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Financial intermediaries that issue securities which represent interests in a pool of similar financial assets are best characterized as:
A)
block brokers.
B)
arbitrageurs.
C)
securitizers.



Securitizers are financial intermediaries that assemble large pools of similar financial assets, such as mortgages or loans, and issue securities that represent interests in the pool. Block brokers assist their clients with large trades of securities. Arbitrageurs simultaneously buy and sell the same asset in different markets to take advantage of different prices for the same asset.

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Which of the following statements about financial intermediaries is most accurate?
A)
Brokers seek out traders that are willing to take the opposite sides of their clients’ orders.
B)
Arbitrageurs buy securities with the anticipation that they will be able to sell the securities in the future at higher prices.
C)
Dealers buy a security in one market and simultaneously sell the same security in a different market.



Brokers seek out traders that are willing to take the opposite side of their clients’ orders. Arbitrageurs buy an instrument in one market and simultaneously sell the same instrument in a different market at a higher price. Dealers buy securities from clients, with the expectation that they will be able to sell the securities to other clients in the future at higher prices.

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Regarding the technical points affecting the short sales of a stock, which of the following statements is most accurate?
A)
The lender must deposit margin to guarantee the eventual return of the stock.
B)
Stocks can only be shorted in a down market.
C)
The short seller must pay all dividends due to the lender of the shorted stock.



The short seller must pay any dividends on the stock to the owner of the borrowed shares. The short seller must also deposit margin money to guarantee the eventual repurchase of the security.

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An investor can profit from a stock price decline by:
A)
placing a stop buy order.
B)
selling short.
C)
purchasing a call option.



Short selling provides a way for an investor to profit from a stock price decline. In order to sell short, the broker borrows the security and then sells it for the short seller. Later, if the investor can replace the borrowed securities by repurchasing them at a lower price, then the investor will profit from the transaction.

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Which of the following statements about selling a stock short is least likely accurate?
A)
The seller must return the securities at the request of the lender.
B)
The seller must inform their broker that the order is a short sale before completing the transaction.
C)
The short seller may withdraw the proceeds of the short sale.



Proceeds from the short sale must remain in the brokerage account along with the required margin deposit.

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A short seller:
A)
often also places a stop loss sell order.
B)
does not receive the dividends.
C)
loses if the price of the stock sold short decreases.



The short seller pays all dividends to the lender, loses if stock prices rise, and is required to post a margin account. A short seller often places a stop buy order to protect the short sale position from a rising market.

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When using margin to invest in equities, which of the following defines initial margin and what level will the margin be brought back to in the event of a margin call?
Initial MarginMargin Call Action
A)
amount of borrowed funds in the transactionsa deposit must be made to bring the margin back to the maintenance margin
B)
minimum amount of equity required of the investor a deposit must be made to bring the margin back to the maintenance margin
C)
minimum amount of equity required of the investora deposit must be made to bring the margin back to the initial margin


The initial margin requirement refers to the minimum amount of equity required of the investor.
With equities, if the margin falls below the maintenance margin, funds must be deposited to bring it back up to the maintenance margin level.

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An investor purchases 200 shares of Merxx on margin. The shares are trading at $40. Initial and maintenance margins are 50% and 25%.If the investor sells the stock when the price rises to $50 at year-end, the return on the investment would be closest to:
A)
25.00%.
B)
18.75%.
C)
50.00%.



Profit = 10,000 – 8,000 = 2,000
Return = 2,000 / 4,000 = 50%

If the company pays a dividend of $0.75, the return on the investment would be closest to:
A)
39.55%.
B)
53.75%.
C)
15.75%.



Dividends income = (0.75) × (200) = $150
Profit = 10,000 – 8,000 + 150 = 2,150
Return = 2,150 / 4,000 = 53.75%

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Using the following assumptions, calculate the rate of return on a margin transaction for an investor who purchases the stock and the stock price at which the investor would have received a margin call.
  • Market Price Per Share: $32
  • Number of Shares Purchased: 1,000
  • Holding Period: 1 year
  • Ending Share Price: $34
  • Initial Margin Requirement: 40%
  • Maintenance margin: 25%
  • Transaction and borrowing costs: $0
  • The company pays no dividends
Margin ReturnMargin Call Price
A)
6.3%$25.60
B)
15.6%$25.60
C)
15.6%$17.07


Part 1: Calculate Margin Return:Margin Return %
= [((Ending Value – Loan Payoff) / Beginning Equity Position) – 1] × 100
= [(([$34 × 1,000] – [$32 × 1,000 × 0.60]) / ($32 × 0.40 × 1,000)) – 1] × 100
= 15.6%


Alternative (Check): Calculate the all cash return and multiply by the margin leverage factor.
[(34,000 – 32,000) / 32,000] × [1 / 0.40] = 6.35% × 2.5 = 15.6%Part 2: Calculate Margin Call Price:
The formula for the margin call price is:
Margin Call = (original price) × (1 - initial margin) / (1 - maintenance margin)
= $32 × (1 - 0.40) / (1 - 0.25) = approximately $25.60

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Lynne Hampton purchased 100 shares of $75 stock on margin. The margin requirement set by the Federal Reserve Board was 40%, but Hampton’s brokerage firm requires a total margin of 50%. Currently the stock is selling at $62 per share. What is Hampton’s return on investment before commission and interest if she sells the stock now?
A)
-35%.
B)
-40%.
C)
-17%.



Hampton originally purchased 100 shares at $75 for a total value of $7500. Half of the value ($3750) was borrowed and Hampton paid cash for the other half. The current total market value of the stock is $6200. If Hampton sells her holdings she will have $2450 left after she pays off the loan. Hampton’s return on her original investment is:
$2450/3750 – 1 = 0.65 – 1 = -0.35 = -35%.

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