Essentials of Investments, 11e (Bodie)
Chapter 3 Securities Markets
1) Underwriting is one of the services provided by ________.
A) the SEC
B) investment bankers
C) publicly traded companies
D) FDIC
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
3) Explicit costs of a stock IPO tend to be around ________ of the funds raised.
A) 1%
B) 7%
C) 15%
D) 25%
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
5) When a firm decides to sell securities it must first ensure ________.
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
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
7) A level ________ subscriber to the NASDAQ system may enter bid and ask prices.
A) 1
B) 2
C) 3
D) 4
8) Which one of the following statements about IPOs is not true?
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.
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%
10) The NYSE acquired the ECN ________, and NASDAQ recently acquired the ECN
________.
A) Archipelago; Instinet
B) Instinet; Archipelago
C) Island; Instinet
D) LSE; Euronext
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
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%
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
14) More than ________ of all trading is believed to be initiated by computer algorithms.
A) 25%
B) 40%
C) 50%
D) 75%
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
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
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
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.
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
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
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.
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.
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) buy stop; stop-loss
B) market; limit
C) stop-loss; buy stop
D) limit; market
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
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
26) The ________ was established to protect investors from losses if their brokerage firms fail.
A) CFTC
B) SEC
C) SIPC
D) AIMR
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
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
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
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
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
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
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
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
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
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
37) The fully automated trade-execution system installed on the NYSE is called ________.
A) FAX
B) Direct +
C) NASDAQ
D) SUPERDOT
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
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%
40) The ________ price is the price at which a dealer is willing to purchase a security.
A) bid
B) ask
C) clearing
D) settlement
41) The ________ price is the price at which a dealer is willing to sell a security.
A) bid
B) ask
C) clearing
D) settlement
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
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
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
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
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
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
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?
Limit Buy Price
Orders Shares
Limit Sell Orders
Orders Shares
$39.75
$40.25
100
$39.50
$40.50
100
A) $39.75
B) $40.25
C) $40.375
D) $40.25 or less
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