Ch 11

Question 1

The primary market is a market in which securities are traded among investors

Answer 1

F

Question 2

The issuer has almost no price risk in a firm commitment offering once the offer price is set

Answer 2

T

Question 3

All public offerings are regulated by the Securities and Exchange Commission (SEC).

Answer 3

T

Question 4

Under a best-effort agreement, investment bankers try to sell the securities of the issuing corporation, but
they assume no risk for a possible failure of the flotation.

Answer 4

T

Question 5

Shelf registration allows firms to register only debt issues with the SEC, and have them available to sell for
two years.

Answer 5

F

Question 6

All firms can use shelf registration which saves issuers both time and money

Answer 6

F

Question 7

Private placement can avoid SEC registration and all SEC regulations.

Answer 7

F

Question 8

Rights offerings among public corporations became infrequent in the United States during the 1980s and
1990s.

Answer 8

T

Question 9

The flotation costs of an initial public offering are comprised solely of direct costs and the spread.

Answer 9

F

Question 10

IPO underpricing occurs only in the United States

Answer 10

F

Question 11

Firm commitment flotation costs, relative to the amount raised, are typically lower than those of best efforts

Answer 11

T

Question 12

An important function of the Securities and Exchange Commission is to pass judgment on the investment
merit of a security

Answer 12

F

Question 13

A dealer is a person who assists in the trading process by buying or selling securities in the market for an
investor.

Answer 13

F

Question 14

The Glass-Steagall Act of 1933 ended the ability of commercial banks to act as underwriters of newly
issued securities.

Answer 14

T

Question 15

The secondary markets provide pricing information and liquidity to investors

Answer 15

T

Question 16

Floor brokers act as agents to execute customers’ orders for securities purchases and sales.

Answer 16

T

Question 17

Designated Market Makers are dealers who have the responsibility of making a market in an assigned
security.

Answer 17

T

Question 18

All securities must be listed before they may be traded on the New York Stock Exchange

Answer 18

T

Question 19

A limit order is an order to sell stock at the market price when the price of the stock falls to a specified level

Answer 19

F

Question 20

The maintenance margin is the minimum margin to which an investment may fall before a margin call is
placed

Answer 20

T

Question 21

The fourth market is a market for large blocks of listed stocks that operate outside the confines of the
organized exchanges.

Answer 21

F

Question 22

American depository receipts are receipts which represent foreign shares to U.S. investors

Answer 22

T

Question 23

Insider trading regulation is provided for under the Securities Exchange Act of 1934.

Answer 23

T

Question 24

A global depository receipt is traded on the American Stock Exchange.

Answer 24

F

Question 25

The Dow-Jones Industrial Average is made up of 30 large blue-chip stocks

Answer 25

T

Question 26

Commissions on stock trades are set by the stock exchanges

Answer 26

F

Question 27

Existing securities are traded in the primary market.

Answer 27

F

Question 28

The prospectus is a contract outlining the duties, responsibilities and fees between the issuing firm and its underwriter.

Answer 28

F

Question 29

Underpricing represents the difference between the aftermarket price and the offering price

Answer 29

T

Question 30

If there were no secondary markets for trading between investors, there would be no primary market for the initial sale of securities.

Answer 30

T

Question 31

The term “Big Board” is another name for the NASDAQ market

Answer 31

F

Question 32

A market order is an order for immediate purchase or sale at the best possible price

Answer 32

T

Question 33

An odd lot is a trade involving 100 shares or multiples of 100 shares.

Answer 33

F

Question 34

Over the counter markets are organized exchanges for trading securities such as the New York Stock Exchange

Answer 34

F

Question 35

ADRs are created and traded in dollars on U.S. exchanges. They represent a given number of shares of a foreign firm’s stock .

Answer 35

T

Question 36

Churning happens when a broker constantly buys and sells securities from a client’s portfolio in an effort to generate commissions.

Answer 36

T

Question 37

In a financial context, due diligence refers to the detailed study of a corporation

Answer 37

T

Question 38

An underwriting agreement is a contract in which the investment banker agrees to buy securities at a predetermined price and then resell them to investors

Answer 38

T

Question 39

An underwriting agreement is a contract in which the investment banker agrees to do its best to sell securities to investors at the highest price it can; the investment banker assumes no risk for the possibility that it may fail to issue all authorized shares.

Answer 39

F

Question 40

A pre-emptive right refers to the right of existing shareholders to sue management in order to head off potential actions by management that would adversely affect the price of the stock.

Answer 40

F

Question 41

A Dutch auction is an offering process in which investors bid on the price and quantity of securities they wish to purchase

Answer 41

T

Question 42

A syndicate is a group of several investment banking firms that participate in underwriting and distributing a security issue.

Answer 42

T

Question 43

The aftermarket is a period of time after an IPO.

Answer 43

T

Question 44

Federal regulation of investment banking is administered primarily under the provisions of the Investment Banking Monitoring and Control Act of 1999

Answer 44

F

Question 45

Organized securities exchanges include the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

Answer 45

F

Question 46

New York Stock Exchange is an example of a primary market.

Answer 46

F