Investment Management Quiz 5 Review

On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security? A. $1,375 B. $500 C. $275 D. $1,450

A. $1,375 (1,003.25 - 1,000.50)500 = $1,375

A market order has: A. price uncertainty but not execution uncertainty B. both price uncertainty and execution uncertainty C. Execution uncertainty but not price uncertainty

A. price uncertainty but not execution uncertainty A market order has price uncertainty but not execution uncertainty.

Assume you purchased 400 shares of XYZ common stock on margin at $25 per share from your broker. If the initial margin is 75%, the amount you borrowed from the broker is _________. A. $7,500 B. $2,500 C. $12,500 D. $10,000

B. $2,500 400($25)(0.25) = $2,500

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. A. interest building B. book building C. market analysis D. customer identification

B. book building

Purchases of new issues of stock take place _________. A. at the desk of the Fed B. in the primary market C. in the secondary market D. in the money markets

B. in the primary market

You short-sell 200 shares of Tuckerton Trading Co., now selling for $46 per share. What is your maximum possible gain, ignoring transactions cost? A. $46 B. $154 C. $9,200 D. unlimited

C. $9,200 Tuckerton could go bankrupt, with a share price of $0. You could keep the entire proceeds from the short sale. Maximum gain=Proceeds − Minimum possible replacement cost =200($46) − 200($0) =$9,200

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss? A. 9% B. 15% C. 48% D. 57%

C. 48% Loss = (22−25)100 = $(300) Amount invested = 0.25 × $25 × 100$625 Return = −$300/$625 =-48%

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. A. overpriced B. correctly priced C. underpriced D. mispriced, but without any particular bias

C. underpriced

Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue? A. $90,000 B. $1,290,000 C. $2,390,000 D. $1,690,000

D. $1,690,000 Total cost = 90,000 + (43 - 35)200,000 = $1,690,000

Rank the following types of markets from least integrated and organized to most integrated and organized: I. Brokered markets II. Continuous auction markets III. Dealer markets IV. Direct search markets A. IV, II, I, III B. I, III, IV, II C. II, III, IV, I D. IV, I, III, II

D. IV, I, III, II