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Chapter 3 How securities are traded
1. What is the difference between an IPO (initial public offering) and an SEO (seasoned equity offering)? (LO 3-1)
2. What are some different components of the effective costs of buying or selling shares of stock? (LO 3-3)
3. What is the difference between a primary and secondary market? (LO 3-3)
4. How do security dealers earn their profits? (LO 3-3)
5. In what circumstances are private placements more likely to be used than public offerings? (LO 3-1)
6. What are the differences between a stop-loss order, a limit sell order, and a market order? (LO 3-3)
7. Why have average trade sizes declined in recent years? (LO 3-3)
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8. What is the role of an underwriter? A prospectus? (LO 3-1)
9. How do margin trades magnify both the upside potential and downside risk of an invest- ment portfolio? (LO 3-4)
10. A market order has: (LO 3-2)
a. Price uncertainty but not execution uncertainty. b. Both price uncertainty and execution uncertainty. c. Execution uncertainty but not price uncertainty.
11. Where would an illiquid security in a developing country most likely trade? (LO 3-3)
a. Broker markets.
b. Electronic crossing networks. c. Electronic limit-order markets.
12. Suppose you short-sell 100 shares of IBX, now selling at $200 per share. (LO 3-4)
a. What is your maximum possible loss?
b. What happens to the maximum loss if you simultaneously place a stop-buy order at $210?
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13. Call one full-service broker and one discount broker and find out the transaction costs of implementing the following strategies: (LO 3-3)
a. Buying 100 shares of IBM now and selling them six months from now. b. Investing an equivalent amount in six-month at-the-money call options on IBM stock now and selling them six months from now.
14. DRK, Inc., has just sold 100,000 shares in an initial public offering. The underwriter’s explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44. (LO 3-1)
a. What is your best guess as to the total cost to DRK of the equity issue?
b. Is the entire cost of the underwriting a source of profit to the underwriters?
15. Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. (LO 3-4)
a. What is the margin in Dée’s account when she first purchases the stock?
b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30%, will she receive a margin call?授课：XXX
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c. What is the rate of return on her investment?
16. Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams from the previous question. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share. (LO 3-4)
a. What is the remaining margin in the account?
b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
c. What is the rate of return on the investment?
17. Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $50. (LO 3-3)
Limit Orders Price $50.25 51.5 54.75 58.25
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Limit Buy Orders
Sell
Price $49.75 49.5 49.25 49 48.5
Shares 500 800 500 200 600
Shares 100 100 300 100
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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 a security dealer, would you want to increase or decrease our inventory of this stock?
18. You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. (LO 3-4)
a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.)
b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.
19. You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. (LO 3-4)
a. How much in cash or securities must you put into your brokerage account if the bro- ker’s initial margin requirement is 50% of the value of the short position?
b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?授课：XXX
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20. Here is some price information on Marriott:
Marriot$67.95 t
Bid Asked $68.05 You have placed a stop-loss order to sell at $68. What are you telling your broker? Given market prices, will your order be executed? (LO 3-2)
21. Here is some price information on Fincorp stock. Suppose first that Fincorp trades in a dealer market. (LO 3-2)
Bid $55.25 Asked $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 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?
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22. You’ve borrowed $20,000 on margin to buy shares in Ixnay, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share. (LO 3-4) a. Will you receive a margin call?
b. How low can the price of Ixnay shares fall before you receive a margin call?
23. On January 1, you sold short one round lot (that is, 100 shares) of Snow’s stock at $21 per share. On March 1, a dividend of $3 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $15 per share. You paid 50 cents per share in com- missions for each transaction. What is the value of your account on April 1? (LO 3-4) Challenge 24. Suppose that XTel currently is selling at $40 per share. You buy 500 shares using
$15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. (LO 3-4)
a. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to (i) $44; (ii) $40; (iii) $36? What is the relation- ship between your percentage return and the percentage change in the price of XTel?
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b. If the maintenance margin is 25%, how low can XTel’s price fall before you get a margin call?
c. How would your answer to (b) change if you had financed the initial purchase with only $10,000 of your own money?
d. What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if XTel is selling after one year at (i) $44; (ii) $40; (iii) $36? What is the relationship between your percentage return and the percentage change in the price of XTel? Assume that XTel pays no dividends.
e. Continue to assume that a year has passed. How low can XTel’s price fall before you get a margin call?
25. Suppose that you sell short 500 shares of XTel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account. (LO 3-4) a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if XTel stock is selling at (i) $44; (ii) $40; (iii) $36? Assume that XTel pays no dividends.
b. If the maintenance margin is 25%, how high can XTel’s price rise before you get a margin call?
c. Redo parts (a) and (b), but now assume that XTel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
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CFA Problems 1. If you place a stop-loss order to sell 100 shares of stock at $55 when the current price is $62, how much will you receive for each share if the price drops to $50? (LO 3-2)
a. $50 b. $55 c. $54.87
d. Cannot tell from the information given
2. Specialists on the New York Stock Exchange traditionally did all of the following except: (LO 3-3) a. Act as dealers for their own accounts. b. Execute limit orders.
c. Help provide liquidity to the marketplace. d. Act as odd-lot dealers.
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