Chapter 03 Flashcards
The trading of stock that was previously issued takes place
in the secondary market
A purchase of a new issue of stock takes place
in the primary market and usually with the assistance of an investment banker.
Firms raise capital by issuing stock
in the primary market
Which of the following statements regarding the specialist are true?
Specialists 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.
Investment bankers
act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyse their financial needs and find buyers for newly issued securities.
In a “firm commitment”, the investment banker
buys the stock from the company and resells the issue to the public
The secondary market consists of
transactions on the AMEX and in the OTC market
Initial margin requirements are determined by
the Federal Reserve System
You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a
limit-sell order
You sold JCP stock short at $80 per share. Your losses could be minimised by placing a
stop-buy order
Which one of the following statements regarding orders is false?
A market order is an order to buy or sell a stock on a specific exchange (market)
Restrictions on trading involving insider information apply to the following except
All of the options are subject to insider trading restrictions
(options include corporate officers, corporate directors, major stockholders)
The cost of buying and selling a stock consists of
broker’s commissions, dealer’s bid-asked spread, and a price concession as investor may be forced to make
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?
$6,300
200 x 70 x (1-0.55)
You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was
$7,200
200 x 60 x 0.60
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.
$50
100 x 70 x 0.5 = $3,500 (loan amount)
0.30 = (100P-3,500)/100P
P = $50
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.
0.25
100 x 45 x 0.5 = $2,250 (loan amount)
X = [100(30) - 2,250]/100(30) = 0.25
You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 605 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.
-41.67%
300(60)(0.60) = $10,800 investment
300(60) = 18,000 x 0.40 = $7,200 loan
proceeds after selling stock and repaying loan = 13,500-7,200 = $6,300
Return = (6,300-10,800)/10,800 = -41.67%
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.
22.22%
Profit on stock = (45-40)x100 = 500
500/2250 (initial investment) = 22.22%
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%?
$65.18
Equity = 300(55) x 1.6 = $26,400
0.35 = (26,400-300P)/300P
P = $65.18
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?
33%
5000 x 1.6 = $8,000
[8000-100(60)]/100(60) = 33%
Specialists on stock exchanges perform which of the following functions?
Act as dealers in their own accounts and provide liquidity to the market
Shares for short transactions
are typically shares held by the short seller’s broker in street name
Which of the following orders is most useful to short sellers who want to limit their potential losses?
Stop-buy order
Which of the following orders instructs the broker to buy at the current market price?
Market order
Which of the following orders instructs the broker to buy at or below a specified price?
Limit-buy order
Which of the following orders instructs the broker to sell at or below a specified price?
Stop-loss
Which of the following orders instructs the broker to sell at or above a specified price?
Limit-sell order
Which of the following orders instructs the broker to buy at or above a specified price?
Stop-buy order
Shelf registration
is a way of placing issues in the primary market and allows firms to register securities for salve over a two-year period.
Block transactions are transactions for more than … shares and they account for about … percent of all trading on the NYSE.
10,000; 30
A program trade is
a coordinated purchase or sale of an entire portfolio of stocks
When stocks are held in street name
the investor does not receive a stock certificate and the broker holds the stock in the brokerage firm’s name on behalf of the client
NASDAQ subscriber levels
permit those with the highest level, 3, to “make a market” in the security; permit those with a level 2 subscription to receive all bid and ask quotes, but not to enter their own quotes; and permit level 1 subscribers to receive general information about prices
You want to buy 100 shares of Holstock Inc. at the best possible price as quickly as possible. You would most likely place a
market order
You want to purchase XON stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3000 to invest, how many shares can you buy?
100 shares
0.5 = [(Q x 60) - 3000]/(Q x 60)
Q = 100
A sale by IBM of new stock to the public would be a(n)
seasoned equity offering
The finalised registration statement for new securities approved by the SEC is called
the prospectus
One outcome from the SEC investigation of the “Flash Crash of 2010” was
approval of new circuit breakers
All of the following are considered new trading strategies except
short selling
You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is
unlimited
You buy 300 shares of Quality Corp. for $30 per share and deposit initial margin of 50%. The next day, Quality Corp.’s price drops to $25 per share. What is your actual margin?
40%
AM = [300(25) - 0.5(300)*(30)]/[300(25)]
When a firm markets new securities, a preliminary registration statement must be filled with
the Securities and Exchange Commission
In a typical underwriting arrangement, the investment banking firm
I) sells shares to the public via an underwriting syndicate
II) purchase the securities from the issuing company
III) assumes the full risk that the shares may not be sold at the offering price
IV) agrees to help the firm sell the issue to the public, but does not actually purchase the securities
I, Ii and III
Which of the following is true regarding private placements of primary security offerings?
The shares are sold directly to a small group of institutional or wealthy investors
A specialist on the AMEX Stock Exchange is offering to buy a security for $37.50. A broker in Oklahoma City wants to sell the security for his client. The Intermarket Trading System shows a bid price of $37.375 on the NYSE. What should the broker do?
Route the order to the AMEX Stock Exchange.
You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was
$2,250
100 x 45 x 0.50
You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was
$1,822.50
150 x 27 x 0.45
You purchased 100 shares of XON common stock on margin at $60 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
$42.86
100 x 60 x 0.5 = $3000 (loan amount)
0.30 = (100P-3000)/100P
P = $42.68
you purchased 1000 shares of CSCO common stock on margin at $19 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 dividends; ignore interest on margin
$13.57
1000 x 19 x 0.50 = $9,500 (loan amount)
0.30 = (1000P - 9,500) / 1000P
P = $13.57
You purchased 100 shares of common stock on margin at $40 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 $25? Ignore interest on margin
0.20
100 x 40 x 0.5 = $2000 (loan amount)
X = [100(25) - 2000]/100(25) = 0.20
You purchased 1000 shares of common stock on margin at $30 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 $24? Ignore interest on margin.
0.375
1000 shares x 30 x 0.5 = $15,000 (loan amount)
X = [1000(24) - 15000]/1000(24) = 0.375
You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50% and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin.
24%
100(50)(0.50) = $2500 investment
gain on stock sale = (56-50)(100) = $600
Return = 600/2500 = 24%
You purchased 100 shares of common stock on margin for $35 per share. The initial margin is 50% and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin.
40%
100(35)(0.50) = $1750 investment
gain on stock sale = (42-35)(100) = $700
Return = 700/1750 = 40%
Assume you sell short 1000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 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.
57.14%
Profit on stock = (35-25)(1000) = $10,000
Initial investment = (35)(1000)(0.5) = $17,500
Return = 10,000/17,500 = 57.14%
Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would your rate of return be if you repurchased the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money form the account before making the offsetting transaction.
-33.33%
Profit on stock = (30-35)(100) = -500
Initial investment = 30x100x0.5 = $1500
Return = 500/1500 = -33.33%
You want to purchase GM stocks at $40 from your broker using as little of your own money as possible. If initial margin is 50% and you have $4000 to invest, how many shares can you buy
200 shares
You can buy (4000/40) = 100 shares outright and you can borrow $4000 to buy another 100 shares
You want to purchase IBM stock at $80 from your broker using as little of your own money as possible. If initial margin is 50% and you have $2000 to invest, how many shares can you buy?
50 shares
You can buy 2000/80 = 25 shares outright and you can borrow $2000 to buy another 25 shares
Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $50?
20%
4000 x 1.5 = $6000
[6000-100(50)]/100(50) = 20%
Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85?
23.5%
7000 x 1.5 = $10.500
[10,500 - 100(85)]/100(85) = 23.5%
You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%?
$86.54
Equity = 100(75) x 1.5 = $11,250
0.30 = (11,250-100P)/100P
P = $86.54
The preliminary prospectus is referred to as a
red herring
The Securities Cct of 1993
I) requires full disclosure of relevant information relating to the issue of new securities
II) requires registration of new securities
III) requires issuance of a prospectus detailing financial prospects of the firm
IV) established the SEC
V) requires periodic disclosure of relevant financial information
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers
I, II and III
The Securities Act of 1934
I) requires full disclosure of relevant information relating to the issue of new securities
II) requires registration of new securities
III) requires issuance of a prospectus detailing financial prospects of the firm
IV) established the SEC
V) requires periodic disclosure of relevant financial information
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers
IV, V and Vi
Which of the following is not required under the CFA Institution Standards of Professional Conduct?
Disclosure of all personal investments, whether or not they may conflict with a client’s investment
According to the CFA Institution Standards of Professional Conduct, CFA Institute members have responsibilities to all of the following except
the government
