ASSIGNMENT:

2.1 Differentiate between each of the following pairs of terms:

a. Investors turn to money market short-term borrowing and lending with debt securities with maturity of less
than 1 year. They turn to the capital market to buy and sell long-term instruments, such as stocks and bonds,
with maturities of more than one year. Depending on whether securities are sold directly to investors or resold
among investors, capital markets are classified as either primary or secondary.

b. The primary market is the market where new issuance of securities are sold to investors. The initial public
offering (IPO) is the most significant transaction in the primary market. The issuer of the equity or debt securities
receives the proceeds of sales in the primary market. The aftermarket, also known as the secondary market, is
where securities are exchanged after they have been issued. An investor can sell his or her holdings to another
investor on the secondary market. Secondary-market transactions, unlike primary-market transactions, do not
include the company that issued the securities.

c. The market is divided into two sections: the broker market and the dealer market. Nasdaq and OTC markets
are examples of dealer markets, while national and regional securities exchanges are examples of broker
markets. Here, Broker markets are regulated, organized securities exchanges where securities listed on a
particular exchange are traded. The dealer market is a sophisticated system of buyers and sellers connected by
an advanced telecommunications network.

2.2 Briefly describe the IPO process and the role of the investment banker in underwriting a public offering.
Differentiate among the terms public offering, rights offering, and private placement.

A financial intermediary known as an investment banker specializes in selling new security issues in what is known as an
initial public offering (IPO) (IPO). With Underwriting, it is purchasing a security issue from the issuing firm at a
predetermined price and taking on the risk of reselling it to the public for a profit. The investment banker advises the
issuer on pricing and other key components of the transaction.

In a public offering, a company sells its stock to the public after registering it with the Securities and Exchange
Commission. Rather than issuing shares publicly, a company can execute a right offering, in which existing stockholders
are offered shares on a pro rata basis. A company sells its shares directly to groups of investors, such as insurance
companies and pension funds, and does not register with the SEC in a private placement.

2.3 For each of the items in the left-hand column, select the most appropriate item in the right-hand column. Explain
the relationship between the items matched.

a. NYSE Amex 5. Is second largest organized U.S. The prospectus describes the key aspects of
a security offering.

b. CBT 2. Is a futures exchange - The Chicago Board of Trade is the most popular
exchange for trading commodity and financial futures (CBT). There a plenty of other futures exchanges, some of
which focus on specific commodities and financial instruments rather than the broad range of options available
on the CBT.

c. NYSE 6. Has the most stringent listing requirements - The New York Stock Exchange
(NYSE) is the world's largest stock exchange.

d. Boston Stock Exchange 4. Is a regional stock exchange - The Nasdaq OMX BX is a regional stock
exchange in which an electronic communications network allows brokers and dealers to make transactions at
the best prices
 e. CBOE 3. Is an options exchange - The Chicago Board Options Exchange is the most
popular options exchange (CBOE). Options exchanges exclusively deal in security options, which allow their
holders to sell or purchase another security at a predetermined price over a specified period.

f.  OTC 1. Trades unlisted securities - Securities that trade over the counter (OTC) are
included in this segment of the dealer market. The OTC Markets are a section of the market that is unregulated,
with corporations not even needed to file with the Securities and Exchange Commission (SEC).

2.4 Explain how the dealer market works. Be sure to mention market makers, bid and ask prices, the Nasdaq market,
and the OTC market. What role does the dealer market play in initial public offerings (IPOs) and secondary
distributions?

The dealer market is a network of markets that are connected by a sophisticated telecommunications infrastructure and
are dispersed across the country. Traders known as dealers participate in this market, offering to purchase or sell
equities at certain prices. The "bid" price is the highest price a dealer is willing to pay to buy a security; the "ask" price is
the lowest amount a dealer is willing to sell a security for. Nasdaq is the bridge that connects the dealers. IPOs, both
listed and unlisted, are sold in the dealer market to provide a continuous market for unlisted securities. Secondary
distributions, or trading in large blocks of outstanding securities, take occur in the OTC market to mitigate the potential
detrimental effects of such transactions on the price of listed stocks.

2.5 What are the third and fourth markets?

Over-the-counter trades in securities listed on the NYSE or one of the other exchanges constitute the third market. The
fourth market includes of transactions between major institutional buyers and sellers of securities that take place over a
computer network rather than on an organized exchange.

2.6 Differentiate between a bull market and a bear market

A bull market is characterized by rising prices, increased investor optimism, economic recovery, and government
stimulus. Bear markets, on the other hand, are linked to declining prices, investor pessimism, government constraint and
, economic slowdown.

2.7 Why is globalization of securities markets an important issue today? How have international investments
performed in recent years?

The primary goal of today's investors is to maximize returns while minimizing risk. Also, the globalization of financial
markets allows investors to seek out possibilities to profit from quickly growing economies all around the world. To
locate the best returns, lowest costs, and best foreign business prospects, issuers of securities and securities firms go
beyond their home countries' marketplaces. The diversification of a portfolio by including a variety of different securities
boost returns and reduce risk.

2.8 Describe how foreign security investments can be made, both indirectly and directly.

International investing is buying assets in foreign currencies, and the trading profits and losses are influenced not only by
security price fluctuations, but also by foreign exchange risk. The danger arises from the fluctuating exchange rates
between the two countries. Once the foreign currency is exchanged for dollars, profits in a foreign security may turn into
losses. Losses from transactions might also result in gains. With this, investors should be aware that the value of a
foreign currency in relation to the dollar can have a significant impact on the returns on foreign security transactions.

2.9 Describe the risks of investing internationally, particularly currency exchange risk.
Diversification and growth are two of the most important reasons why people participate in foreign assets and ventures
with international exposure. Upon investing, there are risk that need to be considered like Political, economic, and social
events, Different market operations, and Changes in currency exchange rates and currency controls. When the exchange
rate between the U.S. dollar and the currency of an international investment changes, it can increase or reduce your
investment return. Furthermore, certain countries may apply foreign currency restrictions, which prohibit or delay the
movement of currency out of a country by investors or the company in which they have invested.

2.10 How are after-hours trades typically handled? What is the outlook for after-hours trading?

Most of the after-hours’ markets handled by Nasdaq, and ECNs are crossing markets, in which orders are only filled if
they can be matched with identical opposing orders at the desired price. Many prominent brokerage companies, both
traditional and online, provide after-hours trading services to their clients. After-hours trading for their clients is handled
by ECNs. It carries a higher level of risk in which price fluctuations are more volatile than during normal sessions, and
markets are less liquid than during day-trading sessions.

2.11 Briefly describe the key requirements of the following federal securities laws:

a. The Securities Act of 1933, also known as the "truth in securities" law requires investors to receive financial
and other significant information about securities being offered for public sale, and it prohibits deception,
misrepresentation, and other fraud in the sale of securities. The firm cannot sell the security until the Securities
and Exchange Commission (SEC) accepts the registration statement, which generally takes around 20 days. The
approval of the registration statement simply means that the facts stated in it appear to reflect the firm's real
position.

b. The Securities Exchange Act of 1934 empowered the Securities and Exchange Commission (SEC) to supervise
organized exchanges and the over-the-counter market, as well as their members, brokers, and dealers, and the
securities traded in these markets. Each of these participants is required to file reports with the Securities and
Exchange Commission (SEC) and to update them on a regular basis.

c. The Maloney Act of 1938 was a revision to the Securities Exchange Act of 1934 that allowed trade
associations to self-regulate the securities business. A new organization called the National Association of
Securities Dealers (NASD) has been established. Nearly all the nation's securities firms that deal with the public
are members of the NASD.

d. The Investment Company Act of 1940 has established laws and regulations for investment businesses, as
well as formally authorizing the Securities and Exchange Commission (SEC) to monitor their practices and
procedures. It required investment firms to register with the Securities and Exchange Commission (SEC) and to
comply with certain disclosure standards. An investment business raises money by selling its stock to investors
and then investing the profits in securities.

e. According to the Investment Advisers Act of 1940, Investment advisers, who are engaged by investors to
advise them on securities investments, must disclose all relevant information about their histories, conflicts of
interest, and any assets they recommend. Investment advisers, or anyone hired by investors to provide advice
on securities investments, must disclose all relevant information about their histories, conflicts of interest, and
any investments they advocate.

f. The Securities Acts Amendments of 1975 mandate that the Securities and Exchange Commission (SEC) and
the securities industry build a competitive nationwide system for trading securities.

g. Insider Trading and Fraud Act of 1988 has established penalties for insider trading, using nonpublic
information to make profitable securities transactions. Insiders are often a company's directors, officials, big
shareholders, bankers, investment bankers, accountants, and attorneys who access nonpublic information.
 h. Sarbanes-Oxley Act of 2002 prohibits corporate fraud, particularly accounting fraud. It established an
accounting industry oversight board, tightened audit regulations and controls, increased the SEC's authority and
budgets for auditors and investigative staff. It also strengthened accounting disclosure requirements and ethical
guidelines for financial officers and established corporate board structure and membership guidelines. It builds
guidelines for analyst conflicts of interest and increased the SEC's authority and budgets for auditors and
investigative staff.

2.12 What is a long purchase? What expectation underlies such a purchase? What is margin trading, and what is the
key reason why investors sometimes use it as part of a long purchase?

In making a long purchase, an investor purchases a security in the hope that it will increase in value and can be sold later

for a profit. The most common type of transaction, the long purchase, generates income from dividends or interest
earned throughout ownership, as well as capital gains or losses (the difference between the purchase and sale prices).

Margin trading is the practice of partially financing the purchase of assets with borrowed funds. As a result, investors can
use margin to reduce their initial investment and borrow money to make a larger acquisition. When the value of the
investment rises, the investor will pay off the loan (with fixed interest rates) and keep the remainder as profit.

2.13 How does margin trading magnify profits and losses? What are the key advantages and disadvantages of margin
trading?

With margin trading You can buy more securities than you could otherwise afford. It is available to most investors. many
types of securities They buy common and uncommon items with it on a regular basis. Most forms of bonds, mutual
funds, options, warrants, and preferred stocks futures. With an investor's equity as a foundation, the principle behind
margin trading is to use financial leverage which is borrowing money to trade. It could increase the value of your
investment. However, it isn't usually used with tax-exempt municipal bonds because they aren't tax-exempt. The
interest paid on such margin loans is not deductible on your tax return.

2.14 Describe the procedures and regulations associated with margin trading. Be sure to explain restricted accounts,
the maintenance margin, and the margin call. Define the term debit balance and describe the common uses of margin
trading.

An investor must first open a margin account before executing a margin transaction. Although the Federal Reserve
Board establishes the minimum amount of equity required for margin transactions, brokerage houses and exchanges
frequently set their own, more strict criteria.

After establishing a margin account, the investor must provide the requisite minimum equity at the time of purchase.
This is known as the initial margin, and it is necessary to avoid excessive trading and speculation. The investor's account
will be restricted if the value of the account falls below the initial margin requirement. The maintenance margin is the
absolute minimum amount of equity required in a margin account by an investor. If the account value falls below the
maintenance margin, the investor will receive a margin call, in which case he or she will have a limited amount of time to
replenish the equity up to the initial margin.

The debit balance is the amount of the margin loan, and it is used to determine the amount of the investor's margin,
along with the value of the securities being margined (the collateral).

2.15 What is the primary motive for short selling? Describe the basic short-sale procedure. Why must the short seller
make an initial equity deposit?

Short sales are initiated when an investor borrows securities from a broker and then sells them in the open market. After
the issue's price has dropped, the short seller buys the securities back and gives them to the lender. Short sellers must
make an initial equity deposit with their broker, which is governed by margin trading laws. The deposit, together with
the proceeds from the sale of the borrowed shares, ensures that the broker has enough money to purchase back the
shorted securities at a later period, even if their price rises. Short sales, like margin transactions, necessitate the use of a
broker.

2.16 What relevance do margin requirements have in the short-selling process? What would have to happen to
experience a margin call on a short-sale transaction? What two actions could be used to remedy such a call?

To make a short sale, the investor must deposit an amount equal to the initial margin requirement with the broker. The
lowest permissible percentage of equity in a position is maintenance margins. If the share price rises, short seller
margins fall because some of the deposit plus the original proceeds will be used to purchase back the shares. A margin
call will be issued if the stock price increases sufficiently to lower short seller margins to maintenance levels. Short
sellers have the option of depositing initial margin or closing out their position by purchasing the shares back.

2.17 Describe the key advantages and disadvantages of short selling. How are short sales used to earn speculative
profits?

The ability to turn a price decrease into a profit-making position is the significant advantage of short selling. The
approach can also be used to safeguard and defer taxes on profits that have already been made. Short selling has a
significant disadvantage in that it exposes you to a high level of risk in exchange for a small return. Short sellers never
receive dividends and must pay them (back to the lender) for the duration of the transaction.

Short sells can provide speculative profits because the investor is betting against the market, which entails a high level of
risk. If the market rises instead of falling, the investor may lose all (or a portion of) the short sale proceeds and margin.

P2.13 Marlene Bellamy purchased 300 shares of WriteLine Communications stock at $55 per share using the
prevailing minimum initial margin requirement of 50%. She held the stock for exactly 4 months and sold it without
brokerage costs at the end of that period. During the 4-month holding period, the stock paid $1.50 per share in cash
dividends. Marlene was charged 9% annual interest on the margin loan. The minimum maintenance margin was 25%.

a. Calculate the initial value of the transaction, the debit balance, and the equity position on Marlene’s
transaction.

Initial Value = no. of shares x stock price = 300 x $55 = 16500

Formula = (V -D) all over V

1. $45 = [(300 X 45) – 8250]/13500 = 0.38888, it is restricted because the margin level have dropped
below the prevailing initial margin of 50%.

2. $70 = [(300 X 70) – 8250]/21000 = 0.6071428, there’s an excess equity because the margin level is
above the prevailing initial margin of 50%.

3. $35 = [(300 X 35) – 8250]/10500 = 0.21428, subject to a margin call, because the margin level falls
below the minimum maintenance margin of 25%

c. Calculate the dollar amount of

(1) dividends received = $1.5 x 300 shares = 450

(2) interest paid on the margin loan during the 4-month holding period.

= 8250 x 9% x 4/12 = 247.5

c. Use each of the following sale prices at the end of the 4-month holding period to calculate Marlene’s
annualized rate of return on the WriteLine Communications stock transaction.

1. $50 2. $60 3. $70

1. [(300 x 0.75) – 247.5] + [(300 X 50) – 16500]/8250 = -18.454545%