Bodie 11e Chapter 03 TB - This documents has the keys to the test back in the book PDF

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Essentials of Investments, 11e (Bodie) Chapter 3 Securities Markets 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 a stock 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 5) When a firm decides to sell securities it must first ensure ________. 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, 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 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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 have been poor long-term investments. B) IPOs often provide very good initial returns to investors. C) IPOs generally provide superior long-term performance as compared to other stocks. D) Shares in IPOs are often primarily allocated to institutional investors. 9) 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% 10) The NYSE 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) 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%

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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 14) More than ________ of all trading is believed to be initiated by computer algorithms. A) 25% B) 40% C) 50% D) 75% 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 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.

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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) 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. 22) 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. 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) buy stop; stop-loss B) market; limit C) stop-loss; buy stop D) limit; market 24) 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

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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 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 goes 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) overpriced B) correctly priced C) underpriced D) mispriced, but without any particular bias 31) 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

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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 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 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 these options 34) 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 35) 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 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 + C) NASDAQ D) SUPERDOT

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38) 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 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) 25% C) 60% D) 75% 40) The ________ price is the price at which a dealer is willing to purchase a security. A) bid B) ask C) clearing D) settlement 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

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44) 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 45) 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 46) 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 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

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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? Limit Buy Price $39.75 $39.50

Orders Shares 100 100

Limit Sell Orders $40.25 $40.50

Orders Shares 100 100

A) $39.75 B) $40.25 C) $40.375 D) $40.25 or less 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 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 onesixteenth of a dollar to one cent in 2001? A) The effective spread increased in 1997 but decreased in 2001. B) The effective spread increased in both cases. C) The effective spread decreased in 1997 but increased in 2001. D) The effective spread decreased in both cases. 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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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 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 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%

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59) 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 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 61) 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. 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 market share held by the NYSE Arca system in February 2011 was approximately ________. A) 65% B) 45% C) 25% D) 10% 64) 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 11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

65) 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 66) All major stock markets today are effectively ________. A) specialist trading systems B) electronic trading systems C) continuous auction markets D) direct search markets 67) In 2007, 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 68) 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 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 × market value of the stock 70) 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

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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) all of these options 72) 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 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 options 75) 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 76) Which of the following are true c...