Essentials of Investments Zvi Bodie 11th Edition- Test Bank

 

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Sample Test

Essentials of Investments, 11e (Bodie)

Chapter 3   Securities Markets

 

1) Underwriting is one of the services provided by ________.

1.   A) the SEC

2.   B) investment bankers

3.   C) publicly traded companies

4.   D) FDIC

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

2) Under firm-commitment underwriting, the ________ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.

1.   A) red herring

2.   B) issuing company

3.   C) initial stockholder

4.   D) underwriter

 

Answer:  D

Difficulty: 2 Medium

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

3) Explicit costs of a stock IPO tend to be around ________ of the funds raised.

1.   A) 1%

2.   B) 7%

3.   C) 15%

4.   D) 25%

 

Answer:  B

Difficulty: 2 Medium

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

4) Barnegat Light sold 200,000 shares in an initial public offering. The underwriter’s explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?

1.   A) $90,000

2.   B) $1,290,000

3.   C) $2,390,000

4.   D) $1,690,000

 

Answer:  D

Explanation:  Total cost = 90,000 + (43 – 35)200,000 = $1,690,000

Difficulty: 3 Hard

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

5) When a firm decides to sell securities it must first ensure ________.

1.   A) the preliminary registration statement is approved by the SEC

2.   B) the IPO is complete

3.   C) the offering is seasoned

4.   D) the lockup period expires

 

Answer:  A

Difficulty: 2 Medium

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

6) Private placements can be advantageous, compared to public issue, because:

 

1.   Private placements are cheaper to market than public issues.

2.   Private placements may still be sold to the general public under SEC Rule 144A.

III. Privately placed securities trade on secondary markets.

1.   A) I only

2.   B) I and III only

3.   C) II and III only

4.   D) I, II, and III

 

Answer:  A

Difficulty: 2 Medium

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

7) A level ________ subscriber to the NASDAQ system may enter bid and ask prices.

1.   A) 1

2.   B) 2

3.   C) 3

4.   D) 4

 

Answer:  C

Difficulty: 1 Easy

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

8) Which one of the following statements about IPOs is not true?

1.   A) IPOs generally have been poor long-term investments.

2.   B) IPOs often provide very good initial returns to investors.

3.   C) IPOs generally provide superior long-term performance as compared to other stocks.

4.   D) Shares in IPOs are often primarily allocated to institutional investors.

 

Answer:  C

Difficulty: 2 Medium

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

9) The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

1.   A) 9%

2.   B) 15%

3.   C) 48%

4.   D) 57%

 

Answer:  C

Explanation:

Loss = (22−25)100	$	(300	)
Amount invested = 0.25 × $25 × 100	$	625
Return = −$300/$625		-48	%

Difficulty: 2 Medium

Topic:  Buying on Margin

Learning Objective:  03-04 Compare the mechanics and investment implications of buying on margin and short-selling.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

10) The NYSE acquired the ECN ________, and NASDAQ recently acquired the ECN ________.

1.   A) Archipelago; Instinet

2.   B) Instinet; Archipelago

3.   C) Island; Instinet

4.   D) LSE; Euronext

 

Answer:  A

Difficulty: 2 Medium

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

11) Rank the following types of markets from least integrated and organized to most integrated and organized:

 

1.   Brokered markets

2.   Continuous auction markets

III. Dealer markets

1.   Direct search markets

2.   A) IV, II, I, III

3.   B) I, III, IV, II

4.   C) II, III, IV, I

5.   D) IV, I, III, II

 

Answer:  D

Difficulty: 3 Hard

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

12) As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks’ prices change by more than ________ in a 5-minute period.

1.   A) 10%

2.   B) 20%

3.   C) 30%

4.   D) 40%

 

Answer:  A

Difficulty: 2 Medium

Topic:  New Trading Strategies

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

13) Which one of the following is not an example of a brokered market?

1.   A) residential real estate market

2.   B) market for large block security transactions

3.   C) primary market for securities

4.   D) NASDAQ

 

Answer:  D

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

14) More than ________ of all trading is believed to be initiated by computer algorithms.

1.   A) 25%

2.   B) 40%

3.   C) 50%

4.   D) 75%

 

Answer:  C

Difficulty: 2 Medium

Topic:  New Trading Strategies

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

15) Purchases of new issues of stock take place ________.

1.   A) at the desk of the Fed

2.   B) in the primary market

3.   C) in the secondary market

4.   D) in the money markets

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

16) Initial margin requirements on stocks are set by ________.

1.   A) the Federal Deposit Insurance Corporation

2.   B) the Federal Reserve

3.   C) the New York Stock Exchange

4.   D) the Securities and Exchange Commission

 

Answer:  B

Difficulty: 1 Easy

Topic:  Buying on Margin

Learning Objective:  03-04 Compare the mechanics and investment implications of buying on margin and short-selling.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

17) Which one of the following types of markets requires the greatest level of trading activity to be cost-effective?

1.   A) broker market

2.   B) dealer market

3.   C) continuous auction market

4.   D) direct search market

 

Answer:  C

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

18) Which one of the following is a false statement regarding NYSE specialists?

1.   A) On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists.

2.   B) Specialists cannot trade for their own accounts.

3.   C) Specialists maintain limit order books, which contain the outstanding unexecuted limit orders.

4.   D) Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

 

Answer:  B

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

19) Restrictions on trading involving insider information apply to:

 

1.   Corporate officers and directors

2.   Major stockholders

III. Relatives of corporate directors and officers

1.   A) I only

2.   B) I and II only

3.   C) II and III only

4.   D) I, II, and III

 

Answer:  D

Difficulty: 3 Hard

Topic:  Regulation of Securities Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

20) An order to buy or sell a security at the current price is a ________.

1.   A) limit order

2.   B) market order

3.   C) stop-loss order

4.   D) stop-buy order

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

21) The term insidequotes refers to ________.

1.   A) the difference between the lowest bid price and the highest ask price in the limit order book.

2.   B) the difference between the highest bid price and the lowest ask price in the limit order book.

3.   C) the difference between the lowest bid price and the lowest ask price in the limit order book.

4.   D) the difference between the highest bid price and the highest ask price in the limit order book.

 

Answer:  B

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

22) The term latency refers to ________.

1.   A) the lag between when an order is placed on the NYSE and when it is executed.

2.   B) the amount of time it takes to accept, process, and deliver a trading order.

3.   C) the time it takes to implement new rules and procedures for stock exchanges and computer trading systems.

4.   D) the lag between when an order is executed and when the investor takes possession of the securities.

 

Answer:  B

Difficulty: 1 Easy

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

23) If an investor places a ________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a ________ order, the stock will be bought if its price rises above the stipulated level.

1.   A) buy stop; stop-loss

2.   B) market; limit

3.   C) stop-loss; buy stop

4.   D) limit; market

 

Answer:  C

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

24) On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer’s gross trading profit for this security?

1.   A) $1,375

2.   B) $500

3.   C) $275

4.   D) $1,450

 

Answer:  A

Explanation:  (1,003.25 – 1,000.50)500 = $1,375

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

25) Advantages of ECNs over traditional markets include all but which one of the following?

1.   A) lower transactions costs

2.   B) anonymity of the participants

3.   C) small amount of time needed to execute and order

4.   D) ability to handle very large orders

 

Answer:  D

Difficulty: 2 Medium

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

26) The ________ was established to protect investors from losses if their brokerage firms fail.

1.   A) CFTC

2.   B) SEC

3.   C) SIPC

4.   D) AIMR

 

Answer:  C

Difficulty: 1 Easy

Topic:  Regulation of Securities Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

27) When matching orders from the public, a specialist is required to use the ________.

1.   A) lowest outstanding bid price and highest outstanding ask price

2.   B) highest outstanding bid price and highest outstanding ask price

3.   C) lowest outstanding bid price and lowest outstanding ask price

4.   D) highest outstanding bid price and lowest outstanding ask price

 

Answer:  D

Difficulty: 3 Hard

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

28) The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

1.   A) interest building

2.   B) book building

3.   C) market analysis

4.   D) customer identification

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

29) The bulk of most initial public offerings (IPOs) of equity securities goes to ________.

1.   A) institutional investors

2.   B) individual investors

3.   C) the firm’s current shareholders

4.   D) day traders

 

Answer:  A

Difficulty: 1 Easy

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

30) Initial public offerings (IPOs) are usually ________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

1.   A) overpriced

2.   B) correctly priced

3.   C) underpriced

4.   D) mispriced, but without any particular bias

 

Answer:  C

Difficulty: 1 Easy

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

31) According to multiple studies by Ritter, initial public offerings tend to exhibit ________ performance initially and ________ performance over the long term.

1.   A) bad; good

2.   B) bad; bad

3.   C) good; good

4.   D) good; bad

 

Answer:  D

Difficulty: 2 Medium

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

32) Specialists try to maintain a narrow bid-ask spread because:

 

1.   If the spread is too large, they will not participate in as many trades, losing commission income.

2.   The exchange requires specialists to maintain price continuity.

III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

1.   A) I only

2.   B) I and II only

3.   C) II and III only

4.   D) I, II, and III

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

33) In a ________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

1.   A) best-efforts

2.   B) firm-commitment

3.   C) private placement

4.   D) none of these options

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

34) The ________ is the most important dealer market in the United States, and the ________ is the most important auction market.

1.   A) NYSE; NASDAQ

2.   B) NASDAQ; NYSE

3.   C) CME; OTC

4.   D) AMEX; NYSE

 

Answer:  B

Difficulty: 1 Easy

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

35) The inside quotes on a limit order book can be found ________.

1.   A) at the top of the list

2.   B) at the bottom of the list

3.   C) by taking the averages of the bid and ask prices on the list

4.   D) only by direct contact with the specialist who maintains the book

 

Answer:  A

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

36) The ________ system enables exchange members to send orders directly to a specialist over computer lines.

1.   A) FAX

2.   B) Direct Plus

3.   C) NASDAQ

4.   D) SUPERDOT

 

Answer:  D

Difficulty: 1 Easy

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

37) The fully automated trade-execution system installed on the NYSE is called ________.

1.   A) FAX

2.   B) Direct +

3.   C) NASDAQ

4.   D) SUPERDOT

 

Answer:  B

Difficulty: 1 Easy

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

38) The NYSE Hybrid Market allows ________.

1.   A) individuals to send orders directly to a specialist

2.   B) individuals to send orders directly to an electronic system

3.   C) brokers to send orders directly to a specialist

4.   D) brokers to send orders either to an electronic system or to a specialist

 

Answer:  D

Difficulty: 2 Medium

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

39) Approximately ________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.

1.   A) 50%

2.   B) 25%

3.   C) 60%

4.   D) 75%

 

Answer:  B

Difficulty: 2 Medium

Topic:  U.S. Markets

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

40) The ________ price is the price at which a dealer is willing to purchase a security.

1.   A) bid

2.   B) ask

3.   C) clearing

4.   D) settlement

 

Answer:  A

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

41) The ________ price is the price at which a dealer is willing to sell a security.

1.   A) bid

2.   B) ask

3.   C) clearing

4.   D) settlement

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

42) The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the ________.

1.   A) market spread

2.   B) bid-ask spread

3.   C) bid-ask gap

4.   D) market variation

 

Answer:  B

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

43) The bid-ask spread exists because of ________.

1.   A) market inefficiencies

2.   B) discontinuities in the markets

3.   C) the need for dealers to cover expenses and make a profit

4.   D) lack of trading in thin markets

 

Answer:  C

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

44) The NYSE has lost market share to ECNs in recent years. Part of the NYSE’s response to the growth of ECNs has been to:

 

1.   Purchase Archipelago, a major ECN, and rename it NYSE Arca

2.   Enable automatic trade execution through its new Market Center

III. Impose a tighter limit on bid-ask spreads

1.   A) I only

2.   B) II and III only

3.   C) I and II only

4.   D) I, II, and III

 

Answer:  A

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

45) The cost of buying and selling a stock includes:

 

1.   Broker’s commissions

2.   Dealer’s bid-asked spread

III. Price concessions that investors may be forced to make

1.   A) I and II only

2.   B) II and III only

3.   C) I and III only

4.   D) I, II, and III

 

Answer:  D

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

46) Which of the following is (are) true about dark pools?

 

1.   They allow anonymity in trading.

2.   They often involve large blocks of stocks.

III. Trades made through them might not be reported.

1.   A) I and II only

2.   B) II and III only

3.   C) I and III only

4.   D) I, II, and III

 

Answer:  D

Difficulty: 2 Medium

Topic:  New Trading Strategies

Learning Objective:  03-03 Describe trading practices in dealer markets, specialist-directed stock exchanges, and electronic communication networks.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

47) You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a ________.

1.   A) limit buy order

2.   B) limit sell order

3.   C) market order

4.   D) stop-loss order

 

Answer:  D

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

48) Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

 

Limit Buy Price	Orders Shares			Limit Sell Orders		Orders Shares
$39.75		100			$40.25			100
$39.50		100			$40.50			100

 

39.                A) $39.75

40.                B) $40.25

41.                C) $40.375

42.                D) $40.25 or less

 

Answer:  D

Explanation:  In this case the specialist would have the option of matching the buy order with the lowest limit sell order ($40.25) or setting an ask price lower than $40.25 ($40 for example) and trading the order from her own stock.

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

49) You find that the bid and ask prices for a stock are $10.25 and $10.30, respectively. If you purchase or sell the stock, you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars?

1.   A) $50

2.   B) $25

3.   C) $30

4.   D) $55

 

Answer:  D

Explanation:  100(10.30 – 10.25) + 2(25) = $55

Difficulty: 2 Medium

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

50) According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for ________ following initial registration.

1.   A) 1 year

2.   B) 2 years

3.   C) 3 years

4.   D) 4 years

 

Answer:  B

Difficulty: 2 Medium

Topic:  How Firms Issue Securities

Learning Objective:  03-01 Describe how firms issue securities to the public.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

51) What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

2001.         A) The effective spread increased in 1997 but decreased in 2001.

2002.         B) The effective spread increased in both cases.

2003.         C) The effective spread decreased in 1997 but increased in 2001.

2004.         D) The effective spread decreased in both cases.

 

Answer:  D

Difficulty: 1 Easy

Topic:  How Securities Are Traded

Learning Objective:  03-02 Identify various types of orders investors can submit to their brokers.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation