Multiple Choice Questions
1. Underwriting is one of the services provided by ____.
B. Investment bankers
2. Under ﬁrm commitment underwriting the ______ assumes the full risk that the shares cannot
be sold to the public at the stipulated offering price.
3. Explicit costs of an IPO tend to be around ______ of the funds raised.
4. Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit
fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the
share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the
5. A red herring becomes a prospectus when _____.
A. The preliminary registration statement is approved by the SEC
6. Private placements can be advantageous rather than public issue because
I. private placements are cheaper to market than public issues
II. private placements may still be sold to the general public under SEC Rule 144A
III. privately placed securities trade on secondary markets
A. I only
7. A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
8. Which one of the following statements about IPOs is not true?
C. Although U.S. IPOs are typically underpriced, most foreign issues are not
9. The issue process where investors submit bids for a new issue and the shares in an IPO are
allocated to the highest bidders until the entire issue is sold is called a
B. Dutch auction
10. The NYSE recently acquired the ECN _______ and NASDAQ recently acquired the ECN
A. Archipelago; Instinet
11. Rank the following types of markets from least integrated and organized to most integrated
I. Brokered markets
II. Continuous auction markets
III. Dealer markets
IV. Direct search markets
D. IV, I, III, II
12. A ______ drop in the Dow Jones Industrial Average would stop trading for the day.
13. Which one of the following is not an example of a brokered market?
a. Residential real estate market
b. Market for large block security transactions
c. Primary market for securities
14. Purchases of new issues of stock take place __________.
B. In the primary market
15. Initial margin requirements on stocks are set by __________.
B. The Federal Reserve
16. Which one of the following types of markets requires the greatest level of trading activity to
be cost effective?
C. Continuous auction market
17. Which one of the following is a false statement regarding NYSE specialists?
a. On a stock exchange all buy or sell orders are executed at a specialist's post on the exchange
B. Specialists can not trade for their own accounts
c. Specialists earn income from commissions and spreads in stock prices
d. Specialists stand ready to trade at quoted bid and ask prices
18. Restrictions on trading involving insider information apply to __________.
I. corporate ofﬁcers and directors
II. major stockholders
III. relatives of corporate directors and ofﬁcers
D. I, II and III
19. An order to buy or sell a security at the current price is a _______________.
B. Market order
20. When U.S. stock prices were converted from fractions to decimals in 2001 the minimum
bid-ask spread charged by dealers_________.
21. The market collapse of 1987 prompted _________________________.
B. Circuit breakers to halt trading during market crises
22. If an investor places a _________ order the stock will be sold if its price falls to the
stipulated level. If an investor places a __________ order the stock will be bought if its price
rises above the stipulated level.
C. Stop-loss; stop-buy
24. Advantages of ECNs over traditional markets include all but which one of the following?
D. Ability to handle very large orders
25. The __________ was established to protect investors from losses if their brokerage ﬁrms
26. When matching orders from the public a specialist is required to use the
D. Highest outstanding bid price and lowest outstanding ask price
27. The process of polling potential investors regarding their interest in a forthcoming initial
public offering (IPO) is called _________.
B. Book building
28. The bulk of most initial public offerings (IPOs) of equity securities go to ____________.
A. Institutional investors
29. Initial public offerings (IPOs) are usually ___________ relative to the levels at which their
prices stabilize after they begin trading in the secondary marekt.
C. Under priced
30. According to Loughran and Ritter, initial public offerings tend to exhibit __________
performance initially, and __________ performance over the long term.
D. Good; bad
31. Specialists try to maintain a narrow bid-ask spread because
I. If the spread is too large they will not participate in as many trades, losing commission
II. The exchange requires specialists to maintain price continuity
III. Specialists are non-proﬁt entities designed to facilitate market transactions rather than make
B. I and II only
32. The fourth market refers to __________.
A. Direct trading between investors in exchange-listed securities without using a broker or
33. In a __________ underwriting arrangement, the underwriter assumes the full risk that
shares cannot be sold to the public at the stipulated offering price.
B. Firm commitment