File: ch04

Multiple Choice Questions

1. The sale of a new issue of common stock of which there are already shares publicly held is known as: a. an !". b. a secondary market issue. c. an #!". d. a seasoned new issue. $ns: d %ifficulty: easy &ef: The !rimary Markets

'. a. b. c. d.

n an underwritin( arran(ement) the risk is assumed by the: issuer of the security in*estment bankers commercial bankers institutional in*estors

$ns: b %ifficulty: easy &ef: The !rimary Markets

+. a. b. c. d.

The ,,,,,,,,,,, summari-es information about a new security issue. syndicate offer !" prospectus shelf rule

$ns: c %ifficulty: easy

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&ef: The !rimary Markets

4. a. b. c. d.

n*estment bankers are compensated by: the underwritin( spread commissions paid by the buyers of the security commission paid by the sellers of the security (uaranteed in*estment contracts

$ns: a %ifficulty: moderate &ef: The !rimary Markets

.. a. b. c. d.

$ ma/or appeal for 0.1. firms sellin( bonds in the #uro market is: less re(ulation than in the 0.1. lower bond yields than in the 0.1. less competition than in the 0.1. less price *olatility than in the 0.1.

$ns: b %ifficulty: difficult &ef: The !rimary Markets

2. a. b. c. d.

$ ma/or ad*anta(e of pri*ate placements o*er public offerin(s is: (reater marketability lower interest cost elimination of 1#C re(istration all of the abo*e

$ns: c %ifficulty: moderate &ef: The !rimary Markets

3. a.

The shelf rule became effecti*e in 14++

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b. c. d.

in*ol*es securities that are placed directly with financial institutions permits 5ualified companies to file a short form re(istration in*ol*es dealer procedures in the "TC market

$ns: c %ifficulty: moderate &ef: The !rimary Markets

6. a. b. c. d.

n*estment bankers operate in the: primary market secondary market third market fourth market

$ns: a %ifficulty: easy &ef: The !rimary Markets

4. a. b. c. d.

7$1%$Q stocks: are (enerally forei(n stocks. trade *ia the 8lue 1heets. are not (enerally listed on or(ani-ed e9chan(es. represent less than 1)000 companies.

$ns: c %ifficulty: easy &ef: The 1econdary Markets

10. a. b. c. d.

:hich e9chan(e member is assi(ned to a specific tradin( post; Commission broker Floor trader 1pecialist %ealer

$ns: c %ifficulty: easy

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&ef: The 1econdary Markets

11. a. b. c. d.

Most of the members on the 7<1# are associated with: in*estment banks commercial banks the 1#C stockbrokera(e firms

$ns: d %ifficulty: easy &ef: The 1econdary Markets

1'. a. b. c. d.

The 7<1# is now a: not=for=profit corporation. a 5uasi=federal a(ency. a publicly=owned company. a multinational company.

$ns: c %ifficulty: moderate &ef: The 1econdary Markets

1+. a. b. c. d.

$ block trade is defined as a transaction in*ol*in( at least: 1)000 shares .)000 shares 10)000 shares 1 million share

$ns: c %ifficulty: moderate &ef: The 1econdary Markets

14. $ type of tradin( in*ol*in( a basket of 1. stocks or more and often used in con/unction with arbitra(e strate(ies is called:

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a. b. c. d.

swappin( pro(ram tradin( day tradin( insider tradin(

$ns: b %ifficulty: moderate &ef: The 1econdary Markets

1.. a. b. c. d.

:hich of the followin( is not true re(ardin( the $me9; t) like the 7<1#) is a specialist=based system. t trades only listed stocks and #TFs. ts listin( re5uirements are less strin(ent than the 7<1#. $ll of the abo*e are true.

$ns: b %ifficulty: moderate &ef: The 1econdary Markets

12. true; a. b. c. d.

:hich of the followin( statements re(ardin( the 7asda5 1tock Market is not t was less affected by the '000='00' market decline than the 7<1#. 7$1%$Q dealers make a market by standin( ready to buy and sell securities. 1tocks listed on the 7<1# may also trade on 7$1%$Q. 7$1%$Q>s electronic tradin( system pro*ides instantaneous transactions.

$ns: a %ifficulty: difficult &ef: The 1econdary Markets

13. $ computeri-ed tradin( network that matches buy and sell orders electronically entered by customers is a: a. 7ational Markets 1ystem

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b. c. d.

#lectronic Communications 7etworks nternet n*estment 1er*ice ?lobal n*estment 7etwork

$ns: b %ifficulty: moderate &ef: The 1econdary Markets

16. The ori(inal electronic network) started in 1424 for brokers) dealers) e9chan(e specialists and institutional in*estors only is known as: a. b. c. d. &eadiMarket 7ational Market 1ystem "TC :orldwide lnstinet

$ns: d %ifficulty: moderate &ef: The 1econdary Market

14. a. b. c. d.

7$1%$Q@s new hi(h=capacity tradin( platform is called the: 7M1 Center. 7$1%$Q Market Center. 7$1%$Q #C7. 7$1%$Q nstinet.

$ns: b %ifficulty: moderate &ef: The 1econdary Markets

'0. a. b. c. d. $ns: c

1ome "TC stocks are traded throu(h the: 8lue 1heets. &ed 1heets. !ink 1heets ?reen 1heets.

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%ifficulty: easy &ef: The 1econdary Markets

'1. a. b. c. d.

The fastest (rowin( re(ion in the world is: :estern #urope. Aatin $merica. #astern #urope. the Far #ast.

$ns: d %ifficulty: easy &ef: The 1econdary Markets

''. a. b. c. d.

:hich of the followin( statements about the 7<1# is true; "*er 10)000 companies are listed on the 7<1#. 1pecialists account for o*er .0 percent of the seats on the 7<1#. The 7<1# is the oldest and most prominent secondary market in the 0.1. nstitutional in*estors do not trade on the 7<1#

$ns: c %ifficulty: difficult &ef: The 1econdary Markets

'+. a. b. c. d.

#urope@s leadin( cross border e9chan(e is the: %eutsche 8oerse. #uromarket. Aondon 1tock #9chan(e. #urone9t.

$ns: d %ifficulty: moderate &ef: The 1econdary Markets

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'4. a. b. c. d.

n=house tradin( refers to: trades made only on the floor of the e9chan(es direct trades made between "TC dealers trades by fund mana(ers without the use of brokers or e9chan(es trades made between specialists on the 7<1#

$ns: c %ifficulty: moderate &ef: The 1econdary Markets

'.. a. b. c. d.

The price that some seller is tryin( to sell a stock for is known at the: the bid 5uote. the ask 5uote. the closin( price. the specialist price.

$ns: b %ifficulty: moderate &ef: The 1econdary Markets

'2. The lar(est electronic screen=based e5uity securities market in the 0.1. is known as: a. b. c. d. !ink 1heets nstinet $me9 7$1%$Q

$ns: d %ifficulty: moderate &ef: The 1econdary Markets

'3. The %ow=Bones ndustrial $*era(e has historically consisted of hi(h 5uality stocks that were considered to be: a. b. "TC stocks cyclical stock

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c. d.

blue=chip stocks defensi*e stocks

$ns: c %ifficulty: easy &ef: 1tock Market nde9es

'6. a. b. c. d.

$ criticism of the %ow=Bones ndustrial $*era(e C%B $D is: it has too few stocks in the a*era(e it is a *alue wei(hted method it ad/usts for e*en small stock di*idends it includes too many risky stocks

$ns: a %ifficulty: moderate &ef: 1tock Market nde9es

'4. a. b. c. d.

$ ma/or difference between the 1tandard E !oor>s .00 nde9 C1E!D and the %ow=Bones ndustrial $*era(e C%B $D is that: the 1E! .00 is more dominated by "TC stocks than the %B $. the 1E! .00 is more difficult to calculate than the %B $. the 1E! .00 is a market *alue inde9 and the %B $ is not. the 1E! .00 is more stable than the %B $.

$ns: c %ifficulty: difficult &ef: 1tock Market nde9es

+0. a. b. c. d. $ns: d

:hich of the followin( limits the usefulness of the 1E! .00 nde9 as a market benchmark; t is too wei(hted with 7<1# stocks to be representati*e. t is too difficult to calculate for the a*era(e in*estor. ts use of a base year in its calculations affects its performance. ts performance can be (reatly affected by a small number of stocks.

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%ifficulty: difficult &ef: 1tock Market nde9es

+1. $ capitali-ation=wei(hted inde9 obtains the current market *alue of each stock by: a. b. c. d. usin( the closin( market price. multiplyin( price times shares outstandin(. multiplyin( price times daily *olume. di*idin( earnin(s by shares outstandin(.

$ns: b %ifficulty: moderate &ef: 1tock Market nde9es

+'. a. b. c. d.

Most secondary bond tradin( takes place on: the 7<1# the $merican 1tock #9chan(e the "TC the !hiladelphia #9chan(e

$ns: c %ifficulty: moderate &ef: 8ond Markets

++. a. b. c. d.

Treasury securities are bou(ht and sold by the Federal &eser*e in its: forei(n e9chan(e operations arbitra(e operations discount window operations open market operations

$ns: d %ifficulty: difficult &ef: 8ond Markets

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+4.

The yields on corporate bonds issued in the primary market should be,,,,,,,,,,,the yields on similar corporate bonds tradin( in the secondary market. much less than e9actly the same as sli(htly hi(her than similar to

a. b. c. d.

$ns: d %ifficulty: moderate &ef: 8ond Markets

+.. a. b. c. d.

The type of bonds with the thinnest secondary market is: a(ency bonds corporate bonds Treasury bonds municipal bonds

$ns: d %ifficulty: moderate &ef: 8ond Markets

+2. a. b. c. d.

The open=outcry system for tradin( securities is utili-ed in the: futures market municipal bond market Treasury bond market options market

$ns: a %ifficulty: easy &ef: %eri*ati*es Markets

True=False Questions

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1. $ lar(e public offerin( is often handled by a syndicate of in*estment bankin( firms) with one lead mana(in( underwriter. $ns: T %ifficulty: easy &ef: The !rimary Markets

'.

0.1. firms with forei(n operations can raise forei(n currency in the form of #uros by directly sellin( bonds in the #uro market.

$ns: T %ifficulty: moderate &ef: The !rimary Markets

+.

n pri*ate placements) new securities issues are sold directly to financial institutions.

$ns: T %ifficulty: easy &ef: The !rimary Markets

4.

1tocks traded on 7$1%$Q are bou(ht and sold from specialists) who are often affiliated with brokera(e firms.

$ns: F %ifficulty: difficult &ef: The !rimary Markets

..

There are appro9imately ')300 companies listed on the 7<1#.

$ns: T %ifficulty: moderate &ef: The 1econdary Markets

2.

1maller companies with fewer shares publicly held are more likely to meet the

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listin( re5uirements of the 7<1#. $ns: F %ifficulty: easy &ef: The 1econdary Markets

3.

!rices of stocks traded on the 7<1# are determined throu(h supply and demand.

$ns: T %ifficulty: moderate &ef: The 1econdary Markets

6.

"rders on 7asda5 come from market makers) #C7s and on=line brokers.

$ns: T %ifficulty: moderate &ef: The 1econdary Markets

4.

$ll "TC stocks are included in the 7asda5.

$ns: F %ifficulty: moderate &ef: The 1econdary Markets

10.

8y '00.) pro(ram tradin( accounted for o*er 30 percent of total 7<1# *olume.

$ns: F %ifficulty: difficult &ef: The 1econdary Markets

11.

#C7s offer the ad*anta(es of automation) lower costs and anonymity to its members.

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$ns: T %ifficulty: moderate &ef: The 1econdary Markets

1'.

7ormal stock e9chan(e hours in the 0.1. are 4:+0 a.m. to 4 p.m.

$ns: T %ifficulty: easy &ef: The 1econdary Markets

1+.

The %ow Bones a*era(es handle stock splits by ad/ustin( the market *alue of the stocks.

$ns: F %ifficulty: moderate &ef: 1tock Market nde9es

14.

$ mo*ement of +0 points in the %B $ results in an a*era(e mo*ement in the %B $ stocks of about 1+ cents.

$ns: T %ifficulty: difficult &ef: 1tock Market nde9es

1hort=$nswer Questions

1.

:hat is the difference between a seasoned new issue and an initial public offerin(;

$ns: $ seasoned new issue is the sale of a publicly traded company while an !" represents the first time an issuer has sold securities. %ifficulty: moderate

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'.

:hat are the ma/or ad*anta(es of a pri*ate placement for the issuer of securities;

$ns: The issuer a*oids 1#C re(istration) which sa*es time. n addition) in*estment bankin( fees are normally a*oided) since they are not typically incurred in pri*ate placements. %ifficulty: moderate

+.

:hat are the ma/or similarities and differences between a specialist and a dealer;

$ns: 8oth ha*e their own in*entory of selected securities and both can make a profit Cor lossD from the trades made from their own in*entory. Fowe*er) the specialist does not set the security>s price as the dealer does. n addition) the specialist operates on the e9chan(es while the dealer operates on the "TC market. %ifficulty: difficult

4.

:hat factors does the 7<1# consider important in determinin( if a company should be listed on the e9chan(e;

$nswer: The e9chan(e pays close attention to the de(ree of national interest in the company) its relati*e position and stability in the industry) and its prospects for maintainin( that relati*e position. %ifficulty: moderate

..

:hat is the 7asda5 7ational Market 1ystem;

$nswer: The 7asda5G7M1) which is a component of the 7asda5 market) is a combination of the competin( market makers in "TC stocks and the up= to= the=minute reportin( of trades. %ifficulty: moderate

2.

:hat are the four %ow Bones a*era(es; The %ow=Bones ndustrial $*era(e) the %ow=Bones Transportation $*era(e) the %ow=Bones 0tility $*era(e and the %ow=Bones Composite

$nswer:

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%ifficulty: easy

3.

:hat is the difference between a price=wei(hted inde9 and a market=*alue inde9; $ price=wei(hted series (i*es more wei(ht to hi(her priced stocks whereas under a market *alue approach) each stock>s importance is based on relati*e total market *alue) not price per share. moderate

$nswer: %ifficulty:

6.

:hy do the %B $ and the 1E! .00 ha*e a hi(h correlation;

$nswer: 8ecause both are calculated primarily usin( 7<1# stocks. %ifficulty: easy

4.

:hat is nstinet and what does it offer for in*estors;

$nswer: t is the ori(inal electronic tradin( network and offers anonymous tradin( and access to more than 40 e5uity markets worldwide. %ifficulty: moderate

Critical Thinkin(G#ssay Questions

1.

Fow do you think the (lobali-ation of the securities markets will impact the 7<1# and the 7asda5; :hat specific de*elopments do you foresee happenin( soon for the (lobal marketplace; There will be a hi(her correlation between international markets and international de*elopments) such as the $sian crisis. 1uch e*ents will ha*e a (reater impact on the 7<1# and the 7asda5 than in times past. 1oon) in*estors will ha*e (reater access to the (lobal marketplace and will be able to trade forei(n securities much easier. This will increase the o*erall *olume of securities tradin(. moderate

$nswer:

%ifficulty:

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'.

:hat impact does the increasin( amount of institutional in*estin( ha*e on securities markets today and what role do you think institutional in*estors will play in the future; nstitutional in*estors definitely increase the *olume of tradin( and *olatility of the markets. 1ince most institutional in*estors) especially the fund mana(ers) are /ud(ed on short=term performance) they are more likely to trade in and out of positions in order to bolster their return. They pro*ide a (reat deal of information to indi*idual in*estors) often free. They are likely to continue to dominate certain sectors of the market) such as !"s. difficult

$nswer:

%ifficulty:

!roblems

1.

?lobal 1tock nde9 is a *alue wei(hted inde9 with /ust ' stocks in the inde9: $8C stock and H<I stock. $8C ended '00. at a price of J.. and had 1 million shares outstandin(. H<I stock ended '00. at a price of J+' and had 4 million shares outstandin(. $8C ended '002 at a price of J'4 Cafter a '=for=1 splitD. H<I stock closed at J+. for '002. Calculate the new *alue of the inde9.

1olution: '00.

stock price $8C J.. H<I J+' stock price $8C J'4 H<I J+.

Kshares 1 million L 4 million L Kshares ' million L 4 million L

Market *alue J..)000)000 1'6)000)000 16+)000)000 Market *alue J.6)000)000 140)000)000 146)000)000

'002

7ew *alue of inde9: 146)000)000

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16+)000)000 %ifficulty: difficult

H 100 L 1.06' H 100 L 106.'

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