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Chapter 03 - Securities Markets

Chapter 03
Securities Markets
Multiple Choice Questions

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


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

2. 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

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


A. 1%
B. 7%
C. 15%
D. 25%

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?
A. $90,000
B. $1,290,000
C. $2,390,000
D. $1,690,000

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Chapter 03 - Securities Markets

5. 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

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
B. I and III only
C. II and III only
D. I, II and III

7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
A. 1
B. 2
C. 3
D. 4

8. 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.

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
A. best efforts offer
B. Dutch auction
C. secondary offering
D. firm commitment offer

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Chapter 03 - Securities Markets

10. The NYSE recently acquired the ECN _______ and NASDAQ recently acquired the ECN
________.
A. Archipelago; Instinet
B. Instinet; Archipelago
C. Island; Instinet
D. LSE; Euronext

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
A. IV, II, I, III
B. I, III, IV, II
C. II, III, IV, I
D. IV, I, III, II

12. A ______ drop in the Dow Jones Industrial Average would stop trading for the day.
A. 10%
B. 20%
C. 30%
D. 40%

13. 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

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Chapter 03 - Securities Markets

14. Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a minimum
of ______ by 2.30 pm.
A. 10%
B. 20%
C. 30%
D. 40%

15. 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

16. 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

17. 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

18. Which one of the following is a false statement regarding NYSE specialists?
A. On a stock exchange all buy or sell orders are executed at a specialist's post on the
exchange
B. Specialists can not trade for their own accounts
C. Specialists earn income from commissions and spreads in stock prices
D. Specialists stand ready to trade at quoted bid and ask prices

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Chapter 03 - Securities Markets

19. 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.

20. 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

21. When U.S. stock prices were converted from fractions to decimals in 2001 the minimum
bid-ask spread charged by dealers ________.
A. increased
B. decreased
C. remained the same
D. fell at first, but then increased

22. The market collapse of 1987 prompted ________________________.


A. Blue Sky laws
B. circuit breakers to halt trading during market crises
C. the Securities Investor Protection Act
D. the National Securities Market Act

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Chapter 03 - Securities Markets

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.
A. stop-buy; stop-loss
B. market; limit
C. stop-loss; stop-buy
D. limit; market

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
B. $500
C. $275
D. $1,450

25. 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

26. The __________ was established to protect investors from losses if their brokerage firms
fail.
A. CFTC
B. SEC
C. SIPC
D. AIMR

27. 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

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Chapter 03 - Securities Markets

28. 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

29. The bulk of most initial public offerings (IPOs) of equity securities go to ___________.
A. institutional investors
B. individual investors
C. the firm's current shareholders
D. day traders

30. Initial public offerings (IPOs) are usually ___________ relative to the levels at which
their prices stabilize after they begin trading in the secondary market.
A. over priced
B. correctly priced
C. under priced
D. mispriced but without any particular bias

31. According to Loughran and 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

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Chapter 03 - Securities Markets

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
A. I only
B. I and II only
C. II and III only
D. I, II and III

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.
A. best efforts
B. firm commitment
C. private placement
D. none of the above

34. The ______________ is the most important dealer market in the U.S. and the
______________ is the most important auction market.
A. NYSE; NASDAQ
B. NASDAQ; NYSE
C. CME; OTC
D. AMEX; NYSE

35. The inside quotes on a limit order book would be comprised of the ______.
A. highest bid price and the lowest ask price
B. lowest bid price and the lowest ask price
C. lowest bid price and the highest ask price
D. highest bid price and the highest ask price

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Chapter 03 - Securities Markets

36. The __________ system enables exchange members to send orders directly to a specialist
over computer lines.
A. FAX
B. Direct Plus
C. NASDAQ
D. SUPERDOT

37. The fully automated trade-execution system installed on the NYSE is called
A. FAX
B. Direct Plus
C. NASDAQ
D. SUPERDOT

38. Nasdaq now offers three listing options. The largest, most actively traded firms are on the
A. Nasdaq Global Market
B. Nasdaq Global Select Market
C. Nasdaq Capital Market
D. Nasdaq Pink Sheet Stocks

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.
A. 50%
B. 75%
C. 80%
D. 95%

40. The _________ price is the price at which a dealer is willing to purchase a security.
A. bid
B. ask
C. clearing
D. settlement

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Chapter 03 - Securities Markets

41. The _________ price is the price at which a dealer is willing to sell a security.
A. bid
B. ask
C. clearing
D. settlement

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 _________.
A. market spread
B. bid-ask spread
C. bid-ask gap
D. market variation

43. 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

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
A. I only
B. II and III only
C. I and II only
D. I, II and III

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Chapter 03 - Securities Markets

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
A. I and II only
B. II and III only
C. I and III only
D. I, II and III

46. Trades on the __________ are the most likely to trade inside the inside quotes than in
other markets.
A. NYSE
B. NASDAQ market
C. OTC market
D. Pink sheet market

47. 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

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?

A. $39.75
B. $40.25
C. $40.375
D. $40.25 or less

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Chapter 03 - Securities Markets

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

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

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


A. 10%
B. 25%
C. 50%
D. 75%

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
_________.
A. $20,000
B. $12,000
C. $8,000
D. $15,000

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Chapter 03 - Securities Markets

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
B. $6,000
C. $9,000
D. $10,000

54. 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

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?
A. $50
B. $150
C. $10,000
D. unlimited

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 ____.
A. $37.50
B. $62.50
C. $56.25
D. $59.75

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Chapter 03 - Securities Markets

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.)
A. $26.55
B. $35.71
C. $28.95
D. $30.77

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.
A. 35%
B. 39%
C. 43%
D. 28%

59. Specialists on the stock exchanges may do all of the following except _________.
A. They make a market in shares of the firms for which they specialize
B. They keep the limit order book
C. Use their privileged information to make speculative investments on their own account
D. Use their privileged information to make investments on behalf of clients of brokerage
firms with which they do business

60. 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

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Chapter 03 - Securities Markets

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
B. fourth market
C. after-market
D. block market

62. __________ 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

63. The approximate dollar value of trades on the NYSE in 2008 was
A. $75 billion
B. $100 billion
C. $125 billion
D. $150 billion

64. Registered traders _________________.


A. trade on their own account only
B. perform trades for brokerage firms
C. perform retail trades for the public
D. trade for the government

65. Which Congressional action directed the SEC to implement a national competitive
securities market?
A. Securities Act of 1933
B. SEC Act of 1934
C. Securities Act Amendments of 1975
D. Financial Services Modernization Act of 1999

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Chapter 03 - Securities Markets

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


A. specialist trading system
B. electronic trading system
C. continuous auction market
D. direct search market

67. Which of the following statements about Saitoris in Japanese stock markets is incorrect?
A. Saitoris maintain the limit order book but may not trade for their own account
B. Saitoris have more responsibilities than NYSE specialists
C. Saitoris act as dealers in the Japanese markets
D. Saitoris are the principle source of liquidity in Japanese markets

68. The term "paying for order flow" refers to the practice of ________________.
A. paying more than one broker to execute your order
B. dealers trading with their customers at an outdated price
C. paying a broker a rebate for directing the trade to a particular stock dealer rather than
directing the order to the NYSE
D. allocating shares in an IPO to preferred customers who agree to buy more shares in the
aftermarket

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
B. market value of the stock + amount owed on the margin loan
C. market value of the stock margin loan
D. margin loan x market value of the stock

70. If the Dow Jones Industrial Average falls by 10% by 11 am, trading will ______.
A. continue unchanged
B. will be halted for one hour
C. will be halted for one-half hour
D. will be halted for the rest of the day

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Chapter 03 - Securities Markets

71. 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. The AIMR Standard require all three

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
A. I and II only
B. II and III only
C. I and III only
D. I, II and III

73. 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

74. 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 acts established the SIPC

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


A. without notice
B. only after 72 hours notice
C. only on new orders
D. only with permission from the SEC

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Chapter 03 - Securities Markets

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
A. I and II only
B. I, III and IV only
C. II and III only
D. I, II, III and IV

77. Day to day regulation of the New York Stock Exchange and enforcement of exchange
rules and federal securities laws is conducted by the
A. SEC.
B. CFTC.
C. NYSE Regulation, Inc.
D. U.S. Department of the Treasury.

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.
A. electronic; Dealers; brokers
B. dealer; Brokers; electronic
C. direct search; Brokers; electronic
D. brokered; Dealers; direct search

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%
B. 12%
C. 14%
D. 19%

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Chapter 03 - Securities Markets

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 ____.
A. $20.00
B. $29.77
C. $30.29
D. $32.45

81. 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

82. 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

83. 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

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Chapter 03 - Securities Markets

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?
A. 17.50%
B. 19.67%
C. 23.83%
D. 25.75%

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?
A. Primary market
B. Secondary market
C. Third market
D. Fourth market

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)
A. 10.00%
B. 20.00%
C. 6.67%
D. 15%

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?
A. $20
B. $22
C. $26
D. $28

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Chapter 03 - Securities Markets

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?
A. $35
B. $45
C. $53
D. $68

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
B. $35.71
C. $31.50
D. $32.25

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?
A. 9%
B. 15%
C. 48%
D. 57%

Chapter 03 Securities Markets Answer Key

Multiple Choice Questions

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Chapter 03 - Securities Markets

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


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

Difficulty: Easy

2. 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

Difficulty: Medium

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


A. 1%
B. 7%
C. 15%
D. 25%

Difficulty: Medium

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Chapter 03 - Securities Markets

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?
A. $90,000
B. $1,290,000
C. $2,390,000
D. $1,690,000
Total Cost = 90,000 + (43 - 35)200,000 = $1,690,000

Difficulty: Hard

5. 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

Difficulty: Medium

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
B. I and III only
C. II and III only
D. I, II and III

Difficulty: Medium

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Chapter 03 - Securities Markets

7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
A. 1
B. 2
C. 3
D. 4

Difficulty: Easy

8. 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.

Difficulty: Medium

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
A. best efforts offer
B. Dutch auction
C. secondary offering
D. firm commitment offer

Difficulty: Medium

10. The NYSE recently acquired the ECN _______ and NASDAQ recently acquired the ECN
________.
A. Archipelago; Instinet
B. Instinet; Archipelago
C. Island; Instinet
D. LSE; Euronext

Difficulty: Medium

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Chapter 03 - Securities Markets

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
A. IV, II, I, III
B. I, III, IV, II
C. II, III, IV, I
D. IV, I, III, II

Difficulty: Hard

12. A ______ drop in the Dow Jones Industrial Average would stop trading for the day.
A. 10%
B. 20%
C. 30%
D. 40%

Difficulty: Medium

13. 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

Difficulty: Medium

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Chapter 03 - Securities Markets

14. Circuit breakers will be imposed if the Dow Jones Industrial Average drops by a minimum
of ______ by 2.30 pm.
A. 10%
B. 20%
C. 30%
D. 40%

Difficulty: Medium

15. 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

Difficulty: Easy

16. 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

Difficulty: Easy

17. 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

Difficulty: Easy

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Chapter 03 - Securities Markets

18. Which one of the following is a false statement regarding NYSE specialists?
A. On a stock exchange all buy or sell orders are executed at a specialist's post on the
exchange
B. Specialists can not trade for their own accounts
C. Specialists earn income from commissions and spreads in stock prices
D. Specialists stand ready to trade at quoted bid and ask prices

Difficulty: Easy

19. 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.

Difficulty: Hard

20. 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

Difficulty: Easy

21. When U.S. stock prices were converted from fractions to decimals in 2001 the minimum
bid-ask spread charged by dealers ________.
A. increased
B. decreased
C. remained the same
D. fell at first, but then increased

Difficulty: Medium

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Chapter 03 - Securities Markets

22. The market collapse of 1987 prompted ________________________.


A. Blue Sky laws
B. circuit breakers to halt trading during market crises
C. the Securities Investor Protection Act
D. the National Securities Market Act

Difficulty: Easy

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.
A. stop-buy; stop-loss
B. market; limit
C. stop-loss; stop-buy
D. limit; market

Difficulty: Easy

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
B. $500
C. $275
D. $1,450
(1003.15 - 1000.50)500 = $1,375

Difficulty: Easy

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Chapter 03 - Securities Markets

25. 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

Difficulty: Medium

26. The __________ was established to protect investors from losses if their brokerage firms
fail.
A. CFTC
B. SEC
C. SIPC
D. AIMR

Difficulty: Easy

27. 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

Difficulty: Hard

28. 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

Difficulty: Easy

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Chapter 03 - Securities Markets

29. The bulk of most initial public offerings (IPOs) of equity securities go to ___________.
A. institutional investors
B. individual investors
C. the firm's current shareholders
D. day traders

Difficulty: Easy

30. Initial public offerings (IPOs) are usually ___________ relative to the levels at which
their prices stabilize after they begin trading in the secondary market.
A. over priced
B. correctly priced
C. under priced
D. mispriced but without any particular bias

Difficulty: Easy

31. According to Loughran and 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

Difficulty: Medium

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Chapter 03 - Securities Markets

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
A. I only
B. I and II only
C. II and III only
D. I, II and III

Difficulty: Easy

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.
A. best efforts
B. firm commitment
C. private placement
D. none of the above

Difficulty: Easy

34. The ______________ is the most important dealer market in the U.S. and the
______________ is the most important auction market.
A. NYSE; NASDAQ
B. NASDAQ; NYSE
C. CME; OTC
D. AMEX; NYSE

Difficulty: Easy

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Chapter 03 - Securities Markets

35. The inside quotes on a limit order book would be comprised of the ______.
A. highest bid price and the lowest ask price
B. lowest bid price and the lowest ask price
C. lowest bid price and the highest ask price
D. highest bid price and the highest ask price

Difficulty: Medium

36. The __________ system enables exchange members to send orders directly to a specialist
over computer lines.
A. FAX
B. Direct Plus
C. NASDAQ
D. SUPERDOT

Difficulty: Easy

37. The fully automated trade-execution system installed on the NYSE is called
A. FAX
B. Direct Plus
C. NASDAQ
D. SUPERDOT

Difficulty: Easy

38. Nasdaq now offers three listing options. The largest, most actively traded firms are on the
A. Nasdaq Global Market
B. Nasdaq Global Select Market
C. Nasdaq Capital Market
D. Nasdaq Pink Sheet Stocks

Difficulty: Medium

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Chapter 03 - Securities Markets

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.
A. 50%
B. 75%
C. 80%
D. 95%

Difficulty: Medium

40. The _________ price is the price at which a dealer is willing to purchase a security.
A. bid
B. ask
C. clearing
D. settlement

Difficulty: Easy

41. The _________ price is the price at which a dealer is willing to sell a security.
A. bid
B. ask
C. clearing
D. settlement

Difficulty: Easy

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 _________.
A. market spread
B. bid-ask spread
C. bid-ask gap
D. market variation

Difficulty: Easy

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Chapter 03 - Securities Markets

43. 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

Difficulty: Easy

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
A. I only
B. II and III only
C. I and II only
D. I, II and III

Difficulty: Medium

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
A. I and II only
B. II and III only
C. I and III only
D. I, II and III

Difficulty: Medium

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Chapter 03 - Securities Markets

46. Trades on the __________ are the most likely to trade inside the inside quotes than in
other markets.
A. NYSE
B. NASDAQ market
C. OTC market
D. Pink sheet market

Difficulty: Medium

47. 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

Difficulty: Medium

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?

A. $39.75
B. $40.25
C. $40.375
D. $40.25 or less
In this case the specialist would have the option of matching the buy order with the lowest
limit sell order ($40.25) or set an ask price lower than $40.25 ($40 for example) and trade the
order from his own stock.

Difficulty: Medium

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Chapter 03 - Securities Markets

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

Difficulty: Medium

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

Difficulty: Medium

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


A. 10%
B. 25%
C. 50%
D. 75%

Difficulty: Medium

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Chapter 03 - Securities Markets

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
_________.
A. $20,000
B. $12,000
C. $8,000
D. $15,000
500($40)(0.40) = $8,000

Difficulty: Medium

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
B. $6,000
C. $9,000
D. $10,000
Investment = 300(30)(.50) = 4500

Difficulty: Medium

54. 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
There is no upper limit to the price of a share of stock; therefore no upper limit the price you
will have to pay to replace the 200 shares of Tuckerton.

Difficulty: Easy

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Chapter 03 - Securities Markets

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?
A. $50
B. $150
C. $10,000
D. unlimited
Tuckerton could go bankrupt with a share price of $0. You could keep the entire proceeds
from the short sale.

Difficulty: Medium

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 ____.
A. $37.50
B. $62.50
C. $56.25
D. $59.75
50 + (2500/200) = $62.50

Difficulty: Medium

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Chapter 03 - Securities Markets

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.)
A. $26.55
B. $35.71
C. $28.95
D. $30.77

Difficulty: Hard

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.
A. 35%
B. 39%
C. 43%
D. 28%

Difficulty: Hard

59. Specialists on the stock exchanges may do all of the following except _________.
A. They make a market in shares of the firms for which they specialize
B. They keep the limit order book
C. Use their privileged information to make speculative investments on their own account
D. Use their privileged information to make investments on behalf of clients of brokerage
firms with which they do business

Difficulty: Medium

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Chapter 03 - Securities Markets

60. 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

Difficulty: Easy

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
B. fourth market
C. after-market
D. block market

Difficulty: Easy

62. __________ 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

Difficulty: Medium

63. The approximate dollar value of trades on the NYSE in 2008 was
A. $75 billion
B. $100 billion
C. $125 billion
D. $150 billion

Difficulty: Medium

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Chapter 03 - Securities Markets

64. Registered traders _________________.


A. trade on their own account only
B. perform trades for brokerage firms
C. perform retail trades for the public
D. trade for the government

Difficulty: Easy

65. Which Congressional action directed the SEC to implement a national competitive
securities market?
A. Securities Act of 1933
B. SEC Act of 1934
C. Securities Act Amendments of 1975
D. Financial Services Modernization Act of 1999

Difficulty: Medium

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


A. specialist trading system
B. electronic trading system
C. continuous auction market
D. direct search market

Difficulty: Medium

67. Which of the following statements about Saitoris in Japanese stock markets is incorrect?
A. Saitoris maintain the limit order book but may not trade for their own account
B. Saitoris have more responsibilities than NYSE specialists
C. Saitoris act as dealers in the Japanese markets
D. Saitoris are the principle source of liquidity in Japanese markets

Difficulty: Medium

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Chapter 03 - Securities Markets

68. The term "paying for order flow" refers to the practice of ________________.
A. paying more than one broker to execute your order
B. dealers trading with their customers at an outdated price
C. paying a broker a rebate for directing the trade to a particular stock dealer rather than
directing the order to the NYSE
D. allocating shares in an IPO to preferred customers who agree to buy more shares in the
aftermarket

Difficulty: Medium

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
B. market value of the stock + amount owed on the margin loan
C. market value of the stock margin loan
D. margin loan x market value of the stock

Difficulty: Medium

70. If the Dow Jones Industrial Average falls by 10% by 11 am, trading will ______.
A. continue unchanged
B. will be halted for one hour
C. will be halted for one-half hour
D. will be halted for the rest of the day

Difficulty: Medium

71. 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. The AIMR Standard require all three

Difficulty: Medium

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Chapter 03 - Securities Markets

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
A. I and II only
B. II and III only
C. I and III only
D. I, II and III

Difficulty: Medium

73. 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

Difficulty: Easy

74. 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 acts established the SIPC

Difficulty: Easy

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


A. without notice
B. only after 72 hours notice
C. only on new orders
D. only with permission from the SEC

Difficulty: Easy

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Chapter 03 - Securities Markets

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
A. I and II only
B. I, III and IV only
C. II and III only
D. I, II, III and IV

Difficulty: Hard

77. Day to day regulation of the New York Stock Exchange and enforcement of exchange
rules and federal securities laws is conducted by the
A. SEC.
B. CFTC.
C. NYSE Regulation, Inc.
D. U.S. Department of the Treasury.

Difficulty: Hard

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.
A. electronic; Dealers; brokers
B. dealer; Brokers; electronic
C. direct search; Brokers; electronic
D. brokered; Dealers; direct search

Difficulty: Hard

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Chapter 03 - Securities Markets

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%
B. 12%
C. 14%
D. 19%

Difficulty: Hard

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 ____.
A. $20.00
B. $29.77
C. $30.29
D. $32.45

Difficulty: Hard

81. 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

Difficulty: Easy

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Chapter 03 - Securities Markets

82. 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

Difficulty: Easy

83. 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

Difficulty: Easy

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?
A. 17.50%
B. 19.67%
C. 23.83%
D. 25.75%

Difficulty: Hard

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Chapter 03 - Securities Markets

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?
A. Primary market
B. Secondary market
C. Third market
D. Fourth market

Difficulty: Easy

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)
A. 10.00%
B. 20.00%
C. 6.67%
D. 15%

Difficulty: Hard

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?
A. $20
B. $22
C. $26
D. $28
Commission = 20 + (400 x .02) = $28.00

Difficulty: Medium

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Chapter 03 - Securities Markets

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?
A. $35
B. $45
C. $53
D. $68
Commission = 50 + (600 x .03) = $68.00

Difficulty: Medium

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
B. $35.71
C. $31.50
D. $32.25

Difficulty: Hard

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?
A. 9%
B. 15%
C. 48%
D. 57%

Difficulty: Medium

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