Chapter 1: Question 1-6B (page 23)
How does investment banking differ from commercial banking?
Investment banking deals in the sale of security
Commercial banks deal with money such as making payment, lending or deposits.
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Consider the three stocks in the following table. P t represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two-for-one in the last period.
P0 | Q0 | P1 | Q1 | P2 | Q2 | |
A | 90 | 100 | 95 | 100 | 95 | 100 |
B | 50 | 200 | 45 | 200 | 45 | 200 |
C | 100 | 200 | 110 | 200 | 55 | 400 |
a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t 50 to t 51).
b. What must happen to the divisor for the price-weighted index in year 2?
c. Calculate the rate of return of the price-weighted index for the second period (t 51to t 52).
What are the differences between a stop-loss order, a limit sell order, and a market order?
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%.
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?
c. What is the rate of return on her investment?
What would you expect to be the relationship between securitization and the role of financial intermediaries in the economy? For example, what happens to the role of local banks in providing capital for mortgage loans when national markets in mortgage backed securities become highly developed?
Why would you expect securitization to take place only in highly developed capital markets?
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