1. Underwriting is one of the services provided by _____.
A. the SEC
B. investment bankers
C. publicly traded companies
D. FDIC
Answer: B. investment bankers
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. underwriter
3. Explicit costs of an IPO tend to be around ______ of the funds raised.
A. 1%
B. 7%
C. 15%
D. 25%
Answer: B. 7%
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. $1,690,000
Total cost = 90,000 + (43 - 35)200,000 = $1,690,000
5. A red herring becomes a prospectus when ____.
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. the preliminary registration statement is approved by the SEC
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. I only
7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
A. 1
B. 2
C. 3
D. 4
Answer: C. 3
8. Which one of the following statements about IPOs is not true?
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 stocks.
D. Shares in IPOs are often primarily allocated to institutional investors.
Answer: C. IPOs generally provide superior long-term performance as compared to other
stocks.
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. 48%
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. Archipelago; Instinet
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. IV, I, III, II
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. 10%
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. NASDAQ
14. More than ______ of all trading is believed to be initiated by computer algorithms.
A. 25%
B. 40%
C. 50%
D. 75%
Answer: C. 50%
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. in the primary market
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. the Federal Reserve
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. Continuous auction market
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. Specialists cannot trade for their own accounts.
19. 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
Answer: D. I, II, and III
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. market order
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. the difference between the highest bid price and the lowest ask price in the limit
order book.
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. the amount of time it takes to accept, process, and deliver a trading order.
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. stop-buy; stop-loss
B. market; limit
C. stop-loss; stop-buy
D. limit; market
Answer: C. stop-loss; stop-buy
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. $1,375
(1,003.25 - 1,000.50)500 = $1,375
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. Ability to handle very large orders
26. The __________ was established to protect investors from losses if their brokerage firms
fail.
A. CFTC
B. SEC
C. SIPC
D. AIMR
Answer: C. SIPC
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. highest outstanding bid price and lowest outstanding ask price
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. book building
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. institutional investors
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. underpriced
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. good; bad
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. I and II only
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. firm-commitment
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. NASDAQ; NYSE
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. at the top of the list
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. SUPERDOT
37. The fully automated trade-execution system installed on the NYSE is called _____.
A. FAX
B. Direct +
C. NASDAQ
D. SUPERDOT
Answer: B. Direct +
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. brokers to send orders either to an electronic system or to a specialist
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. 25%
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. bid
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. ask
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. bid-ask spread
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. the need for dealers to cover expenses and make a profit
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. I only
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. I, II, and III
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. I, II, and III
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. stop-loss order
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?
A. $39.75
B. $40.25
C. $40.375
D. $40.25 or less
Answer: D. $40.25 or less
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.
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. $55
100(10.30 - 10.25) + 2(25) = $55
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. 2 years
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 onesixteenth of a dollar to one cent in 2001?
A. The tick size increased in 1997 but decreased in 2001.
B. The tick size increased in both cases.
C. The tick size decreased in 1997 but increased in 2001.
D. The tick size decreased in both cases.
Answer: D. The tick size decreased in both cases.
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. $8,000
500($40)(.40) = $8,000
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. $4,500
Investment = 300(30)(.50) = 4,500
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. Unlimited
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.
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. $10,000
Tuckerton could go bankrupt, with a share price of $0. You could keep the entire proceeds
from the short sale.
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. $62.50
Amount received from short sale = 200 × $50 = $10,000
Loss = $2,500 = 200P - 10,000
$12,500 = 200P, so P = $62.50
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. $35.71
Equity = 200P - 5,000
Margin = (200P - 5,000)/200P = .30
200P - 5,000 = 60P
140P = 5,000
P = 35.71429
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. 43%
32 – 25/25(0.65) = .43
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. $28.85
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. secondary markets
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. Market liquidity decreased.
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. Stop-buy orders
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. 10%
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. I and III only
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. $68
Commission = 50 + (600 × .03) = $68
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. electronic trading systems
67. In 2008, 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. OMX, which operates seven Nordic and Baltic stock exchanges
68. You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common
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. a seasoned equity offering
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. market value of the stock - amount owed on the margin loan
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. higher for the large stocks in the S&P 500 Index than for the smaller stocks in the
Russell 2000 Index
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. all of these options
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. I, II, and III
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. Securities Act of 1933
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. none of these options
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. brokerage firms
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. I and II only
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. the Financial Industry Regulatory Authority
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. dealer; Brokers; electronic
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. 17%
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 ____.
A. $20
B. $29.77
C. $30.29
D. $32.45
Answer: C. $30.29
A margin call will occur if Equity/Market value = .30 or less
.3 = (200P - 4,000 - 240)/200P
60P = 200P - 4,240
-140P = -4,240
P = $30.29
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. an auction market
82. The primary market where new security issues are offered to the public is a good example
of _________.
A. an auction market
B. a brokered market
C. a dealer market
D. a direct search market
Answer: B. a brokered market
83. The over-the-counter securities market is a good example of _________.
A. an auction market
B. a brokered market
C. a dealer market
D. a direct search market
Answer: C. a dealer market
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. 23.83%
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. all of these options.
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. 20%
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. $28
Commission = 20 + (400 × .02) = $28
