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5. You sold short ABC stock at $50 per share. The current market price of the stock is $53. The
most effective way to limit your potential losses is to place a _______________.
A) limit-buy order
B) stop-buy order
C) limit-sell order
D) stop-loss order
9. You sold short 200 shares of XYZ common stock at $40 per share. The initial margin
requirement was 60%. Your initial investment was _______________.
A) $3,200
B) $4,800
C) $6,000
D) $8,000
11. Which of the following was established to protect investors from losses if their brokerage firms
fail?
A) SEC
B) SIPC
C) FDIC
D) FINRA
12. In a(n) _______________, investment bankers purchase securities from the issuing company
and then resell to the public at a price equal to the public offering price less a spread.
A) auction market
B) shelf registration
C) firm commitment
D) private placement
Problems
13. An investor sells short 200 shares of stock at $15 per share. The initial margin requirement is
60%. The investor earns no interest on funds in the margin account and no dividends are paid.
What is the investor's rate of return after one year if the short sale is covered at $12 per share?
14. Suppose you purchase 400 shares of MLP common stock on margin at $25 per share. The initial
margin is 60%. If the maintenance margin is 30%, how high can Intels price fall before you
get a margin call? (Assume the stock pays no dividends and ignore interest on the margin loan.)
15. Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and give your
broker $15,000 to establish your margin account.
a. If you earn no interest on the funds in your margin account, what will be your rate of return
after one year if Intel stock is selling at (i) $44; (ii) $40; (iii) $36? Assume that Intel pays no
dividends.
b. If the maintenance margin is 25%, how high can Intels price rise before you get a margin
call?
c. Redo parts ( a ) and ( b ), but now assume that Intel also has paid a year-end dividend of $1
per share. The prices in part ( a ) should be interpreted as ex-dividend, that is, prices after
the dividend has been paid.