Chapter 03
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Johns Hopkins University *
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Course
180.367
Subject
Finance
Date
Jan 9, 2024
Type
Pages
71
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1.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Are the following statements true or false?
Required:
a.
An investor who wishes to sell shares immediately should ask his or her broker to enter a limit order.
False
b.
The ask price is less than the bid price.
False
c.
An issue of additional shares of stock to the public by Microsoft would be called an IPO.
False
d.
An ECN (Electronic Communications Network) is a computer link used by security dealers primarily to advertise
prices at which they are willing to buy or sell shares.
True
Explanation:
a.
False: An investor who wishes to sell shares immediately should ask the broker to enter a
market
order.
b.
False: The ask price is
greater
than the bid price. (note: the opposite is true for yields)
c.
False: An issue of additional shares of stock to the public by Microsoft would be called
seasoned offering.
d.
True
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
2.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Are the following statements true or false?
Required:
a.
Market orders entail greater price uncertainty than limit orders.
True
b.
Market orders entail greater time-of-execution uncertainty than limit orders.
False
Explanation:
a.
True
b.
False: Market orders entail
less
time-of-execution uncertainty than limit orders.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
3.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.
Required:
a.
What is the margin in Dée’s account when she first purchases the stock?
b.
If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account?
c.
If the maintenance margin requirement is 30%, will she receive a margin call?
d.
What is the rate of return on her investment?
Required A
Required B
Complete this question by entering your answers in the tabs below.
What is the margin in Dée’s account when she first purchases the stock?
Note: Round your answer to the nearest whole dollar.
Required A
Required B
Required C
Required D
$
Margin
8,000
Explanation:
a.
The stock is purchased for: 300 × $40 = $12,000
The amount borrowed is $4,000. Therefore, the investor put up equity, or margin, of $8,000.
b.
If the share price falls to $30, then the value of the stock falls to $9,000. By the end of the year, the amount of the loan owed to the broker grows to:
$4,000 × 1.08 = $4,320
Therefore, the remaining margin in the investor's account is:
$9,000 − $4,320 = $4,680
c.
The percentage margin is now: $4,680 ÷ $9,000 = 0.52, or 52% > 30%.
Therefore, the investor will not receive a margin call.
d.
Using an end price of $30, the rate of return on the investment is:
(Ending equity in the account − Initial equity) ÷ Initial equity = ($4,680 − $8,000) ÷ $8,000 = −41.5%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
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3.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.
Required:
a.
What is the margin in Dée’s account when she first purchases the stock?
b.
If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account?
c.
If the maintenance margin requirement is 30%, will she receive a margin call?
d.
What is the rate of return on her investment?
Required A
Required C
Complete this question by entering your answers in the tabs below.
If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account?
Note: Round your answer to the nearest whole dollar.
Required A
Required B
Required C
Required D
$
Remaining margin
4,680
Explanation:
a.
The stock is purchased for: 300 × $40 = $12,000
The amount borrowed is $4,000. Therefore, the investor put up equity, or margin, of $8,000.
b.
If the share price falls to $30, then the value of the stock falls to $9,000. By the end of the year, the amount of the loan owed to the broker grows to:
$4,000 × 1.08 = $4,320
Therefore, the remaining margin in the investor's account is:
$9,000 − $4,320 = $4,680
c.
The percentage margin is now: $4,680 ÷ $9,000 = 0.52, or 52% > 30%.
Therefore, the investor will not receive a margin call.
d.
Using an end price of $30, the rate of return on the investment is:
(Ending equity in the account − Initial equity) ÷ Initial equity = ($4,680 − $8,000) ÷ $8,000 = −41.5%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
3.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.
Required:
a.
What is the margin in Dée’s account when she first purchases the stock?
b.
If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account?
c.
If the maintenance margin requirement is 30%, will she receive a margin call?
d.
What is the rate of return on her investment?
Required B
Required D
Complete this question by entering your answers in the tabs below.
If the maintenance margin requirement is 30%, will she receive a margin call?
Required A
Required B
Required C
Required D
If the maintenance margin requirement is 30%, will she receive a margin call?
No
Explanation:
a.
The stock is purchased for: 300 × $40 = $12,000
The amount borrowed is $4,000. Therefore, the investor put up equity, or margin, of $8,000.
b.
If the share price falls to $30, then the value of the stock falls to $9,000. By the end of the year, the amount of the loan owed to the broker grows to:
$4,000 × 1.08 = $4,320
Therefore, the remaining margin in the investor's account is:
$9,000 − $4,320 = $4,680
c.
The percentage margin is now: $4,680 ÷ $9,000 = 0.52, or 52% > 30%.
Therefore, the investor will not receive a margin call.
d.
Using an end price of $30, the rate of return on the investment is:
(Ending equity in the account − Initial equity) ÷ Initial equity = ($4,680 − $8,000) ÷ $8,000 = −41.5%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
3.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.
Required:
a.
What is the margin in Dée’s account when she first purchases the stock?
b.
If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account?
c.
If the maintenance margin requirement is 30%, will she receive a margin call?
d.
What is the rate of return on her investment?
Required C
Required D
Complete this question by entering your answers in the tabs below.
What is the rate of return on her investment?
Note: Negative value should be indicated by a minus sign. Round your answer to 1 decimal place.
Required A
Required B
Required C
Required D
Rate of return
(41.5)
%
Explanation:
a.
The stock is purchased for: 300 × $40 = $12,000
The amount borrowed is $4,000. Therefore, the investor put up equity, or margin, of $8,000.
b.
If the share price falls to $30, then the value of the stock falls to $9,000. By the end of the year, the amount of the loan owed to the broker grows to:
$4,000 × 1.08 = $4,320
Therefore, the remaining margin in the investor's account is:
$9,000 − $4,320 = $4,680
c.
The percentage margin is now: $4,680 ÷ $9,000 = 0.52, or 52% > 30%.
Therefore, the investor will not receive a margin call.
d.
Using an end price of $30, the rate of return on the investment is:
(Ending equity in the account − Initial equity) ÷ Initial equity = ($4,680 − $8,000) ÷ $8,000 = −41.5%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
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4.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams
has risen from $40 to $50, and the stock has paid a dividend of $2 per share.
Required:
a.
What is the remaining margin in the account?
b.
If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
c.
What is the rate of return on the short position (treating the initial margin as the amount invested)?
Required A
Required B
Complete this question by entering your answers in the tabs below.
What is the remaining margin in the account?
Required A
Required B
Required C
$
Remaining margin
8,000
Explanation:
a.
The initial margin was: 0.50 × 1,000 × $40 = $20,000
As a result of the increase in the stock price Old Economy Traders loses:
$10 × 1,000 = $10,000
Margin decreases by $10,000. Old Economy Traders must pay the dividend of $2 per share to the lender of the shares; the margin in the account decreases by an additional $2,000. Therefore, the remaining margin is:
$20,000 − $10,000 − $2,000 = $8,000
b.
The percentage margin is: $8,000 ÷ $50,000 = 0.16, or 16% < 30%
There will be a margin call.
c.
The equity in the account decreased from $20,000 to $8,000 in one year, for a rate of return of:
($40,000 − $50,000 − $2 × 1,000) ÷ $20,000 = − 0.60, or − 60%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
4.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams
has risen from $40 to $50, and the stock has paid a dividend of $2 per share.
Required:
a.
What is the remaining margin in the account?
b.
If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
c.
What is the rate of return on the short position (treating the initial margin as the amount invested)?
Required A
Required C
Complete this question by entering your answers in the tabs below.
If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
Required A
Required B
Required C
If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
Yes
Explanation:
a.
The initial margin was: 0.50 × 1,000 × $40 = $20,000
As a result of the increase in the stock price Old Economy Traders loses:
$10 × 1,000 = $10,000
Margin decreases by $10,000. Old Economy Traders must pay the dividend of $2 per share to the lender of the shares; the margin in the account decreases by an additional $2,000. Therefore, the remaining margin is:
$20,000 − $10,000 − $2,000 = $8,000
b.
The percentage margin is: $8,000 ÷ $50,000 = 0.16, or 16% < 30%
There will be a margin call.
c.
The equity in the account decreased from $20,000 to $8,000 in one year, for a rate of return of:
($40,000 − $50,000 − $2 × 1,000) ÷ $20,000 = − 0.60, or − 60%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
4.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams
has risen from $40 to $50, and the stock has paid a dividend of $2 per share.
Required:
a.
What is the remaining margin in the account?
b.
If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
c.
What is the rate of return on the short position (treating the initial margin as the amount invested)?
Required B
Required C
Complete this question by entering your answers in the tabs below.
What is the rate of return on the short position (treating the initial margin as the amount invested)?
Note: Negative value should be indicated by a minus sign.
Required A
Required B
Required C
Rate of return
(60) %
Explanation:
a.
The initial margin was: 0.50 × 1,000 × $40 = $20,000
As a result of the increase in the stock price Old Economy Traders loses:
$10 × 1,000 = $10,000
Margin decreases by $10,000. Old Economy Traders must pay the dividend of $2 per share to the lender of the shares; the margin in the account decreases by an additional $2,000. Therefore, the remaining margin is:
$20,000 − $10,000 − $2,000 = $8,000
b.
The percentage margin is: $8,000 ÷ $50,000 = 0.16, or 16% < 30%
There will be a margin call.
c.
The equity in the account decreased from $20,000 to $8,000 in one year, for a rate of return of:
($40,000 − $50,000 − $2 × 1,000) ÷ $20,000 = − 0.60, or − 60%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
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5.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Consider the following limit-order book for FinTrade stock. The last trade in the stock occurred at a price of $50.
Limit Buy Orders
Limit Sell Orders
Price
Shares
Price
Shares
$ 49.75
500
$ 50.25
100
49.50
800
51.50
100
49.25
500
54.75
300
49.00
200
58.25
100
48.50
600
Required:
a.
If a market buy order for 100 shares comes in, at what price will it be filled?
b.
At what price would the next market buy order be filled?
c.
If you were a security dealer, would you want to increase or decrease your inventory of this stock?
Required A
Required B
Complete this question by entering your answers in the tabs below.
If a market buy order for 100 shares comes in, at what price will it be filled?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Price
50.25
Explanation:
a.
The buy order for FinTrade will be filled at the best limit-sell order price: $50.25
b.
The next market buy order, after the first 100 shares from part a., will be filled at the next-best limit-sell order price: $51.50
c.
You would want to increase your inventory. There is considerable buying demand at prices just below $50, indicating that downside risk is limited. In contrast, limit sell orders are sparse, indicating that a moderate buy order
could result in a substantial price increase.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
5.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Consider the following limit-order book for FinTrade stock. The last trade in the stock occurred at a price of $50.
Limit Buy Orders
Limit Sell Orders
Price
Shares
Price
Shares
$ 49.75
500
$ 50.25
100
49.50
800
51.50
100
49.25
500
54.75
300
49.00
200
58.25
100
48.50
600
Required:
a.
If a market buy order for 100 shares comes in, at what price will it be filled?
b.
At what price would the next market buy order be filled?
c.
If you were a security dealer, would you want to increase or decrease your inventory of this stock?
Required A
Required C
Complete this question by entering your answers in the tabs below.
At what price would the next market buy order be filled?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Price
51.50
Explanation:
a.
The buy order for FinTrade will be filled at the best limit-sell order price: $50.25
b.
The next market buy order, after the first 100 shares from part a., will be filled at the next-best limit-sell order price: $51.50
c.
You would want to increase your inventory. There is considerable buying demand at prices just below $50, indicating that downside risk is limited. In contrast, limit sell orders are sparse, indicating that a moderate buy order
could result in a substantial price increase.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
5.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Consider the following limit-order book for FinTrade stock. The last trade in the stock occurred at a price of $50.
Limit Buy Orders
Limit Sell Orders
Price
Shares
Price
Shares
$ 49.75
500
$ 50.25
100
49.50
800
51.50
100
49.25
500
54.75
300
49.00
200
58.25
100
48.50
600
Required:
a.
If a market buy order for 100 shares comes in, at what price will it be filled?
b.
At what price would the next market buy order be filled?
c.
If you were a security dealer, would you want to increase or decrease your inventory of this stock?
Required B
Required C
Complete this question by entering your answers in the tabs below.
If you were a security dealer, would you want to increase or decrease your inventory of this stock?
Required A
Required B
Required C
If you were a security dealer, would you want to increase or decrease your inventory of this stock?
Increase
Explanation:
a.
The buy order for FinTrade will be filled at the best limit-sell order price: $50.25
b.
The next market buy order, after the first 100 shares from part a., will be filled at the next-best limit-sell order price: $51.50
c.
You would want to increase your inventory. There is considerable buying demand at prices just below $50, indicating that downside risk is limited. In contrast, limit sell orders are sparse, indicating that a moderate buy order
could result in a substantial price increase.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
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6.
Award:
10.00
points
Problems?
Adjust credit
for all students.
You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in
the stock.
Required:
a.
What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? The stock currently pays no dividends.
b.
How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.
Required A
Required B
Complete this question by entering your answers in the tabs below.
What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? The stock currently pays
no dividends.
Note: Enter your answer as a percent rounded to the nearest whole number.
Required A
Required B
Rate of return
12
%
Explanation:
a.
At $50 per share, you buy 200 shares of Telecom for $10,000 with $5,000 margin. Shares increase in value by 10%, or $1,000. The rate of return will be 12%:
The rate of return will be: ($55 × 200 − $5,000 − ($5,000 + 0.08 × $5,000)) ÷ $5,000 = 0.12
b.
The value of the 200 shares is 200
P
. Equity is (200
P
− $5,000). You will receive a margin call when:
((200 ×
P
− $5,000) ÷ 200 ×
P
) = 0.30
when
P
= $35.71 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
6.
Award:
10.00
points
Problems?
Adjust credit
for all students.
You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in
the stock.
Required:
a.
What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? The stock currently pays no dividends.
b.
How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.
Required A
Required B
Complete this question by entering your answers in the tabs below.
How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume
the price fall happens immediately.
Note: Round your answer to 2 decimal places.
Required A
Required B
$
Margin call will be made at price
35.71
or lower
Explanation:
a.
At $50 per share, you buy 200 shares of Telecom for $10,000 with $5,000 margin. Shares increase in value by 10%, or $1,000. The rate of return will be 12%:
The rate of return will be: ($55 × 200 − $5,000 − ($5,000 + 0.08 × $5,000)) ÷ $5,000 = 0.12
b.
The value of the 200 shares is 200
P
. Equity is (200
P
− $5,000). You will receive a margin call when:
((200 ×
P
− $5,000) ÷ 200 ×
P
) = 0.30
when
P
= $35.71 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
7.
Award:
10.00
points
Problems?
Adjust credit
for all students.
You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share.
Required:
a.
How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position?
b.
How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?
Required A
Required B
Complete this question by entering your answers in the tabs below.
How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of
the value of the short position?
Note: Round your answer to the nearest whole dollar.
Required A
Required B
$
Cash or securities to be put into brokerage account
2,500
Explanation:
a.
Initial margin is 50% of $5,000, or $2,500.
b.
Total assets are $7,500 ($5,000 from the sale of the stock and $2,500 put up for margin). Liabilities are 100
P
. Therefore, equity is ($7,500 − 100
P
). A margin call will be issued when:
($7,500 − 100 ×
p
) ÷ 100 ×
p
= 0.30
when P = $57.69 or higher
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
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7.
Award:
10.00
points
Problems?
Adjust credit
for all students.
You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share.
Required:
a.
How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position?
b.
How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?
Required A
Required B
Complete this question by entering your answers in the tabs below.
How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the
short position?
Note: Round your answer to 2 decimal places.
Required A
Required B
$
Margin call will be made at price
57.69
or higher
Explanation:
a.
Initial margin is 50% of $5,000, or $2,500.
b.
Total assets are $7,500 ($5,000 from the sale of the stock and $2,500 put up for margin). Liabilities are 100
P
. Therefore, equity is ($7,500 − 100
P
). A margin call will be issued when:
($7,500 − 100 ×
p
) ÷ 100 ×
p
= 0.30
when P = $57.69 or higher
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
8.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
Required:
a.
What is the percentage increase in the net worth of your brokerage account if the price of Xtel
immediately
changes to: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage
change in the price of Xtel?
b.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call?
c.
How would your answer to (
b
) change if you had financed the initial purchase with only $10,000 of your own money?
d.
What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling
after 1 year
at: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage
return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends.
e.
Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call?
Required A
Required B
Complete this question by entering your answers in the tabs below.
What is the percentage increase in the net worth of your brokerage account if the price of Xtel
immediately
changes to: (i)
$22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage change in the price of
Xtel?
Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign.
Round your answers to 2 decimal places.
Required A
Required B
Required C
Required D
Required E
Show less
1. Percentage gain
13.33
%
2. Percentage gain
0 %
3. Percentage gain
(13.33)
%
Explanation:
The total cost of the purchase is: $20 × 1,000 = $20,000
You borrow $5,000 from your broker and invest $15,000 of your own funds. Your margin account starts out with equity of $15,000.
a.
(i) Equity increases to: ($22 × 1,000) − $5,000 = $17,000
Percentage gain = $2,000 ÷ $15,000 = 0.1333, or 13.33%
(ii) With price unchanged, equity is unchanged.
Percentage gain = zero
(iii) Equity falls to ($18 × 1,000) − $5,000 = $13,000
Percentage gain = (−$2,000 ÷ $15,000) = −0.1333, or −13.33%
The relationship between the percentage return and the percentage change (%Δ) in the price of the stock is given by:
% return = %Δ in price × Total investment ÷ Investor's initial equity = %Δ in price × 1.333
For example, when the stock price rises from $20 to $22, the percentage change in price is 10%, while the percentage gain for the investor is:
% return = 10% × $20,000 ÷ $15,000 = 13.33%
b.
The value of the 1,000 shares is 1,000
P
. Equity is (1,000
P
− $5,000). You will receive a margin call when:
(1,000 ×
P
− $5,000) ÷ 1,000 ×
P
= 0.25
when P = $6.67 or lower
c.
The value of the 1,000 shares is 1,000
P
. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is (1,000
P
− $10,000). You will receive a margin call when:
(1,000 ×
P
− $10,000) ÷ 1,000 ×
P
= 0.25
when P = $13.33 or lower
With less equity in the account, you are far more vulnerable to a margin call.
d.
By the end of the year, the amount of the loan owed to the broker grows to:
$5,000 × 1.08 = $5,400
The equity in your account is (1,000
P
− $5,400). Initial equity was $15,000. Therefore, your rate of return after one year is as follows:
(i) ((1,000 × $22) − $5,400 − $15,000) ÷ $15,000 = 0.1067, or 10.67%
(ii) ((1,000 × $20) − $5,400 − $15,000) ÷ $15,000 = −0.0267, or −2.67%
(iii) ((1,000 × $18) − $5,400 − $15,000) ÷ $15,000 = −0.1600, or −16.00%
The relationship between the percentage return and the percentage change in the price of Xtel is given by:
For example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is:
e.
The value of the 1000 shares is 1,000
P
. Equity is (1,000
P
− $5,400). You will receive a margin call when:
(1,000 ×
P
− $5,400) ÷ 1,000 ×
P
= 0.25
when P = $7.20 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
Your preview ends here
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- Access to all documents
- Unlimited textbook solutions
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8.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
Required:
a.
What is the percentage increase in the net worth of your brokerage account if the price of Xtel
immediately
changes to: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage
change in the price of Xtel?
b.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call?
c.
How would your answer to (
b
) change if you had financed the initial purchase with only $10,000 of your own money?
d.
What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling
after 1 year
at: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage
return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends.
e.
Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call?
Required A
Required C
Complete this question by entering your answers in the tabs below.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
Required E
$
Margin call will be made at price
6.67
or lower
Explanation:
The total cost of the purchase is: $20 × 1,000 = $20,000
You borrow $5,000 from your broker and invest $15,000 of your own funds. Your margin account starts out with equity of $15,000.
a.
(i) Equity increases to: ($22 × 1,000) − $5,000 = $17,000
Percentage gain = $2,000 ÷ $15,000 = 0.1333, or 13.33%
(ii) With price unchanged, equity is unchanged.
Percentage gain = zero
(iii) Equity falls to ($18 × 1,000) − $5,000 = $13,000
Percentage gain = (−$2,000 ÷ $15,000) = −0.1333, or −13.33%
The relationship between the percentage return and the percentage change (%Δ) in the price of the stock is given by:
% return = %Δ in price × Total investment ÷ Investor's initial equity = %Δ in price × 1.333
For example, when the stock price rises from $20 to $22, the percentage change in price is 10%, while the percentage gain for the investor is:
% return = 10% × $20,000 ÷ $15,000 = 13.33%
b.
The value of the 1,000 shares is 1,000
P
. Equity is (1,000
P
− $5,000). You will receive a margin call when:
(1,000 ×
P
− $5,000) ÷ 1,000 ×
P
= 0.25
when P = $6.67 or lower
c.
The value of the 1,000 shares is 1,000
P
. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is (1,000
P
− $10,000). You will receive a margin call when:
(1,000 ×
P
− $10,000) ÷ 1,000 ×
P
= 0.25
when P = $13.33 or lower
With less equity in the account, you are far more vulnerable to a margin call.
d.
By the end of the year, the amount of the loan owed to the broker grows to:
$5,000 × 1.08 = $5,400
The equity in your account is (1,000
P
− $5,400). Initial equity was $15,000. Therefore, your rate of return after one year is as follows:
(i) ((1,000 × $22) − $5,400 − $15,000) ÷ $15,000 = 0.1067, or 10.67%
(ii) ((1,000 × $20) − $5,400 − $15,000) ÷ $15,000 = −0.0267, or −2.67%
(iii) ((1,000 × $18) − $5,400 − $15,000) ÷ $15,000 = −0.1600, or −16.00%
The relationship between the percentage return and the percentage change in the price of Xtel is given by:
For example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is:
e.
The value of the 1000 shares is 1,000
P
. Equity is (1,000
P
− $5,400). You will receive a margin call when:
(1,000 ×
P
− $5,400) ÷ 1,000 ×
P
= 0.25
when P = $7.20 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
8.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
Required:
a.
What is the percentage increase in the net worth of your brokerage account if the price of Xtel
immediately
changes to: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage
change in the price of Xtel?
b.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call?
c.
How would your answer to (
b
) change if you had financed the initial purchase with only $10,000 of your own money?
d.
What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling
after 1 year
at: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage
return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends.
e.
Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call?
Required B
Required D
Complete this question by entering your answers in the tabs below.
How would your answer to (
b
) change if you had financed the initial purchase with only $10,000 of your own money?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
Required E
$
Margin call will be made at price
13.33
or lower
Explanation:
The total cost of the purchase is: $20 × 1,000 = $20,000
You borrow $5,000 from your broker and invest $15,000 of your own funds. Your margin account starts out with equity of $15,000.
a.
(i) Equity increases to: ($22 × 1,000) − $5,000 = $17,000
Percentage gain = $2,000 ÷ $15,000 = 0.1333, or 13.33%
(ii) With price unchanged, equity is unchanged.
Percentage gain = zero
(iii) Equity falls to ($18 × 1,000) − $5,000 = $13,000
Percentage gain = (−$2,000 ÷ $15,000) = −0.1333, or −13.33%
The relationship between the percentage return and the percentage change (%Δ) in the price of the stock is given by:
% return = %Δ in price × Total investment ÷ Investor's initial equity = %Δ in price × 1.333
For example, when the stock price rises from $20 to $22, the percentage change in price is 10%, while the percentage gain for the investor is:
% return = 10% × $20,000 ÷ $15,000 = 13.33%
b.
The value of the 1,000 shares is 1,000
P
. Equity is (1,000
P
− $5,000). You will receive a margin call when:
(1,000 ×
P
− $5,000) ÷ 1,000 ×
P
= 0.25
when P = $6.67 or lower
c.
The value of the 1,000 shares is 1,000
P
. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is (1,000
P
− $10,000). You will receive a margin call when:
(1,000 ×
P
− $10,000) ÷ 1,000 ×
P
= 0.25
when P = $13.33 or lower
With less equity in the account, you are far more vulnerable to a margin call.
d.
By the end of the year, the amount of the loan owed to the broker grows to:
$5,000 × 1.08 = $5,400
The equity in your account is (1,000
P
− $5,400). Initial equity was $15,000. Therefore, your rate of return after one year is as follows:
(i) ((1,000 × $22) − $5,400 − $15,000) ÷ $15,000 = 0.1067, or 10.67%
(ii) ((1,000 × $20) − $5,400 − $15,000) ÷ $15,000 = −0.0267, or −2.67%
(iii) ((1,000 × $18) − $5,400 − $15,000) ÷ $15,000 = −0.1600, or −16.00%
The relationship between the percentage return and the percentage change in the price of Xtel is given by:
For example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is:
e.
The value of the 1000 shares is 1,000
P
. Equity is (1,000
P
− $5,400). You will receive a margin call when:
(1,000 ×
P
− $5,400) ÷ 1,000 ×
P
= 0.25
when P = $7.20 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
8.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
Required:
a.
What is the percentage increase in the net worth of your brokerage account if the price of Xtel
immediately
changes to: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage
change in the price of Xtel?
b.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call?
c.
How would your answer to (
b
) change if you had financed the initial purchase with only $10,000 of your own money?
d.
What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling
after 1 year
at: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage
return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends.
e.
Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call?
Required C
Required E
Complete this question by entering your answers in the tabs below.
What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is
selling
after 1 year
at: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the
percentage change in the price of Xtel? Assume that Xtel pays no dividends.
Note: Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.
Required A
Required B
Required C
Required D
Required E
Show less
1. Rate of return
10.67
%
2. Rate of return
(2.67)
%
3. Rate of return
(16.00)
%
Explanation:
The total cost of the purchase is: $20 × 1,000 = $20,000
You borrow $5,000 from your broker and invest $15,000 of your own funds. Your margin account starts out with equity of $15,000.
a.
(i) Equity increases to: ($22 × 1,000) − $5,000 = $17,000
Percentage gain = $2,000 ÷ $15,000 = 0.1333, or 13.33%
(ii) With price unchanged, equity is unchanged.
Percentage gain = zero
(iii) Equity falls to ($18 × 1,000) − $5,000 = $13,000
Percentage gain = (−$2,000 ÷ $15,000) = −0.1333, or −13.33%
The relationship between the percentage return and the percentage change (%Δ) in the price of the stock is given by:
% return = %Δ in price × Total investment ÷ Investor's initial equity = %Δ in price × 1.333
For example, when the stock price rises from $20 to $22, the percentage change in price is 10%, while the percentage gain for the investor is:
% return = 10% × $20,000 ÷ $15,000 = 13.33%
b.
The value of the 1,000 shares is 1,000
P
. Equity is (1,000
P
− $5,000). You will receive a margin call when:
(1,000 ×
P
− $5,000) ÷ 1,000 ×
P
= 0.25
when P = $6.67 or lower
c.
The value of the 1,000 shares is 1,000
P
. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is (1,000
P
− $10,000). You will receive a margin call when:
(1,000 ×
P
− $10,000) ÷ 1,000 ×
P
= 0.25
when P = $13.33 or lower
With less equity in the account, you are far more vulnerable to a margin call.
d.
By the end of the year, the amount of the loan owed to the broker grows to:
$5,000 × 1.08 = $5,400
The equity in your account is (1,000
P
− $5,400). Initial equity was $15,000. Therefore, your rate of return after one year is as follows:
(i) ((1,000 × $22) − $5,400 − $15,000) ÷ $15,000 = 0.1067, or 10.67%
(ii) ((1,000 × $20) − $5,400 − $15,000) ÷ $15,000 = −0.0267, or −2.67%
(iii) ((1,000 × $18) − $5,400 − $15,000) ÷ $15,000 = −0.1600, or −16.00%
The relationship between the percentage return and the percentage change in the price of Xtel is given by:
For example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is:
e.
The value of the 1000 shares is 1,000
P
. Equity is (1,000
P
− $5,400). You will receive a margin call when:
(1,000 ×
P
− $5,400) ÷ 1,000 ×
P
= 0.25
when P = $7.20 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
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Your preview ends here
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- Unlimited textbook solutions
- 24/7 expert homework help
8.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
Required:
a.
What is the percentage increase in the net worth of your brokerage account if the price of Xtel
immediately
changes to: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage
change in the price of Xtel?
b.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call?
c.
How would your answer to (
b
) change if you had financed the initial purchase with only $10,000 of your own money?
d.
What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling
after 1 year
at: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage
return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends.
e.
Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call?
Required D
Required E
Complete this question by entering your answers in the tabs below.
Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
Required E
$
Margin call will be made at price
7.20
or lower
Explanation:
The total cost of the purchase is: $20 × 1,000 = $20,000
You borrow $5,000 from your broker and invest $15,000 of your own funds. Your margin account starts out with equity of $15,000.
a.
(i) Equity increases to: ($22 × 1,000) − $5,000 = $17,000
Percentage gain = $2,000 ÷ $15,000 = 0.1333, or 13.33%
(ii) With price unchanged, equity is unchanged.
Percentage gain = zero
(iii) Equity falls to ($18 × 1,000) − $5,000 = $13,000
Percentage gain = (−$2,000 ÷ $15,000) = −0.1333, or −13.33%
The relationship between the percentage return and the percentage change (%Δ) in the price of the stock is given by:
% return = %Δ in price × Total investment ÷ Investor's initial equity = %Δ in price × 1.333
For example, when the stock price rises from $20 to $22, the percentage change in price is 10%, while the percentage gain for the investor is:
% return = 10% × $20,000 ÷ $15,000 = 13.33%
b.
The value of the 1,000 shares is 1,000
P
. Equity is (1,000
P
− $5,000). You will receive a margin call when:
(1,000 ×
P
− $5,000) ÷ 1,000 ×
P
= 0.25
when P = $6.67 or lower
c.
The value of the 1,000 shares is 1,000
P
. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is (1,000
P
− $10,000). You will receive a margin call when:
(1,000 ×
P
− $10,000) ÷ 1,000 ×
P
= 0.25
when P = $13.33 or lower
With less equity in the account, you are far more vulnerable to a margin call.
d.
By the end of the year, the amount of the loan owed to the broker grows to:
$5,000 × 1.08 = $5,400
The equity in your account is (1,000
P
− $5,400). Initial equity was $15,000. Therefore, your rate of return after one year is as follows:
(i) ((1,000 × $22) − $5,400 − $15,000) ÷ $15,000 = 0.1067, or 10.67%
(ii) ((1,000 × $20) − $5,400 − $15,000) ÷ $15,000 = −0.0267, or −2.67%
(iii) ((1,000 × $18) − $5,400 − $15,000) ÷ $15,000 = −0.1600, or −16.00%
The relationship between the percentage return and the percentage change in the price of Xtel is given by:
For example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is:
e.
The value of the 1000 shares is 1,000
P
. Equity is (1,000
P
− $5,400). You will receive a margin call when:
(1,000 ×
P
− $5,400) ÷ 1,000 ×
P
= 0.25
when P = $7.20 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
9.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
Required:
a.
If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.
b.
If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?
c.
Redo parts (
a
) and (
b
), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (
a
) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
Required A
Required B
Complete this question by entering your answers in the tabs below.
If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is
selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.
Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign.
Round your answers to 2 decimal places.
Required A
Required B
Required C
Show less
1. Rate of return
(13.33)
%
2. Rate of return
0 %
3. Rate of return
13.33
%
Explanation:
a.
The gain or loss on the short position is: (−1,000 × Δ
P
)
Invested funds = $15,000
Therefore: rate of return = (−1,000 × Δ
P
) ÷ 15,000
The rate of return in each of the three scenarios is:
(i) Rate of return = (−1,000 × $2) ÷ $15,000 = −0.1333 = −13.33%
(ii) Rate of return = (−1,000 × $0) ÷ $15,000 = 0%
(iii) Rate of return = [−1,000 × (−$2)] ÷ $15,000 = +0.1333 = 13.33%
b.
Total assets in the margin account equal:
$20,000 (from the sale of the stock) + $15,000 (the initial margin) = $35,000
Liabilities are 1,000
P
. You will receive a margin call when:
($35,000 − 1,000
P
) ÷ 1,000
P
= 0.25
when
P
= $28 or higher
c.
With a $1 dividend, the short position must now pay on the borrowed shares: ($1 per share × 1,000 shares) = $1,000. Rate of return is now:
[(−1,000 × Δ
P
) − $1,000] ÷ 15,000
(i) Rate of return = [−1,000 × $2 − $1,000] ÷ $15,000 = −0.2000 = −20.00%
(ii) Rate of return = [−1,000 × $0 − $1,000] ÷ $15,000 = −0.0667 = −6.67%
(iii) Rate of return = [−1,000 × (−$2) − $1,000] ÷ $15,000 = +0.067 = 6.67%
Total assets are $35,000, and liabilities are (1,000
P
+ $1,000). A margin call will be issued when:
($35,000 − 1,000
P
− $1,000) ÷ 1,000
P
= 0.25
when
P
= $27.20 or higher
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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9.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
Required:
a.
If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.
b.
If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?
c.
Redo parts (
a
) and (
b
), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (
a
) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
Required A
Required C
Complete this question by entering your answers in the tabs below.
If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?
Required A
Required B
Required C
$
Margin call will be made at price
28
or higher
Explanation:
a.
The gain or loss on the short position is: (−1,000 × Δ
P
)
Invested funds = $15,000
Therefore: rate of return = (−1,000 × Δ
P
) ÷ 15,000
The rate of return in each of the three scenarios is:
(i) Rate of return = (−1,000 × $2) ÷ $15,000 = −0.1333 = −13.33%
(ii) Rate of return = (−1,000 × $0) ÷ $15,000 = 0%
(iii) Rate of return = [−1,000 × (−$2)] ÷ $15,000 = +0.1333 = 13.33%
b.
Total assets in the margin account equal:
$20,000 (from the sale of the stock) + $15,000 (the initial margin) = $35,000
Liabilities are 1,000
P
. You will receive a margin call when:
($35,000 − 1,000
P
) ÷ 1,000
P
= 0.25
when
P
= $28 or higher
c.
With a $1 dividend, the short position must now pay on the borrowed shares: ($1 per share × 1,000 shares) = $1,000. Rate of return is now:
[(−1,000 × Δ
P
) − $1,000] ÷ 15,000
(i) Rate of return = [−1,000 × $2 − $1,000] ÷ $15,000 = −0.2000 = −20.00%
(ii) Rate of return = [−1,000 × $0 − $1,000] ÷ $15,000 = −0.0667 = −6.67%
(iii) Rate of return = [−1,000 × (−$2) − $1,000] ÷ $15,000 = +0.067 = 6.67%
Total assets are $35,000, and liabilities are (1,000
P
+ $1,000). A margin call will be issued when:
($35,000 − 1,000
P
− $1,000) ÷ 1,000
P
= 0.25
when
P
= $27.20 or higher
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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9.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
Required:
a.
If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.
b.
If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?
c.
Redo parts (
a
) and (
b
), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (
a
) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
Required B
Required C
Complete this question by entering your answers in the tabs below.
Redo parts (
a
) and (
b
), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (
a
)
should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
Note: Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.
Required A
Required B
Required C
$
1. Rate of return
(20.00)
%
2. Rate of return
(6.67)
%
3. Rate of return
6.67
%
Margin call will be made at price
27.20
or higher
Explanation:
a.
The gain or loss on the short position is: (−1,000 × Δ
P
)
Invested funds = $15,000
Therefore: rate of return = (−1,000 × Δ
P
) ÷ 15,000
The rate of return in each of the three scenarios is:
(i) Rate of return = (−1,000 × $2) ÷ $15,000 = −0.1333 = −13.33%
(ii) Rate of return = (−1,000 × $0) ÷ $15,000 = 0%
(iii) Rate of return = [−1,000 × (−$2)] ÷ $15,000 = +0.1333 = 13.33%
b.
Total assets in the margin account equal:
$20,000 (from the sale of the stock) + $15,000 (the initial margin) = $35,000
Liabilities are 1,000
P
. You will receive a margin call when:
($35,000 − 1,000
P
) ÷ 1,000
P
= 0.25
when
P
= $28 or higher
c.
With a $1 dividend, the short position must now pay on the borrowed shares: ($1 per share × 1,000 shares) = $1,000. Rate of return is now:
[(−1,000 × Δ
P
) − $1,000] ÷ 15,000
(i) Rate of return = [−1,000 × $2 − $1,000] ÷ $15,000 = −0.2000 = −20.00%
(ii) Rate of return = [−1,000 × $0 − $1,000] ÷ $15,000 = −0.0667 = −6.67%
(iii) Rate of return = [−1,000 × (−$2) − $1,000] ÷ $15,000 = +0.067 = 6.67%
Total assets are $35,000, and liabilities are (1,000
P
+ $1,000). A margin call will be issued when:
($35,000 − 1,000
P
− $1,000) ÷ 1,000
P
= 0.25
when
P
= $27.20 or higher
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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10.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Here is some price information on Marabel, Incorporated:
Bid
Ask
Marabel
69.95
70.05
You have placed a stop-loss order to sell at $70.
Required:
What are you telling your broker?
To attempt to sell the stock as soon as the stock trades at a bid price of $70 or less.
Explanation:
The broker is instructed to attempt to sell your Marabel, Incorporated stock as soon as the Marabel, Incorporated stock trades at a bid price of $70 or less. Here, the broker will attempt to execute but may not be able to sell at
$70, since the bid price is now $69.95. The price at which you sell may be more or less than $70 because the stop-loss becomes a market order to sell at current market prices.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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11.
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10.00
points
Problems?
Adjust credit
for all students.
Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer market.
Bid
Ask
55.25
55.50
Required:
a.
Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed?
b.
Suppose you have submitted an order to sell at market. At what price will your trade be executed?
c.
Suppose you have submitted a limit order to sell at $55.62. What will happen?
d.
Suppose you have submitted a limit order to buy at $55.37. What will happen?
Required A
Required B
Complete this question by entering your answers in the tabs below.
Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
$
Price
55.50
Explanation:
c.
The trade will not be executed because the bid price is lower than the price specified in the limit-sell order.
d.
The trade will not be executed because the asked price is greater than the price specified in the limit-buy order.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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11.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer market.
Bid
Ask
55.25
55.50
Required:
a.
Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed?
b.
Suppose you have submitted an order to sell at market. At what price will your trade be executed?
c.
Suppose you have submitted a limit order to sell at $55.62. What will happen?
d.
Suppose you have submitted a limit order to buy at $55.37. What will happen?
Required A
Required C
Complete this question by entering your answers in the tabs below.
Suppose you have submitted an order to sell at market. At what price will your trade be executed?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
$
Price
55.25
Explanation:
c.
The trade will not be executed because the bid price is lower than the price specified in the limit-sell order.
d.
The trade will not be executed because the asked price is greater than the price specified in the limit-buy order.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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11.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer market.
Bid
Ask
55.25
55.50
Required:
a.
Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed?
b.
Suppose you have submitted an order to sell at market. At what price will your trade be executed?
c.
Suppose you have submitted a limit order to sell at $55.62. What will happen?
d.
Suppose you have submitted a limit order to buy at $55.37. What will happen?
Required B
Required D
Complete this question by entering your answers in the tabs below.
Suppose you have submitted a limit order to sell at $55.62. What will happen?
Required A
Required B
Required C
Required D
Suppose you have submitted a limit order to sell at $55.62. What will happen?
The trade will not be executed.
Explanation:
c.
The trade will not be executed because the bid price is lower than the price specified in the limit-sell order.
d.
The trade will not be executed because the asked price is greater than the price specified in the limit-buy order.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
References
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11.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer market.
Bid
Ask
55.25
55.50
Required:
a.
Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed?
b.
Suppose you have submitted an order to sell at market. At what price will your trade be executed?
c.
Suppose you have submitted a limit order to sell at $55.62. What will happen?
d.
Suppose you have submitted a limit order to buy at $55.37. What will happen?
Required C
Required D
Complete this question by entering your answers in the tabs below.
Suppose you have submitted a limit order to buy at $55.37. What will happen?
Required A
Required B
Required C
Required D
Suppose you have submitted a limit order to buy at $55.37. What will happen?
The trade will not be executed.
Explanation:
c.
The trade will not be executed because the bid price is lower than the price specified in the limit-sell order.
d.
The trade will not be executed because the asked price is greater than the price specified in the limit-buy order.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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12.
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10.00
points
Problems?
Adjust credit
for all students.
You’ve borrowed $20,000 on margin to buy shares in Ixnay, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price
falls to $35 per share.
Required:
a.
Will you receive a margin call?
b.
How low can the price of Ixnay shares fall before you receive a margin call?
Required A
Required B
Complete this question by entering your answers in the tabs below.
Will you receive a margin call?
Required A
Required B
Will you receive a margin call?
No
Explanation:
a.
You will not receive a margin call. You borrowed $20,000 and with another $20,000 of your own equity you bought 1,000 shares of Ixnay at $40 per share. At $35 per share, the market value of the stock is $35,000, your
equity is $15,000, and the percentage margin is: $15,000 ÷ $35,000 = 42.9%. Your percentage margin exceeds the required maintenance margin.
b.
You will receive a margin call when:
(1000
× P −
$20,000) ÷ 1000
× P =
0.35
when
P
= $30.77 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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12.
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10.00
points
Problems?
Adjust credit
for all students.
You’ve borrowed $20,000 on margin to buy shares in Ixnay, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price
falls to $35 per share.
Required:
a.
Will you receive a margin call?
b.
How low can the price of Ixnay shares fall before you receive a margin call?
Required A
Required B
Complete this question by entering your answers in the tabs below.
How low can the price of Ixnay shares fall before you receive a margin call?
Note: Round your answer to 2 decimal places.
Required A
Required B
$
Margin call will be made at price
30.77
or lower
Explanation:
a.
You will not receive a margin call. You borrowed $20,000 and with another $20,000 of your own equity you bought 1,000 shares of Ixnay at $40 per share. At $35 per share, the market value of the stock is $35,000, your
equity is $15,000, and the percentage margin is: $15,000 ÷ $35,000 = 42.9%. Your percentage margin exceeds the required maintenance margin.
b.
You will receive a margin call when:
(1000
× P −
$20,000) ÷ 1000
× P =
0.35
when
P
= $30.77 or lower
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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13.
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Problems?
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for all students.
On January 1, you sold short one round lot (i.e., 100 shares) of Four Sisters stock at $21 per share. On March 1, a dividend of $2 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $15
per share. You paid 50 cents per share in commissions for each transaction.
Required:
What is the value of your account on April 1?
$
Account value
300
Explanation:
The proceeds from the short sale (net of commission) were: ($21 × 100) − $50 = $2,050
A dividend payment of $200 was withdrawn from the account.
Covering the short sale at $15 per share (with commission): ($15 × 100) + $50 = $1,550
Therefore, the value of your account is equal to the net profit on the transaction:
$2,050 − $200 − $1,550 = $300
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Problems - Algorithmic & Static
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14.
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10.00
points
Problems?
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for all students.
ByLine, Incorporated just sold 800,000 shares in a public offering for an offering price of $26 per share.The underwriting fee was 8.00% of the issue’s total value based on the offering price. As soon as the shares were issued,
the price jumped to $38 per share.
Required:
What are the explicit, implicit, and total costs of the issue?
Note: Round your answer to the nearest dollar.
$
$
$
a. Explicit cost
1,664,000
b. Implicit cost
9,600,000
c. Total cost
11,264,000
Explanation:
a.
The explicit cost is 8.00% × 800,000 shares × $26 per share = $1,664,000.
b.
Because the price jumped by $12 per share immediately after issue, the amount of the issue’s value “left on the table,” or its implicit cost, is $12 per share × 800,000 shares = $9,600,000.
c.
The total cost $9,600,000 + $1,664,000 = $11,264,000. Notably, the implicit costs are much higher than the explicit cost.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
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10.00
points
Problems?
Adjust credit
for all students.
The Arizona Stock Exchange lists a bid price of 1.24 and an ask price of 1.45 for Kicking Bird Energy Corporation.
Required:
a.
At what price can you buy the stock?
b.
What is the dealer’s bid-ask spread?
Required A
Required B
Complete this question by entering your answers in the tabs below.
At what price can you buy the stock?
Note: Round your answer to 2 decimal places.
Required A
Required B
$
Ask price
1.45
Explanation:
a.
You can buy the stock at the ask price of $1.45.
b.
The dealer’s bid-ask spread is $1.45 − 1.24 = $0.21.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
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15.
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10.00
points
Problems?
Adjust credit
for all students.
The Arizona Stock Exchange lists a bid price of 1.24 and an ask price of 1.45 for Kicking Bird Energy Corporation.
Required:
a.
At what price can you buy the stock?
b.
What is the dealer’s bid-ask spread?
Required A
Required B
Complete this question by entering your answers in the tabs below.
What is the dealer’s bid-ask spread?
Note: Input the amount as a positive value. Round your answer to 2 decimal places.
Required A
Required B
$
Bid-ask spread
0.21
Explanation:
a.
You can buy the stock at the ask price of $1.45.
b.
The dealer’s bid-ask spread is $1.45 − 1.24 = $0.21.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
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16.
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points
Problems?
Adjust credit
for all students.
Suppose that you just purchased 250 shares of Talk&Tell stock for $70 per share.
Required:
a.
If the initial margin requirement is 76.50%, how much money must you borrow?
b.
Construct the balance sheet that corresponds to the transaction.
Required A
Required B
Complete this question by entering your answers in the tabs below.
If the initial margin requirement is 76.50%, how much money must you borrow?
Required A
Required B
$
Amount borrowed
4,113
Explanation:
a.
You must borrow (1 − 0.765) × $70 per share × 250 shares = $4,113
b.
The balance sheet would show assets equal to $70 per share × 250 shares = $17,500. The required margin equals 76.50% of the stock’s value, or 0.765 × $17,500 = $13,388. The amount you borrow from the broker, your
liability, is 23.50% of the stock’s value, or 0.235 × $17,500 = $4,112.50. Alternatively, your liability is the total value minus your equity, or $17,500 – 13,388 = $4,112.50.
The balance sheet looks like the one below:
Assets
Liabilities and Equity
Stock
$ 17,500
Loan from broker
$ 4,113
Equity
$ 13,388
Total assets
$ 17,500
Total liabilities and equity
$ 17,500
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
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16.
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10.00
points
Problems?
Adjust credit
for all students.
Suppose that you just purchased 250 shares of Talk&Tell stock for $70 per share.
Required:
a.
If the initial margin requirement is 76.50%, how much money must you borrow?
b.
Construct the balance sheet that corresponds to the transaction.
Required A
Required B
Complete this question by entering your answers in the tabs below.
Construct the balance sheet that corresponds to the transaction.
Required A
Required B
$
$
$
$
$
Assets
Liabilities and Equity
Stock
17,500
Loan from broker
4,113
Equity
13,388
Total assets
17,500
Total liabilities and equity
17,500
Explanation:
a.
You must borrow (1 − 0.765) × $70 per share × 250 shares = $4,113
b.
The balance sheet would show assets equal to $70 per share × 250 shares = $17,500. The required margin equals 76.50% of the stock’s value, or 0.765 × $17,500 = $13,388. The amount you borrow from the broker, your
liability, is 23.50% of the stock’s value, or 0.235 × $17,500 = $4,112.50. Alternatively, your liability is the total value minus your equity, or $17,500 – 13,388 = $4,112.50.
The balance sheet looks like the one below:
Assets
Liabilities and Equity
Stock
$ 17,500
Loan from broker
$ 4,113
Equity
$ 13,388
Total assets
$ 17,500
Total liabilities and equity
$ 17,500
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
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17.
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10.00
points
Problems?
Adjust credit
for all students.
Suppose that you just purchased 200 shares of Beta Banana’s stock for $60 per share. The initial margin requirement is 65.5%, which means the amount borrowed is $4,140. The corresponding balance sheet is below:
Assets
Liabilities and Equity
Stock
$ 12,000.00
Loan from broker
$ 4,140.00
Equity
$ 7,860.00
Total assets
12,000.00
Total liabilities and equity
$ 12,000.00
Required:
a.
Now suppose the price of the stock falls to $37 per share. What is your current margin percentage?
b.
Construct the balance sheet to show the current situation.
c.
If the maintenance margin is 40%, what is the highest stock price that will trigger a margin call?
Required A
Required B
Complete this question by entering your answers in the tabs below.
Now suppose the price of the stock falls to $37 per share. What is your current margin percentage?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Margin percentage
44.05
Explanation:
a.
Note that no matter what happens to the price of the stock, the amount you owe the broker won’t change.When the stock’s price changes, the asset’s value and the equity will change. If the price of the stock falls to $37 per
share, the asset has a total value of $37 × 200 = $7,400. Since you still have a liability of $4,140, your equity is now $7,400 – 4,140.00 = $3,260.00. Your margin percentage equals equity divided by market value, or $3,260 ÷
$7,400 = 44.05%.
b.
Assets
Liabilities and Equity
Stock
$ 7,400.00
Loan from broker
$ 4,140.00
Equity
$ 3,260.00
Total assets
$ 7,400.00
Total liabilities and equity
$ 7,400.00
c.
You will get a margin call if the stock reaches or falls below the point where your margin is 40%. The margin percentage equals equity divided by market value. Expressing these in terms of the stock’s price:
Market value = 100 ×
P
Equity = Market value – Liability = 200 ×
P
– 4,140.00
Margin = [200 ×
P
– 4,140.00] ÷ 200 ×
P
= 0.40
Solving for
P
:
200 ×
P
– 4,140.00 = 40 ×
P
−4,140.00 = − 66 ×
P
P
= −4,140.00 ÷ −66 = 34.50
When the price falls to $34.50 per share or below, you will get a margin call because your equity (margin) will be 40% or less.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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17.
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10.00
points
Problems?
Adjust credit
for all students.
Suppose that you just purchased 200 shares of Beta Banana’s stock for $60 per share. The initial margin requirement is 65.5%, which means the amount borrowed is $4,140. The corresponding balance sheet is below:
Assets
Liabilities and Equity
Stock
$ 12,000.00
Loan from broker
$ 4,140.00
Equity
$ 7,860.00
Total assets
12,000.00
Total liabilities and equity
$ 12,000.00
Required:
a.
Now suppose the price of the stock falls to $37 per share. What is your current margin percentage?
b.
Construct the balance sheet to show the current situation.
c.
If the maintenance margin is 40%, what is the highest stock price that will trigger a margin call?
Required A
Required C
Complete this question by entering your answers in the tabs below.
Construct the balance sheet to show the current situation.
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
$
$
$
$
$
Assets
Liabilities and Equity
Stock
7,400.00
Loan from broker
4,140.00
Equity
3,260.00
Total assets
7,400.00
Total liabilities and equity
7,400.00
Explanation:
a.
Note that no matter what happens to the price of the stock, the amount you owe the broker won’t change.When the stock’s price changes, the asset’s value and the equity will change. If the price of the stock falls to $37 per
share, the asset has a total value of $37 × 200 = $7,400. Since you still have a liability of $4,140, your equity is now $7,400 – 4,140.00 = $3,260.00. Your margin percentage equals equity divided by market value, or $3,260 ÷
$7,400 = 44.05%.
b.
Assets
Liabilities and Equity
Stock
$ 7,400.00
Loan from broker
$ 4,140.00
Equity
$ 3,260.00
Total assets
$ 7,400.00
Total liabilities and equity
$ 7,400.00
c.
You will get a margin call if the stock reaches or falls below the point where your margin is 40%. The margin percentage equals equity divided by market value. Expressing these in terms of the stock’s price:
Market value = 100 ×
P
Equity = Market value – Liability = 200 ×
P
– 4,140.00
Margin = [200 ×
P
– 4,140.00] ÷ 200 ×
P
= 0.40
Solving for
P
:
200 ×
P
– 4,140.00 = 40 ×
P
−4,140.00 = − 66 ×
P
P
= −4,140.00 ÷ −66 = 34.50
When the price falls to $34.50 per share or below, you will get a margin call because your equity (margin) will be 40% or less.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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17.
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10.00
points
Problems?
Adjust credit
for all students.
Suppose that you just purchased 200 shares of Beta Banana’s stock for $60 per share. The initial margin requirement is 65.5%, which means the amount borrowed is $4,140. The corresponding balance sheet is below:
Assets
Liabilities and Equity
Stock
$ 12,000.00
Loan from broker
$ 4,140.00
Equity
$ 7,860.00
Total assets
12,000.00
Total liabilities and equity
$ 12,000.00
Required:
a.
Now suppose the price of the stock falls to $37 per share. What is your current margin percentage?
b.
Construct the balance sheet to show the current situation.
c.
If the maintenance margin is 40%, what is the highest stock price that will trigger a margin call?
Required B
Required C
Complete this question by entering your answers in the tabs below.
If the maintenance margin is 40%, what is the highest stock price that will trigger a margin call?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Price
34.50
Explanation:
a.
Note that no matter what happens to the price of the stock, the amount you owe the broker won’t change.When the stock’s price changes, the asset’s value and the equity will change. If the price of the stock falls to $37 per
share, the asset has a total value of $37 × 200 = $7,400. Since you still have a liability of $4,140, your equity is now $7,400 – 4,140.00 = $3,260.00. Your margin percentage equals equity divided by market value, or $3,260 ÷
$7,400 = 44.05%.
b.
Assets
Liabilities and Equity
Stock
$ 7,400.00
Loan from broker
$ 4,140.00
Equity
$ 3,260.00
Total assets
$ 7,400.00
Total liabilities and equity
$ 7,400.00
c.
You will get a margin call if the stock reaches or falls below the point where your margin is 40%. The margin percentage equals equity divided by market value. Expressing these in terms of the stock’s price:
Market value = 100 ×
P
Equity = Market value – Liability = 200 ×
P
– 4,140.00
Margin = [200 ×
P
– 4,140.00] ÷ 200 ×
P
= 0.40
Solving for
P
:
200 ×
P
– 4,140.00 = 40 ×
P
−4,140.00 = − 66 ×
P
P
= −4,140.00 ÷ −66 = 34.50
When the price falls to $34.50 per share or below, you will get a margin call because your equity (margin) will be 40% or less.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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18.
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points
Problems?
Adjust credit
for all students.
Suppose that you just short sold 100 shares of Quiet Minds stock for $97.00 per share.
Required:
a.
If the initial margin requirement is 75%, how much equity must you invest?
b.
Construct the balance sheet that corresponds to the transaction.
c.
Now suppose the price of the stock falls to $89 per share. What is your current margin percentage?
d.
The maintenance margin is 50%. What is the lowest price that will trigger a margin call?
Required A
Required B
Complete this question by entering your answers in the tabs below.
If the initial margin requirement is 75%, how much equity must you invest?
Note: Round your answer to the nearest dollar.
Required A
Required B
Required C
Required D
$
Equity
7,275
Explanation:
a.
The amount of equity you invest will equal $9,700 × 0.80 = $7,275.
b.
The balance sheet would show assets equal to the amount of cash you received from the short sale ($97 per share × 100 shares = $9,700) plus the amount of cash (or T-bills) you put up as margin ($9,700 × 0.80 = $7,275
for an initial margin percentage of 75%).
Assets
Liabilities and Equity
Cash
$ 9,700
Short position (100 shares)
$ 9,700
T-bills
$ 7,275
Equity
$ 7,275
Total assets
$ 16,975
Total liabilities and equity
$ 16,975
c.
Note that no matter what happens to the price of the stock, the amount you received for the short sale ($9,700) and the amount you put up as initial margin ($7,275) won’t change. When the stock’s price changes, the
liability’s value (100 ×
P
) and the equity will change. Equity is a plug figure that equals total assets ($16,975) minus the amount of the liability. If the price of the stock falls to $89 per share, the value of total assets stays at
$16,975. The value of the liability is 100 × $89 = $8,900. Equity equals total assets minus liabilities = $16,975 – 8,900 = $8,075. Your margin percentage equals equity divided by market value, or $8,075 ÷ $8,900 = 90.73%.
d.
You will get a margin call if the stock reaches or falls below the point where your margin is 50%. The margin percentage equals equity divided by market value. Expressing these in terms of the stock’s price:
Market value = 100 ×
P
Equity = 16,975 – Liability = 16,975 – 100 ×
P
Margin = [11,315 – 100 ×
P
] ÷ 100 ×
P
= 0.50
Solving for
P
:
16,975 – 100 ×
P
= 50 ×
P
16,975 = 150 ×
P
P
= 16,975 ÷ 150 = 113.17
When the price rises to $113.17 per share or above, you will get a margin call because your equity (margin) will be 50% or less.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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18.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that you just short sold 100 shares of Quiet Minds stock for $97.00 per share.
Required:
a.
If the initial margin requirement is 75%, how much equity must you invest?
b.
Construct the balance sheet that corresponds to the transaction.
c.
Now suppose the price of the stock falls to $89 per share. What is your current margin percentage?
d.
The maintenance margin is 50%. What is the lowest price that will trigger a margin call?
Required A
Required C
Complete this question by entering your answers in the tabs below.
Construct the balance sheet that corresponds to the transaction.
Required A
Required B
Required C
Required D
$
$
$
$
$
$
Assets
Liabilities and Equity
Stock
9,700
Short position (100 shares)
9,700
T-bills
7,275 Equity
7,275
Total assets
16,975
Total liabilities and equity
16,975
Explanation:
a.
The amount of equity you invest will equal $9,700 × 0.80 = $7,275.
b.
The balance sheet would show assets equal to the amount of cash you received from the short sale ($97 per share × 100 shares = $9,700) plus the amount of cash (or T-bills) you put up as margin ($9,700 × 0.80 = $7,275
for an initial margin percentage of 75%).
Assets
Liabilities and Equity
Cash
$ 9,700
Short position (100 shares)
$ 9,700
T-bills
$ 7,275
Equity
$ 7,275
Total assets
$ 16,975
Total liabilities and equity
$ 16,975
c.
Note that no matter what happens to the price of the stock, the amount you received for the short sale ($9,700) and the amount you put up as initial margin ($7,275) won’t change. When the stock’s price changes, the
liability’s value (100 ×
P
) and the equity will change. Equity is a plug figure that equals total assets ($16,975) minus the amount of the liability. If the price of the stock falls to $89 per share, the value of total assets stays at
$16,975. The value of the liability is 100 × $89 = $8,900. Equity equals total assets minus liabilities = $16,975 – 8,900 = $8,075. Your margin percentage equals equity divided by market value, or $8,075 ÷ $8,900 = 90.73%.
d.
You will get a margin call if the stock reaches or falls below the point where your margin is 50%. The margin percentage equals equity divided by market value. Expressing these in terms of the stock’s price:
Market value = 100 ×
P
Equity = 16,975 – Liability = 16,975 – 100 ×
P
Margin = [11,315 – 100 ×
P
] ÷ 100 ×
P
= 0.50
Solving for
P
:
16,975 – 100 ×
P
= 50 ×
P
16,975 = 150 ×
P
P
= 16,975 ÷ 150 = 113.17
When the price rises to $113.17 per share or above, you will get a margin call because your equity (margin) will be 50% or less.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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18.
Award:
10.00
points
Problems?
Adjust credit
for all students.
Suppose that you just short sold 100 shares of Quiet Minds stock for $97.00 per share.
Required:
a.
If the initial margin requirement is 75%, how much equity must you invest?
b.
Construct the balance sheet that corresponds to the transaction.
c.
Now suppose the price of the stock falls to $89 per share. What is your current margin percentage?
d.
The maintenance margin is 50%. What is the lowest price that will trigger a margin call?
Required B
Required D
Complete this question by entering your answers in the tabs below.
Now suppose the price of the stock falls to $89 per share. What is your current margin percentage?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
Margin percentage
90.73
Explanation:
a.
The amount of equity you invest will equal $9,700 × 0.80 = $7,275.
b.
The balance sheet would show assets equal to the amount of cash you received from the short sale ($97 per share × 100 shares = $9,700) plus the amount of cash (or T-bills) you put up as margin ($9,700 × 0.80 = $7,275
for an initial margin percentage of 75%).
Assets
Liabilities and Equity
Cash
$ 9,700
Short position (100 shares)
$ 9,700
T-bills
$ 7,275
Equity
$ 7,275
Total assets
$ 16,975
Total liabilities and equity
$ 16,975
c.
Note that no matter what happens to the price of the stock, the amount you received for the short sale ($9,700) and the amount you put up as initial margin ($7,275) won’t change. When the stock’s price changes, the
liability’s value (100 ×
P
) and the equity will change. Equity is a plug figure that equals total assets ($16,975) minus the amount of the liability. If the price of the stock falls to $89 per share, the value of total assets stays at
$16,975. The value of the liability is 100 × $89 = $8,900. Equity equals total assets minus liabilities = $16,975 – 8,900 = $8,075. Your margin percentage equals equity divided by market value, or $8,075 ÷ $8,900 = 90.73%.
d.
You will get a margin call if the stock reaches or falls below the point where your margin is 50%. The margin percentage equals equity divided by market value. Expressing these in terms of the stock’s price:
Market value = 100 ×
P
Equity = 16,975 – Liability = 16,975 – 100 ×
P
Margin = [11,315 – 100 ×
P
] ÷ 100 ×
P
= 0.50
Solving for
P
:
16,975 – 100 ×
P
= 50 ×
P
16,975 = 150 ×
P
P
= 16,975 ÷ 150 = 113.17
When the price rises to $113.17 per share or above, you will get a margin call because your equity (margin) will be 50% or less.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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18.
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10.00
points
Problems?
Adjust credit
for all students.
Suppose that you just short sold 100 shares of Quiet Minds stock for $97.00 per share.
Required:
a.
If the initial margin requirement is 75%, how much equity must you invest?
b.
Construct the balance sheet that corresponds to the transaction.
c.
Now suppose the price of the stock falls to $89 per share. What is your current margin percentage?
d.
The maintenance margin is 50%. What is the lowest price that will trigger a margin call?
Required C
Required D
Complete this question by entering your answers in the tabs below.
The maintenance margin is 50%. What is the lowest price that will trigger a margin call?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
$
Stock price
113.17
Explanation:
a.
The amount of equity you invest will equal $9,700 × 0.80 = $7,275.
b.
The balance sheet would show assets equal to the amount of cash you received from the short sale ($97 per share × 100 shares = $9,700) plus the amount of cash (or T-bills) you put up as margin ($9,700 × 0.80 = $7,275
for an initial margin percentage of 75%).
Assets
Liabilities and Equity
Cash
$ 9,700
Short position (100 shares)
$ 9,700
T-bills
$ 7,275
Equity
$ 7,275
Total assets
$ 16,975
Total liabilities and equity
$ 16,975
c.
Note that no matter what happens to the price of the stock, the amount you received for the short sale ($9,700) and the amount you put up as initial margin ($7,275) won’t change. When the stock’s price changes, the
liability’s value (100 ×
P
) and the equity will change. Equity is a plug figure that equals total assets ($16,975) minus the amount of the liability. If the price of the stock falls to $89 per share, the value of total assets stays at
$16,975. The value of the liability is 100 × $89 = $8,900. Equity equals total assets minus liabilities = $16,975 – 8,900 = $8,075. Your margin percentage equals equity divided by market value, or $8,075 ÷ $8,900 = 90.73%.
d.
You will get a margin call if the stock reaches or falls below the point where your margin is 50%. The margin percentage equals equity divided by market value. Expressing these in terms of the stock’s price:
Market value = 100 ×
P
Equity = 16,975 – Liability = 16,975 – 100 ×
P
Margin = [11,315 – 100 ×
P
] ÷ 100 ×
P
= 0.50
Solving for
P
:
16,975 – 100 ×
P
= 50 ×
P
16,975 = 150 ×
P
P
= 16,975 ÷ 150 = 113.17
When the price rises to $113.17 per share or above, you will get a margin call because your equity (margin) will be 50% or less.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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points
Problems?
Adjust credit
for all students.
The table below shows the limit order book for Foghorn Enterprises.
Limit Buy Orders
Limit Sell Orders
Price
Shares
Price
Shares
$ 92.05
100
$ 92.17
800
92.04
300
92.16
500
92.03
450
92.15
300
92.02
900
92.14
600
92.01
1,600
92.13
300
92.12
400
92.11
215
Required:
a.
If you place a market order to buy 1,050 shares, in what sequence will you pay for the shares?
b.
What is the total cost of the purchase?
Required A
Required B
Complete this question by entering your answers in the tabs below.
If you place a market order to buy 1,050 shares, in what sequence will you pay for the shares?
Note: Round your answer to 2 decimal places.
Required A
Required B
$
$
$
$
Price
Number of
Shares
92.11
215
92.12
400
92.13
300
92.14
135
Explanation:
a.
The order will be filled at the best possible prices. You will pay $92.11 for the first 215 shares, $92.12 for the next 400 shares, $92.13 for the next 300 shares, and $92.14 for the final 135 shares.
b.
Your total cost would be [(215 × $92.11) + (400.00 × $92.12) + (300.00 × $92.13) + (135.00 × $92.14)] = $96,730.00.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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19.
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10.00
points
Problems?
Adjust credit
for all students.
The table below shows the limit order book for Foghorn Enterprises.
Limit Buy Orders
Limit Sell Orders
Price
Shares
Price
Shares
$ 92.05
100
$ 92.17
800
92.04
300
92.16
500
92.03
450
92.15
300
92.02
900
92.14
600
92.01
1,600
92.13
300
92.12
400
92.11
215
Required:
a.
If you place a market order to buy 1,050 shares, in what sequence will you pay for the shares?
b.
What is the total cost of the purchase?
Required A
Required B
Complete this question by entering your answers in the tabs below.
What is the total cost of the purchase?
Note: Input the amount as a positive value. Round your answer to 2 decimal places.
Required A
Required B
$
Total cost
96,730.00
Explanation:
a.
The order will be filled at the best possible prices. You will pay $92.11 for the first 215 shares, $92.12 for the next 400 shares, $92.13 for the next 300 shares, and $92.14 for the final 135 shares.
b.
Your total cost would be [(215 × $92.11) + (400.00 × $92.12) + (300.00 × $92.13) + (135.00 × $92.14)] = $96,730.00.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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20.
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10.00
points
Problems?
Adjust credit
for all students.
You paid cash for $1,200 worth of stock a year ago. Today the portfolio is worth $1,642.
Required:
a.
What rate of return did you earn on the investment?
b.
Now suppose that you bought the same stock but bought it on margin. The initial margin requirement was 70%. Recalculate your rate of return, ignoring any interest due.
c.
Recalculate the rates of return for a cash purchase in the event that the stock is worth $900 today.
d.
Recalculate the rates of return for a margin purchase in the event that the stock is worth $900 today.
Required A
Required B
Complete this question by entering your answers in the tabs below.
What rate of return did you earn on the investment?
Note: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
Rate of return
36.83
%
Explanation:
a.
The return would be
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $1,200 = 36.83%
b.
The amount of your own funds invested is 0.70 × $1,200 = $840, so the return is
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $840 = 52.62%
c.
If you invested $1,200 of your own money, the return is
($900 − $1,200) ÷ $1,200 = –25.00%
d.
If you invested $840 of your own money, the return is
($900 − $1,200) ÷ $840 = −35.71%
Borrowing magnifies returns, both positive and negative. If your investments increase in value you’ll have higher positive returns. If your investments decrease in value you’ll have lower negative returns.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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20.
Award:
10.00
points
Problems?
Adjust credit
for all students.
You paid cash for $1,200 worth of stock a year ago. Today the portfolio is worth $1,642.
Required:
a.
What rate of return did you earn on the investment?
b.
Now suppose that you bought the same stock but bought it on margin. The initial margin requirement was 70%. Recalculate your rate of return, ignoring any interest due.
c.
Recalculate the rates of return for a cash purchase in the event that the stock is worth $900 today.
d.
Recalculate the rates of return for a margin purchase in the event that the stock is worth $900 today.
Required A
Required C
Complete this question by entering your answers in the tabs below.
Now suppose that you bought the same stock but bought it on margin. The initial margin requirement was 70%. Recalculate
your rate of return, ignoring any interest due.
Note: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
Rate of return
52.62
%
Explanation:
a.
The return would be
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $1,200 = 36.83%
b.
The amount of your own funds invested is 0.70 × $1,200 = $840, so the return is
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $840 = 52.62%
c.
If you invested $1,200 of your own money, the return is
($900 − $1,200) ÷ $1,200 = –25.00%
d.
If you invested $840 of your own money, the return is
($900 − $1,200) ÷ $840 = −35.71%
Borrowing magnifies returns, both positive and negative. If your investments increase in value you’ll have higher positive returns. If your investments decrease in value you’ll have lower negative returns.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
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Problems?
Adjust credit
for all students.
You paid cash for $1,200 worth of stock a year ago. Today the portfolio is worth $1,642.
Required:
a.
What rate of return did you earn on the investment?
b.
Now suppose that you bought the same stock but bought it on margin. The initial margin requirement was 70%. Recalculate your rate of return, ignoring any interest due.
c.
Recalculate the rates of return for a cash purchase in the event that the stock is worth $900 today.
d.
Recalculate the rates of return for a margin purchase in the event that the stock is worth $900 today.
Required B
Required D
Complete this question by entering your answers in the tabs below.
Recalculate the rates of return for a cash purchase in the event that the stock is worth $900 today.
Note: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
Rate of return
(25.00)
%
Explanation:
a.
The return would be
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $1,200 = 36.83%
b.
The amount of your own funds invested is 0.70 × $1,200 = $840, so the return is
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $840 = 52.62%
c.
If you invested $1,200 of your own money, the return is
($900 − $1,200) ÷ $1,200 = –25.00%
d.
If you invested $840 of your own money, the return is
($900 − $1,200) ÷ $840 = −35.71%
Borrowing magnifies returns, both positive and negative. If your investments increase in value you’ll have higher positive returns. If your investments decrease in value you’ll have lower negative returns.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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20.
Award:
10.00
points
Problems?
Adjust credit
for all students.
You paid cash for $1,200 worth of stock a year ago. Today the portfolio is worth $1,642.
Required:
a.
What rate of return did you earn on the investment?
b.
Now suppose that you bought the same stock but bought it on margin. The initial margin requirement was 70%. Recalculate your rate of return, ignoring any interest due.
c.
Recalculate the rates of return for a cash purchase in the event that the stock is worth $900 today.
d.
Recalculate the rates of return for a margin purchase in the event that the stock is worth $900 today.
Required C
Required D
Complete this question by entering your answers in the tabs below.
Recalculate the rates of return for a margin purchase in the event that the stock is worth $900 today.
Note: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.
Required A
Required B
Required C
Required D
$
Rate of return
(35.71)
%
Explanation:
a.
The return would be
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $1,200 = 36.83%
b.
The amount of your own funds invested is 0.70 × $1,200 = $840, so the return is
(Ending value − Beginning value) ÷ Amount invested = ($1,642 − $1,200) ÷ $840 = 52.62%
c.
If you invested $1,200 of your own money, the return is
($900 − $1,200) ÷ $1,200 = –25.00%
d.
If you invested $840 of your own money, the return is
($900 − $1,200) ÷ $840 = −35.71%
Borrowing magnifies returns, both positive and negative. If your investments increase in value you’ll have higher positive returns. If your investments decrease in value you’ll have lower negative returns.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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Given the following listing for a Treasury note, calculate the bid-ask spread. Assume a face value of $1,000.
Note: Round your answer to 4 decimal places.
Rate
Maturity
Month/Year
Bid
Asked
Change
Asked yield
6.5
May 12n
107.9601
108.0518
+1
3.86
$
Bid-ask spread
0.9170
Explanation:
The bid price is 107.9601% of face value and is the amount for which the dealer would buy the security
107.9601% × $1,000 = $1,079.60.
The ask price is 108.0518% of face value and is the amount for which the dealer would sell the security
108.0518% × $1,000 = $1,080.52.
The bid-ask spread is the difference between the two prices and is a source of profit to the dealer
$1,080.52 – 1,079.60 = $0.9170.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 03: How Securities Are Traded > Chapter 03 Additional Algorithmic Problems
References
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1.
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2.
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4.
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The trading of stock that was previously issued takes place:
in the secondary market.
in the primary market.
usually with the assistance of an investment banker.
in the secondary and primary markets.
Secondary market transactions consist of trades between investors.
References
Multiple Choice
Difficulty: 1 Basic
A purchase of a new issue of stock takes place:
in the secondary market.
in the primary or secondary market.
usually with the assistance of a commercial banker.
in the secondary and primary markets.
in the primary market and usually with the assistance of an investment banker.
Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction. Investment bankers usually assist by pricing the issue and finding buyers.
References
Multiple Choice
Difficulty: 1 Basic
Firms raise capital by issuing stock
in the secondary market.
in the primary market.
to unwary investors.
only on days when the market is up.
None of the options are correct.
Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction.
References
Multiple Choice
Difficulty: 1 Basic
Which of the following statements regarding the specialist are
true
?
Specialists maintain a book listing outstanding, unexecuted limit orders but cannot trade in their own accounts.
Specialists earn income from commissions and spreads in stock prices but cannot trade in their own accounts.
Specialists stand ready to trade at quoted bid and ask prices but cannot trade in their own accounts.
Specialists cannot trade in their own accounts.
Specialists maintain a book listing outstanding, unexecuted limit orders, earn income from commissions and spreads in stock prices, and stand ready to trade at quoted bid and ask prices.
The specialists' functions are all of the items listed. In addition, specialists trade in their own accounts.
References
Multiple Choice
Difficulty: 2 Intermediate
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Investment bankers:
act as intermediaries between issuers of stocks and investors but not as advisors.
act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.
accept deposits from savers and lend them out to companies.
act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.
The role of the investment banker is to assist the firm in issuing new securities, both in advisory and marketing capacities. The investment banker does not have a role comparable to a commercial bank, as indicated in accept
deposits from savers and lend them out to companies.
References
Multiple Choice
Difficulty: 2 Intermediate
In a "firm commitment," the investment banker:
buys the stock from the company and resells the issue to the public.
agrees to help the firm sell the stock at a favorable price.
finds the best marketing arrangement for the investment-banking firm.
agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment-banking firm.
offers a best-efforts approach.
In a "firm commitment," the investment banker buys the stock from the company and resells the issue to the public.
References
Multiple Choice
Difficulty: 2 Intermediate
The secondary market consists of:
transactions on the AMEX only.
transactions in the OTC market only.
transactions through the investment banker only.
transactions on the AMEX and in the OTC market.
transactions on the AMEX, through the investment banker, and in the OTC market.
The secondary market consists of transactions on the organized exchanges and in the OTC market. The investment banker is involved in the placement of new issues in the primary market.
References
Multiple Choice
Difficulty: 2 Intermediate
Initial margin requirements are determined by:
the Securities and Exchange Commission.
the Federal Reserve System.
the New York Stock Exchange.
the Federal Reserve System and the New York Stock Exchange.
The Board of Governors of the Federal Reserve System determines initial margin requirements.
References
Multiple Choice
Difficulty: 2 Intermediate
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You purchased JNJ stock at $130 per share. The stock is currently selling at $145. Your gains may be protected by placing a
stop-buy order.
limit-buy order.
market order.
limit-sell order.
None of these options are correct.
With a limit-sell order, your stock will be sold only at a specified price, or better. Thus, such an order would protect your gains. None of the other orders are applicable to this situation.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold AAPL stock short at $190 per share. Your losses could be minimized by placing a
limit-sell order.
limit-buy order.
stop-buy order.
day-order.
None of the options are correct.
With a stop-buy order, the stock would be purchased if the price increased to a specified level, thus limiting your loss.
References
Multiple Choice
Difficulty: 2 Intermediate
Which one of the following statements regarding orders is
false
?
A market order is simply an order to buy or sell a stock immediately at the prevailing market price.
A limit-sell order is where investors specify prices at which they are willing to sell a security.
If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45.
A market order is an order to buy or sell a stock on a specific exchange (market).
All statements are true.
All of the order descriptions above are correct except a market order is an order to buy or sell a stock on a specific exchange (market).
References
Multiple Choice
Difficulty: 2 Intermediate
Restrictions on trading involving insider information apply to the following,
except
:
corporate officers.
corporate directors.
major stockholders.
All of the individuals.
None of the options.
Corporate officers, corporate directors, and major stockholders are corporate insiders and are subject to restrictions on trading on inside information. Further, the Supreme Court held that traders may not trade on nonpublic
information even if they are not insiders.
References
Multiple Choice
Difficulty: 2 Intermediate
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The cost of buying and selling a stock consists of:
broker's commissions only.
dealer's bid-asked spread only.
a price concession an investor may be forced to make only.
broker's commissions and dealer's bid-asked spread.
broker's commissions, dealer's bid-asked spread, and a price concession an investor may be forced to make.
All of the options are possible costs of buying and selling a stock.
References
Multiple Choice
Difficulty: 2 Intermediate
Assume you purchased 200 shares of KO common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow from the broker?
$6,000
$4,000
$7,700
$7,000
$6,300
200 shares × $70 per share × (1
−
0.55) = $14,000 × (0.45) = $6,300.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was:
$4,800.
$12,000.
$5,600.
$7,200.
$20,000
200 shares × $60 per share × 0.60 = $12,000 × 0.60 = $7,200.
References
Multiple Choice
Difficulty: 2 Intermediate
You purchased 100 shares of IBM common stock on margin at $130 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock
pays no dividend; ignore interest on margin.
$21.24
$92.86
$49.52
$80.33
$130.00
100 shares × $130 × 0.5 = $13,000 × 0.5 = $6,500 (loan amount); 0.30 = (100P
−
$6,500) ÷ 100P; 30
−
P = 100P
−
$6,500;
−
70P =
−
$6,500; P = $92.86.
References
Multiple Choice
Difficulty: 3 Challenge
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You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30?
Ignore interest on margin.
0.33
0.55
0.43
0.23
0.25
100 shares × $45per share × 0.5 = $4,500 × 0.5 = $2,250 (loan amount); X = [100($30)
−
$2,250] ÷ 100($30); X = 0.25.
References
Multiple Choice
Difficulty: 3 Challenge
You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on
margin.
25.00%
–33.33%
44.31%
–41.67%
–54.22%
300 × $60 × 0.60 = $10,800 investment; 300 × $60 × 0.40 = $18,000 × 0.40 = $7,200 loan;
Proceeds after selling stock and repaying loan: $13,500 – $7,200 = $6,300;
Return = ($6,300
−
$10,800) ÷ $10,800 =
−
41.67%.
References
Multiple Choice
Difficulty: 3 Challenge
Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and
you did not remove any money from the account before making the offsetting transaction.
20.03%
25.67%
22.22%
77.46%
Profit on stock = ($45
−
$40) × 100 = $500, $500 ÷ $2,250 (initial investment) = 22.22%.
References
Multiple Choice
Difficulty: 3 Challenge
You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. At what stock price would you receive a margin call if the maintenance margin is 35%?
$51.00
$65.19
$35.22
$40.36
None of the options are correct.
Equity = 300($55) × 1.6 = $26,400; 0.35 = ($26,400
−
300
P
) ÷ 300
P
; 105
P
= $26,400
−
300
P
; 405
P
= $26,400;
P
= $65.18.
References
Multiple Choice
Difficulty: 3 Challenge
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Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintenance margin if a margin call is made at a stock price of $60?
40%
33%
35%
25%
None of the options are correct.
$5,000 × 1.6 = $8,000; [$8,000
−
100($60)] ÷ 100($60) = 33%.
References
Multiple Choice
Difficulty: 3 Challenge
Specialists on stock exchanges perform which of the following functions?
Act as dealers in their own accounts only
Analyze the securities in which they specialize only
Provide liquidity to the market only
Act as dealers in their own accounts and analyze the securities in which they specialize
Act as dealers in their own accounts and provide liquidity to the market
Specialists are both brokers and dealers and provide liquidity to the market; they are not analysts.
References
Multiple Choice
Difficulty: 2 Intermediate
Shares for short transactions:
are usually borrowed from other brokers.
are typically shares held by the short seller's broker in street name.
are borrowed from commercial banks.
are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.
Typically, the only source of shares for short transactions is the short seller's broker in street name; often these are margined shares.
References
Multiple Choice
Difficulty: 2 Intermediate
Which of the following orders is most useful to short sellers who want to limit their potential losses?
Limit order
Discretionary order
Limit-loss order
Stop-buy order
By issuing a stop-buy order, the short seller can limit potential losses by assuring that the stock will be purchased (and the short position closed) if the price increases to a certain level.
References
Multiple Choice
Difficulty: 2 Intermediate
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Which of the following orders instructs the broker to buy at the current market price?
Limit order
Discretionary order
Limit-loss order
Stop-buy order
Market order
Market orders are to be executed immediately at the best prevailing price.
References
Multiple Choice
Difficulty: 2 Intermediate
Which of the following orders instructs the broker to buy at or below a specified price?
Limit-loss order
Discretionary order
Limit-buy order
Stop-buy order
Market order
Limit-buy orders are to be executed if the market price decreases to the specified limit price.
References
Multiple Choice
Difficulty: 2 Intermediate
Which of the following orders instructs the broker to sell at or below a specified price?
Limit-sell order
Stop-loss order
Limit-buy order
Stop-buy order
Market order
Stop-loss orders are to be executed if the market price decreases to the specified limit price.
References
Multiple Choice
Difficulty: 2 Intermediate
Which of the following orders instructs the broker to sell at or above a specified price?
Limit-buy order
Discretionary order
Limit-sell order
Stop-buy order
Market order
Limit-sell orders are to be executed if the market price increases to the specified limit price.
References
Multiple Choice
Difficulty: 2 Intermediate
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31.
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32.
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Which of the following orders instructs the broker to buy at or above a specified price?
Limit-buy order
Discretionary order
Limit-sell order
Stop-buy order
Market order
Stop-buy orders are to be executed if the market price increases to the specified limit price.
References
Multiple Choice
Difficulty: 2 Intermediate
Shelf registration:
is a way of placing issues in the secondary market.
allows firms to register securities for sale over a five-year period.
increases transaction costs to the issuing firm.
is a way of placing issues in the primary market and allows firms to register securities for sale over a three-year period.
is a way of placing issues in the primary market and increases transaction costs to the issuing firm.
Shelf registration lowers transactions costs to the firm as the firm may register issues for a longer period than in the past and thus requires the services of the investment banker less frequently.
References
Multiple Choice
Difficulty: 1 Basic
Block transactions are transactions for more than _______ shares, and they account for about _____ percent of all trading on the NYSE.
1,000; 5
500; 10
100,000; 50
10,000; 30
5,000; 23
Block transactions are defined as trades of 10,000 or more shares.
References
Multiple Choice
Difficulty: 1 Basic
A program trade is:
a trade of 10,000 (or more) shares of a stock.
a trade of many shares of one stock for one other stock.
a trade of analytic programs between financial analysts.
a coordinated purchase or sale of an entire portfolio of stocks.
not feasible with current technology but is expected to be popular in the near future.
Program trading is a coordinated purchase or sale of an entire portfolio of stocks.
References
Multiple Choice
Difficulty: 2 Intermediate
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When stocks are held in street name,:
the investor receives a stock certificate with the owner's street address.
the investor receives a stock certificate without the owner's street address.
the broker does not receive a stock certificate.
the client holds the stock in the brokerage firm's name on behalf of the broker. .
the investor does not receive a stock certificate, and the broker holds the stock in the brokerage firm's name on behalf of the client.
When stocks are held in street name, the investor does not receive a stock certificate; the broker holds the stock in the brokerage firm's name on behalf of the client. This arrangement speeds transfer of securities.
References
Multiple Choice
Difficulty: 2 Intermediate
NASDAQ subscriber levels:
permit those with the highest level, 3, to "make a market" in the security.
permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes.
permit level 1 subscribers to receive general information about prices.
include all OTC stocks.
permit those with the highest level, 3, to "make a market" in the security; permit those with a level 2 subscription to receive all bid and ask quotes but not to enter their own quotes; and permit level 1 subscribers to
receive general information about prices.
NASDAQ links dealers in a loosely organized network with different levels of access to meet different needs.
References
Multiple Choice
Difficulty: 1 Basic
You want to buy 100 shares of Hotstock Incorporated at the best possible price as quickly as possible. You would most likely place a:
stop-loss order.
stop-buy order.
market order.
limit-sell order.
limit-buy order.
A market order is for immediate execution at the best possible price.
References
Multiple Choice
Difficulty: 1 Basic
You want to purchase KO stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy?
100 shares
200 shares
50 shares
500 shares
25 shares
0.5 = [(
Q
× $60)
−
$3,000] ÷ (
Q
× $60); $30
Q
= $60
Q
−
$3,000; $30
Q
= $3,000;
Q
= 100.
References
Multiple Choice
Difficulty: 2 Intermediate
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39.
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40.
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A sale by IBM of new stock to the public would be a(n):
short sale.
seasoned equity offering.
private placement.
secondary-market transaction.
initial public offering.
When a firm whose stock already trades in the secondary market issues new shares to the public, this is referred to as a seasoned equity offering.
References
Multiple Choice
Difficulty: 1 Basic
The finalized registration statement for new securities approved by the SEC is called
a red herring.
the preliminary statement.
the prospectus.
a best-efforts agreement.
a firm commitment.
The prospectus is the finalized registration statement approved by the SEC.
References
Multiple Choice
Difficulty: 1 Basic
One outcome from the SEC investigation of the "Flash Crash of 2010" was:
a prohibition of short selling.
higher margin requirements.
approval of new circuit breakers.
establishment of electronic communications networks (ECNs).
passage of the Sarbanes-Oxley Act.
See "The Flash Crash of 2010."
References
Multiple Choice
Difficulty: 2 Intermediate
All of the following are considered new trading strategies,
except
high frequency trading.
algorithmic trading.
dark pools.
short selling.
All of the options are considered new trading strategies.
Short selling has been in use for over 100 years in the U.S.
References
Multiple Choice
Difficulty: 2 Intermediate
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44.
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You sell short 100 shares of Loser Company at a market price of $45 per share. Your maximum possible loss is:
$4,500.
unlimited.
zero.
$9,000.
Cannot be determined from the information given.
A short seller loses money when the stock price rises. Since there is no upper limit on the stock price, the maximum theoretical loss is unlimited.
References
Multiple Choice
Difficulty: 2 Intermediate
You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The next day, Qualitycorp's price drops to $25 per share. What is your actual margin?
50%
40%
33%
60%
25%
[300 × $25
−
0.5 × 300 × $30) ÷ (300 × $25) = 0.40.
References
Multiple Choice
Difficulty: 2 Intermediate
When a firm markets new securities, a preliminary registration statement must be filed with:
the exchange on which the security will be listed.
the Securities and Exchange Commission.
the Federal Reserve.
all other companies in the same line of business.
the Federal Deposit Insurance Corporation.
The SEC requires the registration statement and must approve it before the issue can take place.
References
Multiple Choice
Difficulty: 1 Basic
In a typical underwriting arrangement, the investment-banking firm:
I) sells shares to the public via an underwriting syndicate.
II) purchases the securities from the issuing company.
III) assumes the full risk that the shares may not be sold at the offering price.
IV) agrees to help the firm sell the issue to the public but does not actually purchase the securities.
I, II, and III
I, III, and IV
I and IV
II and III
I and II
A typical underwriting arrangement is made on a firm commitment basis.
References
Multiple Choice
Difficulty: 2 Intermediate
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Which of the following is
true
regarding private placements of primary security offerings?
Extensive and costly registration statements are required by the SEC.
For very large issues, they are better suited than public offerings.
They trade in secondary markets.
The shares are sold directly to a small group of institutional or wealthy investors.
They have greater liquidity than public offerings.
Firms can save on registration costs, but the result is that the securities cannot trade in the secondary markets and therefore are less liquid. Public offerings are better suited for very large issues.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was:
$4,800.
$12,000.
$2,250.
$7,200.
100 shares × $45 per share × 0.50 = $4,500 × 0.50 = $2,250.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was:
$4,800.60.
$12,000.25.
$2,250.75.
$1,822.50.
150 shares × $27 per share × 0.45 = $4,050 × 0.45 = $1,822.50.
References
Multiple Choice
Difficulty: 2 Intermediate
You purchased 100 shares of KO common stock on margin at $60 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays
no dividend; ignore interest on margin.
$42.86
$50.75
$49.67
$80.34
100 shares × $60 × 0.5 = $6,000 × 0.5 = $3,000 (loan amount); 0.30 = (100
P
−
$3,000) ÷ 100
P
; 30
−
P
= 100
P
−
$3,000;
−
70
P
=
−
$3,000;
P
= $42.86.
References
Multiple Choice
Difficulty: 3 Challenge
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51.
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52.
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You purchased 1,000 shares of PINS common stock on margin at $19 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock
pays no dividend; ignore interest on margin.
$12.86
$15.75
$19.67
$13.57
1,000 shares × $19 × 0.5 = $19,000 × 0.5 = $9,500 (loan amount); 0.30 = (1,000
P
−
$9,500) ÷ 1,000
P
; 300
P
= 1,000
P
−
$9,500;
−
700
P
=
−
$9,500;
P
= $13.57.
References
Multiple Choice
Difficulty: 3 Challenge
You purchased 100 shares of common stock on margin at $40 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25?
Ignore interest on margin.
0.33
0.55
0.20
0.23
0.25
100 shares × $40 per share × 0.5 = $4,000 × 0.5 = $2,000 (loan amount);
X
= [100($25)
−
$2,000] ÷ 100($25);
X
= 0.20.
References
Multiple Choice
Difficulty: 3 Challenge
You purchased 1,000 shares of common stock on margin at $30 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24?
Ignore interest on margin.
0.330
0.375
0.200
0.235
0.255
1,000 shares × $30 per share × 0.5 = $30,000 × 0.5 = $15,000 (loan amount);
X
= [1,000($24)
−
$15,000]/1,000($24);
X
= 0.375.
References
Multiple Choice
Difficulty: 3 Challenge
You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on
margin.
28%
33%
14%
42%
24%
100($50)(0.50) = $2,500 investment; gain on stock sale = ($56
−
$50)(100) = $600; Return = ($600 ÷ $2,500) = 24%.
References
Multiple Choice
Difficulty: 3 Challenge
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You purchased 100 shares of common stock on margin for $60 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $72 per share? Ignore interest on margin.
28%
33%
14%
40%
24%
100($60)(0.50) = $3,000 investment; gain on stock sale = ($72
−
$60)(100) = $1,200; Return = ($1,200 ÷ $3,000) = 40%
References
Multiple Choice
Difficulty: 3 Challenge
Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 per share? The stock paid no dividends during the period, and
you did not remove any money from the account before making the offsetting transaction.
20.47%
25.63%
57.14%
77.23%
Profit on stock = ($35
−
$25)(1,000) = $10,000; initial investment = ($35)(1,000)(0.5) = $17,500; return = $10,000 ÷ $17,500 = 57.14%.
References
Multiple Choice
Difficulty: 2 Intermediate
Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and
you did not remove any money from the account before making the offsetting transaction.
−
33.33%
−
25.63%
−
57.14%
−
77.23%
Profit on stock = ($30
−
$35)(100) =
−
500; initial investment = ($30)(100)(0.5) = $1,500; return = $500 ÷ $1,500 =
−
33.33%.
References
Multiple Choice
Difficulty: 2 Intermediate
You want to purchase GM stock at $40 from your broker using as little of your own money as possible. If initial margin is 50% and you have $4,000 to invest, how many shares can you buy?
100 shares
200 shares
50 shares
500 shares
25 shares
You can buy $4,000 ÷ $40 = 100 shares outright and you can borrow $4,000 to buy another 100 shares.
References
Multiple Choice
Difficulty: 2 Intermediate
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58.
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59.
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60.
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You want to purchase IBM stock at $130 from your broker using as little of your own money as possible. If initial margin is 50% and you have $19,600 to invest, how many shares can you buy?
150 shares
200 shares
300 shares
500 shares
25 shares
You can buy $19,600 ÷ $130 = 150 (Rounded) shares outright and you can borrow $19,600 to buy another 150 shares (Rounded).
References
Multiple Choice
Difficulty: 2 Intermediate
Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $50?
40%
20%
35%
25%
$4,000 × 1.5 = $6,000; ($6,000
−
100 × $50) ÷ (100 × $50) = 20%.
References
Multiple Choice
Difficulty: 3 Challenge
Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?
40.5%
20.5%
35.5%
23.5%
$7,000 × 1.5 = $10,500; ($10,500
−
100× $85) ÷ (100 × $85) = 23.5%.
References
Multiple Choice
Difficulty: 3 Challenge
You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 35%?
$50
$65
$35
$40
Equity = 100($45) × 1.5 = $6,750; 0.35 = ($6,750
−
100
P
) ÷ 100
P
; 35
P
= $6,750
−
100
P
; 135
P
= $6,750;
P
= $50.00
References
Multiple Choice
Difficulty: 3 Challenge
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62.
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63.
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64.
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You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?
$90.23
$88.52
$86.54
$87.12
Equity = 100($75) × 1.5 = $11,250; 0.30 = ($11,250
−
100
P
) ÷ 100
P
; 30
P
= $11,250
−
100
P
; 130
P
= $11,250;
P
= $86.54.
References
Multiple Choice
Difficulty: 3 Challenge
The preliminary prospectus is referred to as a(n):
red herring.
indenture.
greenmail.
tombstone.
headstone.
The preliminary prospectus is referred to as a red herring.
References
Multiple Choice
Difficulty: 1 Basic
The securities act of 1933:
I) requires full disclosure of relevant information relating to the issue of new securities.
II) requires registration of new securities.
III) requires issuance of a prospectus detailing financial prospects of the firm.
IV) established the SEC.
V) requires periodic disclosure of relevant financial information.
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.
I, II, and III
I, II, III, IV, V, and VI
I, II, and V
I, II, and IV
IV only
The Securities Act of 1933 requires full disclosure of relevant information relating to the issue of new securities, requires registration of new securities, and requires issuance of a prospectus detailing financial prospects of the firm.
References
Multiple Choice
Difficulty: 1 Basic
The Securities Act of 1934:
I) requires full disclosure of relevant information relating to the issue of new securities.
II) requires registration of new securities.
III) requires issuance of a prospectus detailing financial prospects of the firm.
IV) established the SEC.
V) requires periodic disclosure of relevant financial information.
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.
I, II, and III
I, II, III, IV, V, and VI
I, II, and V
I, II, and IV
IV, V, and VI
The Securities Act of 1934 established the SEC, requires periodic disclosure of relevant financial information, and empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.
References
Multiple Choice
Difficulty: 1 Basic
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66.
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67.
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68.
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Which of the following is
not
required under the CFA Institute Standards of Professional Conduct?
Knowledge of all applicable laws, rules, and regulations
Disclosure of all personal investments, whether or not they may conflict with a client's investments
Disclosure of all conflicts to clients and prospects
Reasonable inquiry into a client's financial situation
All of the options are required under the CFA Institute standards.
See "Excerpts from CFA Institute Standards of Professional Conduct." Personal investments need not be disclosed unless they are in potential or actual conflict.
References
Multiple Choice
Difficulty: 2 Intermediate
According to the CFA Institute Standards of Professional Conduct, CFA Institute members have responsibilities to all of the following,
except
:
the government.
the profession.
the public.
the employer.
clients and prospective clients.
See "Excerpts from CFA Institute Standards of Professional Conduct."
References
Multiple Choice
Difficulty: 2 Intermediate
The introduction of the ___________________allowed brokers to send orders either for immediate electronic execution or to the specialist, who could seek price improvement from another trader.
International Exchange
NYSE Hybrid Market
Designated Order Turnaround
NYSE Euronext
AMEX
References
Multiple Choice
Difficulty: 2 Intermediate
Who purchased the NYSE in 2013?
International Exchange
NYSE Hybrid Market
Designated Order Turnaround
NYSE Euronext
AMEX
References
Multiple Choice
Difficulty: 2 Intermediate
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69.
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70.
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71.
Award:
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What was the name of the system that introduced the NYSE to electronic trading?
International Exchange
NYSE Hybrid Market
Designated Order Turnaround
NYSE Euronext
AmNEXT
References
Multiple Choice
Difficulty: 2 Intermediate
The process of marketing a public offering is usually referred to as ____________.
Underwriting
Investment banking
Brokerage
Discounting
IPO
References
Multiple Choice
Difficulty: 2 Intermediate
What kind of entity will often sell a company via an initial public offering when the firm gets too big for similar entities to purchase?
Underwriter
Investment banking
Private Equity
Broker
LBO
References
Multiple Choice
Difficulty: 2 Intermediate
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Related Questions
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▪ Find the company's financial information by putting the company's name in the search bar.
. Calculate the company's cost of equity using the CAPM formula and the short-term risk-free rate assumptions.
▪ Use 8.5 percent as the market risk premium.
▪ Use the current 90-day yield (3-month yield) on U.S. Treasuries as the risk-free rate. Hint: Use the U.S. Department of the Treasury's
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A)
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ethical but illegal
C)
unethical but legal
D)
unethical and illegal
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I want answer with explanation...
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Answer Number 1 and 2:
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market transaction?
2. What if instead an investor buys existing shares of Apple stock in the open market. Is this a primary or secondary market transaction?
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Answer completely.
You will get up vote for sure.
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Dual class stock is generally designed to
Provide bigger dividends to majority owners.
Help minority owners obtain board representation.
Protect the voting rights of managing owners.
Improve marketability of the shares.
A shareholder in a troubled corporation is not likely to lose his/her:
Money invested in the stock.
Personal assets.
Dividends declared.
Par value.
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- A limit order
- A stop order
- a market order
- a GTC order
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