Finance 340: Ch. 1 & 3

Underwriting is one of the services provided by _____. investment bankers
Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price. underwriter
Explicit costs of an IPO tend to be around ______ of the funds raised. 7%
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? $1,690,000
A red herring becomes a prospectus when ____. the preliminary registration statement is approved by the SEC
Private placements can be advantageous, compared to public issue, because: Private placements are cheaper to market than public issues.
A level _____ subscriber to the NASDAQ system may enter bid and ask prices. 3
Which one of the following statements about IPOs is not true? IPOs generally provide superior long-term performance as compared to other stocks.
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? 48%
The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________. Archipelago; Instinet
Rank the following types of markets from least integrated and organized to most integrated and organized: IV, I, III, II
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. 10%
Which one of the following is not an example of a brokered market? NASDAQ
More than ______ of all trading is believed to be initiated by computer algorithms. 50%
Purchases of new issues of stock take place _________. in the primary market
Initial margin requirements on stocks are set by _________. the Federal Reserve
Which one of the following types of markets requires the greatest level of trading activity to be cost-effective? continuous auction market
Which one of the following is a false statement regarding NYSE specialists? Specialists cannot trade for their own accounts.
Restrictions on trading involving insider information apply to: I, II, and III
An order to buy or sell a security at the current price is a ______________. market order
The term inside quotes refers to _____. the difference between the highest bid price and the lowest ask price in the limit order book.
The term latency refers to _____. the amount of time it takes to accept, process, and deliver a trading order.
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. stop-loss; stop-buy
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? $1,375
Advantages of ECNs over traditional markets include all but which one of the following? ability to handle very large orders
The __________ was established to protect investors from losses if their brokerage firms fail. SIPC
When matching orders from the public, a specialist is required to use the _______. highest outstanding bid price and lowest outstanding ask price
The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. book building
The bulk of most initial public offerings (IPOs) of equity securities goes to ___________. institutional investors
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. underpriced
According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________performance over the long term. good; bad
Specialists try to maintain a narrow bid-ask spread because: I and II only
In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price. firm-commitment
The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market. NASDAQ; NYSE
The inside quotes on a limit order book can be found ______. at the top of the list
The __________ system enables exchange members to send orders directly to a specialist over computer lines. SUPERDOT
The fully automated trade-execution system installed on the NYSE is called _____. Direct +
The NYSE Hybrid Market allows _____. brokers to send orders either to an electronic system or to a specialist
Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange. 25%
The _________ price is the price at which a dealer is willing to purchase a security. bid
The _________ price is the price at which a dealer is willing to sell a security. ask
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 _________. bid-ask spread
The bid-ask spread exists because of _______________. the need for dealers to cover expenses and make a profit
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 only
The cost of buying and selling a stock includes: I, II, and III
Which of the following is (are) true about dark pools? I, II, and III
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________. stop-loss order
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? $40.25 or less
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? $55
According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration. 2 years
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 one-sixteenth of a dollar to one cent in 2001? The effective spread decreased in both cases.
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 _________. $8,000
You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. $4,500
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss? unlimited
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost? $10,000
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 ____. $62.50
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.) $35.71
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. 43%
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.) $28.85
Transactions that do not involve the original issue of securities take place in _________. secondary markets
What was the result of high-frequency traders’ leaving the market during the flash crash of 2010? Market liquidity decreased.
__________ often accompany short sales and are used to limit potential losses from the short position. Stop-buy orders
The market share held by the NYSE Arca system in February 2011 was approximately ____. 10%
Regulation NMS: I and III only
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? $68
All major stock markets today are effectively _______________. electronic trading systems
In 2008, the NASDAQ stock market merged with _____. OMX, which operates seven Nordic and Baltic stock exchanges
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 seasoned equity offering
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________. market value of the stock – amount owed on the margin loan
The average depth of the limit order book is _____. higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index
The CFA Institute Standards of Professional Conduct require that members _____. all of these options
Trading on inside information is: I, II, and III
The ____ requires full disclosure of relevant information relating to the issue of new securities. Securities Act of 1933
The SIPC was established by the ____. none of these options
Maintenance requirements for margin accounts are set by ____. brokerage firms
Which of the following are true concerning short sales of exchange-listed stocks? I and II only
The largest nongovernmental regulator of securities firms in the United States is ________. the Financial Industry Regulatory Authority
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. dealer; Brokers; electronic
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 ____. 17%
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 ____. $30.29
The New York Stock Exchange is a good example of _________. an auction market
The primary market where new security issues are offered to the public is a good example of _________. a brokered market
The over-the-counter securities market is a good example of _________. a dealer market
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? 23.83%
Level 3 NASDAQ subscribers _____. all of these options
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.) 20%
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? $28
In 2014, BATS advertised average latency times of approximately _______. 100 microseconds
The market share held by the “Other” category (which includes dark pools) constitutes roughly ______% of trading volume in NYSE-listed shares. 30%
In 2013, NYSE Euronext was acquired by _______. ICE
SIPC ensures investors against failure of a brokerage firm up to a limit of _______. $500,000
Privately held firms may have only _______ shareholders. 499
The term “underwriting syndicate” describes _______. the investment banks that participate in the underwriting
The non-European country with the highest average first-day returns in 2014 was _______. Jordan
Financial assets represent _____ of total assets of U.S. households. Over 70%
Real assets in the economy include all but which one of the following? Common Stock
Net worth represents _____ of the liabilities and net worth of commercial banks. About 11%
According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___. Real Estate
According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________. Mortgages
____ is not a derivative security. A share of common stock
According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____. Pension reserves
Active trading in markets and competition among securities analysts helps ensure that: I,II, and III
The material wealth of society is determined by the economy’s _________, which is a function of the economy’s _________. productive capacity; real assets
Which of the following is not a money market security? Common stock
__________ assets generate net income to the economy, and __________ assets define allocation of income among investors. Real, financial
Which of the following are financial assets? I,II, and III
__________ are examples of financial intermediaries. All of the options
Asset allocation refers to _________. the allocation of the investment portfolio across broad asset classes
Which one of the following best describes the purpose of derivatives markets? Transferring risk from one party to another.
Security selection refers to the ________. choice of specific securities within each asset class
Which of the following is an example of an agency problem? All of the options are examples of agency problems.
_____ is a mechanism for mitigating potential agency problems. Tying income of managers to success of the firm
__________ is (are) real assets. Production equipment
__________ portfolio construction starts with selecting attractively priced securities. Bottom-up
In a market economy, capital resources are primarily allocated by ____________. Financial markets
__________ represents an ownership share in a corporation. Common stock
The value of a derivative security _________. depends on the value of another related security
Commodity and derivative markets allow firms to adjust their _________. exposure to various business risks
__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. Passive
Financial markets allow for all but which one of the following? allow most participants to routinely earn high returns with low risk
Financial intermediaries exist because small investors cannot efficiently _________. All of the options
Methods of encouraging managers to act in shareholders’ best interest include: I, II, and III
Firms that specialize in helping companies raise capital by selling securities to the public are called _________. Investment banks
In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. Higher
When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed. Rise;fewer
Security selection refers to _________. choosing specific securities within each asset class
An example of a derivative security is _________. a call option on Intel stock
__________ portfolio construction starts with asset allocation. Top-down
Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm’s bankruptcy? Parmalat
Debt securities promise: I and II only
The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? Required that firms could no longer employ investment bankers to sell securities to the public.
The success of common stock investments depends on the success of _________. the firm and its real assets
The historical average rate of return on large company stocks since 1926 has been _____ . 11.5%
The average rate of return on U.S. Treasury bills since 1926 was _________. Less than 4%
An example of a real asset is: I, II, and III
The 2002 law designed to improve corporate governance is titled the _____ Sarbanes-Oxley Act
Which of the following is not a financial intermediary? a real estate brokerage firm
The combined liabilities of American households represent approximately __________ of combined assets. 14%
In 2014 real assets represented approximately __________ of the total asset holdings of American households. 30%
In 2014 mortgages represented approximately __________ of total liabilities and net worth of American households. 10%
Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses. 45%
Which of the following is not an example of a financial intermediary? IBM
Real assets represent about ____ of total assets for commercial banks. 1%
Money market securities are characterized by: I, II, and III
After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______. Security analysis
After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ . Asset allocation
Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ . pay less for the security that has higher risk.
The efficient market hypothesis suggests that _______. passive portfolio management strategies are the most appropriate investment strategies
In a perfectly efficient market the best investment strategy is probably _____ . A passsive strategy
Market signals will help to allocate capital efficiently only if investors are acting _____ . on accurate information
Which of the following is (are) true about hedge funds? I and II only
Venture capital is _________. supplied by venture capital funds and individuals to start-up companies
Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because: I and II only
Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. real;financial
Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _____. A new financial asset was created
Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? General Electric
Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____ . Agency problem
Financial institutions that specialize in assisting corporations in primary market transactions are called _______. Investment bankers
When a pass-through mortgage security is issued, what does the issuing agency expect to receive? the principal and interest that are paid by the homeowner, minus a servicing fee
In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______. Lehman Brothers
The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism? Corporate governance
Real assets are ______. assets used to produce goods and services
A major cause of the mortgage market meltdown in 2007 and 2008 was linked to ________. securitization
In recent years the greatest dollar amount of securitization occurred for which type of loan? Home mortgages
Which of the following is (are) true about nonconforming mortgage loans? All of the options are true
The systemic risk that led to the financial crisis of 2008 was increased by _____ . All of the options
An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? Asset allocations
The Volker Rule All of the options
Until 1999, the __________ Act separated commercial banking and investment banking activities. Glass-Steagall
The difference between LIBOR and the Treasury-bill rate All of the options
The Dodd-Frank Reform Act does all of the following except: reduces capital requirements for banks.
Which insurance company sold more than $400 billion of CDS contracts on subprime mortgages prior to the 2008 market crash? AIG
You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. 11%
The ______ measure of returns ignores compounding. arithmetic average
If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. dollar-weighted return
Which one of the following measures time-weighted returns and allows for compounding? geometric average return
Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I, III, II, IV

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