Section 41 Quizzes

What is an Aggressively priced Limit Order?

"Aggressively priced" refers to a buy order with limit prices higher than the best ask or a sell order with a limit price lower than the best bid. Aggressively priced limit orders are most likely to be filled immediately. (Module 41.3, LOS 41.h)

What are money markets?

"Money markets" generally refers to markets for debt securities maturing in one year or less.

What is the Margin Call Price Formula?

= Po (1 - initial margin / 1 - maintenance margin)

Margin Return % Formula An investor buys 1,000 shares of a non-dividend-paying stock for $18. The initial margin requirement is 40% and the maintenance margin is 30%. After one year the investor sells the stock for $24 per share. The investor's rate of return on this investment (ignoring borrowing and transactions costs and taxes), and the price at which the investor would receive a margin call, are closest to:

= [((Ending Value - Loan Payoff) / Beginning Equity Position) - 1] * 100 Margin Return % = [(([$24 × 1,000] - [$18 × 1,000 × 0.60]) / ($18 × 0.40 × 1,000)) - 1] × 100 = = 83.33% Margin Call Price = (original price) × (1 - initial margin) / (1 - maintenance margin) Margin Call price = $18 × (1 - 0.40) / (1 - 0.30) = $15.43 (Module 41.2, LOS 41.f)

What is an order Behind the Market?

A behind-the-market limit order would be least likely executed. In the case of a buy, the limit buy order price is below the best bid and will likely not execute until security prices decline (Module 41.3, LOS 41.h)

Which of the following orders is said to be "behind the market"?

A limit buy order is behind the market if its limit price is below the best bid. A limit sell order is behind the market if its limit price is above the best ask. Market orders are never said to be behind the market. (Module 41.3, LOS 41.h)

Compared to a market order to sell, a limit order to sell will specify:

A: A price that can be higher or lower than the current market price. Limit Sells will sell at or higher than the limit price Limit Buys will buy at or lower than the limit price Price limits on buy or sell orders can be above, at, or below the current market price. (Module 41.3, LOS 41.h)

A market that directs capital to its most productive use is best described as:

A: Allocationally Efficient Markets are said to be allocationally efficient when capital is directed to its most productive uses. Operationally efficient markets are those that have low trading costs. Informationally efficient markets are those in which security prices reflect all information associated with fundamental value in a timely fashion. (Module 41.3, LOS 41.k)

A financial intermediary buys a stock and then resells it a few days later at a higher price. Which intermediary would this most likely describe?

A: Dealer This situation best describes a dealer. A dealer buys an asset for its inventory in the hopes of reselling it later at a higher price. Brokers stand between buyers and sellers of the same security at the same location and time. Arbitrageurs trade in the same security simultaneously in different markets. (Module 41.1, LOS 41.d)

The main functions of the financial system most likely include:

A: Determining equilibrium interest rates and allocating capital to its most productive uses. The main functions of the financial system are to allow individuals and organizations to save, borrow, raise capital, and manage risks; to determine equilibrium rates of return that equate the amounts of lending and borrowing; and to allocate capital to its most productive uses. The money supply is typically controlled by countries' central banks. (Module 41.1, LOS 41.a)

Shares in a publicly traded company that owns gold mines and mining operations are considered:

A: Financial Assets, because it is a stock of the company.

Which of the following conditions is most likely necessary for capital to be allocated to its most valuable uses?

A: Investors are well informed about the risk and return or various investments Capital will flow to its most valuable uses if markets function well and investors are well informed about the risk and return characteristics of various investments. Allocation of capital to its most valuable uses does not require that all investors have complete information or that financial markets are frictionless.

Which of the following statements regarding secondary markets is least accurate? Secondary markets are important because they provide:

A: Regulators with information about market participants Secondary markets are important because they provide liquidity and continuous information to investors. The liquidity of the secondary markets adds value to both the investor and firm because more investors are willing to buy issues in the primary market, when they know these issues will later become liquid in the secondary market. Therefore, the secondary market makes it easier for firms to raise external capital. (Module 41.3, LOS 41.i)

In contrast with a typical forward contract, futures contracts have:

A: Standardized Terms Futures are forward contracts that trade on exchanges and have standardized terms, in contrast with forward contracts, which are customized instruments. A futures clearinghouse reduces counterparty risk by guaranteeing the performance of buyers and sellers. Futures contracts trade on organized exchanges and are more liquid than forward contracts. (Module 41.1, LOS 41.c)

Which of the following statements about selling a stock short is least likely accurate?

A: The Short Seller may withdraw the proceeds of the short sale Proceeds from the short sale must remain in the brokerage account along with the required margin deposit. (Module 41.2, LOS 41.e)

Sonia Fennell purchases 1,000 shares of Xpressoh Inc. for $35 per share. One year later, she sells the stock for $42 per share. Xpressoh Inc. pays no dividends. The initial margin requirement is 50%. Fennell's one-year return assuming an all-cash transaction, and if she buys on margin (assume she pays no transaction or borrowing costs and has not had to post additional margin), are closest to: Cash Return; Margin Return?

All-cash return = 42/35 - 1 = 20% Margin return = (42 - 35)/[(35)(0.5)] = 40% (Module 41.2, LOS 41.f)

Which of the following is most similar to a short position in the underlying asset?

Buying a put is most similar to a short position in the underlying asset because the put increases in value if the underlying asset value decreases. The writer of a put and the holder of a call have a long exposure to the underlying asset because their positions increase in value if the underlying asset value increases. (Module 41.2, LOS 41.e)

Margin Equity % Formula When stock Price Increases An investor bought a stock on margin. The margin requirement was 60%, the current price of the stock is $80, and the stock price was $50 one year ago. If margin interest is 5%, how much equity did the investor have in the investment at year-end?

Equity % = [Value - (margin debt + interest)] / Value A: 73.8% $80 - $21 / $80 = 73.8% (Module 41.2, LOS 41.f)

What are forward markets?

Forward markets refer to contracts for the future exchange of an asset at a price established today.

What is an order making a new market?

In an order that is making a new market or inside the market, the limit buy order price is between the best bid and ask. (Module 41.3, LOS 41.h)

What are Primary Markets?

Primary markets are the markets for newly issued securities.

When the question gives Cash Return, what does that mean?

The total return excluding the margin return. = (Sell price / Buy price) - 1