Chapter 2 Securities Markets
TRUE/FALSE
to facilitate the transfers of securities among investors.
security.
sell the stock for 20.25.
buy the stock for 13.02.
viewed as one of the costs of investing.
round lot at the prices they quote.
makers.
secondary market.
exchange (NYSE) is traded in the over–the–counter markets
such as the Nasdaq stock market.
stocks are not available through the internet.
stock is purchased.
confirmation (often on–line) specifying the amount to be
remitted (i.e., paid).
investment the individual investor must remit.
subsequently declines, the percentage loss is magnified.
registered in the brokerage firm’s name.
loss order to sell if the stock’s price declines.
firm failure by the SEC.
rising.
purchasing American Depository Receipts (ADRs).
information that may affect the value of the firm’s
securities.
investors will not make poor investments.
provide investors with data and facts so they can make
informed investment decisions.
(SIPC) protects individuals from poor investments.
an investor must remit to purchase a stock.
the stock rises, the investor will not receive a margin
call from the broker.
Oversight Board whose task is to regulate securities
prices.
stronger firewall between investment banking activities and
the role of financial analysts.
is to raise capital (money) for firms.
occurs when new securities are issued in the primary
market.
is a private placement, and the securities do not have to
be registered with the SEC.
guarantees the firm selling the securities a specified
amount of funds.
the sale rests with the investment banker.
the new issue of securities.
market price of the securities will rise.
new securities that are sold to the general public.
stock.
securities) is the difference between the price of the
public and the proceeds received by the firm.
general public must be registered with the SEC.
rises, the windfall gain goes to the firm selling the
securities.
assured profit.
securities without having them registered with the SEC.
MULTIPLE CHOICE
a. stresses one type of investment
b. makes a market in securities
c. buys securities for customers’ accounts
d. underwrites stock but not corporate bonds
a. difference between the bid and ask prices
b. commission charged by the broker
c. difference between the purchase and sale prices
d. difference between the commissions charged by full
service and discount/online brokers
1. sells stock at the ask price
2. buys stock at the ask price
3. sells stock at the bid price
4. buys stock at the bid price
a. 1 and 2
b. 1 and 4
c. 2 and 3
d. 3 and 4
1. supply exceeded demand
2. demand exceeded supply
3. the price was too high
4. the price was too low
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
the financial media generally include
1. the volume of transactions
2. the high and low prices for the day
3. the net change in price from the previous day
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. makes a market
b. buys and sells for customers’ accounts
c. represents brokerage firms with the NYSE
d. sets the spread
1. commissions
2. the spread
3. dividends
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. the SEC
b. the Federal Reserve
c. the SIPC
d. the FDIC
a. requiring disclosures of information by firms
b. stopping investors from buying overpriced stock
c. reducing competition among brokers
d. establishing commission schedules
a. is obtained from inside brokerage firms
b. is reported in a firm’s financial statements
c. must be disclosed to the SEC
d. may not be legally used to obtain security
profits
a. part of the cost of investment is borrowed
b. the commissions on the investment are increased
c. the cost of the investment is reduced
d. the interest on the borrowed funds is set by the
Securities and Exchange Commission (SEC)
a. Federal Reserve
b. SEC
c. FDIC
d. SIPC
a. selling borrowed securities
b. selling stock owned for less than a year
c. selling an odd lot
d. selling against the investor’s broker’s advice
a. American stocks traded abroad
b. European stocks traded in Europe
c. foreign stocks traded in the U.S.
d. American and foreign stocks traded OTC
1. no collateral
2. a margin payment
3. delivering securities owned
4. borrowing securities to deliver
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
a. stock prices rise
b. stock prices fall
c. stock prices remain stable
d. The answer is indeterminate.
1. the value of the dollar rises
2. the value of the dollar falls
3. foreign stock markets rise
4. foreign stock markets fall
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
a. reduces potential conflicts of between securities
analysts and investment bankers
b. legalizes the sale of securities by investment
bankers
c. requires corporate directors to own stock
d. mandates that securities analysts file their
recommendations with the SEC.
underwriting process?
a. the prospectus
b. the originating house
c. the SIPC
d. the SEC
1. facilitates the sale of new securities
2. is formed by the originating house
3. creates a secondary market in stocks
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
1. demand will exceed supply
2. supply will exceed demand
3. the price of the securities will rise
4. the price of the securities will fall
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
a. the firm’s balance sheet
b. the price of the securities sold to the public
c. the underwriter’s profit on the sale
d. the underwriting discount
general public must be
a. registered with the SEC
b. initially sold through brokers
c. offered initially to existing stockholders
d. bought by specialists in corporate securities
a. a guaranteed profit on the initial purchase
b. a guaranteed profit to the underwriter
c. the requirement that shares purchased by
insiders prior to an initial public offering
must retain those shares for a specified period
d. initial buyers of the stock in the IPO must
hold the shares for a specified period of time
a. measures the number of shares sold each day
b. may be used to forecast subsequent movements in
the price of a stock
c. an increase in the ratio suggests short sellers
expect the price of the stock to rise
d. a reduction in the ratio may be interpreted that
stock prices will be stable
PROBLEMS
1. An investor purchased on margin Orange Computer for $30
a share. The stock’s price subsequently increased to $50 a
share at which time the investor sold the stock. If the
margin requirement were 60 percent and the interest rate on
borrowed funds were 7 percent, what would be the percentage
earned on the investor’s funds (excluding commissions)?
What would have been the return if the investor had not
bought the stock on margin?
2. An investor bought on margin 100 shares of Copier Corp.
for $85 a share. The firm paid an annual dividend of $4 a
share; the margin requirement was 60 percent with an
interest rate of 8 percent on borrowed funds, and
commissions on the purchase and sale were $75. The price of
the stock rose to $120 in one year.
a. What is the percentage earned on the investment if the
stock is bought for cash (i.e., the investor did not use
margin)?
b. What is the percentage earned on the investment if the
stock is bought on margin?
3. An investor sells 100 shares short at $43. The sale
requires a margin deposit equal to 60 percent of the
proceeds of the sale. If the investor closes the position
at $49, what was the percentage earned or lost on the
investment? If the position had been closed when the price
of the stock was $27, what would have been the percent
earned or lost on the position?
4. An investor sells 100 shares short at $43. The sale
requires a margin deposit equal to 60 percent of the
proceeds of the sale. The company paid a cash dividend of
$2 per share. If the investor closed the position at $36,
what was the percentage earned or lost on the investment?
SOLUTIONS TO PROBLEMS
