Question 1

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

Accepted Answer

A) bid 
B) ask 
C) clearing 
D) settlement

Question 2

Linking a/an ________ to a placement can address concerns about ownership dilution that may result from a placement alone.

Accepted Answer

A) IPO 
B) dividend reinvestment plan 
C) rights issue 
D) share purchase plan

Question 3

The margin requirement on a share 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?

Accepted Answer

A) 9% 
B) 15% 
C) 48% 
D) 57%

Question 4

If an investor uses the full amount of margin available, the equity in a margin account used for a share purchase can be found as ________.

Accepted Answer

A) market value of the share - amount owed on the margin loan 
B) market value of the share + amount owed on the margin loan 
C) market value of the share ÷ margin loan 
D) margin loan x market value of the share

Question 5

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

Accepted Answer

A) Broker market 
B) Dealer market 
C) Continuous auction market 
D) Direct search market

Question 6

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

Accepted Answer

A) IPOs generally underperform in the short run. 
B) IPOs often provide very good initial returns to investors. 
C) IPOs generally provide superior long-term performance as compared to other shares. 
D) Shares in IPOs are often primarily allocated to institutional investors.

Question 7

On a given day a share dealer maintains a bid price of $1000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades which totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

Accepted Answer

A) $1 375 
B) $500 
C) $275 
D) $1 450

Question 8

If you want the trade done quickly, which type of trading order might you give to your broker?

Accepted Answer

A) limit order 
B) market order 
C) stop-loss order 
D) stop-buy order

Question 9

The drawback of a ________ is that it may take time to organise and complete and may also require the release of a prospectus.

Accepted Answer

A) placement 
B) rights issue 
C) share purchase plan 
D) dividend reinvestment plan

Question 10

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you wish to limit your loss to $2 500, you should place a stop-buy order at ________.

Accepted Answer

A) $37.50 
B) $62.50 
C) $56.25 
D) $59.75

Question 11

You sold-short 300 shares at $30 per share. The initial margin is 50%. You must put up ________.

Accepted Answer

A) $4 500 
B) $6 000 
C) $9 000 
D) $10 000

Question 12

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

Accepted Answer

A) $50 
B) $25 
C) $30 
D) $55

Question 13

Margin is the amount contributed by ________.

Accepted Answer

A) the securities exchange 
B) the broker 
C) the investor 
D) the investment bank

Question 14

The commission structure on a share purchase is $20 plus $0.02 per share. If you purchase 4 round lots of a share selling for $56, what is your commission?

Accepted Answer

A) $20 
B) $22 
C) $26 
D) $28

Question 15

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

Accepted Answer

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

Question 16

The allowable margin depends on ________.

Accepted Answer

A) the bid-ask spread 
B) the brokerage 
C) the risk-free interest rate 
D) the share or fund being purchased

Question 17

An investor buys $8 000 worth of a share priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In one year the investor gets a margin call. At the time of the margin call the share's price must have been ________.

Accepted Answer

A) $20.00 
B) $29.77 
C) $30.29 
D) $32.45

Question 18

The commission structure on a share purchase is $50 plus $0.03 per share. If you purchase 600 shares of a share selling for $65, what is your commission?

Accepted Answer

A) $35 
B) $45 
C) $53 
D) $68

Question 19

Transactions that do not involve the original issue of securities take place in ________.

Accepted Answer

A) primary markets 
B) secondary markets 
C) over-the-counter markets 
D) institutional markets

Question 20

What is the capital raising process referred to in the situation where an investor has been offered the option of buying a number of shares unrelated to the size of her existing holding?

Accepted Answer

A) dividend investment plan 
B) placement 
C) rights issue 
D) share purchase plan

Exam 3: Securities Markets