Chapter

Introduction to Investment

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 transactions5. There are huge amount of buyer and seller Question: 1.02: Briefly discuss the characteristics of good market.

Answer: 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: 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 assetsLiquidity 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 liabilitiesLiquidity is the ability of an asset to convert into cash quickly and without any price discountExamples: 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: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: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. Answer:The difference between primary market and secondary market are given below:-

Aspects Primary market Secondary market

DefinitionPrimary markets facilitate the

Issuance of new securities.Secondary markets facilitate the trading of existing securities.

Provide Primary market transactions

Provide funds to the initial issuer to Securities.Secondary market transactions do not.

FacilitateFacilitated the issuance of new

Share.Facilitated the trading of existing shares.

Issuance

The issuance of new corporate

stock or new Treasury securities

Primary market transactions.The sale of existing corporate stock or Treasury security holdings by one investor to another is a secondary market transaction.

Trade

Financial instruments are offered or

Sale.Financial instruments are traded that once issued.

Source

It is an important source of new

Capital.It provides liquidity.

Participant

New firms corporations, or existing

Firms can participate here.Only existing firms which previously issued shares can trade or participate.

Underwriter

Underwriters are investment, banks etc. Underwriters are brokers deals etc.

Question: 1.07: Why secondary Market is important? Or Discuss why the primary market is dependent on the secondary market. Answer: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:

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 DistinctionCall MarketContinuous Market

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

BidsA single bids is determined by the buyer and sellerDealers makes the market bids

UseCall market usually use to

exchange stageContinuous market is use to trade in auction market

PriceSingle price exit hereThere are multiple prices available here

Nature of TradingCall market trade only per dayContinuous market trades continuously

Amount of CapitalLarge amount of capital are traded hereComparatively lower amount of capital exchanged here

Trading referencesA 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.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:

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 DistinctionCompetitive bid underwritingNegotiated underwriting

DefinitionIt is an under writing alternative wherein an issuing entity (governmental body or a corporation) specifies the types of securities to be offered (bond or stock) and the general characteristic of the issuing , and issuer solicit bid from competing investment banking firms with the understanding that the issuer will accept the highest bid from the banker.It is aprocess in which both thepurchase price andthe offering pricefor anew issue are negotiated betweenthe issuer anda singleunderwriter.

Advertised forIssuer advertised for sale to the underwriter.Issuer does not advertise for sale to the underwriter but underwriter advertises for resale to public.

Bond AwardingThe bonds are awarded to the bidder offering the lowest interest cost.The bond is awarded of interest in the issue before establishing final bond pricing.

Bidding PatternThe issuer will accept the highest bid from the bankerthe issuer selects the underwriter

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

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 beingtraded 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 exchangeExample: 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:

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 feesThe 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:

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 DistinctionOver the Counter MarketSpot Market

MarketIt is an unorganized market.It is an organized market.

DeliveryFinancial assets trade for future delivery.Financial assets trade for immediate delivery.

CalledCalled market makers or Also called outside market or third market.Call cash market, physical market

ExampleLondon stock market, NTR sharesthe 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: 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: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:

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 non-standardized 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 between two parties to buy or sell an asset at a certain time in the future for a certain price.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.

There is clearinghouse for trading future contract. There is no clearinghouse for trading future contract.

Future contract which is an exchange traded product.Forward contract is an over the counter instrument.

Future contract can be used to hedge the market risk of an existing stock portfolio.Forward contract can be used to hedge foreign currency risk.

Future contracts are not intended to be settled by delivery.Forward contracts are intended to be settled by delivery.

Generally fewer than 2% of outstanding contracts are settled by delivery. Forward contracts in contrast are intended for delivery.

Future contracts are marked to market at the end of each trading day. Forward contract that is not marked to market.

There are no interim cash flow effects because no additional margin is required.There are interim cash flow effects because additional margin is required.

Forward contract are exposed to credit risk because either party may default on the obligation.Future contract credit risk is minimal because clearinghouse associated with the exchange guarantees the side of any transaction.

Future contract are normally traded on an exchange.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"?

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 a 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 a Process used todeterminewhichsecuritieswill be included in a particularportfolio. Certainfactors, such asrisk and return, are taken intoconsiderationwhen selecting thesecurity.

The goalof security selection is toincreaseone's chances of makingaprofiton allinvestmentsin the portfolio and to hedgeagainstlosses.

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:

Fig: Process of securitization

Financial Engineering:

Financial engineeringis 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 frommathematical financeandcomputational finance, in the practice offinance.[2]Despite its name, financial engineering does not belong to any of thefieldsin traditionalengineering. In the United States, theAccreditation Board for Engineering and Technology(ABET) does not accredit financial engineering degrees. In the United States, financial engineering programs are accredited by theInternational 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

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: 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:-

AspectsFinancial AssetTangible Asset

1.Definition A financial asset by contrast, represent legal claim to some future benefit. A tangible asset is financed by the issuance of some type of financial assets.

2. NatureFinancial assets are intangible assets.Tangible assets are physical properties.

3. Types

Financial asset are such as: Bond, Share debenture etc.Tangible assets are such as: plant, Land, Building etc.

4.FocusFinancial assets deliberate future cash benefit.Tangible assets are both present and future benefit.

There are different types of financial assets which are-

1. 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? 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:

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.

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= $5600Ending 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 = = = 11.35%

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 be-

With the stop loss order==

Without stop loss order = = 20%

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 shares1. 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-= = QUOTE = 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:

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 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%

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,

Therefore, If maintenance margin is 30 percent, then-

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

=> 1071.3price= (3571price)-$75000 => -2499.7price=-$75000

Price=$30

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 +Dividend-Transition cost interest = $2700 $2000 + $50 $141-$90 = $519

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%

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, Compute-

a) 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:

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

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

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.

NU: BBA 2008, 2010

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Special purpose vehicle (SPV)

Sales proceeds for securities

Originator (company securitized it)

Credit entrencher

Trustee (monitor competence)

Funds

Sales Security Assets

Assets

Tangible Assets

Intangible Assets

NU: BBA 2007, 2008, 2009, 2011

NU: BBA 2008, 2011

NU: BBA: 2010, 2012

Problem: 01

NU: BBA: 2008

Problem: 02

Problem: 03

Problem: 04

Problem: 05

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Problem: 06

Problem: 07

Problem: 08

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

NU: BBA 2013

Where,

Market value = price per share No. of shares

Initial Loan Value =Total investment Initial Margin

=$125000-$50000

=$75000

ABS/MBS

Structure the ABS/MBS On perception of Investor demand

Investors (purchasing A B S)

Underwriter /investment

Services (collect of maker payment)

NU: BBA 2010,2012

NU: BBA 2010

1

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