Question 1

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%
A)$51.00
B)$65.18
C)$35.22
D)$40.36

Accepted Answer

Equity = 300($55) × 1.6 = $26,400; 0.35 = ($26,400 - 300P)/300P; 105P = $26,400 - 300P; 405P = $26,400; P = $65.18.

Question 2

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.
A)0.33
B)0.55
C)0.43
D)0.23
E)0.25

Accepted Answer

100 shares × $45/share × 0.5 = $4,500 × 0.5 = $2,250 (loan amount); X = [100($30) - $2,250]/100($30); X = 0.25.

Question 3

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.
A)$21
B)$50
C)$49
D)$80

Accepted Answer

100 shares × $70 × .5 = $7,000 × 0.5 = $3,500 (loan amount); 0.30 = (100P - $3,500)/100P; 30P = 100P - $3,500; -70P = -$3,500; P = $50.

Question 4

The secondary market consists of
A)transactions on the AMEX.
B)transactions in the OTC market.
C)transactions through the investment banker.
D)transactions on the AMEX and in the OTC market.
E)transactions on the AMEX, through the investment banker, and in the OTC market.

Accepted Answer

The secondary market consists of transactions on the organized exchanges and in the OTC market.The investment banker is involved in the placement of new issues in the primary market.

Question 5

The cost of buying and selling a stock consists of
A)broker's commissions.
B)dealer's bid-asked spread.
C)a price concession an investor may be forced to make.
D)broker's commissions and dealer's bid-asked spread.
E)broker's commissions, dealer's bid-asked spread, and a price concession an investor may be forced to make.

Accepted Answer

All of the options are possible costs of buying and selling a stock.

Question 6

You purchased 300 shares of common stock on margin for $60 per share.The initial margin is 60% 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.
A)25.00%
B)-33.33%
C)44.31%
D)-41.67%
E)-54.22%

Accepted Answer

300($60)(0.60) = $10,800 investment; 300($60) = $18,000 × (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%.

Question 7

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.
A)20.03%
B)25.67%
C)22.22%
D)77.46%

Accepted Answer

Profit on stock = ($45 - $40) × 100 = $500, $500/$2,250 (initial investment) = 22.22%.

Question 8

Investment bankers
A)act as intermediaries between issuers of stocks and investors.
B)act as advisors to companies in helping them analyze their financial needs and find buyers for newly issued securities.
C)accept deposits from savers and lend them out to companies.
D)act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly issued securities.

Accepted Answer

The role of the investment banker is to assist the firm in issuing new securities, both in advisory and marketing capacities.The investment banker does not have a role comparable to a commercial bank, as indicated in accept deposits from savers and lend them out to companies.

Question 9

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 market order is an order to buy or sell a stock on a specific exchange (market).

Accepted Answer

All of the order descriptions above are correct except a market order is an order to buy or sell a stock on a specific exchange (market).

Question 10

In a "firm commitment," the investment banker
A)buys the stock from the company and resells the issue to the public.
B)agrees to help the firm sell the stock at a favorable price.
C)finds the best marketing arrangement for the investment banking firm.
D)agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment banking firm.

Accepted Answer

In a "firm commitment," the investment banker buys the stock from the company and resells the issue to the public.

Question 11

You sold JCP stock short at $80 per share.Your losses could be minimized by placing a
A)limit-sell order.
B)limit-buy order.
C)stop-buy order.
D)day-order.
E)None of the options

Accepted Answer

With a stop-buy order, the stock would be purchased if the price increased to a specified level, thus limiting your loss.

Question 12

Firms raise capital by issuing stock
A)in the secondary market.
B)in the primary market.
C)to unwary investors.
D)only on days when the market is up.

Accepted Answer

Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction.

Question 13

You purchased JNJ stock at $50 per share.The stock is currently selling at $65.Your gains may be protected by placing a
A)stop-buy order.
B)limit-buy order.
C)market order.
D)limit-sell order.
E)None of the options

Accepted Answer

With a limit-sell order, your stock will be sold only at a specified price, or better.Thus, such an order would protect your gains.None of the other orders are applicable to this situation.

Question 14

Initial margin requirements are determined by
A)the Securities and Exchange Commission.
B)the Federal Reserve System.
C)the New York Stock Exchange.
D)the Federal Reserve System and the New York Stock Exchange.

Accepted Answer

The Board of Governors of the Federal Reserve System determines initial margin requirements.

Question 15

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
A)$6,000
B)$4,000
C)$7,700
D)$7,000
E)$6,300

Accepted Answer

200 shares × $70/share × (1 - 0.55) = $14,000 × (0.45) = $6,300.

Question 16

Restrictions on trading involving insider information apply to the following except
A)corporate officers.
B)corporate directors.
C)major stockholders.
D)All of the options are subject to insider trading restrictions.
E)None of the options is subject to insider trading restrictions.

Accepted Answer

Corporate officers, corporate directors, and major stockholders are corporate insiders and are subject to restrictions on trading on inside information.Further, the Supreme Court held that traders may not trade on nonpublic information even if they are not insiders.

Question 17

The trading of stock that was previously issued takes place
A)in the secondary market.
B)in the primary market.
C)usually with the assistance of an investment banker.
D)in the secondary and primary markets.

Accepted Answer

Secondary market transactions consist of trades between investors.

Question 18

Which of the following statements regarding the specialist are true
A)Specialists maintain a book listing outstanding unexecuted limit orders.
B)Specialists earn income from commissions and spreads in stock prices.
C)Specialists stand ready to trade at quoted bid and ask prices.
D)Specialists cannot trade in their own accounts.
E)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.

Accepted Answer

The specialists' functions are all of the items listed.In addition, specialists trade in their own accounts.

Question 19

You sold short 200 shares of common stock at $60 per share.The initial margin is 60%.Your initial investment was
A)$4,800.
B)$12,000.
C)$5,600.
D)$7,200.

Accepted Answer

200 shares × $60/share × 0.60 = $12,000 × 0.60 = $7,200.

Question 20

A purchase of a new issue of stock takes place
A)in the secondary market.
B)in the primary market.
C)usually with the assistance of an investment banker.
D)in the secondary and primary markets.
E)in the primary market and usually with the assistance of an investment banker.

Accepted Answer

Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction.Investment bankers usually assist by pricing the issue and finding buyers.

Quiz 3: How Securities Are Traded

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%

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.

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.

The secondary market consists of

The cost of buying and selling a stock consists of

You purchased 300 shares of common stock on margin for $60 per share.The initial margin is 60% 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.

Investment bankers

Which one of the following statements regarding orders is false

In a "firm commitment," the investment banker

You sold JCP stock short at $80 per share.Your losses could be minimized by placing a

Firms raise capital by issuing stock

You purchased JNJ stock at $50 per share.The stock is currently selling at $65.Your gains may be protected by placing a

Initial margin requirements are determined by

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

Restrictions on trading involving insider information apply to the following except

The trading of stock that was previously issued takes place

Which of the following statements regarding the specialist are true

You sold short 200 shares of common stock at $60 per share.The initial margin is 60%.Your initial investment was

A purchase of a new issue of stock takes place