A
. Securities Markets
1. F
B
N Inc. has just sold
100
,000 shares in an initial public offering. The underwriter’s explicit fees were $ 70,000. The offering price for the shares was $ 50, but immediately upon issue, the share price jumped to $ 53.
a. What is your best guess as to the total cost to FBN of the equity issue?
b. Is the entire cost of the underwriting a source of profit to the underwriters?
2. What are the differences between a stop-loss order, a limit sell order, and a market order? (LO 3-3)
3. Suppose you short-sell 100 shares of IBM, now selling at $
20
0
per share. (LO 3-4)
a. What is your maximum possible loss?
b. What happens to the maximum loss if you simultaneously place a stop-buy order at $210?
4.
D
ée 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%. (LO 3-4)
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?
5.
C
onsider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $50. (LO 3-3)
|
Limit Buy Orders |
Limit Sell Orders |
|||||
|
Price |
Shares |
|||||
|
$49.75 |
500 |
$50. 25 |
100 | |||
|
49.50 |
800 |
51.50 |
||||
|
49.25 |
54.75 |
300 | ||||
|
49.00 |
200 |
58.25 |
||||
|
48.50 |
600 |
a. If a market buy order for 100 shares comes in, at what price will it be filled?
b. At what price would the next market buy order be filled?
c. If you were a security dealer, would you want to increase or decrease your inventory of this stock?
6. You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. (LO 3-4)
a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.)
b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.
7. You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. (LO 3-4)
a. How much in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of the value of the short position?
b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?
8. Suppose that Intel currently is selling at $20 per share. You buy 1,000 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% and the maintenance margin is 25%.
a. how low can Intel’s price immediately fall before you get a margin call?
b. assume that a year has passed. How low can Intel’s price fall before you get a margin call?
CFA Problems
8. 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? (LO 3-2)
a. $50
b. $55
c. $54.87
d. Cannot tell from the information given
B. MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES
1. Suppose you observe the investment performance of 350 portfolio managers for 5 years and rank them by investment returns during each year. After 5 years, you find that 11 of the funds have investment returns that place the fund in the top half of the sample in each and every year of your sample. Such consistency of performance indicates to you that these must be the funds whose managers are in fact skilled, and you invest your money in these funds. Is your conclusion warranted?
2. Why can closed-end funds sell at prices that differ from net value while open-end funds do not? (LO 4-2)
3. What is a 12b-1 fee? (LO 4-1)
4. What are some differences between hedge funds and mutual funds? (LO 4-2)
5. An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6%. What is the offering price? (LO 4-3)
6. 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? (LO 4-3)
7. The composition of the Fingroup Fund portfolio is as follows:
|
Stock |
||
| A |
200,000 |
$35 |
| B |
300,000 |
40 |
| C |
400,000 |
20 |
| D |
600,000 |
25 |
The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30,000. There are 4 million shares outstanding. What is the net asset value of the fund? (LO 4-3)
8. Reconsider the Fingroup Fund in the previous problem. If during the year the portfolio manager sells all of the holdings of stock D and replaces it with 200,000 shares of stock E at $50 per share and 200,000 shares of stock F at $25 per share, what is the portfolio turnover rate? (LO 4-5)
9. A closed- end fund starts the year with a net asset value of $ 12.00. By year- end, NAV equals $ 12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. By the end of the year, the fund is selling at a 7% discount to NAV. The fund paid year- end distributions of income and capital gains of $ 1.50.
a. What is the rate of return to an investor in the fund during the year?
b. What would have been the rate of return to an investor who held the same securities as the fund manager during the year?
10. Consider a mutual fund with $200 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $2 million. The stocks included in the fund’s portfolio increase in price by 8%, but no securities are sold, and there are no capital gains distributions. The fund charges 12b-1 fees of 1%, which are deducted from portfolio assets at year-end. What is net asset value at the start and end of the year? What is the rate of return for an investor in the fund?
· C. Answer the following
· how securities are traded on both the primary and secondary markets.
· the mechanics, risk, and calculations involved in both margin and short trading
· the implications, ambiguities, and complexities of the regulation of securities markets.
· Investment Companies –
· NAV (Net Asset Value) calculations–
image1
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
