How Securities are Traded Flashcards
practice questions
At U.S. stock exchange, the limit order book is controlled by:
- specialists
- floor brokers
- registered traders
- floor traders
Specialists are exchange market makers who handle the limit order book and act as dealers, buying and selling their specific stocks to provide market liquidity. Floor brokers, registered traders, and commission brokers only trade for various accounts.
An investor buys 100 shares of XYZ.
The market price is $50 on full margin.
The initial margin requirement is 40%.
The maintenance margin requirement is 25%.
How much equality must the investor have in the account?
Initial margin requirement ($) = (initial margin %) number of shares x price per share)
0.4 x (100 x 50) = $2,000
An investor buys 100 shares of XYZ.
The market price is $50 on full margin.
The initial margin requirement is 40%.
The maintenance margin requirement is 25%.
At what price will the investor get a margin call?
For a long position, the formula for the margin call is:
(original price x (1 - initial margin %)) / 1 - maintenance margin %
(50 x (1 - 0.4)) / 1 - 0.25
= $40
An investor buys 100 shares of XYZ.
The market price is $50 on full margin.
The initial margin requirement is 40%.
The maintenance margin requirement is 25%.
If the price of the stock falls to $45. what is the equity balance in the margin account?
The new margin account balance = initial margin balance - change in stock value
2,000 - 500 = 1,500
(note the $2,000 equity balance comes from the working out the Initial margin requirements). The $500 represents the $5 loss per share.
An investor buys 100 shares of XYZ.
The market price is $50 on full margin.
The initial margin requirement is 40%.
The maintenance margin requirement is 25%.
If the stock is sold one year later for $60, what is the investor’s rate of return?
First, determine the sales proceeds:
($60 x 100 shares) = $6,000
Then calculate the loan payoff = total cost of purchase - initial margin amount)
$5,000 - $2,000 = $3,000
The return = ((proceeds from sale - loan payoff) / equity) -1
($6,000 - $3,000) / $2,000)) - 1 = 1.5 - 1 = 0.50 (50%)
An alternative is to divide the profit by the initial equity:
$6,000 - $5,000 / $2,000 = 0.5
In the United States, who sets the initial margin requirements?
- the justice department
- the federal reserve board
- the securities exchange commission
- the internal revenue service
In the United States, margin lending limits are set by the Federal Reserve Board under regulations T and U.
An investor short sells 400 shares of Future Fuels for $25 a share. The initial margin requirement is 50% and the maintenance margin requirement is 25%. Calculate the return on investment, when the stock price drops to $20 a share.
Proceeds from sale = 400 x $25 = $10,000
Initial margin requirement = $10,000 x 50% = $5,000
Total Funds in account = $10,000 + $5,000 = $15,000
Total value of securities (TV) =
400 x 20 = $8,000
Equity = total funds - dollars needed to buy back shares = 15,000 - 8,000 = $7,000
Profit = 7,000 - 5,000 = $2,000
Return = 2,000 / 5,000 = 40%
Sarbanes-Oxley requires a certification statement from the:
- CEO and the CFO
- CFO only
- CEO only
- CEO or the CFO
Sabarnes-Oxley requires CEO and CFO certification.
Compared to a public offering, a private placements of debt securities likely has:
- more liquidity and a lower yield
- more liquidity and a higher yield
- less liquidity and a lower yield
- less liquidity and a higher yield.
Investors require a higher yield to compensate for the fact that privately placed debt is not registered for public sale and is therefore less liquid than debt registered for public sale.
