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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

Bodie - Chapter 03 #1 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

Bodie - Chapter 03 #2 Difficulty: Medium

3. Explicit costs of an IPO tend to be around ______ of the funds raised. A. 1% B. 7% C. 15% D. 25%

Bodie - Chapter 03 #3 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

Bodie - Chapter 03 #4 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

Bodie - Chapter 03 #5 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

Bodie - Chapter 03 #6 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

Bodie - Chapter 03 #7 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.

Bodie - Chapter 03 #8 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

Bodie - Chapter 03 #9 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

Bodie - Chapter 03 #10 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

Bodie - Chapter 03 #11 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%

Bodie - Chapter 03 #12 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

Bodie - Chapter 03 #13 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%

Bodie - Chapter 03 #14 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

Bodie - Chapter 03 #15 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

Bodie - Chapter 03 #16 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

Bodie - Chapter 03 #17 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

Bodie - Chapter 03 #18 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.

Bodie - Chapter 03 #19 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

Bodie - Chapter 03 #20 Difficulty: Easy

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #21 Difficulty: Medium

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

Bodie - Chapter 03 #22 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

Bodie - Chapter 03 #23 Difficulty: Easy

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #24 Difficulty: Easy

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

Bodie - Chapter 03 #25 Difficulty: Medium

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

Bodie - Chapter 03 #26 Difficulty: Easy

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #27 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

Bodie - Chapter 03 #28 Difficulty: Easy

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

Bodie - Chapter 03 #29 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

Bodie - Chapter 03 #30 Difficulty: Easy

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #31 Difficulty: Medium

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

Bodie - Chapter 03 #32 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

Bodie - Chapter 03 #33 Difficulty: Easy

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #34 Difficulty: Easy

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

Bodie - Chapter 03 #35 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

Bodie - Chapter 03 #36 Difficulty: Easy

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

Bodie - Chapter 03 #37 Difficulty: Easy

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #38 Difficulty: Medium

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%

Bodie - Chapter 03 #39 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

Bodie - Chapter 03 #40 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

Bodie - Chapter 03 #41 Difficulty: Easy

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #42 Difficulty: Easy

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

Bodie - Chapter 03 #43 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

Bodie - Chapter 03 #44 Difficulty: Medium

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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

Bodie - Chapter 03 #45 Difficulty: Medium

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

Bodie - Chapter 03 #46 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

Bodie - Chapter 03 #47 Difficulty: Medium

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Chapter 03 - Securities Markets

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.

Bodie - Chapter 03 #48 Difficulty: Medium

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

Bodie - Chapter 03 #49 Difficulty: Medium

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #50 Difficulty: Medium

51. What percentage of NYSE transactions is executed by specialists? A. 10% B. 25% C. 50% D. 75%

Bodie - Chapter 03 #51 Difficulty: Medium

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

Bodie - Chapter 03 #52 Difficulty: Medium

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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 Investment = 300(30)(.50) = 4500

Bodie - Chapter 03 #53 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.

Bodie - Chapter 03 #54 Difficulty: Easy

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.

Bodie - Chapter 03 #55 Difficulty: Medium

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Chapter 03 - Securities Markets

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

Bodie - Chapter 03 #56 Difficulty: Medium

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

Bodie - Chapter 03 #57 Difficulty: Hard

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Chapter 03 - Securities Markets

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%

Bodie - Chapter 03 #58 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

Bodie - Chapter 03 #59 Difficulty: Medium

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

Bodie - Chapter 03 #60 Difficulty: Easy

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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

Bodie - Chapter 03 #61 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

Bodie - Chapter 03 #62 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

Bodie - Chapter 03 #63 Difficulty: Medium

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

Bodie - Chapter 03 #64 Difficulty: Easy

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Chapter 03 - Securities Markets

65. Which Congressional action directed the SEC to implement a national competitive s...