Chapter 11

Securities Markets
TRUE-FALSE QUESTIONS

1. The primary market is a market in which securities are traded among investors.
Answer: F
Difficulty Level: Easy
Subject Heading: Market Structure

2. The issuer has no price risk in a firm commitment offering once the offer price is
set.
Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

3. All public offerings are regulated by the Securities and Exchange Commission
(SEC).
Answer: T
Difficulty Level: Easy
Subject Heading: Issuing Securities

4. Under a best-effort agreement, investment bankers try to sell the securities of the
issuing corporation, but they assume no risk for a possible failure of the flotation.
Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

5. Under a best-effort agreement, investment bankers try to sell the securities of the
issuing corporation, but they assume no risk for a possible failure of the flotation.
Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

6. Shelf registration allows firms to register only debt issues with the SEC, and have
them available to sell for two years.
Answer: F
Difficulty Level: Medium
Subject Heading: Issuing Securities

7. All firms can use shelf registration which saves issuers both time and money.
Answer: F
Difficulty Level: Medium
Subject Heading: Issuing Securities
 8. Private placement can avoid SEC registration and all SEC regulations.
Answer: F
Difficulty Level: Medium
Subject Heading: Issuing Securities

9. Rights offerings among public corporations became infrequent in the United States
during the 1980s and 1990s.
Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

10. The flotation costs of an initial public offering are comprised solely of direct costs
and the spread.
Answer: F
Difficulty Level: Medium
Subject Heading: Issuing Securities

11. IPO underpricing occurs only in the United States.

Answer: F
Difficulty Level: Medium
Subject Heading: Issuing Securities

12. Firm commitment flotation costs are typically lower than those of best efforts.
Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

13. An important function of the Securities and Exchange Commission is to pass

judgment on the investment merit of a security.
Answer: F
Difficulty Level: Medium
Subject Heading: Market Regulation

14. A dealer is a person who assists in the trading process by buying or selling
securities in the market for an investor.
Answer: F
Difficulty Level: Easy
Subject Heading: Market Structure

15. The Glass-Steagall Act of 1933 ended the ability of commercial banks to act as
underwriters of newly issued securities.
Answer: T
Difficulty Level: Medium
Subject Heading: Market Regulation
16. The secondary markets provide pricing information and liquidity to investors.
Answer: T
Difficulty Level: Easy
Subject Heading: Market Structure

17. Floor brokers act as agents to execute customers’ orders for securities purchases
and sales.
Answer: T
Difficulty Level: Medium
Subject Heading: Market Structure

18. Specialists are dealers who have the responsibility of making a market in an
assigned security.
Answer: T
Difficulty Level: Medium
Subject Heading: Market Structure

19. All securities must be listed before they may be traded on the New York Stock
Exchange.
Answer: T
Difficulty Level: Medium
Subject Heading: Market Regulation

20. A limit order is an order to sell stock at the market price when the price of the stock
falls to a specified level.
Answer: F
Difficulty Level: Medium
Subject Heading: Securities Trading

21. The maintenance margin is the minimum margin to which an investment may fall
before a margin call is placed.
Answer: T
Difficulty Level: Medium
Subject Heading: Securities Trading

22. The fourth market is a market for large blocks of listed stocks that operate outside
the confines of the organized exchanges.
Answer: F
Difficulty Level: Medium
Subject Heading: Market Structure

23. American depository receipts are receipts which represent foreign shares to U.S.
investors.
Answer: T
 Difficulty Level: Easy
Subject Heading: Types of Securities

24. Insider trading regulation is provided for under the Securities Exchange Act of
1934.
Answer: T
Difficulty Level: Easy
Subject Heading: Market Regulation

25. The SEC’s definition of “Insiders” is limited to corporate personnel.

Answer: F
Difficulty Level: Easy
Subject Heading: Market Regulation

26. A global depository receipt is traded on the American Stock Exchange.

Answer: F
Difficulty Level: Easy
Subject Heading: Types of Securities

27. The Dow-Jones Industrial Average is made up of 30 large blue-chip stocks.

Answer: T
Difficulty Level: Easy
Subject Heading: Market Indexes

28. Commissions on stock trades are set by the stock exchanges.

Answer: F
Difficulty Level: Medium
Subject Heading: Securities Trading

29. Existing securities are traded in the primary market.

Answer: F
Difficulty Level: Easy
Subject Heading: Market Structure

30. The prospectus is a contract outlining the duties, responsibilities and fees between
the issuing firm and its underwriter.
Answer: F
Difficulty Level: Medium
Subject Heading: Issuing Securities

31. Underpricing represents the difference between the aftermarket price and the
offering price.
Answer: T
Difficulty Level: Medium
 Subject Heading: Issuing Securities

32.Underpricing represents the difference between the aftermarket price and the initial
offering price.

Answer: T
Difficulty Level: Easy
Subject Heading: Issuing Securities

33. If there were no secondary markets for trading between investors, there would be
no primary market for the initial sale of securities.
Answer: T
Difficulty Level: Medium
Subject Heading: Market Structure

34. The term “Big Board” is another name for the NASDAQ market.
Answer: F
Difficulty Level: Easy
Subject Heading: Market Structure

35. A market order is an order for immediate purchase or sale at the best possible
price.
Answer: T
Difficulty Level: Easy
Subject Heading: Securities Trading

36. An odd lot is a trade involving 100 shares or multiples of 100 shares.
Answer: F
Difficulty Level: Easy
Subject Heading: Securities Trading

37. Over the counter markets are organized exchanges for trading securities such as
the New York Stock Exchange.
Answer: F
Difficulty Level: Easy
Subject Heading: Market Structure

38. ADRs are created and traded in dollars on U.S. exchanges. They represent a given
number of shares of a foreign firm’s stock .
Answer: T
Difficulty Level: Easy
Subject Heading: Types of Securities

39. Churning happens when a broker constantly buys and sells securities from a
client’s portfolio in an effort to generate commissions.
 Answer: T
Difficulty Level: Easy
Subject Heading: Securities Trading

40. In a financial context, due diligence refers to the detailed study of a corporation.

Answer: T
Difficulty Level: Easy
Subject Heading: Issuing Securities

41. An underwriting agreement is a contract in which the investment banker agrees to

buy securities at a predetermined price and then resell them to investors.

Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

42. An underwriting agreement is a contract in which the investment banker agrees to

do its best to sell securities to investors at the highest price it can; the investment
banker assumes no risk for the possibility that it may fail to issue all authorized
shares .

Answer: F
Difficulty Level: Medium
Subject Heading: Issuing Securities

43. A pre-emptive right refers to the right of existing shareholders to sue management
in order to head off potential actions by management that would adversely affect
the price of the stock.

Answer: F
Difficulty Level: Medium
Subject Heading: Market Regulation

44. A Dutch auction is an offering process in which investors bid on the price and
quantity of securities they wish to purchase.

Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

45. A syndicate is a group of several investment banking firms that participate in

underwriting and distributing a security issue.

Answer: T
Difficulty Level: Easy
Subject Heading: Issuing Securities
46. The aftermarket is a period of time after an IPO.

Answer: T
Difficulty Level: Easy
Subject Heading: Market Structure

47. On average and across countries, underpricing securities issues represents a

significant cost to firms that issue securities.

Answer: T
Difficulty Level: Medium
Subject Heading: Issuing Securities

48. Federal regulation of investment banking is administered primarily under the

provisions of the Investment Banking Monitoring and Control Act of 1999.

Answer: F
Difficulty Level: Easy
Subject Heading: Market Regulation

49. Organized securities exchanges include the New York Stock Exchange, the
American Stock Exchange, and NASDAQ.

Answer: T
Difficulty Level: Easy
Subject Heading: Market Structure

50. One goal of the NYSE–Euronext merger is to cross-list shares on the two
exchanges.

Answer: T
Difficulty Level: Easy
Subject Heading: Changes in the Structure of the Stock Market
MULTIPLE-CHOICE QUESTIONS

1. Newly created securities are sold in the:

a. primary market
b. secondary market
c. third market
d. fourth market

Answer: a
Difficulty Level: Easy
Subject Heading: Issuing Securities

2. The document which details the issuer’s finances and must be provided to each
buyer of the security is called the:
a. indenture
b. prospectus
c. tombstone
d. all the above

Answer: b
Difficulty Level: Easy
Subject Heading: Issuing Securities
3. ___________________ is a highly regulated document which details the issuers
operations and finances and must be provided to each buyer of a newly issued
security.
a. A prospectus
b. An underwriting agreement
c. A best efforts agreement
d. none of the above

Answer: a
Difficulty Level: Easy
Subject Heading: Issuing Securities

4. Trades between large institutional investors that take place without the benefits of
brokers or dealers occur in the:
a. primary market
b. secondary market
c. third market
d. fourth market

Answer: d
Difficulty Level: Easy
Subject Heading: Market Structure
5. A market whereby large institutional investors arrange purchases and sales of
securities among themselves without the benefit of a broker or dealer is referred to
as the:
a. primary market
b. secondary market
c. third market
d. fourth market

Answer: d
Difficulty Level: Easy
Subject Heading: Market Structure

6. The market for large blocks of listed stocks that operates outside the confines of
the organized exchanges is called the:
a. primary market
b. secondary market
c. third market
d. fourth market

Answer: c
Difficulty Level: Easy
Subject Heading: Market Structure
7. The market for large blocks of listed stocks that operates outside the confines of the
organized exchanges is called the:
a. primary market
b. secondary market
c. third market
d. fourth market

Answer: c
Difficulty Level: Easy
Subject Heading: Market Structure

8. Sales of securities that the seller does not own is called a:

a. stop-loss order
b. short sale
c. limit order
d. maintenance margin

Answer: b
Difficulty Level: Easy
Subject Heading: Securities Trading

9. The maximum buying price or the minimum selling price specified by the investor is
called a:
a. stop-loss order
b. market order
 c. short sale
d. limit order

Answer: d
Difficulty Level: Medium
Subject Heading: Securities Trading
10. ___________________ is the maximum purchase price or minimum selling price
specified by an investor.
a. A short sale
b. A stop-loss order
c. A limit order
d. Buying on margin

Answer: c
Difficulty Level: Easy
Subject Heading: Securities Trading

11. Brokerage firms that not only assist in trades but also have research staffs that
analyze firms and make recommendations about which stocks to buy or sell are
called:
a. discount brokerage firms
b. full service brokerage firms
c. investment banking firms
d. stock advisory brokers

Answer: B
Difficulty Level: Medium
Subject Heading: Securities Trading

12. A limit order, if not executed, will expire at the end of

a. the day.
b. the week.
c. the month.
d. all of the above are possibilities as the trader will decide the expiration date.

Answer: d
Difficulty Level: Easy
Subject Heading: Securities Trading

13. An order to sell stock at the market price when the price of the stock falls to a
specified level is called a:
a. limit order
b. market order
c. short sale
d. stop-loss order

Answer: d
 Difficulty Level: Easy
Subject Heading: Securities Trading

14. If the value of the securities that you borrowed money from your broker to purchase
falls, you may receive a:
a. maintenance margin call
b. margin call
c. limit order call
d. specialist call

Answer: b
Difficulty Level: Easy
Subject Heading: Securities Trading

15. The price for which the owner is willing to sell the security is called the:
a. bid price
b. spread
c. ask price
d. limit price

Answer: c
Difficulty Level: Easy
Subject Heading: Securities Trading

16. The advantage of buying on margin is:

a. larger potential profit
b. using more of your own money
c. deductible loss
d. non-taxable capital gain

Answer: a
Difficulty Level: Medium
Subject Heading: Securities Trading

17. If an investor feels the price of a stock will decline in the future, which trade should
the investor undertake?
a. market order
b. buy on margin
c. limit order
d. short sale

Answer: d
Difficulty Level: Medium
Subject Heading: Securities Trading
18. The brokers who handle the house broker’s overflow are called:
a. specialists
b. registered traders
c. independent brokers
d. all the above

Answer: C
Difficulty Level: Medium
Subject Heading: Market Structure

19. The Federal Reserve System and the New York Stock Exchange regulations
currently require the short seller to have an initial margin of at least _______ of the
price of the stock:
a. 10%
b. 25%
c. 30%
d. 50%

Answer: d
Difficulty Level: Medium
Subject Heading: Securities Trading

20. An over-the-counter market trade occurs in the:

a. primary market
b. NYSE
c. third market
d. SEC

Answer: C
Difficulty Level: Medium
Subject Heading: Market Structure

21. A trade in the multiple of 100 shares is called a (n):

a. round lot
b. odd lot
c. block trade
d. none of the above

Answer: a
Difficulty Level: Medium
Subject Heading: Securities Trading

22. A person who facilitates market transactions by selling (buying) when other
investors wish to buy (sell) is called a:
a. registered trader
b. floor broker
 c. market maker
d. commission broker

Answer: c
Difficulty Level: Medium
Subject Heading: Securities Trading

23. Which of the following statements is most correct?

a. Because global depository receipts are listed on the London Stock
Exchange, U.S. investors cannot buy GDRs through a broker in the
United States.
b. Foreign stocks can be traded in the United States if they are registered
with the Securities and Exchange Commission.
c. The fourth market is a market for large blocks of listed stocks that
operates outside the confines of the organized exchanges.
d. All the above statements are correct.

Answer: b
Difficulty Level: Hard
Subject Heading: Market Structure

24. Which of the following statements is most correct?

a. Because a specialist is given the monopoly power to make a market on
a particular stock, all trades must pass through the specialist.
b. A specialist can also perform the function of a commission broker.
c. A floor broker acts as an agent to execute customer’s orders for
securities purchases and sales.
d. Each of the above statements is false.

Answer: C
Difficulty Level: Hard
Subject Heading: Securities Trading

25. Which of the following statements is most correct?

a. The Dow Jones Industrial Average is market-value weighted.
b. The Dow Jones Industrial Average is a good benchmark by which to
measure the performance of investment managers.
c. The 500 stocks comprising the S&P 500 are the largest 500 firms.
d. Indexes exist for the bond market.

Answer: d
Difficulty Level: Hard
Subject Heading: Market Structure

26. Which of the following statements is false?

 a. The Dow Jones Industrial Average is an example of a price-weighted
index.
b. An American depository receipt is a receipt which represents foreign
shares to U.S. investors.
c. Index arbitrage occurs when traders buy and sell stocks with offsetting
trades in futures and options in order to lock in profits from price
differences between these different markets.
d. Each of the above statements is correct.

Answer: d
Difficulty Level: Hard
Subject Heading: Multiple Topics

27. Existing securities are traded:

a. in the primary markets
b. in the secondary markets
c. only on organized exchanges
d. only over-the-counter

Answer: b
Difficulty Level: Easy
Subject Heading: Market Structure

28. Which one of the following is not a primary market function of investment bankers?
a. originating
b. underwriting
c. selling
d. making loans

Answer: d
Difficulty Level: Medium
Subject Heading: Issuing Securities

29. A market has ________ if it can absorb large orders without disrupting prices; it
has ___________ if it has many trades.
a. depth, breadth
b. breadth, depth
c. liquidity, quick execution
d. quick execution, liquidity

Answer: A
Difficulty Level: Hard
Subject: Qualities of a Good Market

30. Which of the following is not a characteristic of a good market?

a. central location
b. quick and accurate trade execution
c. low cost of trading
d. all of the above are characteristics of a good market

Answer: A
Difficulty Level: Easy
Subject: Qualities of a Good Market

31. A market is liquid if

a. trades are executed quickly.
b. market prices don’t fluctuate sharply on successive trades
c. both a) and b) are correct.
d. if fees are low.

Answer: C
Difficulty Level: Medium
Subject: Qualities of a Good Market

32. A firm may decide to list its shares on another exchange besides the NYSE
because
a. costs are lower.
b. listing requirements are easier to satify.
c. investors can get faster trade execution in another exchange.
d. all of the above.

Answer: D
Difficulty Level: Easy
Subject: Qualities of a Good Market

33. If a market has “price pressure” this is a sign of

a. good liquidity in the market.
b. low liquidity in the market.
c. high listing fees.
d. high brokerage commissions

Answer: B
Difficulty Level: Medium
Subject: Qualities of a Good Market

34. An agreement whereby an investment banker tries to sell securities of an

issuing corporation, but assumes no risk if the flotation is unsuccessful is called a:
a. due diligence agreement
b. best-effort agreement
c. firm commitment price agreement
d. shelf registration agreement
 Answer: b
Difficulty Level: Medium
Subject Heading: Issuing Securities

35. Which one of the following is not a cost to the issuing firm of going public with an
initial stock offering?
a. direct costs (legal fees, accounting fees, etc.)
b. underwriter’s spread
c. overpricing
d. underpricing

Answer: c
Difficulty Level: Medium
Subject Heading: Issuing Securities

36. The regulation of new security sales by individual states is referred to as:
a. the registration process
b. a truth-in-securities requirement
c. the rating of security quality
d. Blue-sky laws

Answer: d
Difficulty Level: Medium
Subject Heading: Market Regulation

37. Commercial banks were for many years prohibited from full-fledged investment
banking by the:
a. Glass-Steagall Act
b. Garn-St. Germain Depository Institutions Act
c. Securities Act of 1933
d. National Association of Securities Dealers

Answer: a
Difficulty Level: Medium
Subject Heading: Market Regulation

38. Which of the following is not a basic type of member of the New York Stock
Exchange?
a. independent brokers
b. floor brokers
c. registered traders
d. specialists
e. security regulators

Answer: e
Difficulty Level: Medium
 Subject Heading: Market Regulation

39. An order for immediate purchase or sale at the best possible price is called a:
a. market order
b. limit order
c. stop loss order
d. margin order

Answer: a
Difficulty Level: Easy
Subject Heading: Securities Trading

40. Existing firms that are already public and wish to raise additional funds may:
a. sell additional securities by using the underwriting process
b. sell securities to a private party
c. seek competitive bid
d. all the above
e. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Issuing Securities

41. Which of the following securities issues do not require competitive bidding?
a. state government bond issues
b. public utility security issues
c. Federal government bond issues
d. corporate bond issues

Answer: d
Difficulty Level: Medium
Subject Heading: Issuing Securities

42. Which of the following is not an advantage of shelf registration?

a. saving time on issuing securities
b. allows issuer to determine which investment bank offers the best service
c. eliminates filing fees
d. all the above
e. none of the above

Answer: c
Difficulty Level: Medium
Subject Heading: Issuing Securities
43. Under a ______________, if any additional shares of common stock, or any
security that may be converted into common stock, are to be issued, the securities
must be offered for sale first to the existing common stockholders.
a. red herring
b. rights offering
c. seasoned offering
d. shelf registration

Answer: b
Difficulty Level: Medium
Subject Heading: Issuing Securities

44. The flotation costs of an IPO depend on

a. the size of the offering
b. the issuing firm’s earnings
c. the condition of the stock market
d. all of the above
e. none of the above

Answer: D
Difficulty Level: Hard
Subject Heading: Issuing Securities

45. Investment banks engage in all of the following activities EXCEPT:

a. underwrite corporate securities
b. buy and sell commercial paper
c. mergers and acquisitions
d. all of the above
e. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Issuing Securities

46. Which of the following is not a reason to sell securities in a private placement?
a. to keep current shareholders from suspecting “sweetheart deals”
b. to forestall a hostile takeover
c. to fulfill a need for an emergency infusion of equity
d. to reduce dividend payouts to shareholders
e. none of the above

Answer: d
Difficulty Level: Hard
Subject Heading: Issuing Securities

47. The purpose of pre-emptive rights is to allow shareholders to:

 a. buy enough of a new securities offering to maintain their present
proportional share of ownership
b. buy an unlimited amount of the new issue at a discount
c. pre-empt other stockholders from selling securities in a company
d. none of the above

Answer: a
Difficulty Level: Medium
Subject Heading: Issuing Securities

48. A syndicate is:

a. a firm that assists in specialist transactions
b. an organization of market makers
c. the largest group of members on the NYSE
d. all the above
e. none of the above

Answer: e
Difficulty Level: Medium
Subject Heading: Issuing Securities

49. Market stabilization is:

a. disallowed under the Securities Act of 1934
b. permitted for underwriters if the market price falls below the offering
price
c. prohibited by the Securities Exchange Commission
d. none of the above

Answer: b
Difficulty Level: Hard
Subject Heading: Issuing Securities

50. The process whereby an underwriting syndicate steps in to buy back securities to
prevent a larger price drop than that which has already occurred is called.
a. market stabilization
b. price normalization
c. dollar cost averaging
d. all the above
e. none of the above

Answer: a
Difficulty Level: Hard
Subject Heading: Issuing Securities
51. The lead investment banker:
a. is elected by members of the syndicate
b. is appointed by the SEC
c. originates and handles a flotation
d. none of the above

Answer: c
Difficulty Level: Medium
Subject Heading: Issuing Securities

52. The syndicate dissolves:

a. when members elect to do so
b. 30 days after securities issue
c. when the lead investment banker decides
d. the syndicate never dissolves

Answer: c
Difficulty Level: Medium
Subject Heading: Issuing Securities

53. Which of the following activities is not the responsibility of registered traders?
a. buy and sell stocks for their own accounts
b. pay no commissions
c. match up buy and sell orders
d. all the above
e. none of the above

Answer: c
Difficulty Level: Hard
Subject Heading: Securities Trading

54. Floor brokers:

a. act as agents to execute customers’ orders for securities purchases and
sales
b. assist specialists in executing orders
c. trade for their own accounts
d. all the above
e. none of the above

Answer: a
Difficulty Level: Hard
Subject Heading: Securities Trading

55. A stop-loss order:

a. sets a price a broker may not violate
b. stops losses for one trading day
 c. is executed at the market once the stop-price loss or a price below it is
reached
d. stops losses for 30 days

Answer: c
Difficulty Level: Easy
Subject Heading: Securities Trading

56. If you buy stock certificates and keep them at the brokerage firm rather than taking
personal possession of them, your stock is in:
a. street name
b. a short sale
c. a limit order
d. none of the above

Answer: a
Difficulty Level: Easy
Subject Heading: Securities Trading

57. If the initial margin requirement is 50% and you have $5,000 in your brokerage
account, you may purchase an additional __________ worth of securities on
margin.
a. $2,000
b. $2,500
c. $10,000
d. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Securities Trading

58. Over-the-counter (OTC) trades must take place:

a. on the floor of the New York Stock Exchange
b. on the floor of the American Stock Exchange
c. on the floor of the NASDAQ Stock Exchange
d. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Market Structure

59. Index arbitrage refers to:

a. selling securities you don’t own
b. buying and selling stocks with offsetting trades to lock in profits from
price differences between different markets
c. buying IPO’s
d. all the above
 e. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Securities Trading

60. The aftermarket is:

a. the over-the-counter market
b. the foreign exchange market
c. the period after a new issue is initially sold to the public
d. none of the above

Answer: c
Difficulty Level: Medium
Subject Heading: Market Structure

61. ___________________ is when an investor borrows money and invests t he

borrowed funds along with his or her own funds in securities.
a. A short sale
b. A stop-loss order
c. A limit order
d. Buying on margin

Answer: d
Difficulty Level: Easy
Subject Heading: Securities Trading

62. ___________________ is an order to sell stock at the market price when the price
of the stock falls to a specified level.
a. A short sale
b. A stop-loss order
c. A limit order
d. Buying on margin

Answer: b
Difficulty Level: Easy
Subject Heading: Securities Trading

63. __________________ is a technique for trading stocks as a group rather than

individually, defined as a minimum of at least 15 different stocks with a maximum
value of $1 million.
a. A short sale
b. A stop-loss order
c. Margin trading
d. Program trading

Answer: d
Difficulty Level: Medium
 Subject Heading: Securities Trading

64. A receipt that represents foreign shares owned and traded by U.S. investors is
called a (n):
a. global depository receipt
b. American depository receipt
c. representative depository receipt
d. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Securities Trading

65. ___________________ is an agreement by the investment banker to sell securities

of the issuing corporation whereby the investment banker assumes no risk for the
possible failure of the flotation.
a. A prospectus
b. An underwriting agreement
c. A best-effort agreement
d. none of the above

Answer: c
Difficulty Level: Medium
Subject Heading: Issuing Securities

66. ___________________ are comprised of direct costs, the spread, and

underpricing.
a. Commission costs
b. Flotation costs
c. Brokerage commissions
d. none of the above

Answer: b
Difficulty Level: Easy
Subject Heading: Issuing Securities

67. Federal regulation of investment banking is administered primarily under the

provisions of the ___________________.
a. Investment Banking Act of 1977
b. The Garn-St. Germain Act of 1997
c. The Securities Act of 1933
d. none of the above

Answer: c
Difficulty Level: Medium
Subject Heading: Market Regulation
68. In reality, an option’s value will equal its intrinsic value only at expiration. At all other
times, the option’s premium or price will exceed its intrinsic value. A major reason
for this is/are _____________.
a. marketability
b. price
c. trade restrictions
d. time
e. none of the above

Answer: d
Difficulty Level: Hard
Subject Heading: Derivatives

69. In reality, an option’s value will equal its intrinsic value only at expiration. At all
other times, the option’s premium or price will exceed its intrinsic value. A major
reason for this is/are _____________.
a. marketability
b. price
c. trade restrictions
d. brand
e. none of the above

Answer: e
Difficulty Level: Hard
Subject Heading: Derivatives

70. The ________________________, the greater the chance of the option becoming
_____________________.
a. shorter the time to expiration, in-the-money
b. longer the time to expiration, in-the-money
c. less the volatility, in-the-money
d. two of the above are correct.
e. none of the above.

Answer: B
Difficulty Level: Hard
Subject Heading: Derivatives

71. The ________________________, the greater the chance of the option becoming
_____________________.
a. shorter the time to expiration, in-the-money
b. longer the time to expiration, out-of-the-money
c. less the volatility, in-the-money
d. two of the above are correct.
e. none of the above.
 Answer: e
Difficulty Level: Hard
Subject Heading: Derivatives

72. If a Microsoft January 20 call option with a strike price of $20 were about to expire
and the market price of the underlying Microsoft stock was $25.62, the price of the
call option would have to be __________ to eliminate arbitrage opportunities.
a. $0.62
b. $5.62
c. $15.62
d. $25.62
e. none of the above.

Answer: b
Difficulty Level: Hard
Subject Heading: Derivatives

73. If a Microsoft January 20 call option with a strike price of $20 were about to expire
and the market price of the underlying Microsoft stock was $25.62, the price of the
call option would have to be __________ to eliminate arbitrage opportunities.
a. $5.00
b. $10.00
c. $15.00
d. $25.00
e. none of the above.

Answer: e
Difficulty Level: Hard
Subject Heading: Derivatives

74. If a Microsoft January 20 call option with a strike price of $20 was selling for $2.00
and the market price of the underlying Microsoft stock was $25.62, the call option
would be _______________.
a. in-the-money
b. out-of-the-money
c. fairly priced
d. not enough information to tell

Answer: a
Difficulty Level: Hard
Subject Heading: Derivatives

75. If a Microsoft January 20 call option hada strike price of $20 and the market price of
the underlying Microsoft stock was $25.62, the call option would be
_______________.
a. in-the-money
b. out-of-the-money
 c. fairly priced
d. not enough information to tell

Answer: A
Difficulty Level: Hard
Subject Heading: Derivatives

76. If a Microsoft January 20 put option had a strike price of $20 and the market price
of the underlying Microsoft stock was $15.00, the put option would be
_______________.
a. in-the-money
b. out-of-the-money
c. fairly priced
d. not enough information to tell

Answer: c
Difficulty Level: Hard
Subject Heading: Derivatives

77. If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00
and the market price of the underlying Microsoft stock was $10.00, the price of the
put option would be _______________.
a. in-the-money
b. out-of-the-money
c. fairly priced
d. not enough information to tell

Answer: a
Difficulty Level: Medium
Subject Heading: Derivatives

78. If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00
and the market price of the underlying Microsoft stock was $18.00, the price of the
put option would be _______________.
a. in-the-money
b. out-of-the-money
c. fairly priced
d. not enough information to tell

Answer: b
Difficulty Level: Medium
Subject Heading: Derivatives

79. If a Microsoft January 20 put option with a strike price of $20 were about to expire
and the market price of the underlying Microsoft stock was $15.00, the price of the
put option would have to be __________ to eliminate arbitrage opportunities.
a. $1.00
b. $2.00
c. $4.00
 d. $6.00
e. none of the above.

Answer: e
Difficulty Level: Hard
Subject Heading: Derivatives

80. If a Microsoft January 20 put option with a strike price of $20 were about to expire
and the market price of the underlying Microsoft stock was $15.00, the price of the
put option would have to be __________ to eliminate arbitrage opportunities.
a. $5.00
b. $10.00
c. $15.00
d. $25.00
e. none of the above.

Answer: a
Difficulty Level: Hard
Subject Heading: Derivatives

81. The seller of an option contract is called a (n) ____________ and the price paid for
the option itself is the called the ___________.
a. option broker, option price
b. sales agent, option premium
c. option writer, option premium
d. option writer, option price
e. none of the above.

Answer: c
Difficulty Level: Hard
Subject Heading: Derivatives

82. The seller of an option contract is called a (n) ____________ and the price paid for
the option itself is the called the ___________.
a. option broker, option price
b. sales agent, call option
c. sales agent, option premium
d. option writer, option price
e. none of the above.

Answer: e
Difficulty Level: Hard
Subject Heading: Derivatives

83. Exchange-traded options are liquid because they are standardized in terms of:
a. expiration dates
b. exercise prices
c. quantity of the underlying asset
d. quality of the underlying asset
 e. all of the above.

Answer: e
Difficulty Level: Hard
Subject Heading: Derivatives

84. Exchange-traded options are liquid because they are standardized in terms of:
a. announcement dates
b. future prices
c. timing of the underlying asset
d. location of the underlying asset
e. none of the above.

Answer: e
Difficulty Level: Hard
Subject Heading: Derivatives

85. While the Chicago Board Options Exchange remains the main market for exchange
traded options, the ______________ exchange also deals in option contracts.
a. New York
b. American
c. Pacific
d. Philadelphia
e. all of the above.

Answer: e
Difficulty Level: Medium
Subject Heading: Derivatives

86. While the Chicago Board Options Exchange remains the main market for exchange
traded options, the ______________ exchange also deals in option contracts.
a. Miami
b. Indianapolis
c. San Francisco
d. all of the above
e. none of the above.

Answer: e
Difficulty Level: Medium
Subject Heading: Derivatives

87. The ___________________ Exchange (ICE) serves the global markets for
agricultural, credit, currency, emissions, energy and equity index markets.
a. Intercontinental
b. Indianapolis
c. Istanbul
d. International
e. none of the above.
 Answer: a
Difficulty Level: Medium
Subject Heading: Securities Trading

88. The ___________________ Exchange (ICE) serves the global markets for
agricultural, credit, currency, emissions, energy and equity index markets.
a. Italian
b. Indianapolis
c. Istanbul
d. International
e. none of the above.

Answer: e
Difficulty Level: Medium
Subject Heading: Securities Trading

89. Purchasers and sellers of futures are generally required to deposit an initial margin
in the range of ___________ with the exchange’s clearinghouse to reduce credit
risk.
a. 3 to 6 percent
b. 3 to 6 dollars
c. 10 to 15 percent
d. 10 to 15 dollars
e. none of the above.

Answer: a
Difficulty Level: Medium
Subject Heading: Derivatives

90. Purchasers and sellers of futures are generally required to deposit an initial margin
in the range of ___________ with the exchange’s clearinghouse to reduce credit
risk.
a. 15 to 20 percent
b. 15 to 20 dollars
c. 10 to 15 percent
d. 10 to 15 dollars
e. none of the above.

Answer: e
Difficulty Level: Medium
Subject Heading: Derivatives

91. The prudent use of derivatives to hedge, or reduce risk, is similar to the concept of
________________.
a. gambling
b. juggling
c. hiding
d. insurance
e. none of the above.
 Answer: a
Difficulty Level: Easy
Subject Heading: Derivatives

92. The prudent use of derivatives to hedge, or reduce risk, is similar to the concept of
________________.
a. gambling
b. juggling
c. hiding
d. religion
e. none of the above.

Answer: e
Difficulty Level: Easy
Subject Heading: Derivatives

93. ___________________________________ has the goal of a creating a single

market for investment services across the European Union as well as creating a
single set of regulations for financial services firms.
a. European Securities Services (ESS)
b. Markets in Financial Instruments Directive (MiFID)
c. Continental Brokerage Services (CBS)
d. Money Market Clearing House (MMCH)
e. none of the above.

Answer: b
Difficulty Level: Medium
Subject Heading: Market Structure

94. ___________________________________ has the goal of a creating a single

market for investment services across the European Union as well as creating a
single set of regulations for financial services firms.
a. European Securities Services (ESS)
b. Euro Capital Markets Accord (ECMA)
c. Continental Brokerage Services (CBS)
d. Money Market Clearing House (MMCH)
e. none of the above.

Answer: e
Difficulty Level: Medium
Subject Heading: Market Structure

95. _____________ is when a broker constantly buys and sells securities from a
client’s portfolio in an effort to generate commissions. Rather than making
decisions that are in the client’s best interest, frequent commission-generating
trades may be made by brokers with selfish motives.
a. Blending
b. Flipping
 c. Swapping
d. Churning
e. none of the above.

Answer: d
Difficulty Level: Medium
Subject Heading: Trading

96. _____________ is when a broker constantly buys and sells securities from a
client’s portfolio in an effort to generate commissions. Rather than making
decisions that are in the client’s best interest, frequent commission-generating
trades may be made by brokers with selfish motives.
a. Blending
b. Flipping
c. Swapping
d. Sale-resale
e. none of the above.

Answer: e
Difficulty Level: Medium
Subject Heading: Trading

97. Insider trading laws regulate the behavior of

a. corporate officers only
b. investment bankers only
c. anyone with nonpublic information about a firm
d. none of the above.

Answer: C
Difficulty Level: Medium
Subject Heading: Market Regulation