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Chapter 4

SECURITIES MARKETS

Multiple Choice Questions

The Primary Markets

1. The sale of a new issue of common stock of which there are alreadyshares publicly held is known as:

a. an IPO.b. a secondary market issue.c. an EPO.

d. a seasoned new issue.

(d, easy)

2. In an underwriting arrangement, the risk is assumed by the:

a. issuer of the securityb. investment bankers

c. commercial bankersd. institutional investors

(b, easy)

3. The ___________ summarizes information about a new security issue.

a. syndicate offer

b. IPOc. prospectusd. shelf rule

(c, easy)

Chapter FourSecurities Market

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4. Investment bankers are compensated by:

a. the underwriting spreadb. commissions paid by the buyers of the securityc. commission paid by the sellers of the securityd. guaranteed investment contracts

(a, moderate)

5. A major appeal for U.S. firms selling bonds in the Euro market is:

a. less regulation than in the U.S.b. lower bond yields than in the U.S.c. less competition than in the U.S.d. less price volatility than in the U.S.

(b, difficult)

6. A major advantage of private placements over public offerings is:

a. greater marketabilityb. lower interest costc. elimination of SEC registrationd. all of the above

(c, moderate)

7. The shelf rule

a. became effective in 1933b. involves securities that are placed directly with financial institutionsc. permits qualified companies to file a short form registrationd. involves dealer procedures in the OTC market

(c, moderate)

8. Investment bankers operate in the:

a. primary marketb. secondary market

c. third marketd. fourth market

(a, easy)


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The Secondary Markets

9. NASDAQ stocks:

a. are generally foreign stocks.

b. trade via the Blue Sheets.c. are not generally listed on organized exchanges.d. represent less than 1,000 companies.

(c, easy)

10. Which exchange member is assigned to a specific trading post?

a. Commission broker b. Floor traderc. Specialist

d. Dealer

(c, easy)

11. Most of the members on the NYSE are associated with:

a. investment banksb. commercial banksc. the SECd. stockbrokerage firms

(d, easy)

12. The NYSE is now a:

a. not-for-profit corporation.b. a quasi-federal agency.c. a publicly-owned company.d. a multinational company.

(c, moderate)


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13. A block trade is defined as a transaction involving at least:

a. 1,000 sharesb. 5,000 sharesc. 10,000 sharesd. 1 million share

(c, moderate)

14. A type of trading involving a basket of 15 stocks or more and oftenused in conjunction with arbitrage strategies is called:

a. swapping

b. program tradingc. day tradingd. insider trading

(b, moderate)

15. Which of the following is not true regarding the Amex?

a. It, like the NYSE, is a specialist-based system.b. It trades only listed stocks and ETFs.

c. Its listing requirements are less stringent than the NYSE.d. All of the above are true.

(b, moderate)

16. Which of the following statements regarding the Nasdaq Stock Marketis not true?

a. It was less affected by the 2000-2002 market decline than the NYSE.b. NASDAQ dealers make a market by standing ready to buy and sell

securities.c. Stocks listed on the NYSE may also trade on NASDAQ.d. NASDAQs electronic trading system provides instantaneous

transactions.

(a, difficult,)


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17. A computerized trading network that matches buy and sell orderselectronically entered by customers is a:

a. National Markets Systemb. Electronic Communications Networks

c. Internet Investment Serviced. Global Investment Network

(b, moderate)

18. The original electronic network, started in 1969, only for brokers,dealers, exchange specialists and institutional investors is known as:

a. ReadiMarketb. National Market Systemc. OTC Worldwided. lnstinet

(d, moderate)

19. NASDAQ's new high-capacity trading platform is called the:

a. NMS Center.b. NASDAQ Market Center.c. NASDAQ ECN.d. NASDAQ Instinet.

(b, moderate)

20. Some OTC stocks are traded through the:

a. Blue Sheets.b. Red Sheets.c. Pink Sheetsd. Green Sheets.

(c, easy)


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21. The fastest growing region in the world is:

a. Western Europe.

b. Latin America.

c. Eastern Europe.

d. the Far East.

(d, easy)

22. Which of the following statements about the NYSE is true?

a. Over 10,000 companies are listed on the NYSE.b. Specialists account for over 50 percent of the seats on the NYSE.c. The NYSE is the oldest and most prominent secondary market in the

U.S.d. Institutional investors do not trade on the NYSE

(c, easy)

23. Europe's leading cross border exchange is the:

a. Deutsche Boerse.b. Euromarket.c. London Stock Exchange.d. Euronext.

(d, moderate)

24. In-house trading refers to:

a. trades made only on the floor of the exchanges

b. direct trades made between OTC dealersc. trades by fund managers without the use of brokers or exchangesd. trades made between specialists on the NYSE

(c, moderate)


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25. The price that some seller is trying to sell a stock for is known at the:

a. the bid quote.b. the ask quote.c. the closing price.

d. the specialist price.

(b, moderate)

26. On a volume basis, NMS issues account for _________ percent of allNasdaq volume.

a. 50b. 60c. 80d. 90

(d, moderate)

Stock Market Indexes

27. The Dow-Jones Industrial Average is composed of:

a. OTC stocksb. cyclical stockc. blue-chip stocksd. defensive stocks

(c, easy)

28. A criticism of the Dow-Jones Industrial Average (DJIA) is:

a. it has too few stocks in the average

b. it is a value weighted method

c. it adjusts for even small stock dividends

d. it includes too many risky stocks

(a, moderate)


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29. A major difference between the Standard & Poors 500 Index (S&P)and the Dow-Jones Industrial Average (DJIA) is that:

a. the S&P 500 is more dominated by OTC stocks than the DJIA.

b. the S&P 500 is more difficult to calculate than the DJIA.

c. the S&P 500 is a market value index and the DJIA is no.d. the S&P 500 is more stable than the DJIA.

(c, difficult)

30. Which of the following limits the usefulness of the S&P 500 Index asa market benchmark?

a. It is too weighted with NYSE stocks to be representative.b. It is too difficult to calculate for the average investor.c. Its use of a base year in its calculations affects its performance.d. Its performance can be greatly affected by a small number of stocks.

(d, difficult)

31. A capitalization-weighted index obtains the current market value ofeach stock by:

a. using the closing market price.

b. multiplying price times shares outstanding.c. multiplying price times daily volume.d. dividing earnings by shares outstanding.

(b, moderate)

Bond Markets

32. Most secondary bond trading takes place on:

a. the NYSE

b. the American Stock Exchangec. the OTC

d. the Philadelphia Exchange

(c, moderate)


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33. Treasury securities are bought and sold by the Federal Reserve in its:

a. foreign exchange operationsb. arbitrage operations

c. discount window operationsd. open market operations

(d, difficult)

34. Most corporate bonds are traded in round lots of at least ------------bonds.

a. 100

b. 150c. 200d. 250

(d, moderate)

35. The type of bonds with the thinnest secondary market is:

a. agency bondsb. corporate bondsc. Treasury bondsd. municipal bonds

(d, moderate)

Derivatives Markets

36. The open-outcry system for trading securities is utilized in the:

a. futures marketb. municipal bond marketc. Treasury bond marketd. options market

(a, easy)


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True-False Questions

The Primary Markets

1. Investment bankers protect themselves during underwriting arrangements byincorporating themselves and thus reducing liability.

(F, difficult)

2. U.S. firms with foreign operations can raise foreign currency in the form ofEuros by directly selling bonds in the Euro market.

(T, moderate)

3. In private placements, new securities issues are sold directly to financialinstitutions

(T, easy)

4. In the NYSE market, stocks are bought and sold from specialists, who arecalled market makers.

(F, difficult)

The Secondary Markets

5. There are approximately 2,700 companies listed on the NYSE.

(T, moderate)

6. Smaller companies with fewer shares publicly held are more likely to meet thelisting requirements of the NYSE.

(F, easy)

7. Prices of stocks traded on the NYSE are determined through supply anddemand.

(T, moderate )


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8. Orders on Nasdaq come from market makers, ECNs and on-line brokers..(T, moderate)

9. All OTC stocks are included in the Nasdaq.(F, moderate)

10. By 2005, program trading accounted for over 70 percent of total NYSEvolume.

(F, difficult)

11. ECNs offer the advantages of automation, lower costs and anonymity to itsmembers.

(T, moderate)

12. Normal stock exchange hours are 9:30 a.m. to 4 p.m.

(T, easy)

Stock Market Indexes

13. The Dow Jones averages handle stock splits by adjusting the market value ofthe stocks.

(F, moderate)

14. A movement of 30 points in the DJIA results in an average movement in theDJIA stocks of about 13 cents.

(T, difficult)


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Short-Answer Questions

1. What is the difference between a seasoned new issue and an initial public

offering?

Answer: A seasoned new issue is the sale of a publicly traded companywhile an IPO represents the first time an issuer has sold securities.

(moderate)

2. What are the major advantages of a private placement for the issuer ofsecurities?

Answer: The issuer avoids SEC registration, which saves time. In addition,investment banker fees are normally avoided, since they are nottypically used in private placements.

(moderate)

3. What are the major similarities and differences between a specialist and adealer?

Answer: Both have their own inventory of selected securities and both canmake a profit (or loss) from the trades made from their own inventory.However, the specialist does not set the securitys price as the dealerdoes. In addition, the specialist operates on the exchanges while thedealer operates on the OTC market.

(difficult)

4. What factors does the NYSE consider important in determining if a companyshould be listed on the exchange?

Answer: The exchange pays close attention to the degree of national interest inthe company, its relative position and stability in the industry, and itsprospects for maintaining relative position.

(moderate)


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5. What is the Nasdaq National Market System?

Answer: The Nasdaq/NMS, which is a component of the Nasdaq market, is acombination of the competing market makers in OTC stocks and theup- to-the-minute reporting of trades.

(moderate)

6. What are the four Dow Jones averages?

Answer: The Dow-Jones Industrial Average, the Dow-Jones TransportationAverage, the Dow-Jones Utility Average and the Dow-JonesComposite

(easy)

7. What is the difference between a price-weighted index and a market-valueindex?

Answer: A price-weighted series gives more weight to higher priced stockswhereas under a market value approach, each stocks importance isbased on relative total market value, not price per share.

(moderate)

8. Why do the DJIA and the S&P 500 have a high correlation?

Answer: Because both are calculated primarily using NYSE stocks.

(easy)

9. What is Instinet and what does it offer for investors?

Answer: It is the original electronic trading network and offers anonymous

trading and access to more than 40 equity markets worldwide.

(moderate)


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Critical Thinking/Essay Questions

1. How do you think the globalization of the securities markets will impact onthe NYSE and the Nasdaq? What specific developments do you foresee

happening soon for the global marketplace?

Answer: There will be a higher correlation between international markets andinternational developments, such as the Asian crisis, will have agreater impact on the NYSE and the Nasdaq than in times past. Soon,investors will have greater access to the global marketplace and willbe able to trade foreign securities much easier. This will increase theoverall volume of securities trading.

(moderate)

2. What impact does the increasing amount of institutional investing have onsecurities markets today and what role do you think institutional investors will

play in the future?

Answer: Institutional investors definitely increase the volume of trading andvolatility of the market. Since many institutional investors, especiallythe fund managers, are judged on short-term performance, they aremore likely to get in and out of positions in order to bolster theirreturn. They provide a great deal of information to individualinvestors, often free. They are likely to continue to dominant certainsectors of the market, such as the IPOs.

(difficult)

Problems1. Global Stock Index is a value weighted index with just 2 stocks in the index:

ABC stock and XYZ stock.

ABC ended 2005 at a price of $55 and had 1 million shares outstanding. XYZstock ended 2005 at a price of $32 and had 4 million shares outstanding.

ABC ended 2006 at a price of $29 (after a 2-for-1 split). XYZ stock closed at$35 for 2006.

Calculate the new value of the index.

Solution: 2005 stock price X #shares Market valueABC $55 1 million = $55,000,000XYZ $32 4 million = 128,000,000

183,000,000


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2006 stock price X #shares Market valueABC $29 2 million = $58,000,000XYZ $35 4 million = 140,000,000

198,000,000

New value of index: 198,000,000183,000,000 X 100 = 1.082 X 100 = 108.2

(difficult)


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