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Chapter 3 Multiple Choice

1. A limit buy order is an order to buy stock that is executed _______________.


A) immediately at the best available price
B) immediately, at the last traded price
C) at the lowest available price
D) when the stock can be obtained at or below a specified price

2. An over-the-counter market is an example of _______________.


A) an auction market
B) a dealer market
C) a brokered market
D) a direct search market

3. Which of the following statements is true of specialists on the NYSE?


A) Specialists are not obligated to provide price continuity to the market.
B) Specialists strive to maintain a broad bidask spread.
C) When matching trades, a specialist must use the highest offered purchase price and the
lowest offered selling price.
D) Specialists are prohibited from buying or selling stock for their own portfolios.

4. Which of the following statements is true about initial public offerings?


A) An IPO is a secondary market transaction in the stock of a company that was formerly
privately owned.
B) Explicit costs of an IPO tend to be roughly 2% of the funds raised.
C) IPOs have been shown to be poor long-term investments.
D) Almost all IPOs turn out to be overpriced.

5. You sold short ABC stock at $50 per share. The current market price of the stock is $53. The
most effective way to limit your potential losses is to place a _______________.
A) limit-buy order
B) stop-buy order
C) limit-sell order
D) stop-loss order

6. A _______________ broker provides "no frills" services.


A) floor
B) discount
C) full-service
D) discretionary

7. Which of the following is not a provision of the Sarbanes-Oxley Act?


A) Creation of a Public Company Accounting Oversight Board.
B) Prohibition of auditors from providing other services to their audit clients.
C) Full disclosure of relevant information related to the issuance of new securities.
D) Certification of financial reports by a company's CEO and CFO.
8. Which of the following observations concerning private placements is true?
A) They are made available to the general public.
B) They generally will be more suited for very large offerings.
C) They are characterized by high post-issue liquidity.
D) They do not trade in secondary markets like stock exchanges.

9. You sold short 200 shares of XYZ common stock at $40 per share. The initial margin
requirement was 60%. Your initial investment was _______________.
A) $3,200
B) $4,800
C) $6,000
D) $8,000

10. Which of the following statements is true about bond trading?


A) Most trading of bonds on the New York Stock Exchange represents primary market
transactions.
B) Corporate bond trading is very active, although not as active as trading in common stock.
C) In order for a company to list its bonds on the New York Stock Exchange bond trading
system, each bond must be registered with the exchange.
D) The majority of bond trading occurs in the over-the-counter market.

11. Which of the following was established to protect investors from losses if their brokerage firms
fail?
A) SEC
B) SIPC
C) FDIC
D) FINRA

12. In a(n) _______________, investment bankers purchase securities from the issuing company
and then resell to the public at a price equal to the public offering price less a spread.
A) auction market
B) shelf registration
C) firm commitment
D) private placement

Problems

13. An investor sells short 200 shares of stock at $15 per share. The initial margin requirement is
60%. The investor earns no interest on funds in the margin account and no dividends are paid.
What is the investor's rate of return after one year if the short sale is covered at $12 per share?

14. Suppose you purchase 400 shares of MLP common stock on margin at $25 per share. The initial
margin is 60%. If the maintenance margin is 30%, how high can Intels price fall before you
get a margin call? (Assume the stock pays no dividends and ignore interest on the margin loan.)
15. Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and give your
broker $15,000 to establish your margin account.
a. If you earn no interest on the funds in your margin account, what will be your rate of return
after one year if Intel stock is selling at (i) $44; (ii) $40; (iii) $36? Assume that Intel pays no
dividends.
b. If the maintenance margin is 25%, how high can Intels price rise before you get a margin
call?
c. Redo parts ( a ) and ( b ), but now assume that Intel also has paid a year-end dividend of $1
per share. The prices in part ( a ) should be interpreted as ex-dividend, that is, prices after
the dividend has been paid.