Introduction

to
Investment

Chapt
er

Chapter Outline
Market and characteristics of market
Liquid asset and an illiquid asset
Primary and secondary market for securities and its importance
Differences between a competitive bid underwriting and negotiated
underwriting.
Different types of market and their differences
Different types of order
Differences between limit and market order
Short sale and trading system
Technical points that affect short sale
Forward contracts and future contract and their differences
Asset allocation and security selection. Explanation of the term "securitization"
and "financial engineering".
Asset and types of Assets
Categories of exchange membership
Mathematical Problems & Solution

Question: 1.01: Define market and briefly discuss the characteristics

of market?
Answer:
A market is one of many varieties of systems, institutions,
procedures, social relations and infrastructures whereby parties
engage in exchange. While parties may exchange goods and services
by barter, most markets rely on sellers offering their goods or
services (including labor) in exchange for money from buyers.
Market usually refers to the place in where people exchange their
goods and services at different or fixed price level
A market means trough which buyers and sellers are brought
together to aid in the transfer of goods and /or services.
Example: Physical retail markets, (Non-physical) internet markets,
Ad hoc auction markets, Labor markets, International currency and
commodity markets, Stock markets, Artificial markets Illegal markets,
Artificial markets Illegal markets.
The following are the basic characteristics of a market:1. A market need not have a physical location .it it is only necessary
that the buyer and seller can communicate regarding the relevant
aspects of the transaction.
2. The market does not necessarily own the goods or services
involved but chief transfer of ownership.
3. A market can deal in any variety of goods and services.
4. A continuous or fixed price is need for transactions
5. There are huge amount of buyer and seller
6.

Question: 1.02: Briefly discuss the characteristics of good market.

Answer:

NU: BBA 2008, 2010

Characteristics of good market: For a good market, ownership is

not involved; the importance criterion is the smooth, cheap transfer
of goods and service.
1. Time and accurate: Time and accurate information on the price
and volume of past transaction.
2. Liquidity: Liquidity means an asset can be bought or sold quickly
at a price close to the price for previous transaction (has price
continually), assuming no new information has been receive .in
turn ,price continuity required depth.
3. Low Transition Cost: Including the cost of reaching the market,
the actual brokerage cost and the cost of transferring g the assets.
4. Price: Price is rapidly adjusted to new information, so the
prevailing price is fair since it reflect al available information
regarding the asset.

Question: 1.03: Define liquidity and discuss the factors that contribute
to it. Give examples of a liquid asset and an illiquid asset, and discuss
why they are considered liquid and illiquid.
Answer:

NU: BBA 2008, 2010, 2012

Liquidity refers to an asset's ability to be easily converted through an act of buying or

selling without losing in value. An act of exchange of a less liquid asset with a more
liquid asset is called liquidation.

Liquidity also refers both to that quality of a business which enables it to meet its
payment obligations, in terms of possessing sufficient liquid assets
Liquidity in accounting is a measure of the ability of a debtor to pay their debts as and
when they fall due that expressed as a ratio or a percentage of current liabilities
Liquidity is the ability of an asset to convert into cash quickly and without any price
discount
Examples: assets that are easily converted in cash including blue up and money
market securities.

Factors affecting a firms liquidity position:

A firms liquidity position is affected by how the cash inflow or cash outflow is
affected.

Drags on Liquidity: When the cash inflow is reduced or delayed, its referred to
as drag on liquidity.
Examples:
1. Bad debt
2. Obsolete inventory
3. Tight credit: Less or expensive trade credit

Pulls on Liquidity: When the cash out flow increases, its referred to as pull on
liquidity.
Examples:
1. Making payments fast to suppliers, employees, etc.
2. Reduced credit limits by suppliers
On the other hand, the assets which cannot easily convert into cash without losing
any value immediately is called illiquid asset. For example, land, machinery,
building etc.

The examples of a liquid asset and an illiquid asset:

Some examples of illiquid assets include: real estate, huge blocks of stock,
antiques, and collectibles.

Some examples of liquid assets include: Marketable securities, commercial

paper etc.

Question: 1.04: Define a primary and secondary market for securities.

Answer:

NU: BBA 2010

Primary Market: The primary market is that part of the capital

markets that deals with the issuance of new securities. Companies,
governments or public sector institutions can obtain bonds through
the sale of a new stock or bond issue.
Secondary Market: The secondary market is simply trading in
outstanding

securities.

The

secondary

market,

also

called

aftermarket, is the financial market in which previously issued

financial instruments such as stock, bonds, options, and futures are
bought and sold.

Question: 1.05: Why secondary Market is important?

Answer:

NU: BBA 2010,2012

The importance of secondary market for primary market is given

below:1. Secondary market involved transaction between owners after the
issuer has been sold to the public by the company consequently the
proceeds from the sale do not go to the company as is the case with
a primary offering .Thus the price of securities is important to the
issuer to issue new securities and buyer to invest in profitable
securities.

2. It provides s liquidity to the individuals who acquire these

securities.
3. The primary market benefits greatly from the liquidity provides by
the secondary market because investor would hasted to acquire
securities in the primary market it they could not subsequently sell
them in the secondary market.
4. Without an active secondary market, market would have to
provide a much higher rate of return to the compensate investor for
the liquidity risk.
5. New issues of outstanding of stock or bonds to be sold in the
primary market are based on price and yield in the secondary
market.
Therefore, the function of the primary market of would be seriously
hampered in the absence of good secondary market.

Question: 1.06: Discuss how primary differ from secondary market

securities.
NU: BBA 2010

Answer:
The

difference

between

primary

market

and

secondary

market are given below:Aspects

Definition

Primary market

Primary markets facilitate Secondary

the

Provide

Secondary market
facilitate

markets
the

trading

Issuance of new securities. existing securities.

Primary
market Secondary
transactions

of

market

transactions do not.

Provide funds to the initial

Facilitate

issuer to Securities.
Facilitated the issuance of Facilitated the trading of
new

existing shares.

Issuance

Share.
The
issuance

of

new The

corporate
stock

or

Trade

new

existing

Treasury security holdings by one

investor to another is a
market secondary

market

transactions.
transaction.
Financial instruments are Financial instruments are
offered or

Source

of

corporate stock or Treasury

securities
Primary

sale

traded that once issued.

Sale.
It is an important source of It provides liquidity.
new

Participant

Capital.
New firms corporations, or Only existing firms which
existing

previously

issued

shares

Firms can participate here. can trade or participate.

Underwrite Underwriters
are Underwriters are brokers
r

investment, banks etc.

deals etc.

Question: 1.07: Why secondary Market is important? Or Discuss why

the primary market is dependent on the secondary market.
Answer:

NU: BBA 2010,2012

The importance of secondary market for primary market is given

below:1. Secondary market involved transaction between owners after the
issuer has been sold to the public by the company consequently the
proceeds from the sale do not go to the company as is the case with
a primary offering .Thus the price of securities is important to the
issuer to issue new securities and buyer to invest in profitable
securities.

2. It provides s liquidity to the individuals who acquire these

securities.
3. The primary market benefits greatly from the liquidity provides by
the secondary market because investor would hasted to acquire
securities in the primary market it they could not subsequently sell
them in the secondary market.
4. Without an active secondary market, market would have to
provide a much higher rate of return to the compensate investor for
the liquidity risk.
5. New issues of outstanding of stock or bonds to be sold in the
primary market are based on price and yield in the secondary
market.
Therefore, the function of the primary market of would be seriously
hampered in the absence of good secondary market.

Question: 1.08: Call vs. Continuous Market.

Answer:

NU: BBA 2011

Call Markets:
Call market is a market where a stock can only trade at a specific
time. Bids for the stock are collected and then traded at a specific
time and at one price. It is typically only used for smaller markets.
Continuous Market:
Continuous market is a market where a stock can trade at any time
as long as the market is open. Buyers and sellers are matched up on
a continuous basis and the price is determined through an auction or
through bid-ask quotes.

The distinction between call market and continuous market

are given below:Points of
Distinction
Definition

Call Market

Continuous Market
continuous market is
continuously
traded
where dealers make a
market willingly buy
and sell by their own
account

Bids

Call market deals with

fund borrowed or lend
over night one day call
money
and
notice
many for period upto14
day. The return of call
market
is high.bids
A
single
is

Use

determined
by
buyer
seller usually
Call and
market

Price

use to
exchange
stage
Single price
exit here

Dealers
makes
the market bids

the

Continuous market is
use to trade in auction
market
There
are
multiple
prices available here

Nature
Trading
Amount
Capital
Trading
references

of
of

Call market trade only

per day
Large
amount
of
capital are traded here
A call market is a
marketplace in which
trading takes place at
certain points in time
(discrete
time
intervals), i.e., when
the market is called.

Continuous
market
trades continuously
Comparatively
lower
amount
of
capital
exchanged here
A continuous market is
where trading takes
place on an ongoing
basis.

Question: 1.09: Explain the differences between a competitive bid

underwriting and negotiated underwriting.
Answer:

NU: BBA 2006, 2008, 2010

Competitive bid underwriting: In a competitive bid underwriting,

bonds are advertised for sale. The advertisement, by way of a notice
of sale, includes both the terms of the sale and the terms of the bond
issue specifying for the types of security to be offered, the timing etc.
Negotiated underwriting: In a negotiated sale, an underwriter is
selected to purchase the bonds. The underwriter, in turn, sells the
bonds to its investor customers. The terms of the bonds are tailored
to meet the demands of the underwriter's investor clients, as well as
the needs of the issuer.
The distinction between A competitive bid and a negotiated
underwriting are given below:Points of
Distinction
Definition

Competitive bid

Negotiated

underwriting
underwriting
It is an under writing It is a process in which
alternative

wherein

issuing

entity and the offering price for

(governmental body
a corporation)
the types
to be

an both the purchase price

or a new

specifies negotiated

offered (bond or single underwriter.

characteristic
,

solicit
competing

of

and
bid

the
issuer
from

investment

banking firms with the

understanding that the

are

between the

of securities issuer

stock) and the general

issuing

issue

and a

issuer
highest

will
bid

accept

the

from

the

Advertised

banker.
Issuer advertised for sale Issuer does not advertise

for

to the underwriter.

for

sale

to

the

underwriter

but

underwriter

advertises

Bond

for resale to public.

The bonds are awarded The bond is awarded of

Awarding

to the bidder offering the interest

lowest interest cost.

in

the

issue

before establishing final

Bidding

bond pricing.
The issuer will accept the issuer selects

Pattern

the highest bid from the underwriter

the

banker

Question: 1.10: Define the third market. Give an example of a thirdmarket stock.
Answer:

NU: BBA 2009

Third market in finance, refers to the trading of exchange-listed

securities in the over-the-counter (OTC) market. These trades allow
institutional investors to trade blocks of securities directly, rather
than through an exchange, providing liquidity and anonymity to
buyers.
Third

market

involves

exchange-listed

securities

that

are

being traded over-the-counter between brokers/dealers and large

institutional investors.

Third market involves dealers and brokers who trade shares that are
listed on an exchange away from the exchange
Example: The third market is an OTC venue in which brokers and
institutional investors and (e.g., NYSE or AMEX).

Question: 1.11: Define fourth market. Discuss why a financial

institution would use the fourth market.
Answer:

NU: BBA 2009, 2011, 2013

Fourth market involves the direct transactions of the securities of

both listed and unlisted companies between buyer and seller. There
is no existence of the brokers in this market. It describes the direct
trading of securities between two parties with no broker intermediary.
Institution trades in the fourth market since these trades are large
volume and consequently substantial saving can be trading directly
with a buyer, the avoiding commission.
For example, if a mutual fund sells stock in Google to a hedge fund
without going through an exchange, the transaction is said to occur
on the fourth market. These transactions occur in large blocks
without the use of brokers, which save counterparties from significant
fees
The fourth market is important for following reasons:
1. For large volume of investment
2. Consequently substantial saving from investment
3. To reduce the harassment of third party
4. To reduce unnecessary cost

Question: 1.12: What is OTC market?

Answer:
Over the counter (OTC) market is a geographical dispersed group
of

trader who are

linked to one another via telecommunication

system.
OTC market is a intangible organization that consist of a large
collection of broker and dealer connected by telephone line.
OTC market is naturally location-less organization that 24
hours open and securities

traded are unlisted.

Question: 1.13: What are the major features of OTC market?

Answer:
The main feature of OTC market is given bellow:

It include trading in all stock not listed on organized securities

trade

It is not a formal organization.

Any securities can be traded in OTC market as long as

regulated.

It is referred as negotiated market.

It is an automated electronic quotation system.

It has telecommunication network.

Question: 1.14: Distinguish between Over the Counter (OTC) market

and spot market.
Answer:

NU: BBA 2006

Over the counter market (OTC): Over the counter market (OTC) is
a largely unregulated market whereby geographically dispread
traders, who are linked to one another via telecommunication
systems and computer, trades in securities.

Spot Market:

Sport also call cash market the market in which a

financial assets trades for immediate delivery.

The distinction between over the counter market and spot
market:Points of

Over the Counter

Spot Market
Market
an unorganized It is an organized market.

Distinction
Market

It

Delivery

market.
Financial assets trade for Financial assets trade for

is

future delivery.
Called

Called market makers or Call cash market, physical

Also

Example

immediate delivery.

called

outside market

market or third market.

London stock market, the
NTR shares

New

York

Stock

Exchange

Question: 1.15: What are the different types of order? Discuss with an
example.
Answer:
There are different types of order which are given below:1. Market Orders:
A market order is an order to buy or sell at the best available price.
The most frequent types of orders are a market order, an order to
buy or sell a stock at the current price. Market order an order to buy
or sell a security immediately at the best price available. For
example, the bid price for EUR/USD is currently at 1.2140 and the
ask price is at 1.2142. If you wanted to buy EUR/USD at market, then
it would be sold to you at the ask price of 1.2142. You would click buy
and your trading platform would instantly execute a buy order at that
exact price.

2. Limit Orders:
A limit entry is an order placed to either buy below the market or sell
above the market at a certain price. A limit order specifies that the
buy or sale price. Limit order an order that lasts for a sale specified
time to buy sell a security when and if trades at trades at a specified
price. For example, EUR/USD is currently trading at 1.2050. You
want to go short if the price reaches 1.2070. You can either sit in
front of your monitor and wait for it to hit 1.2070 (at which point you
would click a sell market order), or you can set a sell limit order at
1.2070 (then you could walk away from your computer to attend your
ballroom dancing class).
3. Short Sale:
Short sale is the sale of stock that you do not own with the intent of
purchasing it baked later at a lower price. Specifically, you would
borrow the stock from another investor though your broker, sell it in
the market and subsequently replace it at (you hope)a price lower
than the price at which at which you sold it. The investor who lent
the stock has the proceeds of the sale as collateral and can invest
these funds in shorten risk free securities. Although a short sale has
no time limit, the lender of the share can decide to sell the share.
4. Special Orders:
These general order, there are several special types orders. A stop
loss order is the conditional market order whereby the investor
directs the sale of stock if it drops to a given price.

Question: 1.16: What is short sale?

Answer:

NU: BBA 2006, 2008, 2010, 2012

Short sale is the sale of stock that you do not own with the intent of
purchasing it baked later at a lower price. Specifically, you would
borrow the stock from another investor though your broker, sell it in
the market and subsequently replace it at (you hope)a price lower
than the price at which at which you sold it. The investor who lent
the stock has the proceeds of the sale as collateral and can invest
these funds in shorten risk free securities. Although a short sale has
no time limit, the lender of the share can decide to sell the share.

Question: 1.17: What are the technical points that affect short sale?
Or what condition must be meeting for an investment to sell a sort?
Or state the process of short sell?
Answer:

NU: BBA 2006, 2008, 2010

The sale of borrowed securities with the intention of repurchasing

them later at a lower price and earning the difference:

First: A short sale can be made only on uptick trade. Meaning the
price of short sale must be higher than the last trade price .this is
because the exchange do not want trader to a force profit on sort
sale by pushing price down trough continually selling short.

Second: Technical point concerns dividends. The sort seller must

pay any dividends due to the investor who lent the stock .the
purchaser of the short seller must pay a similar dividend to the
lender.

Finally: Short seller must post the same margin as an investor

who had accrue stock this margin can be in any unrestricted
securities owned by short seller.

Question: 1.18: What difference does it make that forward contracts

are valued on discounted basis while futures contracts are marked to
market without discounting.
Answer:

NU: BBA 2008

Future contract: A future contract is a standardized contract to buy

or sell a specified commodity of standardized quality at a certain
date in the future and at a market determined price. A future
contract is an agreement between two parties to buy or sell an asset
at a certain time in the future for a certain price.
Like a forward contract, a futures contract includes an agreed upon
price and time in the future to buy or sell an asset usually stocks,
bonds, or commodities, like gold.
Forward contract: An informal agreement traded through a broken
dealer network to buy and sell specified assets typically currency. At
a specified price at a certain future dates.
In finance, a forward contract or simply a forward is a nonstandardized contract between two parties to buy or to sell an asset
at a specified future time at a price agreed upon today, making it a
type of derivative instrument.
There are difference between future and forward contract.
These are as follows:
Future Contract
Forward Contract
A future contract is an agreement An informal agreement traded
between two parties to buy or sell through a broken dealer network
an asset at a certain time in the to buy and sell specified assets

future for a certain price.

typically currency. At a specified

price at a certain future dates.

There is clearinghouse for trading There is no clearinghouse for

future contract.
Future contract

which

is

trading future contract.

an Forward contract is an over the

exchange traded product.

counter instrument.
Future contract can be used to Forward contract can be used to
hedge the market risk of an hedge foreign currency risk.
existing stock portfolio.
Future contracts are not intended Forward contracts are intended to
to be settled by delivery.
Generally fewer than

2%

be settled by delivery.
of Forward contracts in contrast are

outstanding contracts are settled intended for delivery.

by delivery.
Future contracts are marked to Forward

contract

that

is

not

market at the end of each trading marked to market.

day.
There are no interim cash flow There
effects

because

no

are

interim

cash

flow

additional effects because additional margin

margin is required.
is required.
Forward contract are exposed to Future contract

credit

risk

is

credit risk because either party minimal because clearinghouse

may default on the obligation.

Future

contract

are

traded on an exchange.

associated

with

guarantees

the

the
side

exchange
of

any

transaction.
normally Forward contract is traded in the
over the counter market

Question: 1.19: What do you understand by asset allocation and

security selection? Briefly explain the term "securitization" and
"financial engineering"?
NU: BBA 2008

Answer:
Asset allocation:
Asset allocation is an investment strategy that attempts to
balance risk versus reward by adjusting the percentage of each
asset in an investment portfolio according to the investors risk
tolerance, goals and investment time frame.
Asset allocation is the process of distributing investments
among various asset classes (for example, stocks, bonds, and
cash) and determining their proportions within a portfolio
Asset allocation is fundamental for successful investing, but if
financial planning makes your palms sweat, find a reputable
financial

advisor

and

get

grasp

on

asset

allocation

terminology to help. Choose your investment strategy wisely

and build a profitable portfolio with an asset allocation
structure to yield top returns and minimize risk.
Security selection:
Security

selection

is

to determine which securities will

Process

be

included

used
in

particular portfolio. Certain factors, such as risk and return, are

taken into consideration when selecting the security.
The goal of security selection is to increase one's chances of
making a profit on

all investments in

the

portfolio

and

to

hedge against losses.

Securitization of Asset:

Asset securitizations the reaction and incurve debt securities

of bond whether payment of principal and interest drive from
cash follows generated by superset parts of asset .asset

secretion means that one institution may be involved in lending

capital .this system is cared call different from traditional
system.
Asset securitization is the process involves the collection or
polling of loan and the sale of securities backed loan

Number of difference participants involved in securitization

process is shown in the following:
Originator
(company
securitized it)

Credit
entrencher

Sales
Security
Assets

Trustee (monitor
competence)

Sales
proceeds
for securities

Special purpose
vehicle (SPV)

Services (collect of
maker payment)

Funds
Structure the
ABS/MBS On
perception of
Investor demand

Investors
(purchasing A B S)

Underwriter
/investment

ABS/MBS

Fig: Process of securitization

Financial Engineering:
Financial engineering is a multidisciplinary field involving financial
theory, the methods of engineering, the tools of mathematics and
the practice of programming. [1] It has also been defined as the
application of technical methods, especially from mathematical
finance and computational
[2]

finance,

in

the

practice

of finance.

Despite its name, financial engineering does not belong to any of

the fields in

traditional engineering.

In

the

United

States,

the Accreditation Board for Engineering and Technology (ABET) does

not accredit financial engineering degrees. In the United States,

financial engineering programs are accredited by the International

Association of Financial Engineers.

Question: 1.20: What is Asset? What are the different types of Assets?
Answer:
An asset is any possession that has value in an exchange.
Example: - land, building

Assets
Tangible Assets

Intangible Assets

Tangible Assets: A tangible asset is one whose value depends on

particular physical properties.
Example: Building, Land or machinery.
Intangible Assets: Intangible assets by contrast represent legal
claims to some future benefit. Their value bears no relation to the
form, physical or otherwise, in which these claims are recorded.
Example: Bond, stock, Good will, copyright, Trade mark, Franchise
etc.

Question: 1.21: What are the differences between real and financial
assets? Name the three broad types of financial assets.
Answer:

NU: BBA 2007, 2008, 2009, 2011

Financial Assets: Financial assets is a claim against the income or

wealth of a business firm, household or unit or of government
represented usually by a certificate receipt or other local documents
and is usually created by the lending of money.

Example: money, equity, share/stock, debt etc.

Real Asset: A tangible asset is one whose value depends on
particular physical properties.
Example: Building, Land or machinery.
The differences between Financial Asset and Tangible asset
as follows:Aspects
A

Financial Asset
financial
asset

Tangible Asset
by

1.Definiti

contrast, represent legal

on

claim

2. Nature
3. Types

4.Focus

to

some

benefit.
Financial

assets

future

A tangible asset is financed

by the issuance of some
type of financial assets.

are Tangible

assets

are

intangible assets.
physical properties.
Financial asset are such Tangible assets are such
as: Bond, Share debenture as: plant, Land, Building
etc.
etc.
Financial assets deliberate Tangible assets are both

future cash benefit.

present and future benefit.
There are different types of financial assets which are1. Money Market securities: Treasury Bills, Commercial Papers,
Certificate of deposit, Repurchase Agreement etc.
2. Equity securities: Preferred Stock, Common Stock etc.
3. Debt securities: Bond, Debenture etc.
4. Derivatives

Market

securities:

Forward

contract,

Future

Contract, Option, SWAP etc.

Question: 1.22:

what are the major categories of exchange

membership?
NU: BBA 2008, 2011

Answer:
There are four major categories of exchange membership which are
as follows:
1. Specialist broker: Specialist broker are who constitute 25% of
the total membership in the market.
2. Commission broker: they are considered as a employee of
member firm who buy and sell for the customer of the firm.
3. Floor broker:

Floor broker are independent party for an

exchange who act as direct broker.

4. Registered broker: they are the broker who buy and sell
securities on their own account.

Question: 1.20: what are the differences between market orders and
limit order?
Answer:

NU: BBA 2013

The following are the differences between market orders and limit
order:
All orders must be submitted either 'At Market' or 'At Limit'. Limit
orders can be amended or cancelled provided the order has not
already been executed. Market orders cannot be amended or
cancelled online during market hours, however please contact us on
13 15 19 Monday to Friday (8am 7pm, Sydney time), if you wish to
amend or cancel a market order.
Market orders: Market orders will go into market to execute at the
best available price, however the execution and the price is not
guaranteed. Market orders cannot be accepted outside of market
hours or when trading in a particular stock is halted or suspended.

Limit orders: Limit orders allow you to set a maximum purchase

price for your buy order, or a minimum sale price for your sell orders.
If the market doesn't reach your limit price, your order will not be
executed.
You can place an 'At Limit' order during market hours. You can also
place an 'At Limit' order when the market is closed and it will be
queued ready for processing when the market opens.
Please note that an 'At Limit' order will not be accepted, without any
advice to you, if we consider the limit price to be too far away from
the prevailing market price of that stock.
NU: BBA: 2010, 2012

Problem: 01

You decide to sell short 100 shares of Beximco Textile when it is

selling at its yearly high of 56. Your broker tells you that your
margin requirement is 45% and that the commission on the
purchase is Tk.

155. While you are short the stock, Beximco pays

a Tk. 2.50 per share dividend. At the end of one year, you buy 100
shares of Beximco al 45 to close out your position and are charged
a commission of. Tk. 145 and 8% interest on the money borrowed.
What is your rate of return on the investment?

Answer:
Here,
Begging Value of investment = $56.00100= $5600
Ending Value of investment = $45.00100 = $4500 (Cost of
closing out put)
Dividends = $2.50 100 share = $250
Transaction Cost = 155 + 145 = $300

Interest = 0.80 (0.555600) = 246.40

Total net investment = (0.455600) +155 = 2.520+155 = $2675
Profit = Beginning value Ending Value Dividend Transition cost
Interest
= 5600 4500 250 300 246040 = 303.60

The rate of return of investment =

Pr ofit
Net Investment

= 303.60 =
2675

11.35%

Problem: 02

NU: BBA: 2008

You own 200 shares of Shamrock Enterprises that you bought at

$25 a share. The stock is now selling for $45 a share.
1. If you put in a stop loss order at $40, discuss your reasoning for

this action.
2. If the stock eventually declines in price to $30 a share, what

would be your rate of return with and without the stop loss order?

Answer:
Requirement (1): I am satisfied with the profit resulting from the
sale 200 shares at 40.
Requirement (2): If the stock eventually decline in price 30 a
share, the rate of return will beWith the stop loss order=
40 25
100 60%
25

Selling Pr ice Purchaing Pr ice

100 =
Purchaing price

Without stop loss order =

30 25
100 = 20%
25

Problem: 03
You have $40,000 to invest in Sophie Shoes, a stock selling for $80
a share. The initial margin requirement is 60 percent .Ignoring
taxes and commission ,show in detail the impact on your of rate if
the stock rise to $100 a share and if it declines to $40 a share
assuming.
a) You pay cash for the stock, and
b) You buy it using maximum leverage.

Answer:
Requirement (a): Assume you pay cash for the stock:
Number of the shares you could purchase=40000080=500 shares
1. If the stock is later sold 100 a share the total share proceeds
would be: 100500shares = 50000.
Therefore, the rate of return from investing in the stock is as
follows=

Sellingprice Purchase
50000 40000
100 =
100 =
40000
Purchase

25%

2. If the stock is later is at 40 share proceeds would be 405000 =

20000.
The rate of return from investigation in the sock would be =
40500 =20000
The rate of return from investing in the stock would be:
Rate of return

Selling Pr ice Purchase Pr ise

20000 40000
100
100 50%
Purchase Pr ise
40000

Requirement (b): You buy it using maximum leverage:

Assuming you use of maximum amount of leverage in buying the
stock the underage factors for a 60 percentage margin requirement
is

1
1
5

percentagem arg inrequirement

.60 3

Thus the rate of return on the sock if it is later sold at 100 share =
255/3 = 41.66%
In contrast in the rate of return on stock if is sold for 40 a share =
505/3 = 83.33%

Problem: 04
Lauren has a margin account and deposits $50000.Assuming the
prevailing margin requirement is 40 percent commissions are
ignored and the gentrys shoes corporation is selling at $35 per
share:
a) How many shares can Lauren purchase using the maximum
allowable margin?
b) What is Laurent profit (loss) if the price of Gentrys stocks
1) Rise to$45
2) Falls to $25
c) If the main tense margin is 30 percent to what price can gentry
shoes fall before Laurent will received a margin call?

Answer:
Requirement (a):

Since the margin is 40 percent and Laruen currently has 50000 on

deposit in her margin account, if Lauren users the maximum
allowable margin her $50000 deposit must represent 40% of her
total investment.
Thus $50000 = 4x
Then x= 125000.
Since the share are priced at $35each

Laurent canpurchase$125000$35=3571 share (rounded).

Requirement (b):
We Know:
Total Profit = Total Return Total Investment
1. If stock rise to $45 share
Total Profit =$160695-$125000 =$35695
2. If stock falls to 25 share
3571shares$25 = $89275

Total loose = $89275-$125000 = $35725

Requirement (c)
We Know,
Market Value Debit Balance
Margin
Market Value

Where,
Market value = price per share No.
of shares
Initial Loan Value =Total investment
Initial

Therefore, If maintenance margin is 30 percent, then.30

(3571 share price) $75000

(3571 share price)

=> 0.30(3571price) = (3571price)-$75000

=> 1071.3price= (3571price)-$75000

Margin

=> -2499.7price=-$75000

Price=$30
NU: BBA: 2011

Problem: 05

Suppose you buy around lot of margin industries stoic on 55

percent margin when the stock is selling at $20 a share. The broker
chargers a 10 percent annual interest rate and commission are
3percent of the total stock value on both the purchase and sale. A
year later, you received a $.50 per share dividend and sell the sock
for 27. What is your rate of return on investment?

Answer:
Let, Share Numbers is 100
Here,
Beginning Value of Investment =20100=$2000
Ending Value of Investment =27100=$2700
Dividend =.50100 share=5000
Transition cost (Commission) = (0.032000) + (.032700) =
60+81= $141
Interest =.10 (.452000) = $90000
Net Investment = Margin Requirement + Commission.
= (55$2000) + (0.032000) = $1100+$60 =
1160

Profit of investment = Ending Value Beginning value +DividendTransition

$519

cost interest = $2700 $2000 + $50 $141-$90 =

 The rate of return of investment

Pr ofit
519

44.74%
Net Investment 1160

Problem: 06
You own 200 shares of Shamrock Enterprise that you brought at $25 a share the
stock is now selling for $45 a share.
a) If you put in a stop loss order at $45 discuss your reasoning
for this action
b) If the stock eventually deckling in price to $30 a share, what
would be your rate of return with and without the atop loss
order?

Answer:
Requirement (a):
I am satisfied with the profit resulting from the sale of the 200 share at $40
Requirement (b):
With the stop loss: (40-25) 25 = 60%
Without the stop loss: (30-25) 25 = 20%

Problem: 07
Two years ago, you brought 300 share of Rayleigh Milk Co. for $30 a share with a
margin of 60 percent .currently the Rayleigh stock is selling for $45 a share
.Assuming no dividend and ignore commissions, Computea) The annualized rate of return on this investment if you had

paid cash and

b) Your rate of return with the margin purchase.

Answer:

Requirement (a): Assuming that you pay cash for the stock:
Rate of return

Selling Pr ise Purchase Pr ise

100
Purchase Pr ise

(300 45) (300 300)

13500 9000
100
100 50%
(300 30)
9000

Requirement (b): Assuming, the you used the maximum leverage in buying
the stock, the leverage factor for a 60percent margin requirement is

1
1

1.667
M arg inrequerment .60

Thus rate of return if it is later sold at $45 a share =50%1.60 = 83.33%

Problem: 08
The stock of the Michele Travel Com. is selling for $28 a share. You put in a limit
buy order at$24 for one month. During the month, the stock price deckling to $20,
the jumps to $36. Ignoring commissions, what would have been your rate of return
on this investment? What would be your rate of return if you had put in a market
order? What if your limit order was at $18?

Answer:
Limit order @ $24:
When market declined to $20
Your limit order was executed $24 (buy)
Then the price went to $36
Rate of Return = ($36 $24) $24 = 50%
Assuming, Market order @28:
Buy at $28, price goes to $36
Rate of return = ($36-$28) $28 =28.57%

Limit order @$18:

Since the market did not deckling to $18 (lowest price was $20) the limit order was
never executed.