36 Questions
What is the primary function of the money market?
To buy and sell short-term securities
What is the main difference between primary and secondary markets?
Primary market deals with new issues of securities, while secondary market deals with existing securities
What is an Initial Public Offering (IPO)?
A new firm offering new shares to raise capital
What is the purpose of a rights offering?
To offer new shares to existing shareholders
What is a private placement?
A private offering of shares to specific investors
What is an example of a foreign company whose stock is traded on the NYSE through an ADR?
Mitsubishi
What is an example of a local investment bank that allows operation in a foreign country?
Maybank Invest
What is a consequence of currency exchange rate fluctuations on international investments?
The value of foreign investments can go up or down with exchange rate fluctuations
What is the example of an IPO given in the content?
Nationsgate Holding Berhad
What is the main characteristic of a direct listing?
It involves the listing of existing shares on a stock exchange
What is the formula to calculate IPO underpricing?
($IPO Price - $Offer Price)/$Offer Price
What is a risk associated with investing in international securities markets?
Government policy risks due to unstable foreign governments
What is the primary purpose of an American Depositary Receipt (ADR)?
To hold stocks of foreign companies in vaults of banks
What is the purpose of the primary market?
To provide a platform for firms to raise capital
What is a characteristic of American Depositary Receipts (ADRs)?
They are dollar-denominated receipts for stocks of foreign companies
What is the advantage of investing globally in securities markets?
Diversification and increasing returns or reducing risks
What is the term for the money left on the table in an IPO?
Money left on table
What is the calculation for gross proceeds in an IPO?
Number of shares offered * IPO offer price
How much equity must Wolfgang provide in the transaction if the value is $9375 and the margin is 45%?
$4218.75
Which of the following is an indirect way to invest in foreign securities?
Purchasing shares of local-based multinational with substantial foreign operations
Which of the following stock exchanges is NOT among the top four securities markets by dollar volume?
Shanghai Stock Exchange
What happens if the price of HD stocks falls to $142 per share?
A margin call is triggered.
What is the term for the inclusion of a number of different investment vehicles in a portfolio?
Diversification
What is the benefit of technology advancement in global securities markets?
Easier access to global securities markets
What is the value of the transaction if the price of a unit is $37.5 and the number of units is 250?
$9375
What is the original value of the transaction if Barbara purchased 100 shares of HD stock for $187 per share?
$18700
What is the percentage of equity value required to maintain the margin in the example provided?
45%
How much is the margin call if Barbara must have an equity of $6390?
$605
What is the debit balance of the transaction if the value is $9375 and the margin is 45%?
$5156.25
If the stock price drops below the maintenance margin, what will the investor face?
Margin call
What is the initial margin percentage used by Amy when buying 100 shares of stock?
50%
What is the debit balance in the initial transaction when an investor buys 100 shares of stock at $50 per share with a 75% margin?
$8,750
What is the value of the stock when Amy faces a margin call?
Less than $70
If the stock price rises to $55, what will happen to the investor's margin position?
It will increase
What happens to the equity value when the stock price drops to $45?
It decreases
What is the formula to calculate the equity value required to meet the margin requirement?
Equity value = Equity value at margin requirement - Equity value from current position
Study Notes
Securities Market
- Types of security markets:
- Money Markets: short-term securities are bought and sold
- Capital Market: long-term securities such as stocks and bonds are bought and sold
- Primary Market: new issues of securities are sold to the public
- Secondary Market: securities are traded after they have been issued
Primary Markets
- Choices to Market Securities in Primary Market:
- Initial Public Offering (IPO): new firms offering new shares to raise capital
- Rights Offering: existing firms offering new shares to existing owners
- Private Placement: new/existing firms offering new shares to specific owners
- Direct Listing: private companies transfer existing shares directly to a stock exchange
IPO Underpricing
- Example: Netshoes IPO on April 12, 2017
- IPO offer price: $18
- Closed at $20 on the first day of listing
- Calculated underpricing: 21.91%
Globalization of Securities Markets
- Advantages of investing globally:
- Diversification: inclusion of different investment vehicles in a portfolio
- Securities denominated in different currencies
- Opportunities in rapidly expanding economies
- Easier with the advancement of technology
- Top four securities markets (based on dollar volume) worldwide:
- New York Stock Exchange (NYSE)
- Nasdaq
- London Stock Exchange
- Tokyo Stock Exchange
- Indirect ways to invest in foreign securities:
- Purchase shares of local-based multinational with substantial foreign operations
- Direct ways to invest in foreign securities:
- Purchase securities on foreign stock exchanges
- Buy securities of foreign companies that trade on local stock exchanges
- American Depositary Receipts (ADRs): dollar-denominated receipts for stocks of foreign companies
Risks of International Investing
- Usual investment risks still apply
- Government policies risks: unstable foreign governments, different laws, and economic conditions
- Currency exchange rate risks: value of foreign currency fluctuates compared to local dollar
Basic Types of Securities Transactions
- Margin Trading:
- Example: Barbara purchased 100 shares of HD stock for $187 per share, using a 55% initial margin requirement and a 45% maintenance margin requirement
- If the price of HD stocks falls to $142 per share, Barbara faces a margin call
- Formula 1: Equity value at margin requirement = (Total Value at Margin requirement - Debit Balance)
- Formula 2: Margin call = Equity value at margin requirement - Equity Value from current position
This quiz covers the fundamentals of security markets, including types of markets, IPO and underpricing, globalization, and basic security transactions. Test your knowledge of money markets, capital markets, and more!
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