Question 1

Firms raise capital by issuing stock

Accepted Answer

Firms raise capital by issuing stock in the primary market, where they offer newly issued securities to investors. The secondary market is where existing securities are bought and sold between investors. Option C is incorrect as it suggests unethical behavior, and option D is incorrect as it is not a relevant factor in the process of raising capital.

Question 2

You purchased JNJ stock at $50 per share.The stock is currently selling at $65.Your gains may be protected by placing a

Accepted Answer

A limit-sell order would be the best choice in this scenario. By placing a limit-sell order, you can set a minimum selling price for your shares, ensuring that you lock in your gains and avoid losses if the stock price suddenly drops.

Question 3

You sold JCP stock short at $80 per share.Your losses could be minimized by placing a

Accepted Answer

Placing a stop-buy order would minimize losses in a short position as it would automatically trigger a market buy order if the stock price rises above a certain amount (the stop price) and limit further losses. A limit-sell order would not be beneficial as it could potentially lock in losses if the stock price continues to rise. A limit-buy order would not be useful for a short position. A day-order simply specifies that the order is only valid for the current trading day and does not have any impact on minimizing losses.

Question 4

You purchased 100 shares of IBM common stock on margin at $70 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.

Accepted Answer

100 shares × $70 × 0.5 = $7,000 × 0.5 = $3,500 (loan amount); 0.30 = (100P $3,500)/100P; 30 - P = 100P - $3,500; -70P = -$3,500; P = $50.

Question 5

You sold short 200 shares of common stock at $60 per share.The initial margin is 60%.Your initial investment was

Accepted Answer

To calculate the initial investment, we need to multiply the number of shares sold short by the price per share and the initial margin, which is represented as follows:
Initial Investment = Number of shares sold short x Price per share x Initial Margin
Plugging the given numbers into the formula, we get:
Initial Investment = 200 x $60 x 0.60
Initial Investment = $7,200
Therefore, the correct choice is D.

Question 6

The trading of stock that was previously issued takes place

Accepted Answer

The trading of previously issued stock takes place in the secondary market, where investors buy and sell shares amongst themselves without the involvement of the issuing company. The primary market is where new securities are issued and sold for the first time, often with the assistance of an investment banker. While some trading of new securities may occur in the primary market, the main focus is on initial public offerings (IPOs) and other new issuances, making the secondary market the correct answer for this question.

Question 7

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.

Accepted Answer

The rate of return when selling the stock at $45 per share, considering the initial margin of 60%, can be calculated as follows:1. The total cost of the 300 shares at $60 per share is $18,000.2. The amount borrowed is 40% of the total cost (since the initial margin is 60%), which is $7,200.3. The equity (initial margin) is 60% of the total cost, which is $10,800.4. If the stock is sold at $45 per share, the total sales proceeds are 300 shares * $45 = $13,500.5. The return on the investment is the sales proceeds minus the amount borrowed ($13,500 - $7,200 = $6,300) minus the initial equity ($10,800).6. The loss is $10,800 - $6,300 = $4,500.7. The rate of return is the loss divided by the initial equity, which is -$4,500 / $10,800 = -41.67%.

Question 8

The cost of buying and selling a stock consists of

Accepted Answer

The cost of buying and selling a stock includes broker's commissions (fees paid for the broker's services), dealer's bid-asked spread (the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept), and a price concession an investor may be forced to make (adjusting the price to make the deal happen). All these factors contribute to the overall cost of trading a stock.

Question 9

A purchase of a new issue of stock takes place

Accepted Answer

When a new issue of stock is purchased, it typically occurs in the primary market, where securities are sold for the first time. Investment bankers often assist in this process, helping companies to issue the new stock and sell it to investors.

Question 10

Restrictions on trading involving insider information apply to the following, except

Accepted Answer

Insider trading restrictions apply to corporate officers, directors, and major stockholders, as well as any other individuals who come into possession of material nonpublic information through their relationship with the company. Therefore, option D is the correct choice as it includes all of the individuals listed in the question.

Question 11

Initial margin requirements are determined by

Accepted Answer

The Federal Reserve System is responsible for setting initial margin requirements for securities trading in the United States.

Question 12

Assume you purchased 200 shares of GE 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?

Accepted Answer

The total cost of the shares is 200 * $70 = $14,000. With an initial margin of 55%, the amount you must provide is 55% of $14,000 = $7,700. Therefore, the amount borrowed is the total cost minus your contribution: $14,000 - $7,700 = $6,300.

Question 13

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.

Accepted Answer

The rate of return on a short sale is calculated by the formula: $\frac{(Initial\ Price - Final\ Price) \times Number\ of\ Shares}{Initial\ Margin\ Requirement}$. Here, the initial price is $45, the final price is $40, and the number of shares is 100. The initial margin requirement is 50% of the initial value of the stock, which is 0.5 * $45 * 100 = $2250. The profit from the short sale is $(45 - 40) * 100 = $500. Therefore, the rate of return is $\frac{$500}{$2250} = 22.22\%$.

Question 14

In a "firm commitment," the investment banker

Accepted Answer

In a "firm commitment," the investment banker buys the stock from the company and then resells the issue to the public, taking on the risk of selling the shares at a profit or loss.

Question 15

Which of the following statements regarding the specialist are true?

Accepted Answer

All of the statements are true regarding specialists. They 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. Additionally, specialists can while acting in their capacity as specialists trade for their own account, with pending public customer orders being given precedence.

Question 16

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%?

Accepted Answer

To calculate the price at which a margin call would occur, we need to use the formula:

Stock price at margin call = (Short Sale Price - Current Value of Short Sale) / Number of Shares Shorted

Here's how we can fill in the values using the information given in the question:

Short Sale Price = $55 per share
Number of Shares Shorted = 300

To find the current value of the short sale, we need to use the current stock price. Let's call this "P".

Current Value of Short Sale = Number of Shares Shorted x P

We know that the initial margin is 60%, so we have:

Initial Margin = Short Sale Price x Number of Shares Shorted x 60% = $55 x 300 x 60% = $9,900

We also know that the maintenance margin is 35%, so the minimum value that the short sale can have before a margin call occurs is:

Maintenance Margin = Short Sale Price x Number of Shares Shorted x 35% = $55 x 300 x 35% = $6,075

We can use these values to solve for the current stock price:

$6,075 = $55 x 300 - (300 x P)
$6,075 = $16,500 - 300P
$10,425 = 300P
P = $34.75

Therefore, the stock price at which a margin call would occur is:

(Short Sale Price - Current Value of Short Sale) / Number of Shares Shorted = ($55 - $34.75) / 300 = $0.07

The margin call would occur when the stock price falls to $34.75. However, the answer choices are given in the dollar format, and the closest answer is B, $65.19.

Question 17

Investment bankers

Accepted Answer

Investment bankers act as intermediaries between issuers of stocks and investors, but they also act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities. This dual role is a key feature of investment banking.

Question 18

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.

Accepted Answer

The answer of You purchased 100 shares of common stock...

Question 19

Which one of the following statements regarding orders is false?

Accepted Answer

A market order is not specific to a particular exchange, but rather means that the investor is willing to buy or sell at the prevailing market price regardless of which exchange it is on.

Question 20

The secondary market consists of

Accepted Answer

The secondary market includes transactions on stock exchanges like the AMEX and also over-the-counter (OTC) transactions outside of the formal exchange setting. Therefore, choice D is the correct answer. Transactions through an investment banker are part of the primary market where new securities are issued.

Quiz 3: How Securities Are Traded