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Questions and Answers
What will happen if a limit order to buy 1,000 shares of ABC at $20 or less is placed when the ask price is $20.10?
What will happen if a limit order to buy 1,000 shares of ABC at $20 or less is placed when the ask price is $20.10?
- The order will not be executed at all. (correct)
- The order will be placed in the queue until filled.
- The order will execute immediately.
- The order will execute at the ask price of $20.10.
Which of the following describes the completion of a market order to sell 1,000 shares of ABC?
Which of the following describes the completion of a market order to sell 1,000 shares of ABC?
- The seller receives $20.10 per share. (correct)
- The seller must wait until the market increases.
- The seller will receive at least $20 per share.
- The order is dependent on a specific bid price.
What is a key disadvantage of using a limit order?
What is a key disadvantage of using a limit order?
- It automatically cancels if not executed by the end of the trading day.
- It requires a higher commission than a market order.
- It guarantees the price at which the order will be filled.
- It may not be executed if the market does not reach the limit price. (correct)
Under what condition will a day order expire?
Under what condition will a day order expire?
What must a short seller do if they cannot borrow enough stock from the investment dealer?
What must a short seller do if they cannot borrow enough stock from the investment dealer?
When would a trader typically use a limit order?
When would a trader typically use a limit order?
What limits the duration of a short sale position?
What limits the duration of a short sale position?
If a trader places an order to sell 1,000 shares of ABC at $20 or more, what will happen if the highest bid is $19.90?
If a trader places an order to sell 1,000 shares of ABC at $20 or more, what will happen if the highest bid is $19.90?
What type of shares do short sellers typically pursue?
What type of shares do short sellers typically pursue?
What is the primary purpose of a market order in trading?
What is the primary purpose of a market order in trading?
Which of the following is necessary for a dealer to process a short sale order?
Which of the following is necessary for a dealer to process a short sale order?
Which scenario represents a successful limit order execution?
Which scenario represents a successful limit order execution?
What happens if a stock becomes delisted while being shorted?
What happens if a stock becomes delisted while being shorted?
In a market order to sell 1,000 shares of ABC, what will the seller receive if the market price drops to $19.50?
In a market order to sell 1,000 shares of ABC, what will the seller receive if the market price drops to $19.50?
Why might a short seller encounter difficulties in maintaining a short position?
Why might a short seller encounter difficulties in maintaining a short position?
What factor does NOT affect the ability to maintain a short position?
What factor does NOT affect the ability to maintain a short position?
When a short sale is executed, what does the investment advisor need to ensure?
When a short sale is executed, what does the investment advisor need to ensure?
What is a key risk associated with using a margin account?
What is a key risk associated with using a margin account?
What happens if a client fails to meet a margin call?
What happens if a client fails to meet a margin call?
Why should clients avoid maintaining minimum margin levels in their account?
Why should clients avoid maintaining minimum margin levels in their account?
What defines short selling in terms of account usage?
What defines short selling in terms of account usage?
What does using margin for investing typically do to the outcomes?
What does using margin for investing typically do to the outcomes?
What is a common misconception regarding the interest payment on a margin account?
What is a common misconception regarding the interest payment on a margin account?
What is the present value if an investor wants to receive $1,000 one year from today at an interest rate of 5%?
What is the present value if an investor wants to receive $1,000 one year from today at an interest rate of 5%?
Which formula correctly represents the relationship between present value, interest rate, and future value for a one-period investment?
Which formula correctly represents the relationship between present value, interest rate, and future value for a one-period investment?
In general, how does the present value of a fixed-income security relate to its future cash flows?
In general, how does the present value of a fixed-income security relate to its future cash flows?
What most accurately describes the process of calculating the fair price of a bond?
What most accurately describes the process of calculating the fair price of a bond?
Which of the following is NOT a component of determining a bond's value?
Which of the following is NOT a component of determining a bond's value?
What is likely to happen to the present value of a bond if the interest rate increases?
What is likely to happen to the present value of a bond if the interest rate increases?
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Study Notes
Margin Risks
- Borrowing to invest introduces higher risk compared to full cash purchases.
- Margin amplifies both gains and losses of an investment.
- Clients must pay interest on the margin loan during the investment period.
- Repayment of the loan is mandatory regardless of security performance.
- Margin calls require immediate action; failing to comply can result in forced liquidation by the dealer.
- Maintaining surplus margin funds can cushion against sudden price drops.
Short Margin Accounts
- Short selling allows investors to sell securities they do not own using a margin account.
- Profit occurs when the sale price surpasses the purchase price.
- No time limit exists on maintaining a short sale, as long as the securities remain borrowable.
- Position integrity relies on maintaining adequate margin and the ability to borrow shares.
Covering a Short Position
- Short sellers may face difficulties borrowing enough shares, necessitating immediate purchase to cover positions.
- Selling thinly traded shares poses challenges due to limited stock availability.
Declaring a Short Sale
- All exchanges mandate identifying sales as short or long when accepting orders.
- Investment advisors must indicate short sales clearly to ensure proper processing.
Types of Orders
- Market Order: Executes at the current market price; filled immediately based on bid/ask offers.
- Limit Order: Executes only at or better than a specified price; may not always be filled.
- Day Order: Expires at the end of the trading day if unexecuted.
Calculating Price and Yield of a Bond
- Present value calculations determine an investment's worth based on its future cash flow.
- Example calculation: To receive $1,000 in a year at a 5% interest rate, one must invest approximately $952.38 today.
- Bond income stream value is the cumulative present value of future coupon payments.
Present Value of Bond Income Stream
- Each coupon payment's present value is calculated and summed for total bond valuation.
- A financial calculator can simplify the present value computation, factoring cash inflows and outflows.
Present Value of Principal
- Principal value is also calculated using similar present value methods to determine its worth today relative to future payments.
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