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Flashcards in ch3 kawncehpts Deck (40):
1

Underwriting is one of the services provided by _____.


A. , the SEC

B. , investment bankers

C. , publicly traded companies

D. , FDIC

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

D. , underwriter

3

Explicit costs of an IPO tend to be around ______ of the funds raised.


A. , 1%

B. , 7%

C. , 15%

D. , 25%

B. , 7%

4

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

A. , I only

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

A. , the preliminary registration statement is approved by the SEC

6

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.

C. , IPOs generally provide superior long-term performance as compared to other stocks.

7

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

D. , NASDAQ

8

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

B. , in the primary market

9

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

B. , the Federal Reserve

10

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

C. , Continuous auction market

11

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.

B. , Specialists cannot trade for their own accounts.

12

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

D. , I, II, and III

13

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

B. , market order

14

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.

B. , the difference between the highest bid price and the lowest ask price in the limit order book.

15

., 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

C. , stop-loss; stop-buy

16

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

D. , highest outstanding bid price and lowest outstanding ask price

17

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

B. , book building

18

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

A. , institutional investors

19

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

C. , underpriced

20

., 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

D. , good; bad

21

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

B. , I and II only

22

., 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

B. , firm-commitment

23

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

A. , at the top of the list

24

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

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

25

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

B. , secondary markets

26

__________ 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

D. , Stop-buy orders

27

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

C. , a seasoned equity offering

28

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

A. , market value of the stock - amount owed on the margin loan

29

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

B. , higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

30

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

D. , all of these options

31

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

D. , I, II, and III

32

D. , I, II, and IIIThe ____ 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

B. , Securities Act of 1933

33

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

D. , none of these options

34

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

A. , brokerage firms

35

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

C. , I and II only

36

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

C. , the Financial Industry Regulatory Authority

37

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

B. , dealer; Brokers; electronic

38

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

A. , an auction market

39

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

B. , a brokered market

40

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

C. , a dealer market