Ch 3

Question 1

Shelf registration (SEC Rule 415)

Answer 1

allows firms that are already publicly traded to register securities and gradually sell them to the public for three years following the initial registration; securities are “on the shelf” ready to be issued

Question 2

Underwriters/Investment bankers Bear…

Answer 2

the price risk of an underwritten issue. This is why the issuing firm sells the shares to the underwriting syndicate at PO price less a spread (therefore, being their compensation)

Question 3

Bid-Ask Spread
Spread = Price (ask) - Price (bid)

Answer 3

Compensation for Market Making; Cost of trading with dealer

Question 4

Bid

Answer 4

Price at which dealer will buy from you

Question 5

Ask

Answer 5

Price at which dealer will sell to you

Question 6

Limit Buy Order (price contingent order)

Answer 6

instruct the broker to buy some number of shares if and when they may be obtained at or below a stipulated price; Always below the current market price

Question 7

limit sell (price contingent order)

Answer 7

instructs the broker to sell if and when the stock price rises above a specified limit; Always above the current market price

Question 8

Buying on Margin

Answer 8

purchasing securities with money borrowed
in part from broker

Question 9

Initial Margin Requirement (IMR)

Answer 9

Minimum % initial investor equity
(1 − IMR) = Maximum % amount investor can borrow

Question 10

Maintenance margin requirement (MMR)

Answer 10

Minimum amount equity can be before additional funds must be put into account (a margin call)

Question 11

Short Sale

Answer 11

Borrow stock from a broker; must post margin; Broker borrows the stock from the owner; Broker sells stock and deposits proceeds and margin in a margin account; Cannot withdraw the sale proceeds until you
‘cover’

Question 12

Unit Investment Trust

Answer 12

Money pooled from many investors that is invested in a portfolio fixed for the life of
the fund. Unmanaged, no active management. Sell at a premium

Question 13

open-end fund (managed investment companies)

Answer 13

A fund that issues or redeems
its shares at net asset value

Question 14

closed end fund (managed investment companies)

Answer 14

Shares may not be redeemed, but instead are traded at prices that can differ from net
asset value. Traded like common stock at “market price” (can be at discount or premium to NAV)

Question 15

4 Fee Structures

Answer 15

Operating, front end, back end, 12b-1

Question 16

Operating Fee

Answer 16

the costs incurred by the mutual
fund in operating the portfolio, including administrative expenses and advisory fees paid to the investment manager

Question 17

Front end load

Answer 17

a commission or sales charge paid when you
purchase the shares. About half of all funds today (measured by assets) are no load. Loads effectively reduce the amount of money invested

Question 18

Back end load

Answer 18

a redemption, or “exit,” fee incurred when you sell your shares. Typically, funds that impose back-end loads reduce them by one percentage point for every year the funds are left invested. Incentives people to hold