Understanding the Financial Markets: A Comprehensive Guide
1. High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets? Primary
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? Secondary
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): initial public offering
4. A firm that specializes in arranging financing for companies is called a(n): investment banking firm
5. The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called: underwriting
6. The financing provided for new ventures that are frequently high-risk investments is referred to as”venture ______”. Capital
7. Marco Painting 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): seasoned equity offering
8. Under the provisions of a general cash offer, shares of stock are offered to: the general public on a”first-com” basis.
9. A public offering of securities which are offered first to current shareholders is called a(n): rights offer.
10. The difference between the price an underwriter pays an issuer and the underwriter’s offering price is called the: spread.
11. When a group of underwriters jointly work together to sell a new issue of securities, the underwriters form a(n): 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. firm commitment
13. When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting. best efforts
14. When the price of newly issued shares is determined by competitive bidding the underwriting is known as a _____ underwriting. Dutch auction
15. Which one of the following is the federal agency which regulates the financial markets in the U.S.? Securities and Exchange Commission
16. The document that must be prepared in order to receive approval for a stock offering is called a: prospectus.
17. A preliminary document provided to investors who are interested in a stock offering is called a(n): red herring.
18. A securities dealer is a(n): trader who buys and sells from his or her inventory
19. Which one of the following best describes a broker? intermediary who arranges trades between a buyer and a seller
20. Which one of the following prices will an individual investor receive if he or she sells shares of Microsoft? Bid
21. Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding? Ask
22. The profit a dealer makes on a purchase and resale of shares of stock is called the: spread.
23. A private equity fund: I, II and IV only
24. Which of the following is correct regarding the compensation paid to private equity fund managers? Management compensation is usually subject to a”clawbac” provision to limit the performance fees.
25. An owner of a trading license on the NYSE is called a: member.
26. An NYSE Supplemental Liquidity Provider: I, II and III only.
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: designated market maker.
28. A trading floor broker: executes orders on behalf of commission brokers in exchange for a fee.
29. The NYSE’s Super Display Book is an electronic system which: 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): floor trader.
31. The location on an exchange floor where a particular security trades is called a(n): specialist’s post.
32. You want to sell shares of stock at the current price. Which type of order should you place? Market
33. An order to buy shares of stock at a stated price or less is called a _____ order . limit
34. An order to sell that involves a preset trigger point is called a _____ order stop
35. A market centered on dealers buying and selling for their own inventories is called a(n): OTC market.
36. Which one of the following describes an ECN? Web site used by investors to trade directly with other investors
37. Inside quotes are the: highest bid and lowest asked quotes offered by securities dealers
38. The off-exchange market in which exchange-listed securities trade is referred to as the _____ market third
39. The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market. Fourth
40. Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price? price-weighted
41. When stocks are held in an index in proportion to their total company market value, the index is: 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: staleness.
43. Which one of the following statements concerning the NYSE is correct? The NYSE is part of a firm that also operates a stock exchange in Amsterdam.
44. Which of the following are common sources of venture capital? I. private individuals II. NASDAQ III. university endowment funds IV. insurance companies . I, III, and IV only
45. Which one of the following statements concerning venture capital is correct? Venture capital is frequently provided in stages with each stage financed by a different venture capitalist.
46. How long is the”lock-u” period that is commonly found in an IPO underwriting contract? six months
< months
47. Which one of the following can be assumed when the SEC approves an IPO registration? All rules have been followed to allow for full disclosure of information.
48. Which one of the following transactions occurs in the primary market? sale of newly issued shares by the issuer to a shareholder
49. Trevor currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trevor is a securities: dealer.
50. Anna is an individual investor. She purchases shares at the _____ price and sells at the _____
price. A. asked; bid
51. What is the current structure of the NYSE? D. publicly traded corporation
52. In 2007, NYSE Holdings merged with which one of the following? E. Euronext, N.V.
53. In order to currently trade on the floor of the NYSE, members must: C. purchase a trading license
54. Which one of the following has the greatest duty to provide liquidity to the financial market? D. designated market maker
55. The SuperDOT system has lessened the role of which one of the following? D. floor brokers
56. Which one of the following statements related to the NYSE Hybrid market is correct? A. Floor brokers operate both electronically and in person.
57. To be listed on the NYSE, a firm must have at least: E. pre-tax aggregate earnings of $10 million in the previous 3 years
58. Lucas wants to sell 9,000 shares of stock and places a market order. The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to “stop” the stock. What has the specialist agreed to do? C. purchase the shares if no other buyer is readily available
59. The duties of a specialist include which of the following? I. maintain an orderly market II. offer a higher bid price than the floor brokers III. provide liquidity to the market IV. purchase all shares offered as limit sells A. I and III only
60. Faith placed an order to sell 7,500 shares of stock she currently owned. As soon as the order reached the trading floor, the shares were immediately sold. Which type of order did Faith place? C. market
61. Steve placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Steve know for sure? I. His order will execute but the time of execution is unknown.
II. His order may never execute.III. He will receive exactly $7,000 if his order executes.IV. He could receive more, but not less, than $14 a share. D. II and IV only
62. Kelly wants to sell 600 shares of DeLux stock at the going market price after the stock reaches $42 a share. Which type of order should she place? A. stop
63. After the trigger point is reached, a stop-loss order will be executed at the: E. market price.
64. Which one of the following orders is frequently used as a means to limit losses resulting from a short sale? E. stop-buy
65. Marcus just placed a stop limit order to sell 100 shares at $21 stop, $18 limit. Which one of the following statements is correct concerning this order if the current market price is $16? E. The order will become a limit order to sell at $18 once the market price reaches $21
66. Which one of the following statements is correct regarding the NYSE uptick rule? C. The rule prevents short-selling except following an uptick.
67. NASDAQ dealers post which one of the following in addition to their bid and ask prices? C. number of shares they will commit to buy or sell
68. NASDAQ has which of the following characteristics? I. trading floor II. computer network
III. specialist system IV. multiple market makers B. II and IV only
69. Which one of the following statements concerning NASDAQ is correct? There are more companies listed on NASDAQ than on NYSE.
70. The orders displayed on NASDAQ are placed by: C. both market makers and individuals on ECNs.
71. Stocks which are listed on the NYSE can: E. also be listed on NASDAQ.
72. The stocks listed on the Pink Sheets: B. do not have to file financial statements with the SEC.
73. Which of the following are common characteristic of the OTCBB market? I. low stock prices
II. dual listings with NASDAQ III. high percentage price changes C. I, III, and IV only
74. The DJIA is an index of the stock prices of _____ firms. B. 30
75. Stock market indexes: E. vary in the type of stocks included.
76. Which one of the following is the primary flaw of a price-weighted index? B. The effect a company has on the index is dependent solely on the price per share.
77. Which one of the following statements related to stock indexes is correct? C. The S&P 500 index is value-weighted.
78. Alco Metals just sold 2.7 million shares through an IPO offering. The shares were offered at $21 a share and all shares were sold. The firm received a total of $60,385,500 for this issue. What was the spread? C. Spread = [$60,385,500/($21 × 2,700,000)] – 1 = 6.5 percent
79. Reliant Underwriters has agreed to a firm commitment underwriting in which they will pay $36.75 million in exchange for 3 million shares of stock for an IPO offering. The offering price is expected to be $13.50 a share. How much will the underwriters earn if all of the shares can be sold? Underwriting fees = ($13.50 × 3,000,000) – $36,750,000 = $3.75 million
80. In a recent IPO, the Sausage Co. offered 1.6 million shares of stock at an offer price of $18 a share. The underwriting was conducted on a best efforts basis with a spread of 7.0 percent. The Sausage Co. received a total of $25,079,868.00 in sale proceeds. How many shares were sold? Number of shares = [$25,079,868/(1 – .07)]/$18 = 1,498,200 shares
81. A best efforts IPO underwriting consisted of 2.2 million shares at an offer price of $17 a share.The underwriter’s fee was set at 6.65 percent. How many shares were sold if the issuer received $31,926,260.10? Number of shares = [$31,926,260.10/(1 – .0665)]/$17 = 2,011,800
Shares
82. ML Underwriters paid an issuer $37,748,700 as IPO proceeds. The IPO offered 1.86 million shares of which 1.835 million were sold at an offer price of $22 a share. The underwriting spread was 7.75 percent. What type of underwriting was this? C. firm commitment
83. DT Metals is offering 700 shares in a Dutch auction IPO. The following bids have beenE. $14,700
84. Cee The Moon is offering 700 shares in a Dutch auction IPO. The following bids have been received: How much will Cee The Moon receive from this offering if the underwriter’s fee is 7 percent? D. $11,067
85. Mason Materials is offering 800 shares in a Dutch auction IPO. The following bids have been received: How many shares will be allocated to Bidder A? D. 145
86. Juno Markets is offering 900 shares in a Dutch auction IPO. The following bids have been received: How much will Bidder B have to spend to purchase all of the shares that have been allocated to him? A. $4,320.00
87. An index consists of the following securities and has an index divisor of 3.0. What is the price weighted index return? C. 10.53 percent
88. An index consists of the following securities and has an index divisor of 3.0. What is the price weighted index return? C. 11.54 percent
89. An index consists of the following securities and has an index divisor of 3.0. What is the price weighted index return? E. 7.48 percent
90. An index consists of the following securities and has an index divisor of 2.0. What is the price weighted index return? C. 0.00 percent
91. A price-weighted index consists of stocks A, B, and C which are priced at $38, $21, and $26 a share, respectively. The current index divisor is 2.7. What will the new index divisor be if stock B undergoes a 3-for-1 stock split? [38 + (21/3) + 26]/x = (38 + 21 + 26)/2.7; x = 2.2553
92. A price-weighted index consists of stocks A, B, and C which are priced at $55, $38, and $17 a share, respectively. The current index divisor is 2.75. What will the new index advisor be if stock A undergoes a 5-for-1 stock split? [(55/5) + 38 + 17]/x = (55 + 38 + 17)/2.75; x = 1.65
93. A price-weighted index consists of stocks A, B, and C which are priced at $27, $11, and $18 a share, respectively. The current index divisor is 2.24. If stock B undergoes a 1-for-3 reverse stock split, the new index divisor will be: [27 + (11 × 3) + 18]/x = [(27 + 11 + 18)/2.24]; x = 3.12
94. An index consists of the following securities. What is the value-weighted index return? E. 19.67 percent
95. An index consists of the following securities. What is the value-weighted index return? A. -0.43 percent
96. An index consists of the following securities. What is the value-weighted index return? C. 3.61 percent
97. You have the following information: You want the beginning price-weighted index of these two stocks to be 100. Given this, what is the ending index value? C. 107.02
98. You have the following information:You want the beginning price-weighted index of these two stocks to be 500. Given this, what is the ending index value? D. 591.84
99. An index has a market value of $689,400 at the beginning of the period and $722,009 at the end of the period. If you want the beginning index value to be 100, what is the ending index value? Beginning value-weighted index = (689,400/689,400) × 100 = 100
Ending value-weighted index = (722,009/689,400) × 100 = 104.73
100. Assume the DJIA closed at 12,487 last night. The divisor is 0.123017848. Assume that 29 of the stocks in the index were unchanged today. One stock increased in value from $54.80 a share yesterday to $57.90 a share today. What is the DJIA index value at the close of trading today? Old SP = 12,487 × 0.123017848 = 1,536.12 New SP = 1,536.12 + (57.90 – 54.80) = 1,539.22 New DJIA = 1,539.22/0.123017848 = 12,512.17
101. Yesterday, the DJIA closed at 12,309.16. The divisor is 0.123017848. Today, every one of the stocks in the index increased in value by $0.40 a share. What is the value of today’s closing DJIA? Old SP = 12,309.16 × 0.123017848 = 1,514.25 New SP = 1,514.25 + (.40 × 30) = 1,526.25 New DJIA = 1,526.25/0.123017848 =12,407
102. An order book displays the following information:You place a market order to buy 100 shares. At what price will your order be executed? D. $28.17
103. An order book displays the following information: You place an order to sell 100 shares. At what price will your order be executed? C. $18.07