stock at a price of $70.00 share to cover his position. Ignoring trading costs, what is the dollar return on Ryan's investment? A) $1,200 B) -$400 C) $400 D) $-1,200

D) $-1,200

Justin just made a margin purchase of 100 shares of DEF Corp. for $22.50 per share. The initial margin is 70%. The maintenance margin is 30%. How low can the price of each share of DEF be before Justin will have to add equity to his account? A) $4.73 B) $5.25 C) $6.75 D) $9.64

D) $9.64

The financial crisis of 2008 resulted in... A) a steep increase in the price of newly issued stock because supply was limited. B) new regulations affecting initial public offerings. C) a sharp reduction in the number of initial public offerings. D) B and C, but not A.

D) B and C, but not A.

Short-term securities are brought and sold in the a) capital market b) primary market c) money market d) stock market

c) money market

The dominant options exchange is the... A) Chicago Board Options Exchange. B) American Stock Exchange. C) Pacific Stock Exchange. D) Philadelphia Options Exchange.

A) Chicago Board Options Exchange.

The effects of fluctuating foreign exchange rates may I. increase a U. S. investor's rate of return. II. decrease a U. S. investor's rate of return. III. can be avoided by investing in ADRs. IV. can be avoided by investing in mutual funds that specialize in foreign stocks. A) I and II only B) I and III only C) III and IV only D) I, II, III and IV

A) I and II only

Which of the following are characteristics of short selling? I. borrowing shares of stock from a brokerage firm or other investors II. selling shares of stock you do not own III. betting the stock price will increase IV. limiting losses per share to the price at which the stock was sold A) I and II only B) III and IV only C) I, II and IV only D) I, II, III only

A) I and II only

Which of the following are associated with bear markets? I. investor pessimism II. rising profits III. economic slowdown IV. rising security prices A) I and III only B) II and III only C) I, II and III only D) II, III and IV only

A) I and III only

Functioning securities exchanges are located in... I. Brazil II. China III. Russia IV. South Korea A) I, II, III and IV B) I, II and IV only C) I and IV only D) II, III, and IV only

A) I, II, III and IV

Companies offering their stock to the public for the first time usually seek the assistance of... A) investment bankers B) the Securities and Exchange Commission C) the Federal Reserve Bank D) prospectors

A) Investment Bankers

Which one of the following statements about margin trading is correct?... A) The Federal Reserve sets the minimum margin requirement for margin trading. B) If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $400 in cash to make the purchase. C) Purchasing stocks on margin is less risky than purchasing stocks by paying cash for the entire purchase. D) Margin trading increases the potential profits while lowering the potential losses on a percentage basis.

A) The Federal Reserve sets the minimum margin requirement for margin trading.

The great majority of transactions on the NYSE are executed... A) automatically through electronic technology. B) on the trading floor by brokers known as specialists. C) by dealers known as market makers. D) by auction in trading areas known as pits.

A) automatically through electronic technology.

A restricted account is defined as a margin account wherein the equity is... A) less than the initial margin amount. B) greater than the initial margin amount. C) less than the maintenance margin amount. D) greater than the maintenance margin amount.

A) less than the initial margin amount.

The purchase of stock with cash in the hope of earning a capital gain is known as taking a... A) long position in the stock. B) short position in the stock. C) long, margined position in the stock. D) short, margined position in the stock.

A) long position in the stock.

Which of the following practices is prohibited by the Insider Trading and Fraud Act of 1988? A) the use of nonpublic information to make profitable stock transactions B) selling of stock by officers of the company C) the granting of stock options to corporate executives in lieu of salaries D) private sales of stock between executives of the company

A) the use of nonpublic information to make profitable stock transactions

Michael purchased 1000 shares of stock at a price of $16 a share. He utilized his 50% margin account to make the purchase. What is Michael's initial equity in this investment? A) -$16,000 B) $16,000 C) $8,000 D) -$8,000

C) $8,000

Which one of the following statements concerning the primary market is correct? A) A transaction in the primary market is between two private stockholders. B) The first public sale of a company's stock in the primary market is called a seasoned new issue. C) The first public sale of a company's stock is called an IPO. D) A rights offering is a direct sale of stock to an institution that participates in the primary market.

C) The first public sale of a company's stock is called an IPO.

The Sarbanes-Oxley Act of 2002 focuses on.. A) insider trading. B) IPOs. C) accounting and other public disclosures of information. D) regulation of the OTC markets.

C) accounting and other public disclosures of information

Market makers in dealer markets... A) bring sellers and buyers together by matching offers. B) earn commissions paid by the sellers of securities. C) buy securities at a bid price and hope to resell them at a higher offer price. D) all of the above.

C) buy securities at a bid price and hope to resell them at a higher offer price.

Options contracts on stocks may... A) grant the owner the right to buy the stock at a specified price over a specified period of time. B) grant the owner the right to sell the stock at a specified price over a specified period of time. C) depending on the type of contract, grant the owner the right to either buy or sell the stock at a specified price over a specified period of time. D) legally oblige the owner to buy the stock at a specified price over a specified period of time.

C) depending on the type of contract, grant the owner the right to either buy or sell the stock at a specified price over a specified period of time.

Jocelyn sells short 1000 shares of JKLO stock at $31.25 per share and six months later purchases the shares at $29.00 each. Ignoring margin interest and brokerage fees, Nancy will... A) earn a total profit of $3,125. B) lose a total of $2,900. C) earn a total profit of $2,250. D) Lose a total of $2,250.

C) earn a total profit of $2,250.

Assume the foreign exchange rate for the euro was U.S. $1.00 = .91 euro last month. This month, the exchange rate is U.S. $1.00 = .88 euro. This information indicates that over the past month the... A) U.S. dollar remained unchanged relative to the euro. B) U.S. dollar appreciated relative to all foreign currencies. C) euro appreciated relative to the dollar. D) euro depreciated relative to the dollar.

C) euro appreciated relative to the dollar.

Crossing markets are those that.. A) trade foreign securities. B) conduct transactions between institutional and individual traders. C) fill only the orders which have opposing orders at identical prices. D) conduct business at locations in varying time zones.

C) fill only the orders which have opposing orders at identical prices.

Maintenance margin is the... A) minimum amount of loan that can be used for margin trading. B) initial amount of equity required for a margin purchase. C) minimum amount of equity that an investor can have to avoid a margin call. D) amount of additional funds that need to be added to an account to meet minimal equity requirements.

C) minimum amount of equity that an investor can have to avoid a margin call.

Large technology companies such as IBM and Microsoft trade... A) exclusively on the NASDAQ. B) exclusively on the NYSE. C) on either the NASDAQ or the NYSE. D) exclusively on alternative trading systems.

C) on either the NASDAQ or the NYSE.

The document that describes the issuer of a security's management and financial position is known as a... A) balance sheet. B) 10-K report. C) prospectus. D) red herring.

C) prospectus

Including foreign investments in a portfolio... A) increases the overall risk of the portfolio. B) reduces the potential rate of return. C) provides potential benefits from changes in currency values. D) limits the diversification amongst industries.

C) provides potential benefits from changes in currency values.

American Depositary Receipts represent... A) receipts for dollar deposits in foreign banks. B) receipts from foreign broker-dealers establishing ownership of foreign stocks. C) receipts for the stocks of foreign companies held by banks in the companies' home country. D) receipts for shares of foreign companies held by U.S. broker-dealers.

C) receipts for the stocks of foreign companies held by banks in the companies' home country.

Investment bankers who join together to share the financial risk associated with buying an entire issue of new securities and reselling them to the public is called a(n)... A) selling group. B) tombstone group. C) underwriting syndicate. D) primary market group.

C) underwriting syndicate

Stocks purchased in the secondary market are purchased... A) directly from the issuing corporation. B) from other investors. C) from small, little-known brokerages. D) indirectly through financial institutions.

b) from other investors

The governmental agency that oversees capital markets is the... a) Federal Trade Commission b) Federal Reserve c) Securities and Exchange Commission d) Fair Trade and Banking Agency

c) Securities and Exchange Commission