Chapter 2

All markets must have a physical central trading location.

False

Primary markets are for new issues of securities.

True

5. Which of the following is NOT a characteristic of an organized exchange? A. It functions as a primary market B. Securities are bought and sold in an auction market by brokers acting as agents for buyers and sellers in a central location C. It may be either national or regional D. It has a central location where all trading takes place E. It functions as a secondary market

A. It functions as a primary market

2. Which of the following best describes the function of an investment banker selling an issue on a "best efforts" basis? A. Return unsold securities to the firm B. Guarantee a continuous liquid market C. Private placements to financial institutions D. More than one of the above

A. Return unsold securities to the firm

6. An employee of an investment house who executes orders on the floor of the exchange for customers of the firm is called a: A. floor broker. B. registered trader. C. commission broker. D. specialist. E. dealer

A. floor broker

3. The process of selling a new issue of securities so that the price is guaranteed to the selling firm is referred to as: A. underwriting. B. best efforts. C. direct by issuer. D. shelf registration. E. All of the above involve a price guarantee

A. underwriting.

8. ___________ has two major functions: to handle special orders, such as purchases with a price contingency, and to maintain continuous, liquid, orderly markets. A. A registered trader B. A specialist C. An odd-lot dealer D. A commission broker

B. A specialist

10. ECNs provide several advantages to investors. Which of the following is not an advantage? A. They lower the cost of trading compared to organized exchanges with floor trading B. They let everyone know who is making the trade and at what price C. They provide the ability to trade after hours when the exchanges are closed D. They provide more price transparency than organized exchanges

B. They let everyone know who is making the trade and at what price

4. Bringing private companies public for the first time is called: A. a private placement. B. an initial public offering (IPO). C. a secondary offering. D. a founders sale. E. a shelf registration.

B. an initial public offering (IPO).

1. Creating prices for securities and allowing for liquidity are functions of: A. the real estate market. B. the secondary market. C. the third market. D. the fourth market.

B. the secondary market.

11. Electronic communication systems: A. allow investors to communicate with others in investor chat rooms. B. allow markets to trade American Depository Receipts online in Europe and Asia. C. automatically match buy and sell orders at specified prices. D. are operated by the investment bankers to stabilize new issue markets.

C. automatically match buy and sell orders at specified prices.

14. A house broker is one who: A. is registered to trade on the exchange but is not an employee of a member firm. B. is not associated with a member firm. C. represents a retail brokerage firm and transacts business on the floor for customers of that firm. D. transacts orders for individuals buying or selling less than 100 shares.

C. represents a retail brokerage firm and transacts business on the floor for customers of that firm.

13. In general, markets are efficient when: A. prices respond quickly to new information. B. each successive trade is made at a price close to the preceding price. C. they can absorb large amounts of securities or assets without changing the price significantly. D. All of the above

D. All of the above

12. In order to be listed on an exchange, a firm must meet minimum standards pertaining to the following criteria: A. the number of common shares publicly held. B. the net income of the firm. C. the number of stockholders owning a minimum of 100 shares. D. All of the above are requirements

D. All of the above are requirements

9. Which of the following is true of over-the-counter markets? A. Trading takes place by telephone or electronic network B. It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers C. Government securities of the U.S. Treasury provide the largest dollar volume. D. All of the above are true

D. All of the above are true

15. One of the functions of a specialist is: A. to manipulate price continuity. B. to change quotation spreads. C. to measure market depth as needed. D. to execute special orders for floor brokers.

D. to execute special orders for floor brokers.

7. A person who is registered to trade on an exchange, who owns a seat but is not an employee of any member firm is a: A. commission broker. B. floor broker. C. registered trader. D. dealer. E. B and C

E. B and C

Efficient markets need not be liquid, as long as buyers and sellers can eventually get a fair price for the assets they trade.

False

International competition from world markets has had very little effect on U.S. exchanges.

False

NASDAQ ranks as the largest equity market in the world.

False

The U.S. treasury often uses investment bankers to sell new issues of government securities.

False

The investment banker assumes a price risk under a best efforts agreement.

False

When an investment bank sells securities on a best efforts basis, it assumes all risk of the offering.

False

A market is a way of exchanging assets.

True

A security traded on an exchange must meet listing requirements

True

A shelf registration enables an investment banker to sell a small portion of an issue without forming a syndicate.

True

A specialist is supposed to maintain an orderly market.

True

Because of the 1987 market collapse, the SEC put circuit breakers into effect.

True

Bringing private companies public for the first time is called an initial public offering.

True

Circuit breakers will shut down the market for a period of time if a dramatic drop in stock prices occurs.

True

Deregulation of financial institutions and mergers has created a more competitive environment for retail brokerage houses.

True

Electronic communication networks (ECNs) automatically match buy and sell orders at specified prices, and orders are not routed to the floor of an exchange before processing.

True

Floor brokers act as agents for clients and execute buy and sell orders on the floor of the NYSE exchange.

True

If the DJIA declines by 10% in the time between 2:00-2:30 PM, a 30 minute halt to trading occurs.

True

In the NASDAQ market, it is now permitted to charge fees for data feeds and market information.

True

One characteristic of efficient markets is that prices adjust rapidly to new information.

True

Secondary markets are for existing securities.

True

Specialists are now able to keep their limit orders in the Electronic Book rather than the old manual "specialist's book."

True

Specialists buy and sell for their own account.

True

Stocks traded over-the-counter, like through NASDAQ, have no centrally located market location.

True

The NASDAQ stock market is a publicly traded corporation.

True

The investment banker acts as a middleman in the process of raising new funds for corporations and state and local governments.

True