FInc 314 quiz 1

True or false: The ask price is less than the bid price

The ask price is greater than the bid price (note: the opposite is true for yields)

Here is some price information about Marabel Inc. Bid: 69.96 Ask: 70.05 you have placed a stop-loss order to sell at $70. what are you telling your market broker? Given market prices, will your order be executed?

The broker is instructed to attempt to sell your Marabel, Inc. stock as soon as the Marabel, Inc. 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.

True or false: An investor who wishes to sell shares immediately should ask his or her broker to enter a limit order

False: An investor who wishes to sell shares immediately should ask his or her broker to enter a market order

True or false: An issue of additional shares of stock to the public by Microsoft would be called IPO

False: An issue of additional shares of stock to the public by Microsoft would be called seasoned offering

the continuously compounded annual return on a stock is normally distributed with a mean of 20% and a standard deviation of 30%. with 95.44% confidence, we should expect its actual return in any particular year to be which pair of values ? a) -40% and 80% b) -30% and 80% c) -20.6% and 60.6% d) -10.4% and 50.4%

a) -40% and 80%

True or false: An ECN is a computer link used by security dealers primarily to advertise prices at which they are willing to buy or sell shares

True

suppose 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. a) if you earn no interest on the funds in your margin account, what will be your return after 1 year if Xtel stock is selling at: (i) $22 ; (ii) $20 ; (iii) $18? Assume that Xtel pays no dividends b) if the maintenance margin in 25%. how high can Xtel's price rise before you get a margin call?

a) The gain or loss on the short position is: (-1,000 x ΔP) Invested funds = $15,000 Therefore: rate of return = (-1,000 x ΔP)/15,000 The rate of return in each of the three scenarios is: (i) Rate of return = (-1,000 x $2)/$15,000 = -0.1333, or-13.33% (ii) Rate of return = (-1,000 x $0)/$15,000 = 0% (iii)Rate of return = [-1,000 x (-$2)]/$15,000 = +0.1333, or+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 500P. You will receive a margin call when: ($35,000 - 1,000P)/1000P = .25 where P = $28 or higher

Here is some price information on Fincorp stock. Suppose first that Fincorp trades in a dealer market. Bid Asked 55.25 55.50 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? (Round your answer to 2 decimal places.) c. What will happen suppose you have submitted a limit order to sell at $55.62. d. What will happen suppose you have submitted a limit order to buy at $55.37.

a. $55.50 b. $55.25 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.

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. a. What is the remaining margin in the account? b) What is the margin on the short position? c) If the maintenance margin requirement is 30%, will Old Economy receive a margin call? d) What is the rate of return on the investment? (Negative value should be indicated by a minus sign.)

a. The initial margin was: 0.50 x 1,000 x $40 = $20,000 As a result of the increase in the stock price Old Economy Traders loses: $10 x 1,000 = $10,000 Therefore, margin decreases by $10,000. Moreover, Old Economy Traders must pay the dividend of $2 per share to the lender of the shares, so that 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% So 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: (-$12,000/$20,000) = -0.60, or -60%

Dee 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%: a) What is the margin in Dee's account when she first purchases the stock? b) If the share price falls to $30 a share, 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?

a. The stock is purchased for: 300 x $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 x 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 over the year is: (Ending equity in the account Initial equity)/Initial equity = ($4,680 - $8,000)/$8,000 = -0.415, or -41.5%

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. a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.) 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.

a. You buy 200 shares of Telecom for $10,000. These shares increase in value by 10%, or $1,000. You pay interest of: 0.08 $5,000 = $400 The rate of return will be: ($1,000-$400)/$5,000 = 12% b. The value of the 200 shares is 200P. Equity is (200P - $5,000). You will receive a margin call when: (200P - $5,000)/200P = .30 where P = $35.71 or lower

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. 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?

a. 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 100P. Therefore, equity is ($7,500 - 100P). A margin call will be issued when: (7,500 - 100P)/100P = .30 where P = $57.69 or higher

Limit buy order

an order that purchases stock if the price falls below a predetermined level

market order

either a buy or sell order that is executed immediately at the current market price

limit sell order

sells stock when the price rises above a predetermined level