Chapter 03 How Securities are Traded

Multiple Choice Questions 3. Firms raise capital by issuing stock A. in the secondary market.B. in the i p primary market.C. to unwary investors.D. only on days when the market is t u up.E. C and D. Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction. t
D Difficulty: Easy

4. The following statements regarding the specialist are true: A. Specialists m maintain a book listing outstanding unexecuted limit orders.B. Specialists e earn income from commissions and spreads in stock prices.C. Specialists s stand ready to trade at quoted bid and ask prices.D. Specialists cannot t 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.
D Difficulty: Moderate

7. The secondary market consists of A. transactions on the AMEX. t B. transactions in the OTC market.C. transactions through the investment t b 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.
D Difficulty: Moderate

8. The use of the Internet to trade and underwrite securities A. is illegal u under SEC regulations.B. is regulated by the New York Stock Exchange. i C. decreases underwriting costs for a new security issue.D. increases d u underwriting costs for a new security issue.E. is regulated by the National Association of Securities Dealers.

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.

thus limiting your loss. None of the above.D.D. B and C. the Securities and E Exchange Commission. Your losses could be minimized by placing a __________. none of the above s d With a stop-buy order.B. D Difficulty: Moderate 10. stop-buy orderD. With a limit-sell order. stop-buy o orderB. The New York Stock Exchange determines maintenance margin requirements on NYSE-listed stocks. D Difficulty: Moderate 12. limit-sell orderB.E. limit-buy order l l C. A limit sell order is where investors specify prices a at which they are willing to sell a security. A day order expires at the close of the trading d day. limit-sell orderE. Thus. A. None of the other orders are applicable to this situation.C. the Federal Reserve System.B. The stock is currently selling at $65. a limit-buy order may instruct the broker to buy the stock if and when the s share price falls below $45. Initial margin requirements are determined by A. Your gains may be protected by placing a __________. your stock will be sold only at a specified price.E. such an order would protect your gains. . or better. market orderD. You purchased JNJ stock at $50 per share. brokers usually set maintenance margin requirements above those established by the NYSE.C. the New York t S Stock Exchange. Which one of the following statements regarding orders is false? A. You sold JCP stock short at $80 per share. limit-buy orderC. A. however. None of the other orders are applicable to this situation. day-orderE. the stock would be purchased if the price increased to a specified level. none of the l m l above. A and B The Board of Governors of the Federal Reserve System determines initial margin requirements.D Difficulty: Moderate 9. A market order is simply an order to buy or sell a stock immediately at the p prevailing market price. If stock ABC is selling at $50. D Difficulty: Moderate 11.

You purchased 100 shares of IBM common stock on margin at $70 per share. 0.E.500)/100P.All of the order descriptions above are correct. 44%D. Assume the initial margin is 50% and the stock pays no dividend.500.000C. B. $50C. -33%C.5 = $2. 0. P = $50. A.23E. You purchased 100 shares of common stock on margin at $45 per share. $80E. A. X = [100($30) .33B. -42%E. $6. $49 $ $ $ D. a price concession an investor d m may be forced to make. none of the above $ 100 shares * $70 * . 0.$2. All of the above are possible costs of buying and selling a stock. The initial margin is 60% and the stock pays no dividend. If the initial margin is 55%. 0. Assume the initial margin is 50% and the maintenance margin is 30%. $7.500 * 0. and C. You purchased 300 shares of common stock on margin for $60 per share. ignore interest on margin. A. $21B. broker's c commissionsB. Below what stock price level would you get a margin call? Assume the stock pays no dividend.000B. 25%B.25 0 0 0 0 100 shares * $45/share * 0. -70P = -$3.250 (loan amount).55C. 0.25.55) = $14. D Difficulty: Moderate 14. -54% 2 4 - . 30P = 100P . 0.000 * (0. X = 0.500 (loan amount).$3.000 * 0. how much did you borrow from the broker? A. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin. $4.5 = $3.43D.300 200 shares * $70/share * (1-0.$3. $6.5 = $4.500.45) = $6. dealer's bid-asked spreadC.250]/100($30).5 = $7.300. D Difficulty: Difficult 19. A. The cost of buying and selling a stock consists of __________. D Difficulty: Difficult 18.700D. D Difficulty: Moderate 17. A. Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker. A and B.30 = (100P . $7. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin. Difficulty: Moderate 15.000 $ $ $ $ E.D.

41. 22%D. What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period. $ D Difficulty: Difficult 20. 33%C.000.6 + 16.22%. 40%B. none of the above $ $ $ $ Equity = 300($55) * .800 = . 300($60) = $18.300($60)(0. The initial margin is 60%. 20%B.18 D Difficulty: Difficult 22.200 = $6.300P.300P)/300P. $51B. 405P = 26. Assume you sold short 100 shares of common stock at $50 per share.000 (0.$7. 0.$40) * 100 = $500. 25%C. D Difficulty: Moderate 21. [$8. $65C.200 loan.400 . D Difficulty: Difficult .800 investment. $35D.250 (initial investment) = 22. 25% 4 3 3 2 E. Proceeds after selling stock and repaying loan: $13. and you did not remove any money from the account before making the offsetting transaction.40) = $7.400 . 35%D.400.000 .800)/$10. $500/$2.6 + $5.500 = $26.35 = ($26. What would be the maintenance margin if a margin call is made at a stock price of $60? A.300 . P = $65.400.$10.60) = $10. Return = ($6.67%. 105P = 26.000 = $8. You sold short 300 shares of common stock at $55 per share. $40E. A. At what stock price would you receive a margin call if the maintenance margin is 35%? A.100($60)]/100($60) = 33%. none of the above 2 2 2 7 Profit on stock = ($45 . Assume you sell short 100 shares of common stock at $45 per share. with initial margin at 50%. 77%E.500 . The initial margin is 60%. none of the above 100($50) x 0.300.

5 1 B.B.B. stop-buy orderC. You would most likely place a A. 30E.C. the only source of shares for short transactions is those held by the short seller's broker in street name.000. 10. Shares for short transactions A. When stocks are held in street name.000. the broker holds the stock in the brokerage firms' name on behalf of the client.D. stop-loss order s B. When stocks are held in street name A. are typically shares held by the short seller's broker in street n name. 23 5 1 1 Block transactions are defined as trades of 10. 100. the investor receives a stock c certificate with the owner's street address. are usually borrowed from other b brokers. none of the a above.000 (or more) shares of a stock. limit-sell orderE. the investor does not r receive a stock certificate. A program trade is A. not feasible with current technology but is expected to be popular in the near future.E. the broker holds the stock in the brokerage f firms' name on behalf of the client. 50D. often these are margined shares. This arrangement speeds transfer of securities. B and C. market orderD. the investor receives a stock c certificate without the owner's street address. 1.C.000. D Difficulty: Moderate 34. Typically.E.B. A. limit-buy order s m l .D.E. D Difficulty: Moderate 33. 10C.24.C. You want to buy 100 shares of Hotstock Inc. C and D. D Difficulty: Moderate 32. a coordinated purchase or sale of a an entire portfolio of stocks. the investor does not receive a stock certificate.D. a trade of 10. a t trade of many shares of one stock for one other stock. Block transactions are transactions for more than _______ shares and they account for about _____ percent of all trading on the NYSE. Program trading is a coordinated purchase or sale of an entire portfolio of stocks. are borrowed from commercial banks. at the best possible price as quickly as possible. 5.000 or more shares and they account for 30 percent of NYSE trading. D Difficulty: Moderate 36. a trade of analytic p programs between financial analysts.000. 500.

a frequent trader who performs no public function but e executes trades for himself. Assume you sell short 100 shares of common stock at $30 per share.$25)(1.000/$17.14%. What would be your rate of return if you repurchase the stock at $25/share? The stock paid no dividends during the period.C. none 2 2 5 7 of the above Profit on stock = ($35 .23%E. any counter party to a trade executed on the floor of the exchange. D Difficulty: Moderate 58.A market order is for immediate execution at the best possible price. It doesn't matter .500.375 on the NYSE.47%B. The broker should try to obtain the best price for his client. with initial margin at 50%.5) = $17.D. What should the broker do? A. 25. return = $10. Call the client to see if she has R a preference. D Difficulty: Moderate 57. someone who makes a market in one or more securities. 20. The floor broker is an independent member of the exchange who handles work for commission brokers when they have too many orders to handle.14%D. A specialist on the AMEX Stock Exchange is offering to buy a security for $37. a s representative of a brokerage firm who is on the floor of the exchange to e execute trade. A.B. A broker in Oklahoma City wants to sell the security for his client. an independent member of the exchange who owns a seat and handles overload work for commission b brokers. D Difficulty: Easy 48. Route the order to the AMEX Stock E Exchange.D.000.50.E. he should route the order there. 57.000) = $10. initial investment = ($35) (1. Since the client wants to sell shares and the bid price is higher on the AMEX. Route half of the order to AMEX and the other half to the N NYSE. and you did not remove any money from the account before making the offsetting transaction.he should flip a coin and go with it. 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 .000)(. D Difficulty: Easy 42.E. Assume you sell short 1000 shares of common stock at $35 per share.63%C. Route the order to the NYSE.B. 77.C.500 = 57. The floor broker is best described as A. The Intermarket Trading System shows a bid price of $37.

-25. A. I a and VIC. 200 sharesC. II and IIIB. II and IVE. requires periodic disclosure . V. D Difficulty: Moderate 75. IV. IV only I I The securities act of 1933 requires full disclosure of relevant information relating to the issue of new securities. I. D Difficulty: Moderate 59.period. V. I) requires full disclosure of T r relevant information relating to the issue of new securitiesII) requires r registration of new securitiesIII) requires issuance of a prospectus detailing f financial prospects of the firmIV) established the SECV) requires periodic I d disclosure of relevant financial informationVI) empowers SEC to regulate exchanges. I. I) requires full disclosure of T r relevant information relating to the issue of new securitiesII) requires r registration of new securitiesIII) requires issuance of a prospectus detailing f financial prospects of the firmIV) established the SECV) requires periodic I d disclosure of relevant financial informationVI) empowers SEC to regulate exchanges. The securities act of 1934 ____________. The securities act of 1933 ____________.33%B. II. I. and VI I I The securities act of 1934 established the SEC.14%D. none of the above Profit on stock = ($30 . requires registration of new securities. -33. brokers. III. I. return = $-500/$1. V. I.23% E. III. I a and VIC. initial investment = ($30)(100) (.33%. You want to purchase GM stock at $40 from your broker using as little of your own money as possible. and requires issuance of a prospectus detailing financial prospects of the firm. IV. II and IVE. I. I. and dealers A. II and VD. 25 shares 5 You can buy ($4000/$40) = 100 shares outright and you can borrow $4. and dealers A.500.$35)(100) = -500.000 to buy another 100 shares. -57. 100 sharesB. IV. how many shares can you buy? A.500 = -33. I. -77. and you did not remove any money from the account before making the offsetting transaction. II and VD. If initial margin is 50% and you have $4000 to invest. brokers. II and IIIB. 500 sharesE. II. 50 1 2 s sharesD.63%C. OTC trading. OTC trading. 76.5) = $1.

CFA Institute members have responsibilities to all of the following except: A. D Difficulty: Moderate 78. According to the CFA Institute Standards of Professional Conduct. reasonable inquiry into a client's financial situationE. OTC trading. D Difficulty: Moderate . the employerE. Which of the following is not required under the CFA Institute standards of professional conduct? A.of relevant financial information. knowledge of all applicable laws. the publicD. All of r the above are required under the CFA Institute standards. the professionC. the g governmentB. and dealers. clients and t t t prospective clients See "Excerpts from CFA Institute Standards of Professional Conduct". and empowers SEC to regulate exchanges. disclosure of all personal investments whether or not they m may conflict with a client's investmentsC. D Difficulty: Easy 77. rules and r regulationsB. brokers. disclosure of all conflicts to clients a and prospectsD.

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