investments 3

70. If the Dow Jones Industrial Average falls by 10% by 11 am, trading will ______.

B. will be halted for one hour

80. 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 one year the investor gets a margin call. At the time of the margin call the stock's price must have been ____.

B. $29.77

57. 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.)

B. $35.71

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

B. $62.50

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

B. 2 years

86. You sell short 300 shares of Microsoft which 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 one year if Microsoft is selling at $27? (Ignore any dividends)

B. 20.00%

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

B. 7%

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

B. 75%

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

B. Direct Plus

9. The issue process where investors submit bids for a new issue and the shares in an IPO are allocated to the highest bidders until the entire issue is sold is called a

B. Dutch auction

32. 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 non-profit entities designed to facilitate market transactions rather than make a profit

B. I and II only

34. The ______________ is the most important dealer market in the U.S. and the ______________ is the most important auction market.

B. NASDAQ, NYSE

38. Nasdaq now offers three listing options. The largest, most actively traded firms are on the

B. Nasdaq Global Select Market

67. Which of the following statements about Saitoris in Japanese stock markets is incorrect?

B. Saitoris have more responsibilities than NYSE specialists

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

B. Securities Act of 1933

18. Which one of the following is a false statement regarding NYSE specialists?

B. Specialists can not trade for their own accounts

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

B. a brokered market

41. The _________ price is the price at which a dealer is willing to sell a security.

B. ask

42. 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 _________.

B. bid-ask spread

28. The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

B. book building

22. The market collapse of 1987 prompted ________________________.

B. circuit breakers to halt trading during market crises

78. 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.

B. dealer, brokers, electronic

21. When U.S. stock prices were converted from fractions to decimals in 2001 the minimum bid-ask spread charged by dealers ________.

B. decreased

66. Most European markets, including Euronext, use a/an _____________________.

B. electronic trading system

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

B. firm commitment

15. Purchases of new issues of stock take place _________.

B. in the primary market

20. An order to buy or sell a security at the current price is a ______________.

B. market order

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

B. secondary markets

16. Initial margin requirements on stocks are set by _________.

B. the Federal Reserve

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

C. $10,000

52. 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 _________.

C. $8,000

84. An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $0.50 per share dividend in one year and then the stock is sold at $23 per share. What was the investor's rate of return?

C. 23.83%

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

C. 3

12. A ______ drop in the Dow Jones Industrial Average would stop trading for the day.

C. 30%

58. 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.

C. 43%

90. 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?

C. 48%

17. Which one of the following types of markets requires the greatest level of trading activity to be cost effective?

C. Continuous auction market

44. Both the NYSE and Nasdaq have lost market share to ECNs in recent years. Part of Nasdaq's response to the growth of ECNs has been to _______. I. Purchase Instinet, a major ECN II. Enable automatic trade execution through its new Market Center III. Switch from stock ownership to mutual ownership

C. I and II only

76. Which of the following are true concerning short sales of exchange listed stocks? I. A short sale is permitted only if the last recorded change in the stock's price was positive II. Proceeds from the short sale must be kept on deposit with the broker III. Short-sellers must post margin with their broker to cover potential losses on the position IV. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement

C. II and III only

8. Which one of the following statements about IPOs is not true?

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

77. Day to day regulation of the New York Stock Exchange and enforcement of exchange rules and federal securities laws is conducted by the

C. NYSE Regulation, Inc.

26. The __________ was established to protect investors from losses if their brokerage firms fail.

C. SIPC

65. Which Congressional action directed the SEC to implement a national competitive securities market?

C. Securities Act Amendments of 1975

85. IBM is listed on the NYSE. If a share of IBM is sold via the NASDAQ exchange in which market is it thought to have traded?

C. Third market

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

C. a dealer market

68. The term "paying for order flow" refers to the practice of ________________.

C. paying a broker a rebate for directing the trade to a particular stock dealer rather than directing the order to the NYSE

23. 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.

C. stop-loss, stop-buy

43. The bid-ask spread exists because of _______________.

C. the need for dealers to cover expenses and make a profit

30. Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

C. under priced

4. 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?

D. $1,690,000

63. The approximate dollar value of trades on the NYSE in 2008 was

D. $150 billion

87. The commission structure on a stock purchase is $20 plus $0.02 per share. If you purchase 4 round lots of a stock selling for $56, what is your commission?

D. $28

48. 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?

D. $40.25 or less

88. The commission structure on a stock purchase is $50 plus $0.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission?

D. $68

51. What percentage of NYSE transactions is executed by specialists?

D. 75%

25. Advantages of ECNs over traditional markets include all but which one of the following?

D. Ability to handle very large orders

45. The cost of buying and selling a stock include _________. I. broker's commissions II. dealer's bid-asked spread III. price concessions investors may be forced to make

D. I, II and III

72. Trading on insider information is ____. I. prohibited by federal law II. prohibited by the CFA Institute Standards of Professional Conduct III. legal in Japan

D. I, II and III

19. Restrictions on trading involving insider information apply to _________. I. corporate officers and directors II. major stockholders III. relatives of corporate directors and officers

D. I, II, and III.

11. 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

D. IV, I, III, II

13. Which one of the following is not an example of a brokered market?

D. NASDAQ

36. The __________ system enables exchange members to send orders directly to a specialist over computer lines.

D. SUPERDOT

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

D. Stop-buy orders

71. The CFA Institute Standards of Professional Conduct require that members _____.

D. The AIMR Standard require all three

59. Specialists on the stock exchanges may do all of the following except _________.

D. Use their privileged information to make investments on behalf of clients of brokerage firms with which they do business

31. According to Loughran and Ritter, initial public offerings tend to exhibit __________ performance initially, and __________ performance over the long term.

D. good, bad

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

D. highest outstanding bid price and lowest outstanding ask price

74. The SIPC was established by the ____.

D. none of these acts established the SIPC

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

D. stop-loss order

2. Under firm commitment underwriting the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.

D. underwriter

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

D. unlimited

24. On a given day a stock dealer maintains a bid price of $1000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades which totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

A. $1,375

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

A. $28.85

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

A. $4,500

49. 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?

A. $50 B. $25 C. $30 D. $55

14. Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a minimum of ______ by 2.30 pm.

A. 10%

79. An investor puts up $5,000 but borrows an equal amount of money from their 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 one year the investor sells the stock for $28. The investor's rate of return was ____.

A. 17%

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

A. Archipelago, Instinet

6. Private placements can be advantageous rather than 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

A. I only

46. Trades on the __________ are the most likely to trade inside the inside quotes than in other markets.

A. NYSE

81. The New York Stock Exchange is a good example of _________.

A. an auction market

40. The _________ price is the price at which a dealer is willing to purchase a security.

A. bid

35. The inside quotes on a limit order book would be comprised of the ______.

A. highest bid price and the lowest ask price

29. The bulk of most initial public offerings (IPOs) of equity securities go to ___________.

A. institutional investors

69. 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 ________.

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

1. Underwriting is one of the services provided by _____.

A. the SEC B. investment bankers C. publicly traded companies D. FDIC

5. A red herring becomes a prospectus when ____.

A. the preliminary registration statement is approved by the SEC

61. Many exchange-listed securities are also traded in the over-the-counter market. Trading of this sort is said to take place in the ___________.

A. third market

64. Registered traders _________________.

A. trade on their own account only

75. Brokerage firms can change margin-loan practices ____.

A. without notice