Chapter 03 – Organization and Functioning of Securities Markets
d.
it has a centralized trading location.
e.
All of these are correct.
52. The U.S. secondary market with the largest number of issues traded is the
a.
AMEX.
b.
NASDAQ.
c.
NYSE.
d.
LSE.
e.
TSX.
53. A block trade is one which involves a minimum of
a.
b.
c.
d.
e.
54. 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
a.
the NASDAQ market.
b.
electronic communications networks (ECN).
c.
high frequency trading (HFT).
d.
algorithmic trading (AT).
e.
intermarket trading system (ITS).
Exhibit 3.1
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.
55. Refer to Exhibit 3.1. How many shares of Turtle can Jackie purchase?
a.
5,000
b.
3,000
c.
1,800
d.
1,200
e.
750
56. Refer to Exhibit 3.1. What is Jackie’s profit/loss if Turtle’s price after one year is $40?
a.
$50,000
b.
−$50,000
c.
$100,000
d.
−$100,000
e.
$40,000
57. 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?
a.
$14.56
b.
$23.17
c.
$32.42
d.
$26.67
e.
$25.52
Exhibit 3.2
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.
58. Refer to Exhibit 3.2. How many shares of RC can Heidi buy?
a.
2,500
Chapter 03 – Organization and Functioning of Securities Markets
b.
2,000
c.
1,000
d.
500
e.
250
59. Refer to Exhibit 3.2. What is Heidi’s profit if RC’s price rises to $80?
a.
$55,000
b.
$50,000
c.
$60,000
d.
$68,270
e.
$28,570
60. Refer to Exhibit 3.2. If the maintenance margin is 25 percent, to what price can RC Industries stock price fall before
Heidi receives a margin call?
a.
$21.75
b.
$23.33
c.
$32.00
d.
$33.33
e.
$22.22
Chapter 03 – Organization and Functioning of Securities Markets
Exhibit 3.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80 percent, and Jackson
Industries is currently selling at $40 per share.
61. Refer to Exhibit 3.3. How many shares of Jackson can Kathy buy?
a.
1875
b.
1500
c.
1750
d.
1200
e.
950
62. Refer to Exhibit 3.3. What is Kathy’s profit if Jackson’s price rises to $50?
a.
$18,750
b.
$15,750
c.
$55,000
d.
$37,750
e.
$28,570
63. Refer to Exhibit 3.3. If the maintenance margin is 25 percent, to what price can Jackson Industries fall before Kathy
receives a margin call?
a.
$21.75
b.
$23.00
c.
$10.67
d.
$15.93
e.
$12.67
Exhibit 3.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell 100 shares of Davis Industries short when it is selling at its yearly high of $35. Your broker tells you
that your margin requirement is 55 percent and that the commission on the sale is $15. While you are short, Davis pays a
$0.75 per share dividend. At the end of one year you buy your Davis shares (cover your short sale) at $30 and are charged
a commission of $15 and a 6 percent interest rate.
64. Refer to Exhibit 3.4. What is your dollar return on the investment?
a.
$130.50
b.
$300.50
c.
$100.00
d.
$1,773.75
e.
$3,500.00
65. Refer to Exhibit 3.4. What is your rate of return on the investment?
a.
10.48 percent
b.
12.87 percent
c.
13.98 percent
d.
15.49 percent
e.
18.87 percent
Exhibit 3.5
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.
66. Refer to Exhibit 3.5. What is your dollar return on the investment?
a.
$384.50
b.
$432.88
c.
−$432.88
d.
−$384.50
e.
−$950.55
67. Refer to Exhibit 3.5. What is your rate of return on the investment?
a.
10.48 percent
b.
12.87 percent
c.
−13.98 percent
d.
−24.49 percent
e.
−15.05 percent
68. Suppose you buy a round lot of DG Solutions stock on 60 percent 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?
a.
−10.38 percent
b.
−12.84 percent
c.
−10.95 percent
d.
21.84 percent
e.
28.38 percent
69. 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?
a.
−35.17 percent
b.
−21.84 percent
c.
14.74 percent
d.
21.84 percent
Chapter 03 – Organization and Functioning of Securities Markets
e.
35.17 percent
70. Suppose you buy a round lot of Altman Industries stock on 50 percent margin when it is selling at $35 a share. The
broker charges a 10 percent annual interest rate and commissions are 5 percent of the total stock value on both the
purchase and the sale. If at year end you receive a $1.00 per share dividend and sell the stock for $42.63, what is your rate
of return on the investment?
a.
15.58 percent
b.
11.84 percent
c.
14.74 percent
d.
21.84 percent
e.
28.38 percent
Exhibit 3.6
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 percent. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25
percent per year.
71. 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?
a.
−55.92 percent
b.
10.31 percent
c.
51.06 percent
d.
23.1 percent
Chapter 03 – Organization and Functioning of Securities Markets
e.
−33.05 percent
72. 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.
−40.64 percent
b.
−25.53 percent
c.
5.21 percent
d.
72.7 percent
e.
−71.2 percent
Exhibit 3.7
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.
73. 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?
a.
18.08 percent
b.
23.51 percent
c.
22.32 percent
d.
14.96 percent
e.
19.28 percent
Chapter 03 – Organization and Functioning of Securities Markets
74. 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 paid the full cost of the purchase, what is your rate of return if you
sell RossCorp stock?
a.
−33.05 percent
b.
−23.42 percent
c.
23.42 percent
d.
33.05 percent
e.
−25.35 percent
75. 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 borrowed 25 percent of cost of the purchase, what is your rate of
return?
a.
−23.51 percent
b.
29.35 percent
c.
23.51 percent
d.
5.21 percent
e.
10.06 percent
76. 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?
a.
33.05 percent
b.
−33.05 percent
c.
−23.51 percent
d.
−25.35 percent
e.
−40.64 percent
77. Refer to Exhibit 3.7. Assume that you purchase 150 shares of RossCorp stock at $45 each by making a margin deposit
of 55 percent. At what price would you receive a margin call?
a.
$29.39
b.
$26.48
c.
$50.39
d.
$28.93
e.
$50.10
78. 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?
Chapter 03 – Organization and Functioning of Securities Markets
a.
−30.0 percent
b.
16.7 percent
c.
50.0 percent
d.
66.7 percent
e.
150.0 percent
79. 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?
a.
21 percent
b.
47 percent
c.
52 percent
d.
60 percent
e.
72 percent
Exhibit 3.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You sell 100 shares short of AMF Corporation when it is selling at $45 per share. Your margin requirement is 60 percent
and the commission on the sale is $50 and the broker charges 10 percent annual interest. AMF Corporation paid a $0.50
per share dividend while you were short the stock. After one year, you cover your short sale at $35 per share with a $50
commission for the purchase.
80. Refer to Exhibit 3.8. What is your total dollar return on this investment?
a.
$1,000
Chapter 03 – Organization and Functioning of Securities Markets
b.
$900
c.
$850
d.
$670
e.
$520
81. Refer to Exhibit 3.8. What is your annual rate of return on this investment?
a.
18 percent
b.
24 percent
c.
25 percent
d.
36 percent
e.
37 percent
82. Suppose you purchase 200 shares of Best Hat Corporation at $52 a share by making a margin deposit of 50 percent. If
the maintenance margin is 30 percent, at what price will you receive a margin call?
a.
$37.14
b.
$37.95
c.
$38.23
d.
$38.76
e.
$39.42
83. 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?
a.
8.7 percent
b.
9.2 percent
c.
10.3 percent
d.
11.9 percent
e.
12.8 percent
84. 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?
a.
$76
b.
$80
c.
$84
d.
$88
e.
$92
85. An order that specifies the highest buy or lowest sell price is a
a.
limit order.
b.
short sale.
c.
market order.
d.
margin call.
e.
stop loss.
86. When an investor borrows part of the investment cost it is known as
a.
a short sale.
b.
a fill or kill order.
c.
a margin transaction.
d.
a limit order.
e.
going long.
87. Investors can leverage their stock transactions with the use of
a.
margin orders.
b.
stop loss orders.
c.
limit orders.
d.
market orders.
e.
specialists.