Premium Essay

Porfolio Management

In: Business and Management

Submitted By hazelstar
Words 860
Pages 4
Chapter 3
Securities markets

PROBLEM SETS
SOLUTIONS
Basic
1. An IPO is the first time a formerly privately owned company sells shares to the general public. A placement is the issuance of shares by a company that has already undergone an IPO.
2. Costs can be categorised as explicit, such as brokerage fees, or implicit such as the bid−ask spread and market impact.
3. The primary market is the market for new issues of securities, while the secondary market is the market for already-existing securities. Companies sell shares in the primary market, while investors purchase shares from other investors in the secondary market.
4. A placement is a quick way to raise additional capital. A dividend reinvestment plan would not be appropriate.
5. A stop order is a trade is not to be executed unless stock hits a price limit. The stop loss is used to limit losses when prices are falling. An order specifying a price at which an investor is willing to buy or sell a security is a limit order, while a market order directs the broker to buy or sell at whatever price is available in the market.
6. Margin is a type of leverage that allows investors to post only a portion of the value of the security they purchase. As such, when the price of the security rises or falls, the gain or loss represents a much higher percentage, relative to the actual money invested.

Intermediate
7. a. 55.50
b. 55.25
c. The trade will not be executed because the bid price is lower than the price specified in the limit sell order.
d. The trade will not be executed because the asked price is greater than the price specified in the limit buy order.
8. a. The shares are purchased for: 300 x $40 = $12 000
The amount borrowed is $4000. Therefore the investor put up equity or margin of $8000.
b. If the share price falls to $30 then the value of the shares fall to $9000. By the end of the year

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