Chapter 1: Question 11 (page 80)
Where would an illiquid security in a developing country most likely trade?
a. Broker markets.
b. Electronic crossing networks.
c. Electronic limit-order markets.
The correct answer is a. Broker markets.
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Why do most professionals consider the Wilshire 5000 a better index of the performance of the broad stock market than the Dow Jones Industrial Average?
What are the differences between equity and fixed-income securities?
Suppose that Intel currently is selling at \(40 per share. You buy 500 shares using \)15,000 of your own money, 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?
We noted that oversight by large institutional investors or creditors is one mechanism to reduce agency problems. Why don’t individual investors in the firm have the same incentive to keep an eye on management?
A T-bill with face value $10,000 and 87 days to maturity is selling at a bank discount ask yield of 3.4%. What is the price of the bill? What is its bond equivalent yield?
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