Ch 3

Advantages of ECNs over traditional markets include

(a) lower transactions costs (b) anonymity of the participants (c) small amount of time needed to execute and order they do not have ability to handle very large orders

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 (work out problem and add when you come back to this)

Restrictions on trading involving insider information apply to:

1.Corporate officers and directors 2.Major stockholders 3.Relatives of corporate directors and officers

Which of the following are true concerning short sales of exchange-listed stocks?

1.Proceeds from the short sale must be kept on deposit with the broker. 2.Short-sellers must post margin with their broker to cover potential losses on the position.

Trading on inside information is:

1.Prohibited by federal law 2.Prohibited by the CFA Institute Standards of Professional Conduct 3.Monitored by the SEC

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?

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

Privately held firms may have only _______ shareholders

2,000

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.)

30-27/0.5(30) = 20%

Rank the following types of markets from least integrated and organized to most integrated and organized: 1.Brokered markets 2.Continuous auction markets 3.Dealer markets 4.Direct search markets

4,1,3,2

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 _________.

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

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

Tuckerton could go bankrupt, with a share price of $0. You could keep the entire proceeds from the short sale. 200*50 = 10,000

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

a brokered market

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 _________ 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

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

continuous auction market

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

dealer market

All major stock markets today are effectively

electronic trading systems

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

firm commitment

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

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

secondary markets

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

stop-buy orders

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; buy stop

The term latency refers to

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

Initial margin requirements on stocks are set by

the federal reserve

The term "underwriting syndicate" describes

the investment banks that participate in the underwriting

The bid-ask spread exists because of

the need for dealers to cover expenses and make a profit

When a firm decides to sell securities it must first ensure

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

1. 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 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

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

Which one of the following statements about IPOs is not true? (a) IPOs generally have been poor long-term investments. (b) IPOs often provide very good initial returns to investors. (c) IPOs generally provide superior long-term performance as compared to other stocks (d) Shares in IPOs are often primarily allocated to institutional investors.

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

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

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

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

NASDAQ; NYSE

Private placements can be advantageous, compared to public issue, because

Private placements are cheaper to market than public issues