Testbank Problem CH3

Essentials of Investments, 11e (Bodie)
Chapter 3 Securities Markets
1) Underwriting is one of the services provided by ________.

A) the SEC
B) investment bankers
C) publicly traded companies
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.
A) red herring
B) issuing company
C) initial stockholder
D) underwriter
Answer: D
Difficulty: 2 Medium
Bloom's: Remember
3) Explicit costs of a stock IPO tend to be around ________ of the funds raised.
A) 1%
B) 7%
C) 15%
D) 25%
Answer: B
Bloom's: Remember
1
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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?
A) $90,000
B) $1,290,000
C) $2,390,000
D) $1,690,000
Answer: D
Explanation: Total cost = 90,000 + (43 - 35)200,000 = $1,690,000
Difficulty: 3 Hard
Bloom's: Understand
5) 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
Answer: A
Bloom's: Remember
2
6) 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
Answer: A
Bloom's: Remember
7) A level ________ subscriber to the NASDAQ system may enter bid and ask prices.
A) 1
B) 2
C) 3
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
8) 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.
Answer: C
Bloom's: Remember
3
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?
A) 9%
B) 15%
C) 48%
D) 57%
Answer: C
Explanation:
Loss = (22−25)100 $ (300)
Amount invested = 0.25 × $25 × 100 $ 625
Return = −$300/$625 -48%
Topic: Buying on Margin
Learning Objective: 03-04 Compare the mechanics and investment implications of buying on
margin and short-selling.
Bloom's: Understand
10) The NYSE acquired the ECN ________, and NASDAQ recently acquired the ECN
________.
A) Archipelago; Instinet
B) Instinet; Archipelago
C) Island; Instinet
D) LSE; Euronext
Answer: A
Topic: U.S. Markets
Bloom's: Remember
4
11) 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
Answer: D
Difficulty: 3 Hard
Topic: U.S. Markets
Bloom's: Understand
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.
A) 10%
B) 20%
C) 30%
D) 40%
Answer: A
Topic: New Trading Strategies
Bloom's: Remember
5
13) 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
Answer: D
Topic: How Securities Are Traded
Learning Objective: 03-02 Identify various types of orders investors can submit to their brokers.
Bloom's: Remember
14) More than ________ of all trading is believed to be initiated by computer algorithms.
A) 25%
B) 40%
C) 50%
D) 75%
Answer: C
Bloom's: Remember
15) 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
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
6
16) 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
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
17) 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
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
18) 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.
Answer: B
Bloom's: Remember
19) Restrictions on trading involving insider information apply to:

7
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
Answer: D
Difficulty: 3 Hard
Topic: Regulation of Securities Markets
Bloom's: Remember
20) 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
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
8
21) 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.
Answer: B
Bloom's: Remember
22) 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.
Answer: B
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
9
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.
A) buy stop; stop-loss
B) market; limit
C) stop-loss; buy stop
D) limit; market
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
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?
A) $1,375
B) $500
C) $275
D) $1,450
Answer: A
Explanation: (1,003.25 - 1,000.50)500 = $1,375
Difficulty: 1 Easy
Bloom's: Remember
10
25) 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
Answer: D
Topic: U.S. Markets
Bloom's: Remember
26) The ________ was established to protect investors from losses if their brokerage firms fail.
A) CFTC
B) SEC
C) SIPC
D) AIMR
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
27) 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
Answer: D
Difficulty: 3 Hard
Bloom's: Remember
11
28) 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
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
29) 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
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
30) 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
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
12
31) 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
Answer: D
Bloom's: Remember
32) 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
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
13
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.
A) best-efforts
B) firm-commitment
C) private placement
D) none of these options
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
34) 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
Answer: B
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
35) 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
Answer: A
Bloom's: Remember
14
36) The ________ system enables exchange members to send orders directly to a specialist over
computer lines.
A) FAX
B) Direct Plus
C) NASDAQ
D) SUPERDOT
Answer: D
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
37) The fully automated trade-execution system installed on the NYSE is called ________.
A) FAX
B) Direct +
C) NASDAQ
D) SUPERDOT
Answer: B
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
38) 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
Answer: D
Topic: U.S. Markets
Bloom's: Remember
15
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.
A) 50%
B) 25%
C) 60%
D) 75%
Answer: B
Topic: U.S. Markets
Bloom's: Remember
40) The ________ price is the price at which a dealer is willing to purchase a security.
A) bid
B) ask
C) clearing
D) settlement
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
41) The ________ price is the price at which a dealer is willing to sell a security.
A) bid
B) ask
C) clearing
D) settlement
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
16
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 ________.
A) market spread
B) bid-ask spread
C) bid-ask gap
D) market variation
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
43) 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
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
17
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:
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
Answer: A
Bloom's: Remember
45) 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
Answer: D
Bloom's: Remember
18
46) 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
Answer: D
Bloom's: Remember
47) 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
Answer: D
Bloom's: Remember
19
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
A) $39.75
B) $40.25
C) $40.375
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.
Bloom's: Remember
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?
A) $50
B) $25
C) $30
D) $55
Answer: D
Explanation: 100(10.30 - 10.25) + 2(25) = $55
Bloom's: Remember
20
50) 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
Answer: B
Bloom's: Remember
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?
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.
Answer: D
Difficulty: 1 Easy
Bloom's: Remember
21
52) 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
Answer: C
Explanation: 500($40)(.40) = $8,000
Bloom's: Understand
53) 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
Answer: A
Explanation: Investment = 300(30)(.50) = 4,500
Topic: Short Sales
Bloom's: Understand
22
54) You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is
your maximum possible loss?
A) $50
B) $150
C) $10,000
D) unlimited
Answer: D
Explanation: There is no upper limit to the price of a share of stock and, therefore, no upper
limit to the price you will have to pay to replace the 200 shares of Tuckerton.
Difficulty: 1 Easy
Topic: Short Sales
Bloom's: Understand
55) You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is
your maximum possible gain, ignoring transactions cost?
A) $50
B) $150
C) $10,000
D) unlimited
Answer: C
Explanation: Tuckerton could go bankrupt, with a share price of $0. You could keep the entire
proceeds from the short sale.
Maximum gain = Proceeds – Minimum possible replacement cost

= 200($50) – 200($0)
= $10,000
Topic: Short Sales
Bloom's: Remember
23
56) 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
Answer: B
Explanation: Amount received from short sale = 200 × $50 = $10,000
Loss = $2,500 = 200P - 10,000
$12,500 = 200P, so P = $62.50
Topic: Short Sales
Bloom's: Understand
57) You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the
initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock
drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin
loan.)
A) $26.55
B) $35.71
C) $28.95
D) $30.77
Answer: B
Explanation: Equity = 200P - 5,000
Margin = (200P - 5,000)/200P = .30
200P - 5,000 = 60P
140P = 5,000
P = 35.71429
Difficulty: 3 Hard
Bloom's: Understand
24
58) 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%
Answer: C
Explanation: = 0.43
Difficulty: 3 Hard
Bloom's: Understand
25
59) 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
Answer: A
Explanation: Account at the time of the short sale:
Cash from SS $5,000.00 Liability $5,000.00
Cash For Equity $2,500.00 Equity $2,500.00
TA $7,500.00 TL+E $7,500.00
Account as prices change:

Cash from SS $ 5,000.00 Liability $ 200P
Cash For Equity $ 2,500.00 Equity $ 7,500−200P
TA $ 7,500.00 TL+E $ 7,500.00
Margin call if Equity/Market Value = 3

0.3 = ($7,500 − 200P)/200P
60P = $7,500 − 200P
260P = $7,500
P = $28.84615
Difficulty: 3 Hard
Topic: Short Sales
Bloom's: Understand
60) 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
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
26
61) 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.
Answer: A
Difficulty: 1 Easy
Bloom's: Understand
62) ________ 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
Answer: D
Topic: Short Sales
Bloom's: Remember
27
63) The market share held by the NYSE Arca system in February 2011 was approximately
________.
A) 65%
B) 45%
C) 25%
D) 10%
Answer: D
Topic: U.S. Markets
Bloom's: Remember
64) 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
Answer: C
Difficulty: 1 Easy
Topic: The Rise of Electronic Trading
Bloom's: Remember
28
65) 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
Answer: D
Explanation: Commission = 50 + (600 × .03) = $68
Bloom's: Remember
66) All major stock markets today are effectively ________.

A) specialist trading systems
B) electronic trading systems
C) continuous auction markets
D) direct search markets
Answer: B
Topic: Globalization of Stock Markets
Bloom's: Remember
67) In 2007, the NASDAQ stock market merged with ________.

A) Euronext
B) OMX, which operates seven Nordic and Baltic stock exchanges
C) the International Securities Exchange (ISE)
D) BATS
Answer: B
Topic: Globalization of Stock Markets
Bloom's: Remember
68) You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common
29
stock. You've just learned that the company plans to issue more shares, so that 2 million shares
will be outstanding. This is called ________.
A) an advanced equity offering
B) a weathered equity offering
C) a seasoned equity offering
D) a veteran equity offering
Answer: C
Bloom's: Remember
69) If an investor uses the full amount of margin available, the equity in a margin account used
for a stock purchase can be found as ________.
A) market value of the stock - amount owed on the margin loan
B) market value of the stock + amount owed on the margin loan
C) market value of the stock ÷ margin loan
D) margin loan × market value of the stock
Answer: A
Bloom's: Understand
30
70) The average depth of the limit order book is ________.
A) lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell
2000 Index
B) higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell
2000 Index
C) about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the
Russell 2000 Index
D) unrelated to the sizes of the stocks in the indexes
Answer: B
Bloom's: Remember
71) The CFA Institute Standards of Professional Conduct require that members ________.
A) place their clients' interests before their own
B) disclose conflicts of interest to clients
C) inform their employers that they are obligated to comply with the Standards of Professional
Conduct
D) all of these options
Answer: D
Bloom's: Remember
31
72) Trading on inside information is:
I. Prohibited by federal law

II. Prohibited by the CFA Institute Standards of Professional Conduct
III. Monitored by the SEC
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III
Answer: D
Bloom's: Remember
73) The ________ requires full disclosure of relevant information relating to the issue of new
securities.
A) Insider Trading Act of 1931
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) Investment Company Act of 1940
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
32
74) The SIPC was established by the ________.
A) Insider Trading Act of 1931
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) none of these options
Answer: D
Difficulty: 1 Easy
Bloom's: Remember
75) Maintenance requirements for margin accounts are set by ________.

A) brokerage firms
B) the SEC
C) the Federal Reserve System's Board of Governors
D) the Supreme Court
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
33
76) Which of the following are true concerning short sales of exchange-listed stocks?
I. Proceeds from the short sale must be kept on deposit with the broker.
II. Short-sellers must post margin with their broker to cover potential losses on the position.
III. The short-seller earns interest on any cash deposited with the broker that is used to meet the
margin requirement.
A) I only
B) I and III only
C) I and II only
D) I, II, and III
Answer: C
Difficulty: 3 Hard
Topic: Short Sales
Bloom's: Remember
77) The largest nongovernmental regulator of securities firms in the United States is ________.
A) the CFA Institute
B) the Public Company Accounting Oversight Board
C) the Financial Industry Regulatory Authority
D) the Board of Directors of NYSE Euronext
Answer: C
Bloom's: Remember
34
78) In ________ markets, participants post bid and ask prices at which they are willing to trade,
but orders are not automatically executed by computer. ________ execute trades for people other
than themselves, and in ________ markets a computer matches orders with an existing limit
order book and executes the trades automatically.
A) electronic; Dealers; brokers
B) dealer; Brokers; electronic
C) direct search; Brokers; electronic
D) brokered; Dealers; direct search
Answer: B
Difficulty: 3 Hard
Bloom's: Remember
79) An investor puts up $5,000 but borrows an equal amount of money from his broker to double
the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally
purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate
of return was ________.
A) 17%
B) 12%
C) 14%
D) 19%
Answer: A
Explanation: = 0.17
Difficulty: 3 Hard
Bloom's: Understand
35
80) An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin.
The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the
investor has interest payable and gets a margin call. At the time of the margin call the stock's
price must have been less than ________.
A) $20
B) $29.77
C) $30.29
D) $32.45
Answer: C
Explanation: At the time of purchases:
Stock $ 8000 Loan $ 4,000

Equity $ 4,000
TA $ 8000 TL + E $ 8,000
After one year:
Stock 200P Loan $ 4,000

Int.payable $ 240
Equity 200P−4,000-240
TA 200P TL + E 200P
A margin call will occur if Equity/Market value = 0.30 or less

0.3 = (200P − 4,000 − 240)/200P
60P = 200P − 4,240
−140P = −4,240
P = $30.29
Difficulty: 3 Hard
Bloom's: Understand
36
81) The New York Stock Exchange is a good example of ________.
A) an auction market
B) a brokered market
C) a dealer market
D) a direct search market
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
82) The primary market where new security issues are offered to the public is a good example of
________.
C) a dealer market
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
83) The over-the-counter securities market is a good example of ________.

C) a dealer market
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
37
84) An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin.
The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock
pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was
the investor's rate of return?
A) 17.5%
B) 19.67%
C) 23.83%
D) 25.75%
Answer: C
Explanation: Value of stock in 1 yr $18,400
Dividends received 400
Interest due (512)
Loan payoff (6,400)
Ending account balance 11,888
Return = $11,888/$9,600 - 1 = 23.83%

Difficulty: 3 Hard
Bloom's: Understand
85) Level 3 NASDAQ subscribers ________.

A) are registered market makers
B) can post bid and ask prices
C) have the fastest execution of trades
D) all of these options
Answer: D
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
38
86) You sell short 300 shares of Microsoft that are currently selling at $30 per share. You post the
50% margin required on the short sale. If you earn no interest on the funds in your margin
account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any
dividends.)
A) 10%
B) 20%
C) 6.67%
D) 15%
Answer: B
Explanation: = 20%
Topic: Short Sales
Bloom's: Understand
87) The commission structure on a stock purchase is $20 plus $.02 per share. If you purchase
four round lots of a stock selling for $56, what is your commission?
A) $20
B) $22
C) $26
D) $28
Answer: D
Explanation: Commission = 20 + (400 × .02) = $28
Bloom's: Understand
39
88) In 2014, BATS advertised average latency times of approximately ________.
A) 100 microseconds
B) 200 microseconds
C) 1 second
D) 5 seconds
Answer: A
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
89) 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%
Answer: C
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
90) In 2013, NYSE Euronext was acquired by ________.

A) DOT
B) ICE
C) BATS
D) It was not acquired.
Answer: B
Difficulty: 1 Easy
Topic: U.S. Markets
Bloom's: Remember
40
91) 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
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
92) Privately held firms may have only ________ shareholders.

A) 10
B) 99
C) 250
D) 2,000
Answer: D
Difficulty: 1 Easy
Bloom's: Remember
93) 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
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
41
94) The non-European country with the highest average first-day returns in 2014 was ________.
A) Canada
B) United States
C) China
D) Jordan
Answer: D
Difficulty: 1 Easy
Bloom's: Remember
42

Testbank Problem CH3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Testbank Problem CH3

Uploaded by

Copyright:

Available Formats

Essentials of Investments, 11e (Bodie)

Chapter 3 Securities Markets

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

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

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

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

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

19) Restrictions on trading involving insider information apply to:

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

22) The term latency refers to ________.

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

38) The NYSE Hybrid Market allows ________.

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

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

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

I. They allow anonymity in trading.

Maximum gain = Proceeds – Minimum possible replacement cost

Account as prices change:

Margin call if Equity/Market Value = 3

64) Regulation NMS:

I. Supports the goal of integrating financial markets

66) All major stock markets today are effectively ________.

67) In 2007, the NASDAQ stock market merged with ________.

I. Prohibited by federal law

75) Maintenance requirements for margin accounts are set by ________.

Stock $ 8000 Loan $ 4,000

After one year:

Stock 200P Loan $ 4,000

A margin call will occur if Equity/Market value = 0.30 or less

83) The over-the-counter securities market is a good example of ________.

Return = $11,888/$9,600 - 1 = 23.83%

85) Level 3 NASDAQ subscribers ________.

90) In 2013, NYSE Euronext was acquired by ________.

92) Privately held firms may have only ________ shareholders.

93) The term "underwriting syndicate" describes ________.

You might also like