Fundamentals of Investments, 8e (Jordan)
Chapter 5 The Stock Market
1) Bright Detergent is issuing new shares of stock which will trade on NASDAQ. If Sally
purchases 300 of these shares, the trade will occur in which one of the following markets?
A) primary
B) secondary
C) third
D) fourth
E) over-the-counter
2) Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE.
This purchase will occur in which one of the following markets?
A) primary
B) secondary
C) third
D) fourth
E) fifth
3) Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public.
This stock issue will be referred to as a(n):
A) open-end sale.
B) break-out issue.
C) public service offering.
D) initial public offering.
E) initial trial issue.
4) A firm that specializes in arranging financing for companies is called a(n):
A) floor broker.
B) investment banking firm.
C) investment dealer.
D) private broker.
E) marketing firm.
5) The process of purchasing newly issued shares from the issuer and reselling those shares to
the general public is called:
A) underwriting.
B) capitalizing.
C) securing.
D) brokering.
E) deploying.
6) The financing provided for new ventures that are frequently high-risk investments is referred
to as “venture ________”.
A) capital
B) leverage
C) risk funds
D) funding
E) investing
7) Main Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm
issues an additional 10,000 shares, those shares will be referred to as a(n):
A) supplemental offering.
B) seasoned equity offering.
C) initial public offer.
D) market expansion offer.
E) after-market underwriting.
8) Under the provisions of a general cash offer, shares of stock are offered to:
A) underwriters on a guaranteed sale basis only.
B) current shareholders prior to being offered to the general public.
C) institutional investors only.
D) the issuer’s employees on a cash purchase basis only.
E) the general public on a “first-come” basis.
9) A public offering of securities which are offered first to current shareholders is called a(n):
A) existing shareholder offer.
B) limited offer.
C) rights offer.
D) venture offer.
E) preference offer.
10) The difference between the price an underwriter pays an issuer and the underwriter’s offering
price is called the:
A) spread.
B) margin.
C) offer differential.
D) firm commitment.
E) underwriting capital.
11) When a group of underwriters jointly work together to sell a new issue of securities, the
underwriters form a(n):
A) underwriting cartel.
B) market union.
C) venture capital association.
D) Dutch market.
E) syndicate.
12) When an underwriting syndicate purchases an entire issue of new securities and accepts the
risk of unsold shares, the underwriting is known as a ________ underwriting.
A) Dutch auction
B) full-fledge
C) firm commitment
D) best efforts
E) guaranteed sale
13) When the issuer assumes the risk for any shares the underwriters cannot sell, the
underwriting is known as a ________ underwriting.
A) Dutch auction
B) partial
C) firm commitment
D) best efforts
E) pro-rata
14) When the price of newly issued shares is determined by competitive bidding the
underwriting is known as a ________ underwriting.
A) Dutch auction
B) market-priced
C) seasoned
D) best efforts
E) rights
15) Which one of the following is the federal agency which regulates the financial markets in the
U.S.?
A) Treasury Department
B) National Association of Securities Dealers
C) Over the Counter Commission
D) Federal Reserve
E) Securities and Exchange Commission
16) The document that must be prepared in order to receive approval for a stock offering is
called a:
A) tombstone.
B) prospectus.
C) offering agreement.
D) regulatory report.
E) offering paper.
17) A preliminary document provided to investors who are interested in a stock offering is called
a(n):
A) prospectus.
B) inquiry form.
C) draft offer.
D) green shoe.
E) red herring.
18) A securities dealer is a(n):
A) intermediary who arranges trades between a buyer and a seller.
B) trader who buys and sells from his or her inventory.
C) firm which charges a commission for arranging a transaction.
D) person who buys securities for his or her own account on an exchange floor.
E) trader who transacts business on behalf of a securities issuer.
19) Which one of the following best describes a broker?
A) intermediary who arranges trades between a buyer and a seller
B) trader who buys and sells from his or her inventory
C) firm which charges a commission for arranging a transaction
D) person who buys securities for his or her own account on an exchange floor
E) trader who transacts business on behalf of a securities issuer
20) Which one of the following prices will an individual investor receive if he or she sells shares
of Intel?
A) bid
B) ask
C) issue
D) offer
E) Dutch
21) Which one of the following prices will an investor pay to purchase shares of stock that are
currently outstanding?
A) issue
B) option
C) bid
D) ask
E) primary
22) The profit a dealer makes on a purchase and resale of shares of stock is called the:
A) margin.
B) bid.
C) float.
D) offer.
E) spread.
23) A private equity fund:
I. is set up as a limited partnership
II. usually uses a 2/20 fee structure
III. place no constraints on manager compensation
IV. typically have a stated life of 7 to 10 years
A) I and II only
B) I and III only
C) I, II and III only
D) I, II and IV only
E) I, II, III, and IV
24) Which of the following is correct regarding the compensation paid to private equity fund
managers?
A) Managers typically receive 20 percent of fund profits but no separate management fee.
B) Managers typically receive a high percentage management fee but no portion of fund profits.
C) Management compensation is usually subject to a “clawback” provision to limit the
performance fees.
D) “Carried interest” refers to the interest fund managers earn on performance fees.
E) Fees paid to fund managers do not reduce the net return of the fund.
25) An owner of a trading license on the NYSE is called a:
A) broker.
B) shareholder.
C) member.
D) trader.
E) dealer.
26) An NYSE Supplemental Liquidity Provider:
I. can trade the same stocks as designated market makers
II. can trade only from offices outside the exchange
III. must quote bid or ask quotes a certain percent of the day
IV. is paid 30 cents per 100 shares traded
A) I and II only
B) I, II and III only
C) I and III only
D) I, II, and IV only
E) I, II, III and IV
27) The party who serves as a dealer for a few securities on an exchange floor and is obligated to
maintain an orderly market for those securities is called a:
A) floor trader.
B) designated market maker.
C) floor broker.
D) member.
E) house broker.
28) A trading floor broker:
A) is a NYSE member who trades on the floor for his or her personal account.
B) executes orders on behalf of commission brokers in exchange for a fee.
C) executes customers’ orders in exchange for a commission.
D) trades a limited number of securities and is obligated to maintain an orderly market for those
securities.
E) is any party who owns a NYSE trading license.
29) The NYSE’s Super Display Book is an electronic system which:
A) maintains the historical records of each customer’s trading activity.
B) transmits the latest market information to the news media.
C) allows floor traders to execute trades via cell phones.
D) tracks the activity on an exchange floor to ensure regulatory compliance.
E) is based on NYSE’s ARCA electronic trading engine.
30) A NYSE member who trades only for his or her own account is called a(n):
A) floor trader.
B) specialist.
C) individual broker.
D) floor broker.
E) house broker.
31) The location on an exchange floor where a particular security trades is called a(n):
A) specialist’s post.
B) broker’s terminal.
C) floor spot.
D) exchange spot.
E) market pit.
32) You want to sell shares of stock at the current price. Which type of order should you place?
A) limit
B) post
C) market
D) short
E) stop
33) An order to buy shares of stock at a stated price or less is called a ________ order.
A) limit
B) stop
C) market
D) short
E) bid
34) An order to sell that involves a preset trigger point is called a ________ order.
A) limit
B) day
C) stop
D) short
E) market
35) A market centered on dealers buying and selling for their own inventories is called a(n):
A) exchange floor.
B) SuperDot.
C) OTC market.
D) subscriber market.
E) Big Board.
36) Which one of the following describes an ECN?
A) website used by investors to trade directly with other investors
B) website limited to use by professional brokers and dealers
C) computerized trading floor
D) communications network used by specialists
E) cellular trading network
37) Inside quotes are the:
A) highest asked and lowest bid quotes offered by securities dealers.
B) highest bid and lowest asked quotes offered by securities dealers.
C) latest prices at which corporate insiders have purchased or sold securities.
D) bid and asked prices which are offered only to institutional traders or large private investors.
E) latest price at which a security traded.
38) The off-exchange market in which exchange-listed securities trade is referred to as the
________ market.
A) independent
B) secondary
C) fourth
D) third
E) primary
39) The market where individual investors directly trade exchange-listed securities with other
individual investors is referred to as the ________ market.
A) home
B) independent
C) third
D) fourth
E) SuperDOT
40) Which of the following types of indexes is a stock market index in which stocks are held in
proportion to their share price?
A) balanced
B) market-weighted
C) dollar-weighted
D) price-weighted
E) value-weighted
41) When stocks are held in an index in proportion to their total company market value, the
index is:
A) dollar-weighted.
B) front-weighted.
C) back-weighted.
D) price-weighted.
E) value-weighted.
42) An index is valued on a daily basis. However, some stocks in this particular index have not
traded recently. As a result, this index suffers from index:
A) fatigue.
B) devaluation.
C) flatness.
D) staleness.
E) weighting.