Chapter 1: Question 3 (page 79)
What is the difference between a primary and secondary market?
Primary market is a market for issue of new securities.
Secondary market is a market for trading/issue of already existing securities.
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: 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 \(50?
a. \)50
b. \(55
c. \)54.87
d. Cannot tell from the information given
Using the data in the previous problem, calculate the first-period rates of return on the following indexes of the three stocks:
a. A market value–weighted index
b. An equally weighted index
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 in six-month at-the-money call options on IBM stock now and selling them six months from now.
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) \(36? Assume that Intel pays no dividends.
b. If the maintenance margin is 25%, how high can Intel’s price rise before you get a margin call?
c. Redo parts ( a ) and ( b ), but now assume that Intel also has paid a year-end dividend of \)1 per share. The prices in part ( a ) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
If the offering price of an open-end fund is $12.30 per share and the fund is sold with a front-end load of 5%, what is its net asset value?
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