FINC 409 - Chpt 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. (Pick the closest answer.) a. $2,000 b. $2,500 c. $10,000 d. $12,500

10,000

Purchasers and sellers of futures are generally required to deposit an initial margin in the range of ___________ with the exchange's clearinghouse to reduce credit risk. a. 3 to 6 percent b. 3 to 6 dollars c. 10 to 15 percent d. 10 to 15 dollars e. none of the above.

3 to 6

if a Microsoft January 20 call option with a strike price of $20 were about to expire and the market price of the underlying Microsoft stock was $25.62, the premium for the call option would have to be __________ or higher to eliminate arbitrage opportunities. a. $31.24 b. $5.62 c. $15.62 d. $25.62 e. $14.38

5,62

he 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%

50%

A receipt that represents foreign shares owned and traded by U.S. investors is called a (n): a. global depository receipt b. American depository receipt c. representative depository receipt d. none of the above

American depository receipt

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.

Foreign stocks can be traded in the US 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 distributing of a security issue c. the largest group of members on the NYSE d. composed of direct costs, the spread, and underpricing

a group of several investment baking firms that participate in the underwrite and distributing of a security issue.

Exchange-traded options are liquid because they are standardized in terms of: a. expiration dates b. exercise prices c. quantity of the underlying asset d. quality of the underlying asset e. all of the above.

all

Investment banks engage in the following activities: a. underwrite corporate securities b. buy and sell commercial paper c. mergers and acquisitions d. all of the above (a, b, and c) e. none of the above (neither a, b, or c)

all

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 (a, b, c) e. none of the above (neither a, b, or c)

all

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. Philadelphia e. all of the above.

all

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.

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 of the above are possibilities as the trader will decide the expiration date.

all of the above are possibilities as the trader will decide the expiration date.

Insider trading laws regulate the behavior of a. corporate officers only b. investment bankers only c. anyone with nonpublic information about a firm d. none of the above.

anyone with nonpublic info about a firm

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

ask price

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

best effort agreement

___________________ 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. none of the above

best-effort agreement

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

blue-sky laws

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.

both a and b

. 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

buy enough of a new securities offering to maintain their present proportional share of ownership

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. none of the above

buying and selling stocks with offsetting trades to lock in profits from price differences between different markerts

__________________ 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

buying on margin

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

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 d. all of the above are characteristics of a good market

central location

_____________ is when a broker constantly buys and sells securities from a client's portfolio in an effort to generate commissions. Rather than making decisions that are in the client's best interest, frequent commission- generating trades may be made by brokers with selfish motives. a. Blending b. Flipping c. Swapping d. Churning

churning

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

corporate bond

___________________ are comprised of direct costs, the spread, and underpricing. a. Commission costs b. Flotation costs c. Brokerage commissions d. none of the above

floating costs

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

depth, breadth

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

fourth market

the ________________________, the greater the chance of the option becoming _____________________. a. shorter the time to expiration, in-the-money b. longer the time to expiration, out-of-the-money c. less the volatility, in-the-money d. two of the above are correct. e. none of the above.

e longer the time to expiration, in the money

The seller of an option contract is called a (n) ____________ and the price paid for the option itself is the 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 option writer, option premium

Which of the following (a, b, c) 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 (a, b, c) e. none of the above (neither a, b, or c)

eliminating filing fees

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

fourth market

10. 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

full service brokerage firms

A contract that obligates the owner to purchase or sell a particular underlying asset at a specified price on a specified day is called a (n): a. call option b. put option c. futures contract d. derivative option

futures contreact

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

glass-steagall act

Floor brokers include: a. house brokers b. independent brokers c. designated market makers d. all the above (a, b, and c) e. both a and b

house brokers, independent brokers

f a Microsoft January 20 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

in-the-money

The brokers who handle the house broker's overflow are called: a. specialists b. registered traders c. independent brokers d. all the above

independent brokers

The prudent use of derivatives to hedge, or reduce risk, is similar to the concept of ________________. a. gambling b. juggling c. hiding d. insurance e. none of the above.

insurance

. 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

is executed at the market price when the price of the stock falls to a specified level

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

large potential profit

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

limit order

__________________ 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

limit order

The ________________________, the greater the chance of the option 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.

longer the time to expiration, 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

low liquidity in the market

Which one of the following is not a primary market function of investment bankers? a. originating b. underwriting c. selling d. making loans

making loans

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

margin call

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

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. none of the above

market stabilization

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

match up buy and sell orders

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. none of the three (a, b, and c)

none

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

none

_____________ is when a broker constantly buys and sells securities from a client's portfolio in an effort to generate commissions. Rather than making decisions that are in the client's best interest, frequent commission- generating trades may be made by brokers with selfish motives. a. Blending b. Flipping c. Swapping d. Retailing e. none of the above.

none

while the 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 Francisco d. all three (a, b, and c) e. none of the three (a, b, and c)

none

Purchasers and sellers of futures are generally required to deposit an initial margin in the range of ___________ with the exchange's clearinghouse to reduce credit risk. a. 15 to 20 percent b. 15 to 20 dollars c. 10 to 15 percent d. 10 to 15 dollars e. none of the above.

none 3 to 6

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. brand e. none of the above

none TIME

The prudent use of derivatives to hedge, or reduce risk, is similar to the concept of ________________. a. gambling b. juggling c. hiding d. depreciating e. none of the above.

none insurance

The seller of an option contract is called a (n) ____________ and the price paid for the option itself is the 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.

option writes, 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. none of the above

originates and handles a flotation

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

overpricing

. 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

permitted for underwriters if the market prices falls below the offering price

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

pre-emptive rights offering

Newly created securities are sold in the: a. primary market b. secondary market c. third market d. fourth market

primary market

_________________ is a technique for trading stocks as a group rather than individually, defined as a minimum of at 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

program trading

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

prospectus

___________________ 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

prospectus

A contract that gives the owner the choice of selling 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

put option

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

round lot

Existing securities are traded: a. in the primary markets b. in the secondary markets c. only on organized exchanges d. only over-the-counter

secondary markets

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

security regulators

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

short sale

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

short sale

__________________ 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

stop-loss

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

stop-loss order

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

street name

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

the period after a new issue is initially sold to the public

61. Federal regulation of investment banking is administered primarily under the provisions of the ___________________. a. Investment Banking Act of 1977 b. The Garn-St. Germain Act of 1997 c. The Securities Act of 1933 d. none of the above

the securities act of 1933

. An over-the-counter market trade occurs in the: a. primary market b. NYSE c. third market d. SEC

third market

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

third market

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

time

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

to reduce dividends payout to shareholders.

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

when the lead investment banker decides