Question 1

In a typical underwriting arrangement the investment banking firm I) sells shares to the public via an underwriting syndicate.
II) purchases the securities from the issuing company.
III) assumes the full risk that the shares may not be sold at the offering price.
IV) agrees to help the firm sell the issue to the public, but does not actually purchase the securities.

Accepted Answer

A) I, II, and III 
B) I, III, and IV 
C) I and IV 
D) II and III 
E) I and II

Question 2

When a firm markets new securities, a preliminary registration statement must be filed with

Accepted Answer

A) the exchange on which the security will be listed. 
B) the Securities and Exchange Commission. 
C) the Federal Reserve. 
D) all other companies in the same line of business. 
E) the Federal Deposit Insurance Corporation.

Question 3

Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%.What would be your rate of return if you repurchase the stock at $40 per share The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction.

Accepted Answer

A) 20.03% 
B) 25.67% 
C) 22.22% 
D) 77.46%

Question 4

You want to purchase GM stock at $40 from your broker using as little of your own money as possible.If initial margin is 50% and you have $4,000 to invest, how many shares can you buy

Accepted Answer

A) 100 shares 
B) 200 shares 
C) 50 shares 
D) 500 shares 
E) 25 shares

Question 5

You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%.The next day, Qualitycorp's price drops to $25 per share.What is your actual margin

Accepted Answer

A) 50% 
B) 40% 
C) 33% 
D) 60% 
E) 25%

Question 6

You purchased 100 shares of common stock on margin at $40 per share.Assume the initial margin is 50% and the stock pays no dividend.What would the maintenance margin be if a margin call is made at a stock price of $25 Ignore interest on margin.

Accepted Answer

A) 0.33 
B) 0.55 
C) 0.20 
D) 0.23 
E) 0.25

Question 7

Specialists on stock exchanges perform which of the following functions

Accepted Answer

A) Act as dealers in their own accounts. 
B) Analyze the securities in which they specialize. 
C) Provide liquidity to the market. 
D) Act as dealers in their own accounts and analyze the securities in which they specialize. 
E) Act as dealers in their own accounts and provide liquidity to the market.

Question 8

A sale by IBM of new stock to the public would be a(n)

Accepted Answer

A) short sale. 
B) seasoned equity offering. 
C) private placement. 
D) secondary market transaction. 
E) initial public offering.

Question 9

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

Accepted Answer

A) I, II, and III 
B) I, II, III, IV, V, and VI 
C) I, II, and V 
D) I, II, and IV 
E) IV, V, and VI

Question 10

According to the CFA Institute Standards of Professional Conduct, CFA Institute members have responsibilities to all of the following except

Accepted Answer

A) the government. 
B) the profession. 
C) the public. 
D) the employer. 
E) clients and prospective clients.

Question 11

Which of the following orders instructs the broker to buy at the current market price

Accepted Answer

A) Limit order 
B) Discretionary order 
C) Limit-loss order 
D) Stop-buy order 
E) Market order

Question 12

Which of the following is true regarding private placements of primary security offerings

Accepted Answer

A) Extensive and costly registration statements are required by the SEC. 
B) For very large issues, they are better suited than public offerings. 
C) They trade in secondary markets. 
D) The shares are sold directly to a small group of institutional or wealthy investors. 
E) They have greater liquidity than public offerings.

Question 13

The preliminary prospectus is referred to as a

Accepted Answer

A) red herring. 
B) indenture. 
C) greenmail. 
D) tombstone. 
E) headstone.

Question 14

You purchased 100 shares of common stock on margin for $50 per share.The initial margin is 50% and the stock pays no dividend.What would your rate of return be if you sell the stock at $56 per share Ignore interest on margin.

Accepted Answer

A) 28% 
B) 33% 
C) 14% 
D) 42% 
E) 24%

Question 15

You sold short 150 shares of common stock at $27 per share.The initial margin is 45%.Your initial investment was

Accepted Answer

A) $4,800.60. 
B) $12,000.25. 
C) $2,250.75. 
D) $1,822.50.

Question 16

Which of the following orders instructs the broker to sell at or below a specified price

Accepted Answer

A) Limit-sell order 
B) Stop-loss 
C) Limit-buy order 
D) Stop-buy order 
E) Market order

Question 17

A specialist on the AMEX Stock Exchange is offering to buy a security for $37.50.A broker in Oklahoma City wants to sell the security for his client.The Intermarket Trading System shows a bid price of $37.375 on the NYSE.What should the broker do

Accepted Answer

A) Route the order to the AMEX Stock Exchange. 
B) Route the order to the NYSE. 
C) Call the client to see if she has a preference. 
D) Route half of the order to AMEX and the other half to the NYSE. 
E) It doesn't matter-he should flip a coin and go with it.

Question 18

Shelf registration

Accepted Answer

A) is a way of placing issues in the primary market. 
B) allows firms to register securities for sale over a two-year period. 
C) increases transaction costs to the issuing firm. 
D) is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period. 
E) is a way of placing issues in the primary market and increases transaction costs to the issuing firm.

Question 19

Shares for short transactions

Accepted Answer

A) are usually borrowed from other brokers. 
B) are typically shares held by the short seller's broker in street name. 
C) are borrowed from commercial banks. 
D) are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.

Question 20

Assume you sold short 100 shares of common stock at $50 per share.The initial margin is 60%.What would be the maintenance margin if a margin call is made at a stock price of $60

Accepted Answer

A) 40% 
B) 33% 
C) 35% 
D) 25%

Exam 3: How Securities Are Traded