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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. A and B.
E. B and C.

 

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. A and B.
E. B and C.

 

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.
E. C and D.

 

4.   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. A, B, and C are all true.

 

 

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. A and B.
E. A, B, and C.

 

6.   In a “firm commitment”
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.
D. B and C.
E. A and B.

 

7.   The secondary market consists of
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.

 

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. B and C.
E. A and B

 

 

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 the above.

 

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 above.

 

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).
E. None of the above.

 

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 above are subject to insider trading restrictions.
E. None of the above is subject to insider trading restrictions.

 

 

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. A and B.
E. A, B, and C.

 

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

 

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.
E. none of the above.

 

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
E. none of the above

 

 

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

 

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%

 

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/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%
E. none of the above

 

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. $65.18
C. $35.22
D. $40.36
E. none of the above

 

 

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%
E. none of the above

 

22.                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.

 

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. B and C.
E. none of the above.

 

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. None of the above

 

 

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

 

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

 

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

 

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

 

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

 

 

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. A and B.
E. A and C.

 

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

 

32.                A program trade 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 coordinated purchase or sale of an entire portfolio of stocks.
E. not feasible with current technology but is expected to be popular in the near future.

 

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 firms’ name on behalf of the client.
E. C and D.

 

 

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. A, B, and C.

 

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

 

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 $3000 to invest, how many shares can you buy?
A. 100 shares
B. 200 shares
C. 50 shares
D. 500 shares
E. 25 shares

 

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.

 

 

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

 

39.                The minimum market value required for an initial listing on the New York Stock Exchange is
A. $2,000,000
B. $2,500,000
C. $1,100,000
D. $60,000,000
E. 100,000,000

 

40.                In 2005, the price of a seat on the NYSE reached a high of
A. $1,000,000
B. $4,000,000
C. $1,750,000
D. $2,225,000
E. $3,000,000

 

41.                You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is
A. $4500
B. unlimited
C. zero
D. $9000
E. cannot tell from the information given

 

 

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%

 

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.

 

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

 

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.

 

 

46.                A specialist on the AMEX Stock Exchange is offering to buy a security for $37.50. A broker in Oklahoma City wants to sell the security for his client. The Intermarket Trading System shows a bid price of $37.375 on the NYSE. What should the broker do?
A. Route the order to the AMEX Stock Exchange.
B. Route the order to the NYSE.
C. Call the client to see if she has a preference.
D. Route half of the order to AMEX and the other half to the NYSE.
E. It doesn’t matter – he should flip a coin and go with it.

 

47.                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. none of the above.

 

48.                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. none of the above.

 

49.                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. none of the above

 

 

50.                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. none of the above

 

51.                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

 

52.                You purchased 1000 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

 

53.                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%

 

 

54.                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%

 

55.                Assume you sell short 1000 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/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. none of the above

 

56.                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/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. none of the above

 

 

57.                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 $4000 to invest, how many shares can you buy?
A. 100 shares
B. 200 shares
C. 50 shares
D. 500 shares
E. 25 shares

 

58.                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 $2000 to invest, how many shares can you buy?
A. 100 shares
B. 200 shares
C. 50 shares
D. 500 shares
E. 25 shares

 

59.                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. none of the above

 

60.                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. none of the above

 

 

61.                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. none of the above

 

62.                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. none of the above

 

63.                Despite large first-day IPO returns, average first-year returns in the US are approximately ____________ percent.
A. 7.2
B. 18.2
C. 26.4
D. 4.8
E. 9.1

 

64.                Average second-year IPO returns in the US are approximately ____________ percent.
A. 6.7
B. 18.2
C. 26.4
D. 7.0
E. 9.1

 

 

65.                Average third-year IPO returns in the US are approximately ____________ percent.
A. 6.7
B. 18.2
C. 26.4
D. 5.3
E. 10.4

 

66.                The preliminary prospectus is referred to as a ____________.
A. red herring
B. indenture
C. green mail
D. tombstone
E. headstone

 

67.                The minimum revenue required for an initial listing on the New York Stock Exchange is
A. $2,000,000
B. $25,000,000
C. $50,000,000
D. $75,000,000
E. 100,000,000

 

68.                The minimum annual pretax income in the previous two years required for an initial listing on the New York Stock Exchange is
A. $2,000,000
B. $25,000,000
C. $50,000,000
D. $75,000,000
E. 100,000,000

 

 

69.                The average daily number of shares traded on the NYSE in 2008 was approximately ____________ dollars.
A. over 3 billion
B. 1.8 trillion
C. 12 billion
D. 4 trillion
E. none of the above

 

70.                The securities act of 1933 ____________.
I) requires full disclosure of relevant information relating to the issue of new securities
II) requires registration of new securities
III) requires issuance of a prospectus detailing financial prospects of the firm
IV) established the SEC
V) requires periodic disclosure of relevant financial information
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers
A. I, II and III
B. I, II, III, IV, V, and VI
C. I, II and V
D. I, II and IV
E. IV only

 

71.                The securities act of 1934 ____________.
I) requires full disclosure of relevant information relating to the issue of new securities
II) requires registration of new securities
III) requires issuance of a prospectus detailing financial prospects of the firm
IV) established the SEC
V) requires periodic disclosure of relevant financial information
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers
A. I, II and III
B. I, II, III, IV, V, and VI
C. I, II and V
D. I, II and IV
E. IV, V, and VI

 

 

72.                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 above are required under the CFA Institute standards.

 

73.                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

 

 

Short Answer Questions

74.                Discuss margin buying of common stocks. Include in your discussion the advantages and disadvantages, the types of margin requirements, how these requirements are met, and who determines these requirements.

 

 

 

 

 

75.                List three factors that are listing requirements for the New York Stock Exchange. Why does the exchange have such requirements?

 

 

 

 

 

 

Chapter 03 How Securities Are Traded Answer Key
 

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. A and B.
E. B and C.

Secondary market transactions consist of trades between investors.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Topic: Stocks

 

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. A and B.
E. B and C.

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Topic: Stocks

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.
E. C and D.

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

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Topic: Stocks

 

4.   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. A, B, and C are all true.

The specialists’ functions are all of the items listed in A, B, and C. In addition, specialists trade in their own accounts.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stocks

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. A and B.
E. A, B, and C.

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

 

6.   In a “firm commitment”
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.
D. B and C.
E. A and B.

In a “firm commitment” the investment banker buys the stock from the company and resells the issue to the public.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stock Trading

7.   The secondary market consists of
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.

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

 

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. B and C.
E. A and B

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

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stocks

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 the above.

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.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Moderate
Topic: Stock Trading

 

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 above.

With a stop-buy order, the stock would be purchased if the price increased to a specified level, thus limiting your loss.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stock Trading

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).
E. None of the above.

All of the order descriptions above are correct except D.

 

AACSB: Reflective Thinking
Bloom’s: Apply
Difficulty: Moderate
Topic: Stock Trading

 

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 above are subject to insider trading restrictions.
E. None of the above is subject to insider trading restrictions.

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

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. A and B.
E. A, B, and C.

All of the above are possible costs of buying and selling a stock.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stock Trading

 

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

200 shares * $70/share * (1-0.55) = $14,000 * (0.45) = $6,300.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Moderate
Topic: Stock Trading

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.
E. none of the above.

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

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Moderate
Topic: Stock Trading

 

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
E. none of the above

100 shares * $70 * .5 = $7,000 * 0.5 = $3,500 (loan amount); 0.30 = (100P – $3,500)/100P; 30P = 100P – $3,500; -70P = -$3,500; P = $50.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Difficult
Topic: Trading on Margin

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

100 shares * $45/share * 0.5 = $4,500 * 0.5 = $2,250 (loan amount); X = [100($30) – $2,250]/100($30); X = 0.25.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Difficult
Topic: Trading on Margin

 

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%

300($60)(0.60) = $10,800 investment; 300($60) = $18,000 X (0.40) = $7,200 loan; Proceeds after selling stock and repaying loan: $13,500 – $7,200 = $6,300; Return = ($6,300 – $10,800)/$10,800 = – 41.67%.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Difficult
Topic: Trading on Margin

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/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%
E. none of the above

Profit on stock = ($45 – $40) * 100 = $500, $500/$2,250 (initial investment) = 22.22%.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Moderate
Topic: Trading on Margin

 

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. $65.18
C. $35.22
D. $40.36
E. none of the above

Equity = 300($55) * 1.6 = $26,400; 0.35 = ($26,400 – 300P)/300P; 105P = 26,400 – 300P; 405P = 26,400; P = $65.18

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Difficult
Topic: Trading on Margin

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%
E. none of the above

$5,000 X 1.6 = $8,000; [$8,000 – 100($60)]/100($60) = 33%.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Difficult
Topic: Trading on Margin

 

22.                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.

Specialists are both brokers and dealers and provide liquidity to the market; they are not analysts.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stock Trading

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. B and C.
E. none of the above.

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.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stock Trading

 

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. None of the above

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

 

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

 

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

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. A and B.
E. A and C.

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Topic: Stock Trading

 

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

Block transactions are defined as trades of 10,000 or more shares.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

32.                A program trade 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 coordinated purchase or sale of an entire portfolio of stocks.
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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Stock Trading

 

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 firms’ name on behalf of the client.
E. C and D.

When stocks are held in street name, the investor does not receive a stock certificate; the broker holds the stock in the brokerage firms’ name on behalf of the client. This arrangement speeds transfer of securities.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Moderate
Topic: Stocks

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. A, B, and C.

NASDAQ links dealers in a loosely organized network with different levels of access to meet different needs.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Easy
Topic: Exchanges

 

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.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Easy
Topic: Stock Trading

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 $3000 to invest, how many shares can you buy?
A.100 shares
B. 200 shares
C. 50 shares
D. 500 shares
E. 25 shares

.5 = [(Q * $60)-$3,000]/(Q * $60); $30Q = $60Q-$3,000; $30Q = $3,000; Q=100.

 

AACSB: Analytic
Bloom’s: Apply
Difficulty: Moderate
Topic: Stock Trading

 

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.

When a firm whose stock already trades in the secondary market issues new shares to the public this is referred to as a seasoned equity offering.

 

AACSB: Analytic
Bloom’s: Understand
Difficulty: Easy
Topic: Stocks

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.

 

AACSB: Analytic
Bloom’s: Remember
Difficulty: Moderate
Topic: Regulation

 

39.                The minimum market value required for an initial listing on the New York Stock Exchange is
A.$2,000,000
B. $2,500,000
C. $1,100,000
D. $60,000,000
E. 100,000,000

See Table 3.2.