Q&A Hero

Q: All major stock markets today are effectively ________. A) specialist trading systems B) electronic trading systems C) continuous auction markets D) direct search markets

Q: The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission? A) $35 B) $45 C) $53 D) $68

Q: Regulation NMS: I. Supports the goal of integrating financial markets II. Requires the use of specialists to execute trades III. Requires that exchanges honor quotes of other exchanges when they can be executed automatically A) I only B) I and II only C) I and III only D) I, II, and III

Q: ________ often accompany short sales and are used to limit potential losses from the short position. A) Limit orders B) Restricted orders C) Limit loss orders D) Stop-buy orders

Q: What was the result of high-frequency traders' leaving the market during the flash crash of 2010? A) Market liquidity decreased. B) Market liquidity increased. C) Market volatility decreased. D) Trading frequency increased.

Q: Transactions that do not involve the original issue of securities take place in ________. A) primary markets B) secondary markets C) over-the-counter markets D) institutional markets

Q: You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.) A) $28.85 B) $35.71 C) $31.50 D) $32.25

Q: You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be ________ if you sell the stock at $32 per share. Ignore interest on margin. A) 35% B) 39% C) 43% D) 28%

Q: You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ________. A) $37.50 B) $62.50 C) $56.25 D) $59.75

Q: You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up ________. A) $4,500 B) $6,000 C) $9,000 D) $10,000

Q: Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is ________. A) $20,000 B) $12,000 C) $8,000 D) $15,000

Q: 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? A) The effective spread increased in 1997 but decreased in 2001. B) The effective spread increased in both cases. C) The effective spread decreased in 1997 but increased in 2001. D) The effective spread decreased in both cases.

Q: According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for ________ following initial registration. A) 1 year B) 2 years C) 3 years D) 4 years

Q: 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? A) $50 B) $25 C) $30 D) $55

Q: 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 A) $39.75 B) $40.25 C) $40.375 D) $40.25 or less

Q: You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a ________. A) limit buy order B) limit sell order C) market order D) stop-loss order

Q: Which of the following is (are) true about dark pools? I. They allow anonymity in trading. II. They often involve large blocks of stocks. III. Trades made through them might not be reported. A) I and II only B) II and III only C) I and III only D) I, II, and III

Q: The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make A) I and II only B) II and III only C) I and III only D) I, II, and III

Q: 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: I. Purchase Archipelago, a major ECN, and rename it NYSE Arca II. Enable automatic trade execution through its new Market Center III. Impose a tighter limit on bid-ask spreads A) I only B) II and III only C) I and II only D) I, II, and III

Q: The bid-ask spread exists because of ________. A) market inefficiencies B) discontinuities in the markets C) the need for dealers to cover expenses and make a profit D) lack of trading in thin markets

Q: 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 ________. A) market spread B) bid-ask spread C) bid-ask gap D) market variation

Q: The ________ price is the price at which a dealer is willing to sell a security. A) bid B) ask C) clearing D) settlement

Q: The ________ price is the price at which a dealer is willing to purchase a security. A) bid B) ask C) clearing D) settlement

Q: Approximately ________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange. A) 50% B) 25% C) 60% D) 75%

Q: The NYSE Hybrid Market allows ________. A) individuals to send orders directly to a specialist B) individuals to send orders directly to an electronic system C) brokers to send orders directly to a specialist D) brokers to send orders either to an electronic system or to a specialist

Q: The fully automated trade-execution system installed on the NYSE is called ________. A) FAX B) Direct + C) NASDAQ D) SUPERDOT

Q: The ________ system enables exchange members to send orders directly to a specialist over computer lines. A) FAX B) Direct Plus C) NASDAQ D) SUPERDOT

Q: The inside quotes on a limit order book can be found ________. A) at the top of the list B) at the bottom of the list C) by taking the averages of the bid and ask prices on the list D) only by direct contact with the specialist who maintains the book

Q: The ________ is the most important dealer market in the United States, and the ________ is the most important auction market. A) NYSE; NASDAQ B) NASDAQ; NYSE C) CME; OTC D) AMEX; NYSE

Q: In a ________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price. A) best-efforts B) firm-commitment C) private placement D) none of these options

Q: Specialists try to maintain a narrow bid-ask spread because: I. If the spread is too large, they will not participate in as many trades, losing commission income. II. The exchange requires specialists to maintain price continuity. III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit. A) I only B) I and II only C) II and III only D) I, II, and III

Q: According to multiple studies by Ritter, initial public offerings tend to exhibit ________ performance initially and ________ performance over the long term. A) bad; good B) bad; bad C) good; good D) good; bad

Q: Initial public offerings (IPOs) are usually ________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. A) overpriced B) correctly priced C) underpriced D) mispriced, but without any particular bias

Q: The bulk of most initial public offerings (IPOs) of equity securities goes to ________. A) institutional investors B) individual investors C) the firm's current shareholders D) day traders

Q: The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. A) interest building B) book building C) market analysis D) customer identification

Q: When matching orders from the public, a specialist is required to use the ________. A) lowest outstanding bid price and highest outstanding ask price B) highest outstanding bid price and highest outstanding ask price C) lowest outstanding bid price and lowest outstanding ask price D) highest outstanding bid price and lowest outstanding ask price

Q: The ________ was established to protect investors from losses if their brokerage firms fail. A) CFTC B) SEC C) SIPC D) AIMR

Q: Advantages of ECNs over traditional markets include all but which one of the following? A) lower transactions costs B) anonymity of the participants C) small amount of time needed to execute and order D) ability to handle very large orders

Q: 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? A) $1,375 B) $500 C) $275 D) $1,450

Q: 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. A) buy stop; stop-loss B) market; limit C) stop-loss; buy stop D) limit; market

Q: The term latency refers to ________. A) the lag between when an order is placed on the NYSE and when it is executed. B) the amount of time it takes to accept, process, and deliver a trading order. C) the time it takes to implement new rules and procedures for stock exchanges and computer trading systems. D) the lag between when an order is executed and when the investor takes possession of the securities.

Q: The term inside quotes refers to ________. A) the difference between the lowest bid price and the highest ask price in the limit order book. B) the difference between the highest bid price and the lowest ask price in the limit order book. C) the difference between the lowest bid price and the lowest ask price in the limit order book. D) the difference between the highest bid price and the highest ask price in the limit order book.

Q: An order to buy or sell a security at the current price is a ________. A) limit order B) market order C) stop-loss order D) stop-buy order

Q: Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers A) I only B) I and II only C) II and III only D) I, II, and III

Q: Which one of the following is a false statement regarding NYSE specialists? A) On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists. B) Specialists cannot trade for their own accounts. C) Specialists maintain limit order books, which contain the outstanding unexecuted limit orders. D) Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

Q: Which one of the following types of markets requires the greatest level of trading activity to be cost-effective? A) broker market B) dealer market C) continuous auction market D) direct search market

Q: Initial margin requirements on stocks are set by ________. A) the Federal Deposit Insurance Corporation B) the Federal Reserve C) the New York Stock Exchange D) the Securities and Exchange Commission

Q: Purchases of new issues of stock take place ________. A) at the desk of the Fed B) in the primary market C) in the secondary market D) in the money markets

Q: More than ________ of all trading is believed to be initiated by computer algorithms. A) 25% B) 40% C) 50% D) 75%

Q: Which one of the following is not an example of a brokered market? A) residential real estate market B) market for large block security transactions C) primary market for securities D) NASDAQ

Q: 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. A) 10% B) 20% C) 30% D) 40%

Q: Rank the following types of markets from least integrated and organized to most integrated and organized: I. Brokered markets II. Continuous auction markets III. Dealer markets IV. Direct search markets A) IV, II, I, III B) I, III, IV, II C) II, III, IV, I D) IV, I, III, II

Q: The NYSE acquired the ECN ________, and NASDAQ recently acquired the ECN ________. A) Archipelago; Instinet B) Instinet; Archipelago C) Island; Instinet D) LSE; Euronext

Q: 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? A) 9% B) 15% C) 48% D) 57%

Q: Which one of the following statements about IPOs is not true? A) IPOs generally have been poor long-term investments. B) IPOs often provide very good initial returns to investors. C) IPOs generally provide superior long-term performance as compared to other stocks. D) Shares in IPOs are often primarily allocated to institutional investors.

Q: A level ________ subscriber to the NASDAQ system may enter bid and ask prices. A) 1 B) 2 C) 3 D) 4

Q: Private placements can be advantageous, compared to public issue, because: I. Private placements are cheaper to market than public issues. II. Private placements may still be sold to the general public under SEC Rule 144A. III. Privately placed securities trade on secondary markets. A) I only B) I and III only C) II and III only D) I, II, and III

Q: When a firm decides to sell securities it must first ensure ________. A) the preliminary registration statement is approved by the SEC B) the IPO is complete C) the offering is seasoned D) the lockup period expires

Q: 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? A) $90,000 B) $1,290,000 C) $2,390,000 D) $1,690,000

Q: Explicit costs of a stock IPO tend to be around ________ of the funds raised. A) 1% B) 7% C) 15% D) 25%

Q: Under firm-commitment underwriting, the ________ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price. A) red herring B) issuing company C) initial stockholder D) underwriter

Q: Underwriting is one of the services provided by ________. A) the SEC B) investment bankers C) publicly traded companies D) FDIC

Q: The non-European country with the highest average first-day returns in 2014 was ________. A) Canada B) United States C) China D) Jordan

Q: The term "underwriting syndicate" describes ________. A) the issuing firm B) the lead underwriter C) the investment banks that participate in the underwriting D) the private investors that purchase the shares

Q: SIPC ensures investors against failure of a brokerage firm up to a limit of ________. A) $100,000 B) $250,000 C) $500,000 D) $1,000,000

Q: In 2013, NYSE Euronext was acquired by ________. A) DOT B) ICE C) BATS D) It was not acquired.

Q: The market share held by the "Other" category (which includes dark pools) constitutes roughly ________% of trading volume in NYSE-listed shares. A) 5% B) 10% C) 30% D) 50%

Q: What would be the profit or loss per share of stock to an investor who bought an October expiration Apple call option with an exercise price of $130 if Apple closed on the expiration date at $120? Assume the option premium was $3.00. A) $0 B) $3.00 gain C) $3.00 loss D) $7.00 gain

Q: Which of the following reforms were not included in 2014 regulations regarding money market funds? A) Institutional funds will "float" the prices of their shares. B) Funds can limit redemptions or impose a 2% fee if assets fall by more than 30%. C) increased disclosure of assets' values and liquidity D) All of the options were included.

Q: Several large banks manipulated the reported rates on which key money market rate? A) federal funds rate B) LIBOR C) bankers' acceptances D) brokers' calls rate

Q: The brokers' call rate represents A) the rate the broker charges an investor on a margin account. B) the rate the broker pays its bank on borrowed funds. C) the return earned by the broker on a margin account. D) the return earned by the investor on a margin account.

Q: Which of the following mortgage scenarios will benefit the homeowner the most? A) adjustable rate mortgage when interest rate increases. B) fixed rate mortgage when interest rates falls. C) fixed rate mortgage when interest rate rises. D) None of these options, as the banker's interest will always be protected.

Q: A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index? A) 5.78% B) 4.35% C) 6.16% D) 7.42%

Q: A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket? A) 2.34% B) 2.68% C) 3.25% D) 4.92%

Q: An index computed from a simple average of returns is a/an ________. A) equal weighted index B) value weighted index C) price weighted index D) share weighted index

Q: A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket? A) 3.2% B) 3.68% C) 4.92% D) 5%

Q: What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%? A) 6.48% B) 7.25% C) 8.02% D) 9%

Q: All but which one of the following indices is value weighted? A) NASDAQ Composite B) S&P 500 C) Wilshire 5000 D) DJIA

Q: A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is ________, and the after-tax return to the individual investor is ________. A) 3.96%; 5.1% B) 5.39%; 5.1% C) 6%; 6% D) 3.96%; 6%

Q: In a ________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal. A) value-weighted index B) equally weighted index C) price-weighted index D) bond price index