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Multiple Choice Questions
1.
A purchase of a new issue of stock takes place
Answer: E Difficulty: Easy
Rationale: Funds from the sale of new issues flow to the issuing
corporation,
making
this
a
primary
market
transaction.
Investment
bankers
usually assist by pricing the issue and finding buyers.
2.
The following statements regarding the specialist are
true
:
A) Specialists maintain a book listing outstanding unexecuted limit
orders.
Answer: E Difficulty: Moderate
Rationale: The specialists' functions are all of the items listed in A,
B, and C. In addition, specialists trade in their own accounts.
3.
Investment bankers
B) Specialists
earn
income
from
commissions
and
spreads
in
stock
prices.
C) Specialists stand ready to trade at quoted bid and ask prices.
D) Specialists cannot trade in their own accounts.
E) A, B, and C are all true.
A) in the secondary market.
B) in the primary market.
C) usually with the assistance of an investment banker.
D) A and B.
E) B and C.
A) act as intermediaries between issuers of stocks and investors.
B) act as advisors to companies in helping them analyze their financial
needs and find buyers for newly issued securities.
C) accept deposits from savers and lend them out to companies.
D) A and B.
E) A, B, and C.
Answer: D Difficulty: Moderate
Rationale: The role of the investment banker is to assist the firm in
issuing new securities, both in advisory and marketing capacities. The
investment banker does not have a role comparable to a commercial bank,
as indicated in C.
4.
In a
A) the investment banker buys
the
stock from the
company and resells
the
issue to the public.
B) the investment banker agrees to help the firm sell the stock at a
favorable price.
C) the investment banker finds the best marketing arrangement for the
investment banking firm.
Answer: A Difficulty: Moderate
5.
The secondary market consists of
Answer: D Difficulty: Moderate
Rationale:
The
secondary
market
consists
of
transactions
on
the
organized
exchanges and in the OTC market. The investment banker is involved in
the placement of new issues in the primary market.
6.
The use of the Internet to trade and underwrite securities
A) is illegal under SEC regulations.
A) transactions on the AMEX.
B) transactions in the OTC market.
C) transactions through the investment banker.
D) A and B.
E) A, B, and C.
D) B and C.
E) A and B.
B) is regulated by the New York Stock Exchange.
C) decreases underwriting costs for a new security issue.
D) increases underwriting costs for a new security issue.
E) is regulated by the National Association of Securities Dealers.
Answer: C Difficulty: Moderate
Rationale: The SEC permits trading and underwriting of securities over
the Internet, but has required firms participating in this activity to
take steps to safeguard investment funds. This form of underwriting is
expected to grow quickly due to its lower cost.
7.
Initial margin requirements are determined by
Answer: B Difficulty: Moderate
Rationale:
The
Board
of
Governors
of
the
Federal
Reserve
System
determines
initial margin requirements. The New York Stock Exchange determines
maintenance margin requirements on NYSE-listed stocks; however, brokers
usually set maintenance margin requirements above those established by
the NYSE.
8.
You
purchased
XYZ
stock
at
$$50
per
share.
The
stock
is
currently
selling
at $$65. Your gains may be protected by placing a __________
Answer: D Difficulty: Moderate
Rationale: With a limit-sell order, your stock will be sold only at a
specified
price,
or
better.
Thus,
such
an
order
would
protect
your
gains.
None of the other orders are applicable to this situation.
A) stop-buy order
B) limit-buy order
C) market order
D) limit-sell order
E) none of the above.
A) the Securities and Exchange Commission.
B) the Federal Reserve System.
C) the New York Stock Exchange.
D) B and C.
E) A and B
9.
You
sold
ABC
stock
short
at
$$80
per
share.
Your
losses
could
be
minimized
by placing a __________:
Answer: C Difficulty: Moderate
Rationale:
With
a
stop-buy
order,
the
stock
would
be
purchased
if
the
price
increased
to
a
specified
level,
thus
limiting
your
loss.
None
of
the
other
orders are applicable to this situation.
A) limit-sell order
B) limit-buy order
C) stop-buy order
D) day- order
E) none of the above.
10.
Which one of the following statements regarding orders is
false
A) A market order is simply an order to buy or sell a stock immediately
at the prevailing market price.
B) A
limit
sell
order
is
where
investors
specify
prices
at
which
they
are
willing to sell a security.
C) If stock ABC is selling at $$50, a limit-buy order may instruct the
broker to buy the stock if and when the share price falls below $$45.
Answer: E Difficulty: Moderate
Rationale: All of the order descriptions above are correct.
D) A day order expires at the close of the trading day.
E) None of the above.
11.
Restrictions on trading involving insider information apply to the
following
except
Answer: D Difficulty: Moderate
Rationale: A, B, and C are corporate insiders and are subject to
restrictions
on
trading
on
inside
information.
Further,
the
Supreme
Court
held
that
traders
may
not
trade
on
nonpublic
information
even
if
they
are
not insiders.
A) corporate officers and directors.
B) relatives of corporate directors and officers.
C) major stockholders.
D) All of the above are subject to insider trading restrictions.
E) None of the above is subject to insider trading restrictions.
12.
The cost of buying and selling a stock consists of __________.
Answer: E Difficulty: Moderate
Rationale: All of the above are possible costs of buying and selling a
stock.
A) broker's commissions
B) dealer's bid-asked spread
C) a price concession an investor may be forced to make.
D) A and B.
E) A, B, and C.
13.
Assume you purchased 200 shares of XYZ common stock on margin at $$70 per
share from your broker. If the initial margin is 55%, how much did you
borrow from the broker
Answer: E Difficulty: Moderate
Rationale: 200 shares * $$70/share * = $$14,000 * = $$6,300.
A) $$6,000
B) $$4,000
C) $$7,700
D) $$7,000
E) $$6,300
14.
You sold short 200 shares of common stock at $$60 per share. The initial
margin is 60%. Your initial investment was
Answer: D Difficulty: Moderate
Rationale: 200 shares * $$60/share * = $$12,000 * = $$7,200
A) $$4,800.
B) $$12,000.
C) $$5,600.
D) $$7,200.
E) none of the above.
15.
You purchased 100 shares of ABC common stock on margin at $$70 per share.
Assume
the
initial
margin
is
50%
and
the
maintenance
margin
is
30%.
Below
what stock price
level
would you get
a margin
call Assume the
stock
pays
no dividend; ignore interest on margin.
A) $$21
B) $$50
C) $$49
D) $$80
E) none of the above
Answer: B Difficulty: Difficult
Rationale: 100 shares * $$70 * .5 = $$7,000 * = $$3,500 (loan amount); =
(100P - $$3,500)/100P; 30P = 100P - $$3,500; -70P = -$$3,500; P = $$50.
16.
You
purchased
100
shares
of
common
stock
on
margin
at
$$45
per
share.
Assume
the initial margin
is
50% and the
stock pays
no dividend. What would
the
maintenance margin be if a margin call is made at a stock price of $$30
Ignore interest on margin.
Answer: E Difficulty: Difficult
Rationale: 100 shares * $$45/share * = $$4,500 * = $$2,250 (loan amount);
X = [100($$30) - $$2,250]/100($$30); X = .
17.
You
purchased
300
shares
of
common
stock
on
margin
for
$$60
per
share.
The
initial margin is 60% and the stock pays no dividend. What would your
rate of return be if
you sell the stock at $$45 per share
Ignore interest
on margin.
Answer: D Difficulty: Difficult
Rationale: 300($$60) = $$10,800 investment; 300($$60) = $$18,000 X = $$7,200
A) 25%
B) -33%
C) 44%
D) -42%
E)
–
54%
A)
B)
C)
D)
E)
loan; Proceeds after selling stock and repaying loan: $$13,500 - $$7,200
= $$6,300; Return = ($$6,300 - $$10,800)/$$10,800 = - %.
18.
Assume you sell short 100 shares of common stock at $$45 per share, with
initial
margin
at
50%.
What
would
be
your
rate
of
return
if
you
repurchase
the stock at $$40/share The stock paid no dividends during the period,
and you did not remove any money from the account before making the
offsetting transaction.
Answer: C Difficulty: Moderate
Rationale:
Profit
on
stock
=
($$45
-
$$40)
*
100
=
$$500,
$$500/$$2,250
(initial
investment) = %.
A) 20%
B) 25%
C) 22%
D) 77%
E) none of the above
19.
You sold short 300 shares of common stock at $$55 per share. The initial
margin is 60%. At what stock price would you receive a margin call if
the maintenance margin is 35%
Answer: B Difficulty: Difficult
Rationale:
Equity
=
300($$55)
*
=
$$26,400;
=
($$26,400
-
300P)/300P;
105P
= 26,400 - 300P; 405P = 26,400; P = $$
20.
Assume you sold short 100 shares of common stock at $$50 per share. The
initial margin is 60%. What would be the maintenance margin if a margin
call is made at a stock price of $$60
Answer: B Difficulty: Difficult
Rationale: $$5,000 X = $$8,000; [$$8,000 - 100($$60)]/100($$60) = 33%.
A) 40%
B) 33%
C) 35%
D) 25%
E) none of the above
A) $$51
B) $$65
C) $$35
D) $$40
E) none of the above
21.
Specialists on stock exchanges perform the following functions
A) Act as dealers in their own accounts.
B) Analyze the securities in which they specialize.
C) Provide liquidity to the market.
D) A and B.
E) A and C.
Answer: E Difficulty: Moderate
Rationale:
Specialists
are
both
brokers
and
dealers
and
provide
liquidity
to the market; they are not analysts.
22.
Shares for short transactions
Answer: B Difficulty: Moderate
Rationale: Typically, the only source of shares for short transactions
is those held by the short seller's broker in street name; often these
are margined shares.
23.
Which of the following orders is most useful to short sellers who want
to limit their potential losses
Answer: D Difficulty: Moderate
Rationale: By issuing a stop-buy order, the short seller can limit
potential losses by assuring that the stock will be purchased (and the
short position closed) if the price increases to a certain level.
24.
Shelf registration
A) Limit order
B) Discretionary order
C) Limit-loss order
D) Stop-buy order
E) None of the above
A) are usually borrowed from other brokers.
B) are
typically
shares
held
by
the
short
seller's
broker
in
street
name.
C) are borrowed from commercial banks.
D) B and C.
E) none of the above.
A) is a way of placing issues in the primary market.
B) allows firms to register securities for sale over a two-year period.
C) increases transaction costs to the issuing firm.
D) A and B.
E) A and C.
Answer: D Difficulty: Easy
Rationale: Shelf registration lowers transactions costs to the firm as
the firm may register issues for a longer period than in the past, and
thus requires the services of the investment banker less frequently.
25.
NASDAQ subscriber levels
A) permit those with the highest level, 3, to
security.
B) permit those with a level 2 subscription to receive all bid and ask
quotes, but not to enter their own quotes.
C) permit level 1 subscribers to receive general information about
prices.
Answer: E Difficulty: Easy
Rationale: NASDAQ links dealers in a loosely organized network with
different levels of access to meet different needs.
26.
You want to buy 100 shares of Hotstock Inc. at the best possible price
as quickly as possible. You would most likely place a
Answer: C Difficulty: Easy
Rationale:
A
market
order
is
for
immediate
execution
at
the
best
possible
price.
A) stop-loss order
B) stop-buy order
C) market order
D) limit-sell order
E) limit-buy order
D) include all OTC stocks.
E) A, B, and C.
27.
You want to purchase XYZ stock at $$60 from your broker using as little
of
your
own
money
as
possible.
If
initial
margin
is
50%
and
you
have
$$3000
to invest, how many shares can you buy
A) 100 shares
B) 200 shares
C) 50 shares
D) 500 shares
E) 25 shares
Answer: A Difficulty: Moderate
Rationale: .5 =
[(Q
* $$60)-$$3,000] /
(Q
*
$$60);
= $$3,000; Q=100.
$$60Q-$$3,000; $$30Q
$$30Q =
28.
A sale by IBM of new stock to the public would be a(n)
Answer: B Difficulty: Easy
Rationale:
When
a
firm
whose
stock
already
trades
in
the
secondary
market
issues
new
shares
to
the
public
this
is
referred
to
as
a
seasoned
new
issue.
29.
The finalized registration statement for new securities approved by the
SEC is called
Answer: C Difficulty: Moderate
Rationale: The prospectus is the finalized registration statement
approved by the SEC.
30.
The minimum market value required for an initial listing on the New York
Stock Exchange is
A) $$2,000,000
A) a red herring
B) the preliminary statement
C) the prospectus
D) a best-efforts agreement
E) a firm commitment
A) short sale.
B) seasoned new issue offering.
C) private placement.
D) secondary market transaction.
E) initial public offering.
B) $$2,500,000
C) $$1,100,000
D) $$60,000,000
E) 100,000,000
Answer: E Difficulty: Moderate
Rationale: See Table .
31.
In 2005, the price of a seat on the NYSE reached a high of
Answer: B Difficulty: Moderate
Rationale: See Table .
A) $$1,000,000
B) $$4,000,000
C) $$1,750,000
D) $$2,225,000
E) $$3,000,000
32.
The floor broker is best described as
A) an independent member of the exchange who owns a seat and handles
overload work for commission brokers.
B) someone who makes a market in one or more securities.
C) a
representative
of
a
brokerage
firm
who
is
on
the
floor
of
the
exchange
to execute trade.
D) a
frequent
trader
who
performs
no
public
function
but
executes
trades
for himself.
Answer: A Difficulty: Easy
Rationale: The floor broker is an independent member of the exchange who
handles work for commission brokers when they have too many orders to
handle.
33.
You
sell
short
100
shares
of
Loser
Co.
at
a
market
price
of
$$45
per
share.
Your maximum possible loss is
Answer: B Difficulty: Moderate
Rationale: A short seller loses money when the stock price rises. Since
there is no upper limit on the stock price, the maximum theoretical loss
A) $$4500
B) unlimited
C) zero
D) $$9000
E) cannot tell from the information given
E) any counter party to a trade executed on the floor of the exchange.
is unlimited.
34.
You buy 300 shares of Qualitycorp for $$30 per share and deposit initial
margin of 50%. The next day Qualitycorp's price drops to $$25 per share.
What is your actual margin
A) 50%
B) 40%
C) 33%
D) 60%
E) 25%
Answer: B Difficulty: Moderate
Rationale: AM = [300 ($$25) - .5 (300) ($$30) ] / [300 ($$25)] = .40
35.
When
a
firm
markets
new
securities,
a
preliminary
registration
statement
must be filed with
Answer: B Difficulty: Easy
Rationale: The SEC requires the registration statement and must approve
it before the issue can take place.
36.
In a typical underwriting arrangement the investment banking firm
I)
sells shares to the public via an underwriting syndicate.
II)
purchases the securities from the issuing company.
III)
assumes
the
full
risk
that
the
shares
may
not
be
sold
at
the
offering
price.
IV)
agrees to help the firm sell the issue to the public but does not
actually purchase the securities.
A) I, II, and III
B) I, III, and IV
C) I and IV
D) II and III
E) I and II
A) the exchange on which the security will be listed.
B) the Securities and Exchange Commission.
C) the Federal Reserve.
D) all other companies in the same line of business.
E) the Federal Deposit Insurance Corporation.
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