Exam 4: Organization and Functioning of Securities Markets

Super DOT is an electronic order-routing system through which member firms can transmit market and limit orders directly to the posts where the securities are traded.

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

Exhibit 4.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%. -You purchased 100 shares of Highlight Company for $20 a share one year ago with a margin of 50%. The stock is currently selling for $28 a share and no dividends were ever paid. The broker charges an annual interest rate of 8% and a $100 commission on both the purchase and sale of these shares. What is your annual rate of return on this investment?

Exhibit 4.1 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 4.1. How many shares of Turtle can Jackie purchase?

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

In a negotiated bid, the underwriter carries out the following service(s)

The primary market is where issues are traded between current and potential owners.

Which of the following is an underwriting function?

If transaction prices are volatile, but long-term prices are stable, this is referred to as price continuity.

When an investor borrows part of the investment cost it is known as

Initial public offerings (IPOs) involve selling of bonds to the public for the first time.

Exhibit 4.2 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 4.2. If the maintenance margin is 25 percent, to what price can RC Industries stock price fall before Heidi receives a margin call?

Exhibit 4.6 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%. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25% per year. -Refer to Exhibit 4.6. 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%. What is your rate of return on the investment?

You purchased 75 shares of Basket Company for $42 a share. One share of the stock is currently trading between $52 and $53 and you placed a stop loss order at $47. If the stock price drops to $40 a share, what is your return on this investment?

Exhibit 4.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%. -Refer to Exhibit 4.7. 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% of cost of the purchase, what is your rate of return?

When a market is externally efficient, it means that

Secondary markets are important because

Investors can leverage their stock transactions with the use of

Floor brokers on the New York Stock Exchange

Exhibit 4.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its yearly high of $42.25. Your broker tells you that your margin requirement is 60 percent and that the commission on the sale is $20. While you are short, Topgun pays a $0.85 per share dividend. At the end of one year you buy your Topgun shares (cover your short sale) at $44 and are charged a commission of $20 and a 5 percent interest rate. -Suppose you buy a round lot of DG Solutions stock on 60% margin when it is selling at $55 a share. The broker charges a 10 percent annual interest rate and commissions are 3 percent of the total stock value on both the purchase and the sale. If at year end you receive a $1.10 per share dividend and sell the stock for 55 5/8, what is your rate of return on the investment?