HOW SECURITIES ARE TRADED
In addition to the explicit fees of $70,000, FBN appears to have paid an implicit
price in underpricing of the IPO.
The underpricing is $3/share or $300,000 total,
implying total costs of $370,000.
The underwriters do not capture the part of the costs corresponding to the
The underpricing may be a rational marketing strategy.
it, the underwriters would need to spend more resources to place the issue with
They would then need to charge higher explicit fees to the issuing
The issuing firm may be just as well off paying the implicit issuance cost
represented by the underpricing.
In principle, potential losses are unbounded, growing directly with increases in
the price of IBX
If the stop-buy order can be filled at $78, the maximum possible loss per share is
If IBX shares go above $78, the stop-buy order is executed, limiting the
losses from the short sale.
a.The stock is purchased for 300
$40 = $12,000.
Borrowed funds are $4,000.
Therefore, the investor put up equity or margin of $8,000.
If the share price falls to $30, the value of the stock falls to $9,000.
of the loan owed to the broker grows to $4,000
1.08 = $4,320.
remaining margin is 9,000
4,320 = $4,680.
The percentage margin is now 4,680/9,000 = .52, so there will not be a margin
c.The rate of return on investment over the years is (Ending value of account
initial equity)/Initial equity
a.The initial margin was .50
$40 = $20,000.
The firm loses $10
$10,000 due to the increase in the stock price so margin falls by $10,000.
Moreover, the firm must pay the dividend of $2 per share, which means the
margin account falls by an additional $2,000.
So remaining margin is $8,000
The percentage margin is $8,000/$50,000 = .16, so there will be a margin call.
c.The margin in the account fell from $20,000 to $8,000 in one year, for a rate of