Question 1

Investors can leverage their stock transactions with the use of
A) margin orders.
B) stop loss orders.
C) limit orders.
D) market orders.
E) specialists.

Accepted Answer

Margin orders allow investors to leverage their stock transactions by borrowing money from the brokerage to buy more shares than they would be able to with just their own funds. However, using margin orders carries additional risks and investors should have a clear understanding of the potential consequences before doing so.

Question 2

An order that specifies the highest buy or lowest sell price is a
A) limit order.
B) short sale.
C) market order.
D) margin call.
E) stop loss.

Accepted Answer

A limit order specifies a maximum price a buyer is willing to pay or minimum price a seller is willing to accept for a security. It is different from a market order, where the buyer or seller agrees to execute a trade at the best available price in the market. Short sale, margin call, and stop loss are not applicable to defining the highest buy or lowest sell price.

Question 3

You sell short 100 shares of Hi-Light Corporation when it is trading at $70. Your margin requirement is 50 percent. Assuming there was no commission and the maintenance margin is 25 percent, at what stock price would you receive a margin call?
A) $76
B) $80
C) $84
D) $88
E) $92

Accepted Answer

To receive a margin call, the equity in the account must fall below the maintenance margin requirement. Initially, you sell short 100 shares at $70, receiving $7,000. The margin requirement is 50%, so you must have $3,500 in your account. The maintenance margin is 25%, so your equity must be at least 25% of the current market value of the shorted stock. If the stock price rises to $84, the market value of the shorted stock is $8,400. Your equity would be $7,000 (initial proceeds) - $8,400 (current market value) + $3,500 (initial margin) = $2,100. The required equity at $84 is 25% of $8,400, which is $2,100, triggering a margin call.

Question 4

You purchased 75 shares of Basket Company for $42 a share. One share of the stock is currently trading between $52 and $53, and you placed a stop loss order at $47. If the stock price drops to $40 a share, what is your return on this investment?
A) 8.7 percent
B) 9.2 percent
C) 10.3 percent
D) 11.9 percent
E) 12.8 percent

Accepted Answer

The current value of the shares is between $52 and $53, so if we take the midpoint of $52.50 as the current market price, the total value of the shares would be:

Total value = 75 shares x $52.50 per share = $3,937.50

If the stock price drops to $40 a share, the total value of the shares would be:

Total value = 75 shares x $40 per share = $3,000

Therefore, the loss in value would be:

Loss = $3,937.50 - $3,000 = $937.50

The initial investment was $3,150 (75 shares x $42 per share), so the return on investment would be:

Return on investment = (Initial investment - Loss) / Initial investment x 100%

Return on investment = ($3,150 - $937.50) / $3,150 x 100% = 70.3%

However, since there was a stop loss order at $47, the actual loss would be:

Loss = 75 shares x ($47 - $42) per share = $375

The return on investment with the stop loss order would be:

Return on investment = ($3,150 - $375) / $3,150 x 100% = 88.1%

Therefore, the correct answer is option D, which is 11.9%.

Question 5

When an investor borrows part of the investment cost it is known as
A) a short sale.
B) a fill or kill order.
C) a margin transaction.
D) a limit order.
E) going long.

Accepted Answer

Borrowing part of the investment cost is known as a margin transaction, where the investor is obtaining a loan from the broker to purchase securities. This allows the investor to increase their potential returns, but also increases the potential losses. A short sale involves borrowing shares to sell with the hopes of buying them back at a lower price, while a fill or kill order is an order to execute a trade immediately or cancel it. A limit order is an order to buy or sell a security at a specific price or better. Going long refers to buying securities with the hopes of profiting from a price increase.

Question 6

Suppose you purchase 200 shares of Best Hat Corporation at $52 a share by making a margin deposit of 50 percent. If the maintenance margin is 30 percent, at what price will you receive a margin call?
A) $37.14
B) $37.95
C) $38.23
D) $38.76
E) $39.42

Accepted Answer

To determine the price at which you'll receive a margin call, you first calculate the amount borrowed and the equity required at the maintenance margin level. You bought 200 shares at $52, totaling $10,400. With a 50% margin deposit, you borrowed $5,200. The maintenance margin is 30%, so the equation for the price at which a margin call occurs is: $5,200 / (1 - 0.30) = Equity needed. This simplifies to $5,200 / 0.70 = $7,428.57 as the total value needed. For 200 shares, the price per share for a margin call is $7,428.57 / 200 = $37.14.

Question 7

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You sell 100 shares short of AMF Corporation when it is selling at $45 per share. Your margin requirement is 60 percent and the commission on the sale is $50 and the broker charges 10 percent annual interest. AMF Corporation paid a $0.50 per share dividend while you were short the stock. After one year, you cover your short sale at $35 per share with a $50 commission for the purchase.
-Refer to Exhibit 3.8. What is your annual rate of return on this investment?
A) 18 percent
B) 24 percent
C) 25 percent
D) 36 percent
E) 37 percent

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Quiz 3: Organization and Functioning of Securities Markets

Investors can leverage their stock transactions with the use of

An order that specifies the highest buy or lowest sell price is a

You sell short 100 shares of Hi-Light Corporation when it is trading at $70. Your margin requirement is 50 percent. Assuming there was no commission and the maintenance margin is 25 percent, at what stock price would you receive a margin call?

You purchased 75 shares of Basket Company for $42 a share. One share of the stock is currently trading between $52 and $53, and you placed a stop loss order at $47. If the stock price drops to $40 a share, what is your return on this investment?

When an investor borrows part of the investment cost it is known as

Suppose you purchase 200 shares of Best Hat Corporation at $52 a share by making a margin deposit of 50 percent. If the maintenance margin is 30 percent, at what price will you receive a margin call?