Chapter 03 – Organization and Functioning of Securities Markets
1. A market is a means through which buyers and sellers are brought together to aid in the transfer of goods and/or
services.
a.
True
b.
False
2. It is required by law that a stock market must have a physical location.
a.
True
b.
False
3. If transaction prices are volatile, but long-term prices are stable, this is referred to as price continuity.
a.
True
b.
False
4. A continuous market that has price continuity requires depth of buyers and sellers.
a.
True
b.
False
5. A market in which prices adjust rapidly to new information is considered to be internally efficient.
a.
True
b.
False
6. Informational efficiency refers to when the cost of acquiring information is very cheap.
a.
True
b.
False
7. The primary market is where issues are traded between current and potential owners.
a.
True
b.
False
8. Negotiation, competitive bids, and best efforts are three forms of underwriting arrangements.
a.
True
b.
False
9. A corporation wishing to raise funds will normally want the investment banker to use a “best efforts” arrangement
rather than a negotiated basis.
a.
True
b.
False
10. Rule 415, shelf registration, allows large firms to register ten years’ worth of financing needs all at one time.
a.
True
b.
False
11. Only the stocks of large companies are traded in the primary market.
a.
True
b.
False
12. A good secondary market is important to the efficiency of the primary market.
a.
True
b.
False
13. Rule 415 allows corporations to place securities privately with large, sophisticated institutional investors without
extensive registration documents.
a.
True
b.
False
14. Rule 144A reduced registration documentation requirements for placing securities privately with large institutional
Chapter 03 – Organization and Functioning of Securities Markets
investors.
a.
True
b.
False
15. Secondary equity issues are new shares offered by firms that already have stock outstanding.
a.
True
b.
False
16. In a pure auction market, buyers and sellers submit bid-and-ask prices for a given stock to a central location.
a.
True
b.
False
17. In a dealer market trading system, shares of stock are sold to the investor with the highest bid price and bought from
the seller with the lowest offering price.
a.
True
Chapter 03 – Organization and Functioning of Securities Markets
b.
False
18. Call markets can also be used at the opening for stocks on any exchange if there is an overnight buildup of buy and/or
sell orders.
a.
True
b.
False
19. In a continuous market, trades occur at any time the market is open and stocks are priced either by auction or by
dealers.
a.
True
b.
False
20. A pure auction market is also referred to as a quote-driven market.
a.
True
b.
False
21. The NYSE has dominated the other U.S. exchanges in trading volume.
a.
True
b.
False
22. In recent years, there has been a trend toward the consolidation of existing exchanges in developed markets, such as
London, Frankfurt, and Paris.
a.
True
b.
False
23. The over-the-counter market includes all stocks not listed on one of the major exchanges but constitutes a lesser
dollar value than the New York and American Exchanges combined.
a.
True
b.
False
24. The over-the-counter market lists more stocks than the New York Stock Exchange and the American Stock Exchange
combined.
a.
True
b.
False
25. The value of the stocks traded in the over-the-counter market is greater than the combined values of the stocks traded
on the New York Stock Exchange and the American Stock Exchange combined.
a.
True
b.
False
26. The Nasdaq National Market System is an order-driven market.
a.
True
b.
False
27. The NYSE is a dealer market.
a.
True
b.
False
28. Algorithmic trading is basically creating computer programs to make trading decisions.
a.
True
b.
False
29. Margin transaction involves borrowing part of the cost of an investment.
a.
True
b.
False
30. Short selling is practiced when an investor borrows part of the cost of the investment, e.g., they are “short” on cash.
a.
True
b.
False
31. The individual placing a limit order specifies the buy or sell price.
a.
True
b.
False
32. The financial market landscape has become a few large holding companies that own global exchanges for stocks,
bonds, and derivatives.
a.
True
b.
False
33. Which of the following statements about a market is true?
a.
It is not necessary for the market to have a physical location.
b.
The market does not necessarily own the goods or services involved.
c.
A market can deal in any variety of goods and services.
d.
Both buyers and sellers benefit from the existence of a market.
e.
All of these are correct.
34. Which of the following is NOT a characteristic of a good market for goods and services?
a.
timely and accurate information
b.
liquidity
c.
low transaction costs
d.
external efficiency
e.
All of these are correct.
35. When a market is externally efficient, it means that
a.
timely and accurate information is available.
b.
the market is liquid.
c.
transaction costs are low.
d.
prices adjust rapidly to new information.
e.
the number of buyers and sellers are the same.
36. When a market is internally efficient, it means that the market has
a.
price continuity.
b.
minimal transactions costs.
c.
good depth.
d.
more buyers than sellers.
e.
more sellers than buyers.
37. In a negotiated bid, the underwriter carries out the following service(s):
a.
origination, risk-bearing, and distribution.
b.
origination and risk-bearing.
c.
risk-bearing and distribution.
d.
origination and distribution.
e.
risk-bearing and distribution.
38. Municipal bonds are sold using the following method or methods:
a.
competitive bid
b.
negotiated sale
c.
private placement
Chapter 03 – Organization and Functioning of Securities Markets
d.
using an underwriting function.
e.
All of these are correct.
39. Which of the following is an underwriting function?
a.
origination
b.
risk-bearing
c.
distribution
d.
putting together an underwriting syndicate.
e.
All of these are correct.
40. The basic distinction between a primary and a secondary market is that
a.
proceeds from sales in the primary market go to the current owner of a security; proceeds in secondary market
go to the original owner.
b.
primary markets involve direct dealings within regional exchanges.
c.
only new securities are sold in the primary market; only outstanding securities are bought and sold in the
secondary market.
d.
primary markets deal exclusively in bonds; secondary markets deal primarily in common stock.
e.
primary markets deal exclusively in common stocks; secondary markets deal primarily in bonds.
41. Which of the following is NOT a characteristic of shelf registrations? Shelf registrations
a.
were introduced by Rule 415.
b.
allow large firms to register security issues and sell them piecemeal during the following six years.
c.
provide flexibility and reduce registration fees and expenses.
d.
are typically used for the sale of straight debentures rather than common stock or convertible issues.
e.
All of these are correct.
42. Which of the following is NOT a secondary equity market?
a.
treasury market
b.
national exchanges
c.
regional exchanges
d.
over-the-counter market
e.
call market.
43. Which of the following is NOT a function of the specialist?
a.
assists the Federal Reserve in controlling the money supply
b.
acts as a broker who handles the limit orders or special orders placed with member brokers
c.
buys and sells securities in order to stabilize the market.
d.
acts as a dealer in assigned stocks to maintain a fair and orderly market.
e.
attempts to derive a new equilibrium price using a call-market approach.
Chapter 03 – Organization and Functioning of Securities Markets
44. The member of the New York Stock Exchange who acts as a dealer on assigned stocks is known as a
a.
registered trader.
b.
commission broker.
c.
registered broker.
d.
floor broker.
e.
specialist.
45. In a call market, trading for individual stocks
a.
occurs anytime the market is open.
b.
takes place at specific times.
c.
takes place at the open and close of the trading day.
d.
is priced either by auction or by dealers.
e.
None of these are correct.
46. A pure auction market is one in which
a.
dealers provide liquidity by buying and selling shares of stock for themselves.
b.
dealers compete against each other to provide the highest bid and lowest asking prices.
c.
buyers submit bid prices to sellers.
d.
sellers submit ask prices to buyers.
e.
buyers and sellers submit bid and ask prices to a central location to be matched.
47. Trading in the secondary markets for U.S. Government and municipal bonds
a.
takes place through a network of primary dealers.
b.
takes place over the counter by dealers who buy and sell on their own account.
c.
takes place on the NYSE bond annex.
d.
takes place on financial futures exchanges.
e.
takes place on equity markets.
48. Secondary markets are important because
a.
the prevailing market price of securities is determined in the secondary market.
b.
it has an impact on price stability.
c.
it has an impact on price continuity.
d.
the proceeds from a sale go to the issuing unit.
e.
they prevent price discovery.
49. All of the following are advantages of secondary markets EXCEPT that they
a.
provide liquidity to individuals holding the securities.
b.
support the primary market by reducing the required rate of return due to the lower liquidity risk for securities.
c.
provide price discovery for corporations selling seasoned securities.
d.
impact market efficiency and price volatility.
e.
All of these are correct.
50. Which of the following is NOT a major category of membership in stock exchanges?
a.
specialist
b.
commission broker
c.
floor broker
d.
financial analyst
e.
registered trader
51. All of the following are characteristics of a dealer market EXCEPT that:
a.
it is a quote-driven market.
b.
the NASDAQ market is a dealer market.
c.
individual dealers buy and sell shares for themselves.