Chapter 3
When matching orders from the public, a specialist is required to use the _______. A. lowest outstanding bid price and highest outstanding ask price B. highest outstanding bid price and highest outstanding ask price C. lowest outstanding bid price and lowest outstanding ask price D. highest outstanding bid price and lowest outstanding ask price
D. highest outstanding bid price and lowest outstanding ask price
The SIPC was established by the ____. A. Insider Trading Act of 1931 B. Securities Act of 1933 C. Securities Exchange Act of 1934 D. none of these options
D. none of these options
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________. A. limit buy order B. limit sell order C. market order D. stop-loss order
D. stop-loss order
Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price. A. red herring B. issuing company C. initial stockholder D. underwriter
D. underwriter
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. A. I and II only B. II and III only C. I and III only D. I, II, and III
D. I, II, and III
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 A. IV, II, I, III B. I, III, IV, II C. II, III, IV, I D. IV, I, III, II
D. IV, I, III, II
Which one of the following is not an example of a brokered market? A. Residential real estate market B. Market for large block security transactions C. Primary market for securities D. NASDAQ
D. NASDAQ
The __________ system enables exchange members to send orders directly to a specialist over computer lines. A. FAX B. Direct Plus C. NASDAQ D. SUPERDOT
D. SUPERDOT
__________ often accompany short sales and are used to limit potential losses from the short position. A. Limit orders B. Restricted orders C. Limit loss orders D. Stop-buy orders
D. Stop-buy orders
What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001? A. The tick size increased in 1997 but decreased in 2001. B. The tick size increased in both cases. C. The tick size decreased in 1997 but increased in 2001. D. The tick size decreased in both cases.
D. The tick size decreased in both cases.
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss? A. $50 B. $150 C. $10,000 D. Unlimited
D. Unlimited
The CFA Institute Standards of Professional Conduct require that members _____. A. place their clients' interests before their own B. disclose conflicts of interest to clients C. inform their employers that they are obligated to comply with the Standards of Professional Conduct D. all of these options
D. all of these options
Level 3 NASDAQ subscribers _____. A. are registered market makers. B. can post bid and ask prices. C. have the fastest execution of trades. D. all of these options.
D. all of these options.
The NYSE Hybrid Market allows _____. A. individuals to send orders directly to a specialist B. individuals to send orders directly to an electronic system C. brokers to send orders directly to a specialist D. brokers to send orders either to an electronic system or to a specialist
D. brokers to send orders either to an electronic system or to a specialist
According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term. A. bad; good B. bad; bad C. good; good D. good; bad
D. good; bad
The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. A. interest building B. book building C. market analysis D. customer identification
B. book building
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? A. $1,375 B. $500 C. $275 D. $1,450
A. $1,375
You sell short 200 shares of Doggie Treats Inc. that 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 B. $35.71 C. $31.50 D. $32.25
A. $28.85
You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. A. $4,500 B. $6,000 C. $9,000 D. $10,000
A. $4,500
As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks' prices change by more than _____ in a 5-minute period. A. 10% B. 20% C. 30% D. 40%
A. 10%
An investor puts up $5,000 but borrows an equal amount of money from his 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 1 year the investor sells the stock for $28. The investor's rate of return was ____. A. 17% B. 12% C. 14% D. 19%
A. 17%
The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________. A. Archipelago; Instinet B. Instinet; Archipelago C. Island; Instinet D. LSE; Euronext
A. Archipelago; Instinet
Private placements can be advantageous, compared to 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 B. I and III only C. II and III only D. I, II, and III
A. I only
The NYSE has lost market share to ECNs in recent years. Part of the NYSE's response to the growth of ECNs has been to: I. Purchase Archipelago, a major ECN, and rename it NYSE Arca II. Enable automatic trade execution through its new Market Center III. Impose a tighter limit on bid-ask spreads A. I only B. II and III only C. I and II only D. I, II, and III
A. I only
What was the result of high-frequency traders' leaving the market during the flash crash of 2010? A. Market liquidity decreased. B. Market liquidity increased. C. Market volatility decreased. D. Trading frequency increased.
A. Market liquidity decreased.
The New York Stock Exchange is a good example of _________. A. an auction market B. a brokered market C. a dealer market D. a direct search market
A. an auction market
The inside quotes on a limit order book can be found ______. A. at the top of the list B. at the bottom of the list C. by taking the averages of the bid and ask prices on the list D. only by direct contact with the specialist who maintains the book
A. at the top of the list
The _________ price is the price at which a dealer is willing to purchase a security. A. bid B. ask C. clearing D. settlement
A. bid
Maintenance requirements for margin accounts are set by ____. A. brokerage firms B. the SEC C. the Federal Reserve System's Board of Governors D. the Supreme Court
A. brokerage firms
The bulk of most initial public offerings (IPOs) of equity securities goes to ___________. A. institutional investors B. individual investors C. the firm's current shareholders D. day traders
A. institutional investors
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 B. market value of the stock + amount owed on the margin loan C. market value of the stock ÷ margin loan D. margin loan × market value of the stock
A. market value of the stock - amount owed on the margin loan
A red herring becomes a prospectus when ____. A. the preliminary registration statement is approved by the SEC B. the IPO is complete C. the offering is seasoned D. the lockup period expires
A. the preliminary registration statement is approved by the SEC
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.) A. $26.55 B. $35.71 C. $28.95 D. $30.77
B. $35.71
You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____. A. $37.50 B. $62.50 C. $56.25 D. $59.75
B. $62.50
According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration. A. 1 year B. 2 years C. 3 years D. 4 years
B. 2 years
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.) A. 10% B. 20% C. 6.67% D. 15%
B. 20%
Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange. A. 50% B. 25% C. 60% D. 75%
B. 25%
Explicit costs of an IPO tend to be around ______ of the funds raised. A. 1% B. 7% C. 15% D. 25%
B. 7%
The fully automated trade-execution system installed on the NYSE is called _____. A. FAX B. Direct + C. NASDAQ D. SUPERDOT
B. Direct +
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 nonprofit entities designed to facilitate market transactions rather than make a profit. A. I only B. I and II only C. II and III only D. I, II, and III
B. I and II only
The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market. A. NYSE; NASDAQ B. NASDAQ; NYSE C. CME; OTC D. AMEX; NYSE
B. NASDAQ; NYSE
In 2008, the NASDAQ stock market merged with _____. A. Euronext B. OMX, which operates seven Nordic and Baltic stock exchanges C. the International Securities Exchange (ISE) D. BATS
B. OMX, which operates seven Nordic and Baltic stock exchanges
The ____ requires full disclosure of relevant information relating to the issue of new securities. A. Insider Trading Act of 1931 B. Securities Act of 1933 C. Securities Exchange Act of 1934 D. Investment Company Act of 1940
B. Securities Act of 1933
Which one of the following is a false statement regarding NYSE specialists? A. On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists. B. Specialists cannot trade for their own accounts. C. Specialists maintain limit order books, which contain the outstanding unexecuted limit orders. D. Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.
B. Specialists cannot trade for their own accounts.
The primary market where new security issues are offered to the public is a good example of _________. A. an auction market B. a brokered market C. a dealer market D. a direct search market
B. a brokered market
The _________ price is the price at which a dealer is willing to sell a security. A. bid B. ask C. clearing D. settlement
B. ask
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 _________. A. market spread B. bid-ask spread C. bid-ask gap D. market variation
B. bid-ask spread
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. A. electronic; Dealers; brokers B. dealer; Brokers; electronic C. direct search; Brokers; electronic D. brokered; Dealers; direct search
B. dealer; Brokers; electronic
All major stock markets today are effectively _______________. A. specialist trading systems B. electronic trading systems C. continuous auction markets D. direct search markets
B. 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. A. best-efforts B. firm-commitment C. private placement D. none of these options
B. firm-commitment
The average depth of the limit order book is _____. A. lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index B. higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index C. about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index D. unrelated to the sizes of the stocks in the indexes
B. higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index
Purchases of new issues of stock take place _________. A. at the desk of the Fed B. in the primary market C. in the secondary market D. in the money markets
B. in the primary market
Underwriting is one of the services provided by _____. A. the SEC B. investment bankers C. publicly traded companies D. FDIC
B. investment bankers
An order to buy or sell a security at the current price is a ______________. A. limit order B. market order C. stop-loss order D. stop-buy order
B. market order
Transactions that do not involve the original issue of securities take place in _________. A. primary markets B. secondary markets C. over-the-counter markets D. institutional markets
B. secondary markets
Initial margin requirements on stocks are set by _________. A. the Federal Deposit Insurance Corporation B. the Federal Reserve C. the New York Stock Exchange D. the Securities and Exchange Commission
B. the Federal Reserve
The term latency refers to _____. A. the lag between when an order is placed on the NYSE and when it is executed. B. the amount of time it takes to accept, process, and deliver a trading order. C. the time it takes to implement new rules and procedures for stock exchanges and computer trading systems. D. the lag between when an order is executed and when the investor takes possession of the securities.
B. the amount of time it takes to accept, process, and deliver a trading order.
The term inside quotes refers to _____. A. the difference between the lowest bid price and the highest ask price in the limit order book. B. the difference between the highest bid price and the lowest ask price in the limit order book. C. the difference between the lowest bid price and the lowest ask price in the limit order book. D. the difference between the highest bid price and the highest ask price in the limit order book.
B. the difference between the highest bid price and the lowest ask price in the limit order book.
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost? A. $50 B. $150 C. $10,000 D. Unlimited
C. $10,000
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 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been ____. A. $20 B. $29.77 C. $30.29 D. $32.45
C. $30.29
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 _________. A. $20,000 B. $12,000 C. $8,000 D. $15,000
C. $8,000
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 $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return? A. 17.5% B. 19.67% C. 23.83% D. 25.75%
C. 23.83%
A level _____ subscriber to the NASDAQ system may enter bid and ask prices. A. 1 B. 2 C. 3 D. 4
C. 3
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. A. 35% B. 39% C. 43% D. 28%
C. 43%
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? A. 9% B. 15% C. 48% D. 57%
C. 48%
More than ______ of all trading is believed to be initiated by computer algorithms. A. 25% B. 40% C. 50% D. 75%
C. 50%
Which one of the following types of markets requires the greatest level of trading activity to be cost-effective? A. Broker market B. Dealer market C. Continuous auction market D. Direct search market
C. Continuous auction market
Which of the following are true concerning short sales of exchange-listed stocks? I. Proceeds from the short sale must be kept on deposit with the broker. II. Short-sellers must post margin with their broker to cover potential losses on the position. III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement. A. I only B. I and III only C. I and II only D. I, II, and III
C. I and II only
Regulation NMS: I. Supports the goal of integrating financial markets II. Requires the use of specialists to execute trades III. Requires that exchanges honor quotes of other exchanges when they can be executed automatically A. I only B. I and II only C. I and III only D. I, II, and III
C. I and III only
Which one of the following statements about IPOs is not true? A. IPOs generally underperform in the short run. 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.
C. IPOs generally provide superior long-term performance as compared to other stocks.
The __________ was established to protect investors from losses if their brokerage firms fail. A. CFTC B. SEC C. SIPC D. AIMR
C. SIPC
The over-the-counter securities market is a good example of _________. A. an auction market B. a brokered market C. a dealer market D. a direct search market
C. a dealer market
You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____. A. an advanced equity offering B. a weathered equity offering C. a seasoned equity offering D. a veteran equity offering
C. a seasoned equity offering
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. A. stop-buy; stop-loss B. market; limit C. stop-loss; stop-buy D. limit; market
C. stop-loss; stop-buy
The largest nongovernmental regulator of securities firms in the United States is ________. A. the CFA Institute B. the Public Company Accounting Oversight Board C. the Financial Industry Regulatory Authority D. the Board of Directors of NYSE Euronext
C. the Financial Industry Regulatory Authority
The bid-ask spread exists because of _______________. A. market inefficiencies B. discontinuities in the markets C. the need for dealers to cover expenses and make a profit D. lack of trading in thin markets
C. the need for dealers to cover expenses and make a profit
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. A. overpriced B. correctly priced C. underpriced D. mispriced, but without any particular bias
C. underpriced
Trading on inside information is: I. Prohibited by federal law II. Prohibited by the CFA Institute Standards of Professional Conduct III. Monitored by the SEC A. I and II only B. II and III only C. I and III only D. I, II, and III
D. I, II, and III
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? A. $90,000 B. $1,290,000 C. $2,390,000 D. $1,690,000
D. $1,690,000
The commission structure on a stock purchase is $20 plus $.02 per share. If you purchase four round lots of a stock selling for $56, what is your commission? A. $20 B. $22 C. $26 D. $28
D. $28
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? A. $39.75 B. $40.25 C. $40.375 D. $40.25 or less
D. $40.25 or less
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
D. $55
The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission? A. $35 B. $45 C. $53 D. $68
D. $68
The market share held by the NYSE Arca system in February 2011 was approximately ____. A. 65% B. 45% C. 25% D. 10%
D. 10%
Advantages of ECNs over traditional markets include all but which one of the following? A. Lower transactions costs B. Anonymity of the participants C. Small amount of time needed to execute and order D. Ability to handle very large orders
D. Ability to handle very large orders
Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers A. I only B. I and II only C. II and III only D. I, II, and III
D. I, II, and III
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 A. I and II only B. II and III only C. I and III only D. I, II, and III
D. I, II, and III