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Limit Orders
- A limit order is an instruction to trade shares at a specific price or better.
Limit Buy Order: buy shares at or below the limit
Limit Sell Order: sell shares at or above the limit
Stop Orders
- A stop order is an instruction to trade shares at a specific price or worse.
Stop-Buy Order: buy shares at or above the limit (usually
accompany with short sale)
Stop-Loss Order: buy shares at or below the limit
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a. Suppose you have submitted an order to your broker to buy at market. At what price will
your trade be executed?
$55.50
b. Suppose you have submitted an order to sell at market. At what price will your trade be
executed?
$55.25
c. Suppose you have submitted a limit order to sell at $55.62. What will happen?
The trade will not be executed because the bid price is lower than the price specified in
the limit sell order.
d. Suppose you have submitted a limit order to buy at $55.37. What will happen?
The trade will not be executed because the asked price is greater than the price
specified in the limit buy order.
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At Time 0:
Old Economy Trader
Asset Liabilities
Cash 1000 x $40= $40,000 Short Position in Internet Dreams
Other Asset = $20,000 1000 x $40 = $40,000
Owner's Equity
Equity
1000 x $40 x 50% = $20,000
At Time 1:
Old Economy Trader
Asset Liabilities
Cash 1000 x $40= $40,000 Short Position in Internet Dreams
Other Asset = $20,000 1000 x $50 + 1000 x $2= $52,000
Owner's Equity
Equity $8,000
b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?
The percentage margin is: $8,000/$50,000 =16%<30%, so there will be a margin call.
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d. How high can the price of Internet Dreams rise in order to get a margin call before any
dividend incur?
Asset − Liabilities
Maintenance Margin = = 30%
Value of Stock
$60,000 − 1,000P
= 30%
1000P
P = $𝟒𝟔. 𝟏𝟓
e. How high can the price of Internet Dreams rise in order to get a margin call when the
dividend has been paid?
Asset − Liabilities
Maintenance Margin = = 30%
Value of Stock
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closed-end funds
- no redemption and issuance of shares after establishment.
- price may be at premium or discount to NAV.
- traded continuously on exchanges.
Front-End Load
- One-time commission paid when you purchase the shares. Loads effectively
reduce the amount of money invested.
Back-End Load
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- One-time exit fee incurred when you sell your shares. Typically, funds that
impose back-end loads reduce them by certain percentage for every year the
funds are left invested.
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$42,000,000 − $30,000
Net asset value = = $𝟏𝟎. 𝟒𝟗
4,000,000
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P1 − P0 + Distributions
Rate of return =
P0
b. What would have been the rate of return to an investor who held the same securities in an
open-end fund?
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P1 − P0
Rate of Return =
P0
$22.16 − $20.83
=
$20.83
= 𝟔. 𝟑𝟕%
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