Chapter 7
A designated market maker (DMM) may not accept which of the following orders? a. Not-held order b. Market order c. Good-'til-cancelled (open) order d. Day order
a A designated market maker (formerly known as a specialist) may accept all of the orders listed except a not-held order, which allows a floor broker to use discretion in executing an order. If the question asked which orders may be accepted and placed on his book, the answer would be open (GTC) and day orders only. A DMM may accept a market order but must execute it immediately and may not place it in his book.
A secondary market exists for: a. Dealer-placed commercial paper b. Federal funds c. Repurchase agreements d. U.S. savings bonds
a A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds.
A customer entered a GTC sell stop order for GM at $35. GM was selling at $38 when the order was entered. GM sells ex-dividend by the amount of the dividend which is $1.60. The customer's order will appear on the designated market maker's book after the stock goes ex-dividend as: a. 33.40 b. 35 c. 36.40 d. 38
a All GTC orders that are entered below the current market on the designated market maker's (DMM) book (buy limit, sell stop, and sell stop-limit orders) will be reduced by the amount of the dividend when the stock sells ex-dividend. The stock will always be reduced by an amount to cover the dividend entirely. The dividend is $1.60, so the order will be reduced 1.60, which will reduce the stop price on the order to 33.40.
On Tuesday, the S&P 500 Index closed at 1,600. At 11:30 the next morning, the S&P 500 Index is at 1,488. All NMS stocks will: a. Stop trading for 15 minutes b. Stop trading for 30 minutes c. Stop trading for the remainder of the day d. Continue to trade
a If the S&P 500 Index falls by 7% from the previous trading day's closing price, it is defined as a Level 1 Market Decline and triggers a 15-minute trading halt. In this question, the drop from the closing price of 1,600 to 1,488 the next day (112 points) is a 7% decline. 1488/1600=93 100-93=7%
A transaction for a stock that is not DTCC eligible, settles on a regular-way basis. This means that settlement occurs: I.In three business days II.In five business days III.At the buyer's premises IV.At the seller's premises a. I and III only b. I and IV only c. II and III only d. II and IV only
a Regular-way settlement for stock transactions is in three business days. In most cases, settlement occurs electronically through DTCC. In this case, since the seller must make physical delivery of the securities, settlement takes place at the buyer's premises.
Which of the following factors is LEAST important when recommending a long-term brokered CD to a client? a. The CD was issued by a bank located in a different state from where the client lives b. The CD has a feature in which the interest rate is based on a percentage increase in an equity index c. The client will be purchasing the CD in a retirement account d. The firm may make a market in this CD, but is not obligated to do so
a The state in which the client or issuing bank is located is not an important factor when recommending a long-term brokered CD. The features that establish the interest rate of the security, such as an index of fixed-income or equity securities, is relevant to the client. The amount of FDIC insurance and tax considerations are different depending on whether the CD is purchased in a retirement account. In addition, a broker-dealer is not required to maintain a secondary market or act as a market maker in a CD that was sold to the client. This will limit the liquidity of the security if the client needs the funds prior to maturity
A market maker has displayed a firm quote of 15 - 15.50, 5 x 8 for a stock. If a broker-dealer contacts the market maker and wants to purchase 1,000 shares, how many shares is the market maker obligated to sell at 15.50? a.800 shares b.500 shares c.1,000 shares d.Whatever amount the market maker decides to sell
a When a market maker gives a firm quote, the market maker is obligated to buy or sell up to the number of shares at the price quoted. The number of shares that are firm is based on round lots of 100 shares, first the number for the bid and then the number for the offer. The market maker is obligated to buy 500 shares at $15.00 and obligated to sell 800 shares at $15.50. The market maker is permitted to sell 1,000 shares, but only obligated to sell 800 shares.
Which TWO of the following statements are TRUE concerning a company that becomes delisted from the NYSE or Nasdaq? I.It may be quoted on the OTC Bulletin Board II.It may only be quoted in the OTC Pink market III.Firm quotes would no longer be available IV.Firm quotes may still be available a. I and III b. I and IV c. II and III d. II and IV
b A company that fails to meet the maintenance requirements of securities listed on the NYSE or Nasdaq will become delisted. When this occurs, the company may be quoted (but not listed) on the OTC Bulletin Board or in the OTC Pink Market (also called the Pink Sheets). Quotes on the OTCBB or the electronic Pink Sheets generally are firm quotes. Firm quotes obligate the offering dealer to buy or sell the amount quoted
A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover her short position. The customer instructs her registered representative to cover the short position at the market on the close. The order: a.Will be executed only at the closing price of the day b.Will be executed as close as possible to the closing price c.Will be executed at any price within the last 15 minutes of trading d.Is not permitted to be entered by a retail customer
b A market-on-close (MOC) order will be executed as close as possible to the closing price of the day
A customer is willing to accept a partial execution on an order to buy up to 800 shares of XYZ stock at 30. If the client does not want the unexecuted portion to be left open, this order should be entered as: a. Buy 800 XYZ NH b. Buy 800 XYZ at 30 IOC c. Buy 800 XYZ at 30 Day Order d. Buy 800 XYZ at 30 GTC
b An immediate-or-cancel (IOC) order must be executed immediately but does not need to be executed in its entirety. Part of the order may be executed. The unexecuted portion of a day order or a GTC order is placed on the designated market maker's book. A not-held (NH) order gives the floor broker discretion as to when to execute the order.
Which of the following choices is NOT permitted to write call options on XYZ Corporation? a. An individual who owns XYZ Corporation stock b. XYZ Corporation c. An individual who owns more than 5% of XYZ Corporation stock d. All of the above
b Any entity is permitted to write call options except the corporation itself.
Which of the following statements is TRUE concerning electronic communication networks (ECNs) a.They can be used only by retail investors b.They can be used to obtain automatic execution c.They can be used only by institutional investors d.They can be used by clients that do not want to use a broker-dealer
b Electronic communication networks (ECNs) are trading systems designed to match buyers with sellers of securities. They can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another, but allow subscribers such as broker-dealers to use these systems to execute the orders sent to them by their clients.
Charlene contacts her registered representative to buy an OTC stock. Rather than buying it directly from a market maker, Charlene's broker-dealer contacts another broker-dealer, who buys it from a market maker creating two levels of transaction fees. This is known as: a. Free-riding and withholding b. Interpositioning c. Backing away d. Churning
b Interpositioning occurs when a broker-dealer, executing an order for a customer, places another broker-dealer between itself and the market. This is generally prohibited.
If an issue of commercial paper is rated P-1 by Moody's, it is considered: a. Speculative b. Highest quality c. Intermediate quality d. On credit watch
b P-1 (also called Prime 1) is the highest rating that Moody's will assign to commercial paper. Intermediate ratings are P-2 and P-3. Speculative commercial paper would receive a rating of NP (not prime
On May 25, the president of MaxCo bought 3,000 shares of MaxCo stock in the open market at $33. Two months later, the stock has increased to $40. If the president now wants to sell the shares: a.Permission must be granted by the MaxCo board of directors b.The profit from the trade must be forfeited according to the short-swing profit rule c.Notification must be made to the corporation's legal counsel d.Permission must be granted by FINRA
b The Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than six months. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. Under Rule 144, the six-month holding period applies only to restricted stock and, since the stock was purchased in the open market, the shares would be considered control stock.
ABC Corporation bonds are convertible at $50. If the bonds are selling in the market for 90 ($900) and the common stock is selling for $43, which TWO of the following statements are TRUE? I.The stock is selling at a discount to parity with the bond II.The stock is selling at a premium to parity with the bond III.Liquidating the stock after converting the bond would be currently profitable IV.Liquidating the stock after converting the bond would not be currently profitable a. I and III b. I and IV c. II and III d. II and IV
b The conversion ratio, which is not given, is found by dividing the par value of the bond ($1,000) by the conversion price ($50). This equals 20 to 1 ($1,000 divided by $50 equals 20). The market price of the common stock is $43 per share. The stock is selling at a discount to parity with the bond ($43 stock x 20 shares = $860 which is below the $900 market price of the bond). If the bonds were converted and the stock was then sold at the market price, the investor would have a loss.
An investor purchases stock on Monday, September 15. The settlement date on the purchase is: a. Monday, September 15 b. Thursday, September 18 c. Monday, September 22 d. Wednesday, September 24
b The settlement date on a transaction is three business days following the trade date. Regulation T requires payment by customers for purchases in two business days following the settlement date, while the rules of the SRO require settlement between the buying and selling brokers in three business days from the trade date.
A designated market maker places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The designated market maker should adjust the order when the stock sells ex-dividend to: a. 1,000 shares at $20 b. 1,000 shares at $30 c. 1,500 shares at $20 d. 1,500 shares at $30
c The order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000).
A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? a. A market order b. Sell stop $63 c. Sell limit $63 d. Sell stop-limit $63
b This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order will not allow the client to receive further profits if the stock increases above $70. A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit
A transaction occurs between two dealers for a Nasdaq stock. The trade must be reported by: a.The buyer within 10 seconds b.The seller within 10 seconds c.Both within 10 seconds d.Both by the end of the day
b Transactions in Nasdaq stocks must be reported to FINRA by the seller within 10 seconds of the trade.
As it relates to a Nasdaq market maker, the term spread is BEST defined as which of the following? a.The difference between the price that an issuer will receive for its securities and the price that the public will pay for the securities b.The difference between the price at which a firm will buy a security and the price at which it will sell a security c.The amount of profit that a firm will make when it buys a security from or sells a security to a customer d.The amount of the firm's markup or markdown to a customer who buys or sells a security
b When used in reference to a Nasdaq market maker, the spread represents the difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security. For example, if the bid price is $21.20 per share and the offer price is $21.30 per share, the market maker's spread is $.10. Choice (a) is the spread or profit that an underwriter makes when it sells an IPO to a customer. Choice (c) is a market maker's profit based on its inventory cost for a security (i.e., the price at which it purchased a security from a customer compared to the price at which it was sold to a different customer. The markup or markdown is the difference between the prices the customer paid or received compared to the best bid or offer price of all Nasdaq market makers (the inside market). For example, if the inside market is $25.50 - $25.70 and the customer paid $25.90 to purchase the stock, the markup is $.20
When trading equity securities, the term dark pool is BEST defined as trading: a. Prior to an exchange's normal market hours b. After an exchange ends its normal market hours c. Between investors, allowing them to buy and sell securities anonymously without quotes being displayed d. Between investors, allowing them to buy and sell securities anonymously with quotes being displayed
c A dark pool is a source of liquidity for large institutional investors and high-frequency traders, and this system would not disseminate quotes. The system can be operated by broker-dealers or exchanges, and allows these investors to buy and sell large blocks of stock anonymously. The objective is to allow these investors to trade with the least amount of market impact, with low transaction costs. Some dark pools provide matching systems and can also allow for participants to negotiate prices. Normal market hours are 9:30 a.m. to 4:00 p.m. and trading outside these times is referred to as extended-hours trading.
Which of the following short positions violates SEC rules? a. A customer short stock that he borrowed from the brokerage firm b. A customer short and long the same stock at the same time c. A customer borrowing stock in order to profit from a tender offer d. A customer short stock while owning bonds convertible into that stock
c A tender offer takes place when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally done for the purpose of acquiring control of the company. According to SEC rules, a customer may not tender short (borrowed) shares
A type of order that becomes a market order when a round-lot trades at or through a particular price is called a: a. Market order b. Limit order c. Stop order d. Stop-limit order
c A type of order that becomes a market order when a round-lot trades at or through a particular price is called a stop order. A variation of a stop order is a stop-limit order, which is activated when a round-lot trades at or through a particular price, along with the requirement that the limit price be satisfied.
Who may not trade on the floor of the NYSE? a. An independent broker b. A designated market maker c. An institutional block trader d. A floor trader
c An institutional block trader may forward orders to the NYSE trading floor from the brokerage firm's trading desk but is not physically located and trading on the floor of the NYSE. The designated market maker, an independent broker, and floor traders are permitted to trade on the NYSE floor.
Which of the following choices BEST describes Eurodollars? a. U.S. dollars on deposit in U.S. banks b. U.S. dollars on deposit in European banks c. U.S. dollars on deposit in foreign banks d. European currency on deposit in U.S. banks
c Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.
Which of the following securities is LEAST suitable for an investor seeking income as a primary investment objective? a.A convertible bond b.A high-yield bond fund c.An exchange-traded note (ETN) d.A corporate bond with an adjustable-rate coupon
c Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. An investor seeking income as a primary investment objective would not be a suitable candidate for an ETN. The other investment choices carry some type of risk but would still typically pay interest.
Regulation NMS modernized the U.S. markets for trading equity securities and prohibited: a. Trading exchange-listed securities over-the-counter b. A broker-dealer from selling a security to a customer from its own inventory c. The execution of a buy order at one market center at a price above the lowest ask price in another market center d. Trading ADRs on U.S. exchanges
c Regulation NMS modernized the U.S. markets for trading equity securities. Among other rules, Regulation NMS prohibits a trade-through of a protected quote. A protected quote is the highest bid and lowest offer (the inside market) in a market center that allows electronic executions. A trade-through occurs when there is an execution of a buy order at a price above the lowest ask price, or an execution of a sell order below the highest bid. For example, assume the same security is quoted on two market centers (NYSE and Nasdaq). If the NYSE has an ask price of $23.50 and Nasdaq has an ask price $23.60, it is a violation to execute an electronic buy order at $23.60 when there is a better or lower price of $23.50. The other choices are not prohibited. If a broker-dealer sells a security to a customer from its own inventory, it is acting as a principal. Trading exchange-listed securities over-the-counter is allowed and is referred to as a third-market trade. ADRs (American Depositary Receipts) may be listed and traded on U.S. exchanges, such as the New York Stock Exchange or Nasdaq. ADRs may also be quoted on the OTCBB or in the Pink Market and may trade over-the-counter.
The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The conversion ratio of the bonds is approximately: a. 75 to 1 b. 85 to 1 c. 95 to 1 d. 100 to 1
c The conversion price is given as $10.50. To find the conversion ratio, divide the par value ($1,000) of the bond by the conversion price of $10.50. This equals a conversion ratio of 95 to 1 ($1,000 divided by $10.50 equals 95).
An XYZ Corporation convertible bond is selling in the market at $1,248.75. It is convertible at $30. XYZ common stock's market price is 37.50. The bond has been called at 103. Which of the following activities is the LEAST attractive alternative for a holder of the bond? a. Sell the bond b. Convert to common and sell the common c. Allow the bond to be called d. Convert common stock to a bond
c The holder could sell the bond and receive $1,248.75. If he converted, he would receive 33 1/3 shares ($1,000 par divided by $30 per share conversion feature) with a total value of $1,249.88 (33 1/3 x $37.50). The least attractive alternative is to allow the bond to be called and receive $1,030
Which TWO of the following statements concerning convertible bonds are TRUE? I.Coupon rates are usually higher than nonconvertible bonds of the same issuer II.Convertible bondholders are considered creditors of the corporation III.Convertible bonds are usually issued by companies with strong credit ratings IV.It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond a. I and III b. I and IV c. II and III d. II and IV
d Convertible bondholders are considered creditors of a corporation and provide investors with the ability to convert their bonds into shares of common stock of the same issuer at a set price (conversion price). This feature links these types of bonds to the equity markets and the price of a convertible bond is affected by the price of the underlying stock. However, if the price of the underlying stock declines to the point where there is no advantage to the conversion feature, the bond may sell at a price based on its inherent value as a bond, disregarding the convertible feature. Moreover, convertible bonds are issued by companies with weaker credit ratings and allow the issuer to sell debt at a lower cost. Since the conversion feature is a benefit to the bondholder, convertible bonds will have a lower coupon than similar nonconvertible bonds
A customer purchases 1,000 shares of an OTC equity in a cash account through an online brokerage firm on Wednesday, March 11th. The transaction will settle: a.By the close of business on March 11th b.On March 14th c.On March 18th d.On March 16th
d Regular way settlement of corporate securities is three business days. The transaction would settle on Monday, March 16thd
A client is notified by his broker-dealer that certain trades may be executed by an Electronic Communication Network (ECN). Which TWO of the following choices are risks of using this type of system?I.Trades are not subject to SRO regulations II.There may be a limited ability to execute transactions III.Higher commissions are possible IV.The system may only accept certain types of orders a. I and III b. I and IV c. II and III d. II and IV
d Some broker-dealers use ECNs to execute customer orders. ECNs act as matching systems to execute orders from subscribers. Some broker-dealers will use a market maker during normal business hours and an ECN to execute trades after normal business hours (after 4 p.m.). If the system cannot match a buyer and seller, a client's order may have a limited ability to be executed. Some ECNs will accept only certain types of orders, such as limit orders. Trades are subject to SRO regulations and the commissions clients are charged generally are not higher if a broker-dealer uses an ECN.
The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2/% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The bonds are secured by: a. The barges and equipment of the Barge Towing Corporation b. The common stock of the Barge Towing Corporation c. The underwriter of the Barge Towing Corporation d. The full faith and credit and no specific collateral of the Barge Towing Corporation
d The tombstone ad states the bonds to be issued are subordinated debenture bonds, which are unsecured bonds. The bonds are secured by the full faith and credit and no specific collateral of the Barge Towing Corporation
A mutual fund buys stock from the portfolio of an insurance company. This is a trade executed in the: a. Over-the-counter market b. Exchange market c. Third market d. Fourth market
d When an institutional investor such as a mutual fund buys stock from the portfolio of an insurance company (another institution), it is considered a trade executed in the fourth market. This is the name given to the so-called market where institutions trade with other institutions.