Investment Analysis (FIN 670) Fall 2009 Homework 2 Instructions: please read carefully • You should show your work how to get the answer for each calculation question to get full credit • The due date is Tue, Sep 29, 2009. Late homework will not be graded. Name(s): Student IDChapter 3 1. Market orders are buy or sell order that will be executed immediately at _______________ prices a. the best b. current market c. the highest d. the lowest 2. Trading of exiting stock take place in the _______________. a. secondary market b. third market c. forth market d. All of the above. 3. You purchased 100 shares of AAA common stock on margin for $40 per share. The initial margin is 60% and the stock pays no dividend. Your rate of return would be _______________ if you sell the stock at $43 per share a. -12.5% b. -7.5% c. 7.5% d. 12.5% 4. The _______________ price is the price a dealer is willing to purchase a security. a. Bid b. Ask c. Limit d. Offering 5. You purchased ABC stock at $50 per share. The stock is currently selling at $49. Your potential loss could be reduced by placing a _______________. a. limit-buy order b. limit-sell order c. market order d. stop-loss order 6. The Nasdaq Stock Market is a _______________. a. primary market b. secondary market c. dealer market d. Both B and C above.7. You purchased 400 shares of XYZ common stock on margin at $20 per share. Assume the initial margin is 60% and the maintenance margin is 30%. You would get a margin call if the stock price is below _______________. Assume the stock pays no dividend and ignore interest on margin. a. $15.71 b. $11.43 c. $13.57 d. $10.14 8. You sold short 200 shares of XYZ common stock at $40 per share with an initial margin of 60%. Your initial investment was _______________. a. $3,200 b. $4,800 c. $6,000 d. $8,000 9. In buying on margin, the margin is the _______________ of the investor's account a. loan amount b. equity value c. total value d. none of the above 10. In a _______________, the investment bankers purchase securities from the issuing company and then resell to the public. a. best-efforts agreement b. total package agreement c. firm commitment d. private placement 11. Electronic Communication Networks are private computer networks that link _______________. a. buyers and sellers b. different stock exchanges c. different stock brokers d. global stock exchanges 12. You wish to sell short 100 shares of XYZ corporation stock. If the last two transactions were at $34.12 followed by $34.25, you can sell short on the next transaction only at a price of a. 34.12 or higher b. 34.25 or higher c. 34.25 or lower d. 34.12 or lower13. Which one of the following statements regarding orders is false? a. A market order is simply an order to buy or sell a stock immediately at the prevailing market price. b. A limit sell order is where investors specify prices at which they are willing to sell a security. c. If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45. d. A day order expires at the close of the trading day. e. None of the above. 14. Assume you sold short 200 shares of common stock at $60 per share. The initial margin is 50%. What would be the maintenance margin if a margin call was made at a stock price of $70? a. 29% b. 40% c. 25% d. 33% e. none of the above 15. Assume you sell short 100 shares of Citibank 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. a. 25% b. 22% c. 20% d. 77% e. none of the above 16. Shelf registration a. increases transaction costs to the issuing firm b. allows firms to register securities for sale for a two-year period. c. is a way of placing issues in the primary market. d. A and C e. B and C 17. A sale by Wal-Mart of new stock to the public would be a(n) a. short sale b. initial public offering. c. secondary market transaction d. seasoned equity offering. e. none of the above.18. You sell short 200 shares of Bad Co. at a market price of $55 per share. Your maximum possible loss is a. $11,000. b. zero. c. unlimited. d. $22,000. e. cannot tell from the given information 19. Assume you purchased 100 shares of common stock at $50 per share using 2,500 of your own money. The initial margin requirement is 50%. If the maintenance margin is 30%, at what prince would you get a margin call? a. $26.14 b. $50.00 c. $35.71 d. $77.12 e. $78.00 20. Consider the following limit order book of a specialist. The last trade occurred at a price of $50. Limit buy orders Limit sell orders Price Shares Price Shares 49.75 500 50.25 100 49.50 800 51.50 100 49.25 500 54.75 300 49.00 200 58.25 100 48.50 600 a. If a market buy order for 100 shares comes in, at what price will it be filled? b. At what price would the next market buy order be filled? c. If you were the specialists, would you want to increase or decrease your inventory of this stock21. Here is some information on XYZ stock. Suppose first that XYZ trades in a dealer market such as Nasdaq Bid Ask 55.25 55.50 a. Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed b. Suppose you have submitted an order to your broker to sell at market. At what price will your trade be executed c. Suppose you have submitted a limit order to sell at 55.62. What will happen d. Suppose you have submitted a limit order to buy at 55.37. What will happen 22. Now reconsider question 21, assume that XYZ trades in an exchange market like NYSE (specialist system). Is there any chance of an immediate trade at 55.37 for the limit buy order in part d. Explain23. You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share e. How much in cash or securities must you put into your brokerage account if the broker’s initial requirements is 50% f. How high can the price of the stock go before you get a margin call if the maintenance margin is 30%24. You are bullish on Telecom stock. The current market price is $50 per share, and you have