Chapter 1: Question 6 (page 79)
What are the differences between a stop-loss order, a limit sell order, and a market order?
They are a subset of Market and Price-contingent orders
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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
What is the role of an underwriter? A prospectus?
Here is some price information on Marriott:
You have placed a stop-loss order to sell at $20. What are you telling your broker? Given market prices, will your order be executed?
What is meant by limited liability?
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?
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