Equity Investments - Equity Investments Section 1

Avatto>>CFA Level 1>>PRACTICE QUESTIONS>>Equity Investments>>Equity Investments Section 1

1. For stock X, market has the following limit oders standing on its book:

Buyer Bid size(# ofshares)Limit Price($Offer size(# of shares)Seller
A  9009.70  
B  1009.84  
3009.89  
20010.02  
  10.03  700X
  10.11 1000Y
  10.16 300Z

  • Option : B
  • Explanation : Dave’s average trade price is: $9.93 = (200 * $10.02 +300 * $9.89 +100 * $9.84) / (200 + 300 + 100) Dave’s sell order first fills with the most aggressively priced buy order, which is D’s order for 200 shares at $10.02. Dave still has 800 shares for sale. The next most aggressively priced buy order is C’s order for 300 shares at $9.89. This order is filled. Dave still has 500 shares for sale. The next most aggressively priced buy order is B’s order for 100 shares at $9.84. A third trade takes place. Dave still has 400 shares for sale. The next buy order is A’s order for 900 shares at $9.70. However, this price is below Dave’s limit price of $9.83. Therefore, no more trade is possible.
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2. A trader places a limit order to buy shares at a price of $14.75 with the stock trading at a market bid price of $14.54 and the bid-ask spread of 0.7%. The order will most likely be filled at:

  • Option : B
  • Explanation : An order is filled at the best available price as long as this price is lower than the limit price. In this case, the best available price is the market ask price = $14.54 * (1 + 0.7%) = $14.64. Since this price is lower than the limit price of $14.75, the order will be filled at this price.
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3. The limit orders for a stock on market’s book is provided below:

Buyer Bid Size(# ofshares)Limit Price($)SellerOffer Size(# ofshares)LimitPrice ($)
1   40018.30130020.00
2  30018.452 20020.15
3   10018.95320020.35
4  20019.504100  20.95
5  3009.805200 

  • Option : B
  • Explanation : The limit buy order will be filled first with the most aggressively priced limit sell order and will be followed by filling with the higher priced limit sell orders that are needed up to and including the limit buy price until the order is filled. Average price = [(300 * $20.00) + (200 * $20.15) + (100 * $20.35)] / 600 = $20.11
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5. GP Investment bank agrees to help IFT Corp. raise funds on a best effort basis. Who bears the risk when the entire issue is not sold to the public at the stipulated offering price?

  • Option : B
  • Explanation : Since this a best-effort arrangement, the issuer (IFT) bears the risk that the issue may be undersubscribed.
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