chapter 11

73. 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.

c. option writer, option premium

45. 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

c. originates and handles a flotation

30. 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

c. overpricing

54. 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

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

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

c. third market

6. 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

c. third market

46. 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

c. when the lead investment banker decides

68. If a Microsoft January 20 call option had a strike price of $20 and the market price of the underlying Microsoft stock was $25.62, the call option would be _______________. a. in-the-money option with a positive intrinsic value (can profit by exercising the call) b. out-of-the-money option with zero intrinsic value (can't profit by exercising the call) c. fairly priced d. not enough information to tell

a. in-the-money

26. 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.

c. both a) and b) are correct.

79. 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.

a. 3 to 6 percent

3. ___________________ 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

a. A prospectus

18. The 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%

d. 50%

31. 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

d. Blue-sky laws

55. ___________________ is when an investor borrows money and invests t he 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

d. Buying on margin

__________ 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 e. none of the above

d. Churning

57. __________________ 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

d. Program trading

38. 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 e. none of the above

d. all of the above

11. 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.

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

27. 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 satify. c. investors can get faster trade execution in another exchange. d. all of the above.

d. all of the above.

35. Which of the following securities issues do not require competitive bidding? a. state government bond issues b. public utility security issues governmental agency c. Federal government bond issues d. corporate bond issues

d. corporate bond issues

4. 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

d. fourth market

5. 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

d. fourth market

81. 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.

d. insurance

8. The maximum buying price or the minimum selling price specified by the investor is called a: a. stop-loss order order to sell stock at market price when price of the stock falls to specified level b. market order order for immediate purchase or sale at the best price possible c. short sale sale of securities that the seller does not own d. limit order maximum buying price or minimum selling price specified by the investor

d. limit order maximum buying price or minimum selling price specified by the investor

32. 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. Securities Act of 1933 d. National Association of Securities Dealers

a. Glass-Steagall Act

48. Floor brokers: a. act as agents to execute customers' orders for securities purchases and sales b. assist specialists in executing orders c. trade for their own accounts d. all the above e. none of the above

a. act as agents to execute customers' orders for securities purchases and sales

41. 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

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

87. A contract that gives the owner the option or 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

a. call option

25. 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

a. central location

24. 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

a. depth, breadth

67. If a Microsoft January 20 call option with a strike price of $20 was selling for $2.00 and the market price of the underlying Microsoft stock was $25.62, the call option would be _______________. a. in-the-money option with a positive intrinsic value (can profit by exercising the call) b. out-of-the-money option with zero intrinsic value (can't profit by exercising the call) c. fairly priced d. not enough information to tell

a. in-the-money

36. Which of the following 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 e. none of the above

c. eliminates filing fees

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

d. making loans

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

d. none of the above

16. 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

d. short sale

12. 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

d. stop-loss order

62. 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/are _____________. a. marketability b. price c. trade restrictions d. time e. none of the above

d. time

40. 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

d. to reduce dividend payouts to shareholders

72. If a Microsoft January 20 put option with a strike price of $20 were about to expire and the market price of the underlying Microsoft stock was $15.00, the price of the put option would have to be __________ or higher to eliminate arbitrage opportunities. a. $1.00 b. $2.00 c. $4.00 d. $6.00 e. $5.00

e. $5.00

75. 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.

e. all of the above.

77. 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.

e. all of the above.

39. Investment banks engage in all of the following activities EXCEPT: a. underwrite corporate securities p 277 b. buy and sell commercial paper p 286 c. mergers and acquisitions p 287 d. all of the above e. none of the above

e. none of the above

42. A syndicate is: a. a firm that assists in specialist transactions b. an organization of market makers c. the largest group of members on the NYSE d. all the above e. none of the above

e. none of the above

63. 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/are _____________. a. marketability b. price c. trade restrictions d. brand e. none of the above

e. none of the above

65. 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. none of the above

78. 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 of the above e. none of the above.

e. none of the above

______________ 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. Sale-reslae e. none of the above

e. none of the above

74. 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. none of the above.

76. Exchange-traded options are liquid because they are standardized in terms of: a. announcement dates b. future prices c. timing of the underlying asset d. location of the underlying asset e. none of the above.

e. none of the above.

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

e. none of the above.

33. 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

e. security regulators

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 (contract for the purchase of securities) b. put option (contract for the sale of securities) c. futures contract d. derivative option

c. futures contract

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

c. independent brokers

49. 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 once the stop-price loss or a price below it is reached d. stops losses for 30 days

c. is executed at the market once the stop-price loss or a price below it is reached

47. 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 e. none of the above

c. match up buy and sell orders

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.

Answer: e p 307 usually 3 to 6 percent of the price of the contract, reduces risk other side of the transaction will default

70. If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00 and the market price of the underlying Microsoft stock was $10.00, the put option would be _______________. a. in-the-money option with a positive intrinsic value (can profit by exercising the put) b. out-of-the-money option with zero intrinsic value (can't profit by exercising the put) c. fairly priced d. not enough information to tell

a. in-the-money

9. If a Microsoft January 20 put option had a strike price of $20 and the market price of the underlying Microsoft stock was $15.00, the put option would be _______________. a. in-the-money option with a positive intrinsic value (can profit by exercising the put) b. out-of-the-money option with zero intrinsic value (can't profit by exercising the put) c. fairly priced d. not enough information to tell

a. in-the-money

15. 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

a. larger potential profit

34. 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

a. market order

44. 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. all the above e. none of the above

a. market stabilization

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

a. primary market

20. 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

a. round lot

50. 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

a. street name

66. 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 price of 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

b. $5.62

56. ___________________ 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

b. A stop-loss order

58. 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

b. American depository receipt

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

b. Flotation costs

14. 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

c. ask price

21. 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.

b. Foreign stocks can be traded in the United States if they are registered with the Securities and Exchange Commission.

29. 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

b. best-effort agreement

53. Index arbitrage refers to: a. selling securities you don't own short sale b. buying and selling stocks with offsetting trades to lock in profits from price differences between different markets bottom of p 288 c. buying IPO's d. all the above e. none of the above

b. buying and selling stocks with offsetting trades to lock in profits from price differences between different markets bottom of p 288

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 banking firms d. stock advisory brokers

b. full service brokerage firms

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

b. in the secondary markets

64. 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.

b. longer the time to expiration, in-the-money

28. 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

b. low liquidity in the market.

13. If the value of the securities that you borrowed money from your broker to purchase falls, you may receive a: a. maintenance margin call b. margin call c. limit order call d. specialist call

b. margin call

71. If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00 and the market price of the underlying Microsoft stock was $23.00, the price of the put option would be _______________. a. in-the-money option with a positive intrinsic value (can profit by exercising the put) b. out-of-the-money option with zero intrinsic value (can't profit by exercising the put) c. fairly priced d. not enough information to tell

b. out-of-the-money option with zero intrinsic value (can't profit by exercising the put)

43. 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

b. permitted for underwriters if the market price falls below the offering price

37. 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

b. pre-emptive rights offering

2. 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

b. prospectus

86. A contract that gives the owner the option or 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

b. put option

7. 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

b. short sale

51. 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

c. $10,000

59. ___________________ 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

c. A best-effort agreement

9. ___________________ 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

c. A limit order

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

c. The Securities Act of 1933

85. 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.

c. anyone with nonpublic information about a firm