FIN 366 Week 4 Textbook Problems

Week 4 Textbook Problems

FIN/366

Ch. 10, p.277, # 17

International mutual funds or IMFs are portfolios if international stocks created and managed by many financial institutions. These portfolios can also spread across various countries rather than just one. This type of fund makes it easier for investors since they don’t have to personally manage their investment.

Ch. 10, p.277, # 18

Spinning refers to the process where banks issue shares from an IPO to corporation executives or to other businesses seeking help for the securities firm. Laddering is when brokers encourage investors to place first-day bids that are above offer price. This is done with hopes of it building upward price momentum. These actions can affect both shareholders and potential investors as it affects the potential of the shares reaching value.

Ch. 10, p.277, # 21

Well, the dilemma for the Denton Company is whether to follow the advice of the securities firm and sell at $12 per share or to attempt and sell at $14 per share. If they do as the securities firm suggest then there is the advantage that all shares will be sold. The disadvantage is that there will be a decrease $2 per share in profit. I think they are indeed aligned since the Denton Company is hoping to sell $4million shares the securities firm is just trying to ensure that happens.

Ch. 10, p.278, # Dividend Yield Problem

The dividend yield is 0.10%

Ch. 12, p.336, # 1

A market order is one where the buying or selling of a stock is made at the best possible price. A limit order means exactly that, that the stock being sold has a limit to the price at which it can be sold or purchased.

Ch. 12, p.336, # 2

From my understanding the margin requirements are supposed to ensure investors can cover their end of the deal in the event that their investment declines. The requirements are that investors have to pay at least 50% in full of the amount they are investing if they are borrowing from the brokerage firm. I would think that the return on the investment could be potentially be lower, but the risk can be lower because of the requirements. This is assuming that the amount borrowed has to be repaid with interest. The requirement of having the investor pay 50% minimizes the risk on the broker. Maintenance margin is the minimum proportion of equity investors must keep in their account of what the stock is worth.

Ch. 12, p.336, # 13

Well one reason why there is a wide bid-ask spread is because penny stocks are highly illiquid. This in effect means that they are difficult to trade. They are no longer traded in the Nasdaq market and are only dealt by individual investors.

Ch. 13, p.364, # 1

A futures contract is an agreement to deliver or receive a specific amount of financial instrument at a specific date and price. A clearinghouse facilitates the trading of financial futures contracts by recording all transactions and guaranteeing payments.

Ch. 13, p.365, # 10

Short hedge is more volatile and exposed to the changing conditions of interest rates. Long hedge is used to reduce exposure to changes in interest rates. Long hedge futures contract can lock in the price and be used in the event that the dealer believes a bond price will rise before the time of purchase.

Ch. 14, p.397, # 1