Question 1

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?

Accepted Answer

A)  $50 
B)  $150 
C)  $10,000 
D)  unlimited

Question 2

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

Accepted Answer

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.

Question 3

All major stock markets today are effectively ________.

Accepted Answer

A)  specialist trading systems 
B)  electronic trading systems 
C)  continuous auction markets 
D)  direct search markets

Question 4

Purchases of new issues of stock take place ________.

Accepted Answer

A)  at the desk of the Fed 
B)  in the primary market 
C)  in the secondary market 
D)  in the money markets

Question 5

SIPC ensures investors against failure of a brokerage firm up to a limit of ________.

Accepted Answer

A)  $100,000 
B)  $250,000 
C)  $500,000 
D)  $1,000,000

Question 6

Restrictions on trading involving insider information apply to:
I. Corporate officers and directors
II. Major stockholders
III. Relatives of corporate directors and officers

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II, and III

Question 7

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?

Accepted Answer

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

Question 8

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

Accepted Answer

A)  NYSE; NASDAQ 
B)  NASDAQ; NYSE 
C)  CME; OTC 
D)  AMEX; NYSE

Question 9

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.

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II, and III

Question 10

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 ________.

Accepted Answer

A)  17% 
B)  12% 
C)  14% 
D)  19%

Question 11

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

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4

Question 12

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

Accepted Answer

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

Question 13

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?

Accepted Answer

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

Question 14

The market share held by the "Other" category (which includes dark pools) constitutes roughly ________% of trading volume in NYSE-listed shares.

Accepted Answer

A)  5% 
B)  10% 
C)  30% 
D)  50%

Question 15

The NYSE Hybrid Market allows ________.

Accepted Answer

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

Question 16

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

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III

Question 17

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

Accepted Answer

A)  best-efforts 
B)  firm-commitment 
C)  private placement 
D)  none of these options

Question 18

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.)

Accepted Answer

A)  $26.55 
B)  $35.71 
C)  $28.95 
D)  $30.77

Question 19

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?

Accepted Answer

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

Question 20

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

Exam 3: Securities Markets