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The above site contains information on construction of Standard & Poor's Indexes and has links to most major exchanges.

PROBLEMS

1. FBN, Inc., has just sold 100,000 shares in an initial public offering. The underwriter's explicit fees were $70,000. The offering price for the shares was $50, but immediately upon issue the share price jumped to $53.

a. What is your best guess as to the total cost to FBN of the equity issue?

b. Is the entire cost of the underwriting a source of profit to the underwriters?

2. Suppose that you sell short 100 shares of IBX, now selling at $70 per share.

a. What is your maximum possible loss?

b. What happens to the maximum loss if you simultaneously place a stop-buy order at $78?

3. Dee 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%.

a. What is the margin in Dee's account when she first purchases the stock?

b. If the 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?

c. What is the rate of return on her investment?

4. Old Economy Traders opened an account to short sell 1,000 shares of Internet Dreams from the previous problem. 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.

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?

5. An expiring put will be exercised and the stock will be sold if the stock price is below the exercise price. A stop-loss order causes a stock sale when the stock price falls below some limit. Compare and contrast the two strategies of purchasing put options versus issuing a stop-loss order.

6. Compare call options and stop-buy orders.

7. Here is some price information on Marriott:

Bid

Asked

Marriott

37.80

38.10

You have placed a stop-loss order to sell at $38. What are you telling your broker? Given market prices, will your order be executed?

Do you think it is possible to replace market-making specialists by a fully automated computerized trade-matching system?

CHAPTER 3 How Securities Are Traded

9. Consider the following limit-order book of a specialist. The last trade in the stock took place 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 specialist, would you desire to increase or decrease your inventory of this stock?

10. What purpose does the Designated Order Turnaround system (SuperDot) serve on the New York Stock Exchange?

11. Who sets the bid and asked price for a stock traded over the counter? Would you expect the spread to be higher on actively or inactively traded stocks?

12. Consider the following data concerning the NYSE:

Year

Average Daily Trading Volume (Thousands of Shares)

Annual High Price of an Exchange Membership

1991

178,917

$ 440,000

1992

202,266

600,000

1993

264,519

775,000

1994

291,351

830,000

1995

346,101

1,050,000

1996

411,953

1,450,000

What do you conclude about the short-run relationship between trading activity and the value of a seat?

13. Suppose that Intel currently is selling at $40 per share. You buy 500 shares, using $15,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.

a. What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to (i) $44; (ii) $40; (iii) $36? What is the relationship between your percentage return and the percentage change in the price of Intel?

b. If the maintenance margin is 25%, how low can Intel'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 Intel 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 Intel? Assume that Intel pays no dividends.

e. Continue to assume that a year has passed. How low can Intel's price fall before you get a margin call?

14. Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account.

a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Intel stock is selling at (i) $44; (ii) $40; (iii) $36? Assume that Intel pays no dividends.

b. If the maintenance margin is 25%, how high can Intel's price rise before you get a margin call?

c. Redo parts (a) and (b), now assuming that Intel's dividend (paid at year end) is $1 per share.

15. Here is some price information on Fincorp stock. Suppose first that Fincorp trades in a dealer market.

Bid

Asked

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 sell at market. At what price will your trade be executed?

c. Suppose an investor has submitted a limit order to sell at $55.38. What will happen?

d. Suppose another investor has submitted a limit order to buy at $55.38. What will happen?

16. Now reconsider the previous problem assuming that Fincorp sells in an exchange market like the NYSE.

a. Is there any chance for price improvement in the market orders considered in parts (a) and (b)?

b. Is there any chance of an immediate trade at $55.38 for the limit-buy order in part (d)?

17. You are bullish on AT&T stock. The current market price is $25 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.

a. What will be your rate of return if the price of AT&T stock goes up by 10% during the next year? (Ignore the expected dividend.)

b. How far does the price of AT&T stock have to fall for you to get a margin call if the maintenance margin is 30%?

18. You've borrowed $20,000 on margin to buy shares in Disney, 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.

a. Will you receive a margin call?

b. How low can the price of Disney shares fall before you receive a margin call?

19. You are bearish on AT&T stock and decide to sell short 100 shares at the current market price of $25 per share.

a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position?

Bodie-Kane-Marcus: Investments, Fifth Edition

I. Introduction

3. How Securities Are Traded

© The McGraw-Hill Companies, 2001

CHAPTER 3 How Securities Are Traded 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?

20. On January 1, you sold short one round lot (i.e., 100 shares) of Zenith stock at $14 per share. On March 1, a dividend of $2 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $9 per share. You paid 50 cents per share in commissions for each transaction. What is the value of your account on April 1?

21. Call one full-service broker and one discount broker and find out the transaction costs of implementing the following strategies:

a. Buying 100 shares of IBM now and selling them six months from now.

b. Investing an equivalent amount of six-month at-the-money call options (calls with strike price equal to the stock price) on IBM stock now and selling them six months from now.

The following questions are from past CFA examinations:

22. 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?

d. Cannot tell from the information given.

23. You wish to sell short 100 shares of XYZ Corporation stock. If the last two transactions were at 34.10 followed by 34.15, you only can sell short on the next transaction at a price of a. 34.10 or higher.

24. Specialists on the New York Stock Exchange do all of the following except 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.

Limited-time shelf registration was introduced because of its favorable trade-off of saving issue costs against mandated disclosure. Allowing unlimited-time shelf registration would circumvent blue sky laws that ensure proper disclosure. Run for the hills! If the issue were underpriced, it most likely would be oversubscribed by institutional traders. The fact that the underwriters need to actively market the shares to the general public may indicate that better-informed investors view the issue as overpriced. 100P - $4,000 = 100P

60 P = $4,000 P = $66.67 per share The investor will purchase 150 shares, with a rate of return as follows:

SOLUTIONS TO CONCEPT CHECKS

Year-End Change in Price

Year-End Value of Shares

Repayment of Principal and Interest

Investor's Rate of Return

30%

19,500

$5,450

40.5%

No change

15,000

5,450

-4.5

-30%

10,500

5,450

-49.5

E-INVESTMENTS:

LISTING

REQUIREMENTS

Go to www.nasdaq.com/sitemap/sitemap.stm. On the sitemap there is an item labeled listing information. Select that item and identify the following items in Initial Listing Standards for the National Market System 1, 2, and 3 and the Nasdaq Small Cap Market for domestic companies

Public Float in millions of shares Market Value of Public Float Shareholders of round lots

Go to www.nyse.com and select the listed company item or information bullet. Under the bullet select the listing standards tab. Identify the same items for NYSE (U.S. Standards) initial listing requirements.

In what two categories are the listing requirements most significantly different?

SHORT SALES

Go to the website for Nasdaq at http://www.nasdaq.com. When you enter the site, a dialog box appears that allows you to get quotes for up to 10 stocks. Request quotes for the following companies as identified by their ticker: Noble Drilling (NE), Diamond Offshore (DO), and Haliburton (HAL). Once you have entered the tickers for each company, click the item called info quotes that appears directly below the dialog box for quotes.

On which market or exchange do these stocks trade? Identify the high and low based on the current day's trading.

Below each of the info quotes another dialog box is present. Click the item labeled fundamentals for the first stock. Some basic information on the company will appear along with an additional submenu. One of the items is labeled short interest. When you select that item a 12-month history of short interest will appear. You will need to complete the above process for each of the stocks.

Describe the trend, if any exists for short sales over the last year. What is meant by the term Days to Cover that appears on the history for each company? Which of the companies has the largest relative number of shares that have been sold short?

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Responses

  • Aurelio
    What is the margin when she first purchases the stock?
    7 years ago
  • tapio ylih
    Do you think it is possible to replace marketmaking specialists with a fully?
    7 years ago
  • teodata de luca
    Is you place a stop loss order to sell 100 shares of stock at 55 when the current price is 62?
    6 years ago
  • Ida
    What is the margin in dee's account when she first purchases the stock?
    6 years ago
  • Mebrahtu
    Who would you expect the spread to be higher on actively or inactively traded stockks?
    6 years ago
  • daisy
    What is maximum posible loss if i sell short 100 shares of IBX, now selling at 70$ per share?
    6 years ago
  • marcel
    Who sets the bid and asked price for a stock traded over the counter?
    6 years ago
  • futsum
    What is the rate of return on your margined position (assuming again that you?
    6 years ago

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