Investments 9Th Canadian Edition By Bodie – Test Bank

 

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Sample Test

Chapter 03

How Securities Are Traded

 

 

Multiple Choice Questions

1.   The trading of stock that was previously issued takes place
A.in the secondary market.
B. in the primary market.
C. usually with the assistance of an investment banker.
D. in the secondary and primary markets.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

2.   A purchase of a new issue of stock takes place
A.in the secondary market.
B. in the primary market.
C. usually with the assistance of an investment banker.
D. in the secondary and primary markets.
E. in the primary market and usually with the assistance of an investment banker.

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.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

 

 

3.   Firms raise capital by issuing stock
A.in the secondary market.
B. in the primary market.
C. to unwary investors.
D. only on days when the market is up.

Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

4.   Which of the following statements regarding the specialist are true?
A.Specialists maintain a book listing outstanding, unexecuted limit orders.
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. Specialists maintain a book listing outstanding, unexecuted limit orders, earn income from commissions and spreads in stock prices, and stand ready to trade at quoted bid and ask prices.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

5.   Investment bankers
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. act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

6.   In a “firm commitment,” the investment banker
A.buys the stock from the company and resells the issue to the public.
B. agrees to help the firm sell the stock at a favorable price.
C. finds the best marketing arrangement for the investment-banking firm.
D. agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment-banking firm.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

7.   The secondary market consists of
A.transactions on the AMEX.
B. transactions in the OTC market.
C. transactions through the investment banker.
D. transactions on the AMEX and in the OTC market.
E. transactions on the AMEX, through the investment banker, and in the OTC market.

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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

8.   Initial margin requirements are determined by
A.the Securities and Exchange Commission.
B. the Federal Reserve System.
C. the New York Stock Exchange.
D. the Federal Reserve System and the New York Stock Exchange.

The Board of Governors of the Federal Reserve System determines initial margin requirements.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

9.   You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a
A.stop-buy order.
B. limit-buy order.
C. market order.
D. limit-sell order.
E. None of these options are correct.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

10.                You sold JCP stock short at $80 per share. Your losses could be minimized by placing a
A.limit-sell order.
B. limit-buy order.
C. stop-buy order.
D. day-order.
E. None of the options are correct.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

11.                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.
D. A market order is an order to buy or sell a stock on a specific exchange (market).

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

12.                Restrictions on trading involving insider information apply to the following, except
A. corporate officers.
B. corporate directors.
C. major stockholders.
D. All of the individuals.
E. None of the options.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-06 Regulation of Securities Markets.
Topic: 03-06 Initial Public Offerings

13.                The cost of buying and selling a stock consists of
A.broker’s commissions.
B. dealer’s bid-asked spread.
C. a price concession an investor may be forced to make.
D. broker’s commissions and dealer’s bid-asked spread.
E. broker’s commissions, dealer’s bid-asked spread, and a price concession an investor may be forced to make.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

14.                Assume you purchased 200 shares of GE 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?
A.$6,000
B. $4,000
C. $7,700
D. $7,000
E. $6,300

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

15.                You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was
A.$4,800.
B. $12,000.
C. $5,600.
D. $7,200.

200 shares ´ $60/share ´ 0.60 = $12,000 ´ 0.60 = $7,200.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

16.                You purchased 100 shares of IBM 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

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

17.                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.
A.0.33
B. 0.55
C. 0.43
D. 0.23
E. 0.25

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

18.                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.
A.25.00%
B. -33.33%
C. 44.31%
D. -41.67%
E. -54.22%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

19.                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 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.
A.20.03%
B. 25.67%
C. 22.22%
D. 77.46%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

20.                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%?
A.$51.00
B. $65.19
C. $35.22
D. $40.36

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

21.                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?
A.40%
B. 33%
C. 35%
D. 25%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

22.                Specialists on stock exchanges perform which of 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. Act as dealers in their own accounts and analyze the securities in which they specialize
E. Act as dealers in their own accounts and provide liquidity to the market

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

23.                Shares for short transactions
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. are typically shares held by the short seller’s broker in street name and are borrowed from commercial banks.
E. Are lended to the broker

Typically, the only source of shares for short transactions is the short seller’s broker in street name; often these are margined shares.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

24.                Which of the following orders is most useful to short sellers who want to limit their potential losses?
A.Limit order
B. Discretionary order
C. Limit-loss order
D. Stop-buy order
E. Market order

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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

25.                Which of the following orders instructs the broker to buy at the current market price?
A.Limit order
B. Discretionary order
C. Limit-loss order
D. Stop-buy order
E. Market order

Market orders are to be executed immediately at the best prevailing price.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

26.                Which of the following orders instructs the broker to buy at or below a specified price?
A.Limit-loss order
B. Discretionary order
C. Limit-buy order
D. Stop-buy order
E. Market order

Limit-buy orders are to be executed if the market price decreases to the specified limit price.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

27.                Which of the following orders instructs the broker to sell at or below a specified price?
A.Limit-sell order
B. Stop-loss
C. Limit-buy order
D. Stop-buy order
E. Market order

Stop-loss orders are to be executed if the market price decreases to the specified limit price.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

28.                Which of the following orders instructs the broker to sell at or above a specified price?
A.Limit-buy order
B. Discretionary order
C. Limit-sell order
D. Stop-buy order
E. Market order

Limit-sell orders are to be executed if the market price increases to the specified limit price.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

29.                Which of the following orders instructs the broker to buy at or above a specified price?
A.Limit-buy order
B. Discretionary order
C. Limit-sell order
D. Stop-buy order
E. Market order

Stop-buy orders are to be executed if the market price increases to the specified limit price.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

30.                Shelf registration
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. is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period.
E. is a way of placing issues in the primary market and increases transaction costs to the issuing firm.

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.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

31.                Block transactions are transactions for more than _______ shares, and they account for about _____ percent of all trading on the NYSE.
A.1,000; 5
B. 500; 10
C. 100,000; 50
D. 10,000; 30
E. 5,000; 23

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

32.                A ECN is
A.a trade of 10,000 (or more) shares of a stock.
B. a trade of many shares of one stock for one other stock.
C. a trade of analytic programs between financial analysts.
D. a fully automated market.
E. not feasible with current technology but is expected to be popular in the near future.

Program trading is a coordinated purchase or sale of an entire portfolio of stocks.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

33.                When stocks are held in street name,
A.the investor receives a stock certificate with the owner’s street address.
B. the investor receives a stock certificate without the owner’s street address.
C. the investor does not receive a stock certificate.
D. the broker holds the stock in the brokerage firm’s name on behalf of the client.
E. the investor does not receive a stock certificate, and the broker holds the stock in the brokerage firm’s name on behalf of the client.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

34.                NASDAQ subscriber levels
A.permit those with the highest level, 3, to “make a market” in the 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.
D. include all OTC stocks.
E. permit those with the highest level, 3, to “make a market” in the security; permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes; and permit level 1 subscribers to receive general information about prices.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

35.                You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. You would most likely place a
A.stop-loss order.
B. stop-buy order.
C. market order.
D. limit-sell order.
E. limit-buy order.

A market order is for immediate execution at the best possible price.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-02 How Securities are Traded.
Topic: 03-02 Privately Held Firms

36.                You want to purchase XON stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy?
A.100 shares
B. 200 shares
C. 50 shares
D. 500 shares
E. 25 shares

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

37.                A sale by IBM of new stock to the public would be a(n)
A.short sale.
B. seasoned equity offering.
C. private placement.
D. secondary-market transaction.
E. initial public offering.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

38.                The finalized registration statement for new securities approved by the SEC is called
A.a red herring.
B. the preliminary statement.
C. the prospectus.
D. a best-efforts agreement.
E. a firm commitment.

The prospectus is the finalized registration statement approved by the SEC.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

39.                One outcome from the SEC investigation of the “Flash Crash of 2010” was
A.a prohibition of short selling.
B. higher margin requirements.
C. approval of new circuit breakers.
D. establishment of electronic communications networks (ECNs).
E. passage of the Sarbanes-Oxley Act.

See “The Flash Crash of 2010.”

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-03 Securities Markets.
Topic: 03-14 Securities Markets

40.                All of the following are considered new trading strategies, except
A. high frequency trading.
B. algorithmic trading.
C. dark pools.
D. short selling.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-03 Securities Markets.
Topic: 03-02 Privately Held Firms

41.                You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is
A.$4,500.
B. unlimited.
C. zero.
D. $9,000.
E. Cannot be determined from the information given.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

42.                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%

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

43.                When a firm markets new securities, a preliminary registration statement must be filed with
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.

The SEC requires the registration statement and must approve it before the issue can take place.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

44.                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

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

45.                Which of the following is true regarding private placements of primary security offerings?
A.Extensive and costly registration statements are required by the SEC.
B. For very large issues, they are better suited than public offerings.
C. They trade in secondary markets.
D. The shares are sold directly to a small group of institutional or wealthy investors.
E. They have greater liquidity than public offerings.

Firms can save on registration costs, but the result is that the securities cannot trade in the secondary markets and therefore are less liquid. Public offerings are better suited for very large issues.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

46.                You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was
A.$4,800.
B. $12,000.
C. $2,250.
D. $7,200.
E. $1,200

100 shares ´ $45/share ´ 0.50 = $4,500 ´ 0.50 = $2,250.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

47.                You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was
A.$4,800.60.
B. $12,000.25.
C. $2,250.75.
D. $1,822.50.
E. $1,200

150 shares ´ $27/share ´ 0.45 = $4,050 ´ 0.45 = $1,822.50.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

48.                You purchased 100 shares of XON common stock on margin at $60 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.$42.86
B. $50.75
C. $49.67
D. $80.34
E. $20.00

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

49.                You purchased 1000 shares of CSCO common stock on margin at $19 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.$12.86
B. $15.75
C. $19.67
D. $13.57
E. $10.02

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

50.                You purchased 100 shares of common stock on margin at $40 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 $25? Ignore interest on margin.
A.0.33
B. 0.55
C. 0.20
D. 0.23
E. 0.25

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

51.                You purchased 1,000 shares of common stock on margin at $30 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 $24? Ignore interest on margin.
A.0.33
B. 0.375
C. 0.20
D. 0.23
E. 0.25

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

52.                You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.
A.28%
B. 33%
C. 14%
D. 42%
E. 24%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

53.                You purchased 100 shares of common stock on margin for $35 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin.
A.28%
B. 33%
C. 14%
D. 40%
E. 24%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

54.                Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.
A.20.47%
B. 25.63%
C. 57.14%
D. 77.23%
E. 18.75%

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

55.                Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.
A.-33.33%
B. -25.63%
C. -57.14%
D. -77.23%
E. -12%

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

56.                You want to purchase GM stock at $40 from your broker using as little of your own money as possible. If initial margin is 50% and you have $4,000 to invest, how many shares can you buy?
A.100 shares
B. 200 shares
C. 50 shares
D. 500 shares
E. 25 shares

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

57.                You want to purchase IBM stock at $80 from your broker using as little of your own money as possible. If initial margin is 50% and you have $2,000 to invest, how many shares can you buy?
A.100 shares
B. 200 shares
C. 50 shares
D. 500 shares
E. 25 shares

You can buy ($2,000/$80) = 25 shares outright and you can borrow $2,000 to buy another 25 shares.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

58.                Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $50?
A.40%
B. 20%
C. 35%
D. 25%
E. 15%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

59.                Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?
A.40.5%
B. 20.5%
C. 35.5%
D. 23.5%
E. 22.5%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

60.                You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 35%?
A.$50
B. $65
C. $35
D. $40
E. $30

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

61.                You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?
A.$90.23
B. $88.52
C. $86.54
D. $87.12
E. $78.5

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 03-05 Trading with Margin and Short Sales.
Topic: 03-05 Short Form Prospectus System (SFPD)

62.                The preliminary prospectus is referred to as a(n)
A.red herring.
B. indenture.
C. greenmail.
D. tombstone.
E. headstone.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 How Firms Issue Securities.
Topic: 03-01 How Firms Issue Securities

63.                Bonds are traded
A.on exchanges
B. Over-the counter
C. On a venture exchange
D. NYSE
E. AMEX

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-03 Securities Markets.
Topic: 03-03 Publicly Traded Companies

64.                An explicit trading cost is
A.commission
B. Execution cost
C. Bid-ask spread
D. Annual fee
E. Dealer spread

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 03-04 Trading Costs.
Topic: 03-04 Shelf Registration

65.                Which of the following is not required under the CFA Institute Standards of Professional Conduct?
A.Knowledge of all applicable laws, rules, and regulations
B. Disclosure of all personal investments, whether or not they may conflict with a client’s investments
C. Disclosure of all conflicts to clients and prospects
D. Reasonable inquiry into a client’s financial situation
E. All of the options are required under the CFA Institute standards.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-06 Regulation of Securities Markets.
Topic: 03-06 Initial Public Offerings

66.                According to the CFA Institute Standards of Professional Conduct, CFA Institute members have responsibilities to all of the following, except
A. the government.
B. the profession.
C. the public.
D. the employer.
E. clients and prospective clients.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 03-06 Regulation of Securities Markets.
Topic: 03-06 Initial Public Offerings

 

Chapter 05

Risk, Return, and the Historical Record

 

 

Multiple Choice Questions

1.   Over the past year, you earned a nominal rate of interest of 10% on your money. The inflation rate was 5% over the same period. The exact actual growth rate of your purchasing power was
A.15.5%.
B. 10.0%.
C. 5.0%.
D. 4.8%.
E. 15.0%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

2.   Over the past year, you earned a nominal rate of interest of 8% on your money. The inflation rate was 4% over the same period. The exact actual growth rate of your purchasing power was
A.15.5%.
B. 10.0%.
C. 3.8%.
D. 4.8%.
E. 15.0%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

 

 

3.   A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?
A.5%
B. 10%
C. 7%
D. 3%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

4.   A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year?
A.1.5%
B. 10%
C. 7%
D. 3%
E. None of the options are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

5.   If the annual real rate of interest is 5%, and the expected inflation rate is 4%, the nominal rate of interest would be approximately
A.1%.
B. 9%.
C. 20%.
D. 15%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

6.   If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.7%, the nominal rate of interest would be approximately
A.3.7%.
B. 6.2%.
C. 2.5%.
D. -1.2%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

7.   You purchased a share of stock for $20. One year later, you received $1 as a dividend and sold the share for $29. What was your holding-period return?
A.45%
B. 50%
C. 5%
D. 40%
E. None of the options are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

8.   You purchased a share of stock for $68. One year later, you received $3.00 as a dividend and sold the share for $74.50. What was your holding-period return?
A.12.5%
B. 14.0%
C. 13.6%
D. 11.8%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

9.   Which of the following determine(s) the level of real interest rates?

I) The supply of savings by households and business firms
II) The demand for investment funds
III) The government’s net supply and/or demand for funds
A.I only
B. II only
C. I and II only
D. I, II, and III

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

10.                Which of the following statement(s) is(are) true?

I) The real rate of interest is determined by the supply and demand for funds.
II) The real rate of interest is determined by the expected rate of inflation.
III) The real rate of interest can be affected by actions of the Fed.
IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.
A.I and II only
B. I and III only
C. III and IV only
D. II and III only
E. I, II, III, and IV only

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

11.                Which of the following statement(s) is(are) true?
A.Inflation has no effect on the nominal rate of interest.
B. The realized nominal rate of interest is always greater than the real rate of interest.
C. Certificates of deposit offer a guaranteed real rate of interest.
D. None of the options are true.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

12.                Other things equal, an increase in the government budget deficit
A.drives the interest rate down.
B. drives the interest rate up.
C. might not have any effect on interest rates.
D. increases business prospects.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

13.                Ceteris paribus, a decrease in the demand for loans
A.drives the interest rate down.
B. drives the interest rate up.
C. might not have any effect on interest rates.
D. results from an increase in business prospects and a decrease in the level of savings.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates