Buying and Selling Securities

Question 1

Cost to borrow money for margin account

Answer 1

Broker’s call rate + spread

Question 2

Margin call

Answer 2

Debt balance/(1-Maintenance margin%)

Question 3

Actual margin

Answer 3

(MV -loan)/MV= ((short sale proceeds+initial margin)-loan)/loan

Question 4

Break point formula / lowest price where margin level is acceptable

Answer 4

((1-initial margin req)/(1-maintenance req))*Purchase price

Question 5

Holding period return for cash account

Answer 5

(Price1+D-P0)/P0

Question 6

Holding period return for margin account

Answer 6

(P1-P0-margin cost)/Inital equity

Question 7

Precise rule/up-tick rule

Answer 7

Short sale must be made on a plus/up- tick or 0+ tick

Question 8

When opening a margin account with a brokerage firm, which agreement must an investor sign?

Answer 8

Hypothecation agreement grants the brokerage firm the right to pledge the investor’s securities as collateral for bank loans, provided that securities are purchased using a margin account.

Question 9

Amount required as collateral against a short sale

Answer 9

(Current market value of the stock short sold) x (1+maintenance margin requirement)

Question 10

Amount required as collateral against a margin purchase

Answer 10

Dollar value of the margin loan/ (1- maintenance margin requirement)

Question 11

In a typical wrap account, how is the firm compensated?

Answer 11

an annual fee equal to a percentage of assets under management

Question 12

Amy purchases 100 shares of Widget Corporation on margin for $50 per share. The initial margin percentage is 60%. Which of the following statements is CORRECT regarding the impact of the purchase on Amy’s Statement of Financial position on the day of purchase?

Answer 12

Assets are increased by $5,000
Liabilities increased by $2,000

Question 13

Which of the following types of security purchase orders does not typically include any time limit?

Answer 13

Market order

Question 14

The daily calculation of the actual margin in an investor’s account is known as ___________________________________.

Answer 14

having the account marked to the market. At the time of the margin purchase, the actual margin and the initial margin are the same. However, after the purchase, the actual margin can be either greater than or less than the initial margin.

Question 15

Under SEC Rule 415, how long do companies have to issue shares from their IPO filing?

Answer 15

Rule 415 allows up to two years for shares to be issued in an IPO filing. This allows for better timing of the issues.

Question 16

The money market is best described as

Answer 16

a financial market