Question 1

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.

Accepted Answer

To avoid a margin call, the equity in the investment must stay above 30% of the market value of the stock. The initial investment is 100 shares at $130/share, totaling $13,000. With an initial margin of 50%, you borrow $6,500 and use $6,500 of your own money. The formula for the price at which the maintenance margin call occurs is: $$P = \frac{Loan}{(1 - Maintenance\ Margin) \times Number\ of\ Shares}$$Plugging in the values:$$P = \frac{6500}{(1 - 0.30) \times 100} = \frac{6500}{0.7 \times 100} = \frac{6500}{70} = $92.86$$So, you would get a margin call if the stock price falls below $92.86.

Question 2

You sold AAPL stock short at $190 per share. Your losses could be minimized by placing a

Accepted Answer

A stop-buy order is used in short selling to limit potential losses. If the stock price rises to a certain level, the stop-buy order is triggered, buying back the stock to cover the short position, thus minimizing further losses.

Question 3

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 not being able to sell all the shares at the desired price.

Question 4

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

Accepted Answer

When selling short 200 shares at $60 each, the total value is $12,000. With an initial margin requirement of 60%, the initial investment is 60% of $12,000, which is $7,200.

Question 5

A purchase of a new issue of stock takes place

Accepted Answer

The purchase of a new issue of stock typically occurs in the primary market, where securities are sold for the first time, and it often involves the assistance of an investment banker to manage the sale, underwrite the securities, and help set the initial offering price.

Question 6

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 initial investment is 60% of the total value, so for 300 shares at $60 each, the total value is $18,000, and the initial investment is 0.6 * $18,000 = $10,800. Selling at $45 per share, the total value is 300 * $45 = $13,500. The loss is $18,000 - $13,500 = $4,500. The rate of return is the loss divided by the initial investment: $4,500 / $10,800 = -41.67%.

Question 7

The cost of buying and selling a stock consists of

Accepted Answer

The cost of buying and selling a stock includes broker's commissions (the fee charged by a broker for executing the transaction), dealer's bid-asked spread (the difference between the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept), and a price concession an investor may be forced to make (which can occur in situations where an investor needs to adjust their price to make a trade happen). These elements together constitute the total cost associated with trading a stock.

Question 8

You purchased JNJ stock at $130 per share. The stock is currently selling at $145. Your gains may be protected by placing a

Accepted Answer

A limit-sell order allows you to set a minimum price at which you're willing to sell your stock, thus protecting your gains by ensuring the stock is not sold for less than your target price.

Question 9

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

The initial value of the short sale is 300 shares * $55 = $16,500. The initial margin requirement means you must have 60% of this value in your account, which is $16,500 * 0.60 = $9,900. For a short sale, a margin call occurs when the equity in the account falls below the maintenance margin requirement. The equity in a short account is the initial margin plus the initial value of the short sale minus the current market value of the shorted stock. The formula to find the stock price at which a margin call occurs is: Initial Value of Short Sale - (Initial Margin Requirement * Initial Value of Short Sale) / (1 - Maintenance Margin Requirement) = Current Market Value of Shorted Stock. Plugging in the numbers: $16,500 - ($9,900) / (1 - 0.35) = Current Market Value. Solving for the current market value gives $25,230.77. Dividing this by the number of shares (300) gives a stock price of approximately $65.19.

Question 10

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?

Accepted Answer

The maintenance margin is calculated as the equity in the account divided by the market value of the securities. When the stock price increases to $60, the loss on the short sale is $10 per share, or $1,000 total (100 shares * $10). The initial equity was $3,000 (60% of $5,000, which is 100 shares * $50). After the loss, the equity is $2,000 ($3,000 initial equity - $1,000 loss). The market value of the shorted stock is now $6,000 (100 shares * $60). Therefore, the maintenance margin is $2,000 / $6,000 = 33.33%, which rounds to 33%.

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 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: [(Initial Price - Final Price) / Initial Margin Requirement]. Here, the initial price is $45, and the final price is $40, so the profit per share is $5. The initial margin requirement is 50% of $45, which is $22.50 per share. Therefore, the rate of return is ($5 / $22.50) * 100 = 22.22%.

Question 13

Which of the following statements regarding the specialist are true?

Accepted Answer

Specialists, now often referred to as Designated Market Makers (DMMs) on exchanges like the New York Stock Exchange (NYSE), have several key roles including maintaining a book of outstanding, unexecuted limit orders, earning income through commissions and the spread between bid and ask prices, and standing ready to buy or sell stocks at quoted prices to ensure market liquidity.

Question 14

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

Accepted Answer

Restrictions on trading involving insider information apply to corporate officers, corporate directors, and major stockholders.

Question 15

The secondary market consists of

Accepted Answer

The secondary market includes transactions on the AMEX (American Stock Exchange) and in the OTC (Over-The-Counter) market, where securities are traded among investors after the initial issuance. Transactions through the investment banker pertain to the primary market, not the secondary market.

Question 16

Which one of the following statements regarding orders is false?

Accepted Answer

A market order is not restricted to a specific exchange; it is an order to buy or sell a stock immediately at the best available current price, regardless of the exchange.

Question 17

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 maintenance margin is calculated as (Equity/Stock Value). At a stock price of $30, the equity is $1,500 (initial equity) - $1,500 (loss from stock price drop), and the stock value is $3,000. Thus, the maintenance margin is $1,500/$3,000 = 0.25.

Question 18

Firms raise capital by issuing stock

Accepted Answer

In the primary market, firms issue new stock to raise capital directly from investors. This is the initial sale of securities by a company to the public, unlike the secondary market where existing securities are traded among investors.

Question 19

Investment bankers

Accepted Answer

Investment bankers serve both as intermediaries between issuers of securities and investors and as advisors to companies on financial matters, including the issuance of new securities. They do not typically accept deposits or make loans like traditional banks, which differentiates them from the role described in option C.

Question 20

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?

Accepted Answer

The answer of Assume you purchased 200 shares of KO...

Quiz 3: How Securities Are Traded