LiquidAssets10

Which of the following statements regarding primary and secondary markets is least accurate?

A) Prevailing market prices are determined by primary market transactions and are used in pricing new issues.

B) Secondary market transactions occur between two investors and do not involve the firm that originally issued the security.

C) New issues of government securities can be sold on the primary market.

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Prevailing market prices are determined by the transactions that take place on the secondary market. This information is used to determine the price of new issues sold on primary markets.

LiquidAssets10

Which of the following is least likely a service provided by an underwriter in the primary market?

A) Origination.

B) Diversification.

C) Risk Bearing.

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The underwriter provides the following services to the issuer:

• Origination, which involves the design, planning, and registration of the issue.
• Risk bearing, which means the underwriter guarantees the price by purchasing the securities.
• Distribution, which is the sale of the issue.

LiquidAssets10

Which of the following statements about securities markets is least accurate?

A) A market that features low transactions costs is said to have operational efficiency.

B) Initial public offerings (IPOs) are sold in the secondary market.

C) In a continuous market, a security can trade any time the market is open.

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IPOs are sold in the primary market.

LiquidAssets10

A primary market transaction involves:

A) the direct trading of securities between institutional investors.

B) primarily preferred stocks.

C) the sale of new securities to investors.

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A primary market is a market for new issues of securities.

LiquidAssets10

Which of the following statements about securities markets is least accurate?

A) A limit buy order and a stop buy order are both placed below the current market price.

B) Characteristics of a well-functioning securities market include: many buyers and sellers willing to trade at below market price, low bid-ask spreads, timely information on price and volume of past transactions, and accurate information on supply and demand.

C) Secondary markets, such as the over-the-counter (OTC) market, provide liquidity and price continuity.

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A limit buy is placed below the current market price, but a stop buy order is placed above the current market price (stop buy orders are often placed to protect a short sale from a rising market).
The other choices are true. A well-functioning securities market includes the following characteristics:

• timely and accurate information on price and volume of past transactions.
• timely and accurate information on the supply and demand for current transactions.
• liquidity (as indicated by low bid-ask spreads).
• marketability.
• price continuity.
• depth (many buyers and sellers willing to transact above and below the current price).
• operational efficiency (low transaction costs).
• informational efficiency (rapidly adjusting prices).

LiquidAssets10

An order to sell a security at the best price available is most likely a:

A) limit order.

B) market order.

C) stop order.

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A market order is an order to buy or sell a security immediately at the best available price. A limit order is an order to buy at the specified limit price or lower, or to sell at the limit price or higher. A stop order is an order to buy if the market price increases to the specified stop price, or to sell if the market price decreases to the stop price.

LiquidAssets10

Stop loss sell orders are:

A) placed to protect a short position.

B) executed on an uptick only.

C) placed to protect the gains on a long position.

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Stop loss sell orders are limit sell orders that are placed below market price. When the share price drops to the designated price, a sell order is executed protecting the investor from further declines

LiquidAssets10

An order placed to protect a short position is called a:

A) stop loss sell.

B) protective call.

C) stop loss buy.

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A short position profits from declines in stock price and experiences losses as the price rises. A stop loss buy is a limit order that is placed above the market price. When the stock price reaches the stop price, the limit order is executed curtailing further loses.

LiquidAssets10

An investor sold a stock short and is worried about rising prices. To protect himself from rising prices he would place a:

A) limit order to buy.

B) stop order to buy.

C) stop order to sell.

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A limit order to buy is placed below the current market price.
A limit order to sell is placed above the current market price.
A stop (loss) order to buy is placed above the current market price.
A stop (loss) order to sell is placed below the current market price.
A stop order becomes a market order if the price is hit.

LiquidAssets10

Byron Campbell purchased 300 shares of Crescent, Inc., stock at a price of $80 per share. The purchase was made on margin with an initial margin requirement of 50%. Assuming the maintenance margin is 25%, the stock price of Crescent, Inc. has to fall below what level for Campbell to receive a margin call?

A) $53.33.

B) $20.00.

C) $40.00.

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Trigger price (margin purchases) = Po (1 − initial margin) / (1 − maintenance margin).
$80(1-.5)/(1-.25) = 40/.75 = $53.33.
P = $53.33
If Crescent, Inc. falls below $53.33 then Campbell will get a margin call.