Exam 3: Organization and Functioning of Securities Markets

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60 percent and Turtle Industries is currently selling at $50 per share. -Refer to Exhibit 3.1. If the maintenance margin is 25 percent, to what price can Turtle Industries fall before Jackie receives a margin call?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent. -Refer to Exhibit 3.7. At the end of one year, shares of RossCorp stock are selling for $55 per share and the company paid dividends of $0.85 per share. Assuming that you paid the full cost of the purchase, what is your rate of return if you sell RossCorp stock?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin deposit is 65 percent. Commission on the sale is 1.25 percent. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25 percent per year. -Refer to Exhibit 3.6. At the end of one year you close out your short position by purchasing share of XCorp at $45 per share. The commission is 1.25 percent. What is your rate of return on the investment?

In a dealer market trading system, shares of stock are sold to the investor with the highest bid price and bought from the seller with the lowest offering price.

An order that specifies the highest buy or lowest sell price is a

You own 50 shares of Auto Corporation that you purchased for $30 a share. The stock is currently selling for $50 a share, and you placed a stop loss order at $45. If the stock price drops to $35 a share what is your return on this investment?

Secondary markets are important because

A good secondary market is important to the efficiency of the primary market.

You sell short 100 shares of Hi-Light Corporation when it is trading at $70. Your margin requirement is 50 percent. Assuming there was no commission and the maintenance margin is 25 percent, at what stock price would you receive a margin call?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent. -Refer to Exhibit 3.7. At the end of one year, shares of RossCorp stock are selling for $35 per share and the company paid dividends of $0.85 per share. Assuming that you borrowed 25 percent of cost of the purchase, what is your rate of return?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share. -Refer to Exhibit 3.2. What is Heidi's profit if RC's price rises to $80?

A 1994 study concluded dealers were colluding to maintain wide bid/ask spreads by concentrating market quotes in quarters instead of eighths. This study eventually led to new order handling rules that required quotes to be available to the public through

You purchased 100 shares of Highlight Company for $20 a share one year ago with a margin of 50 percent. The stock is currently selling for $28 a share, and no dividends were ever paid. The broker charges an annual interest rate of 8 percent and a $100 commission on both the purchase and sale of these shares. What is your annual rate of return on this investment?

All of the following are characteristics of a dealer market EXCEPT that:

It is required by law that a stock market must have a physical location.

Rule 144A reduced registration documentation requirements for placing securities privately with large institutional investors.

When a market is internally efficient, it means that the market has

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin deposit is 65 percent. Commission on the sale is 1.25 percent. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25 percent per year. -Refer to Exhibit 3.6. Suppose at the end of one year XCorp is selling at $90 per share and you cover your short position at this price. What is your rate of return on the investment? (Assume a 1.25 percent commission on the purchase.)

A pure auction market is also referred to as a quote-driven market.

Suppose you buy a round lot of HS Inc. stock on 55 percent margin when it is selling at $40 a share. The broker charges a 10 percent annual interest rate and commissions are 4 percent of the total stock value on both the purchase and the sale. If at year end you receive a $0.90 per share dividend and sell the stock for 35 5/8, what is your rate of return on the investment?