3 Question 1 (6 marks each, total 36 marks) Briefly explain with 1 or 2 sentences only (not more than 50 words) that whether you agree or disagree each of the following parts. a) Primary market involves trading of common stocks but not bonds. b) In general, the price of derivatives would be increased when the price of underlying assets increases. c) Bond X was issued on 1 Jan 2001, and would be matured tomorrow (17 Mar 2021). An investor has just bought 10 units of Bond X today, and thus he is trading in the secondary market and the money market. d) The issuer of a coupon bond is required to pay coupon to the bondholder regardless of whether the firm has positive income or net loss, but the issuer of a common stock only requires paying dividend if it generates positive income. e) Investors may buy a put warrant even though the price of the underlying asset (stock) is higher than the strike price of the put warrant. f) David purchased 100 shares of common stock issued by ABC Limited 3 years ago at $50, and he did not get any trading during these 3 years. Today, David sells all the shares at $50. As a result, we can conclude that the return rate for such investment made by David is zero. Question 2 (24 marks) You would like to buy 3 lots of Stock K, and there are 100 shares for each lot of Stock K. Currently, the price of a share of Stock K is at $50, and you would like to open a margin account to buy 3 lots of the shares. Assuming he initial margin requirement is 40%, and the maintenance margin requirement is 30%, and you would borrow maximally. a) Assuming you have $8000 cash in total currently. Discuss with calculation that whether you can open a margin account to buy 3 lots of Stock K. If so, how much will you borrow, and how much will you pay for the shares? If no, what is the additional amount that you need to pay in order to fulfil the margin requirement. (8 marks) b) Assuming you have opened an account to buy 3 lots of Stock K. If the share price of Stock K decreases to $40, would you receive a margin call? Discuss it with calculation. (6 marks) c) Assuming you have opened an account to buy 3 lots of Stock K. Calculate the minimum share price of Stock K in which you would not receive any margin call. (6 marks) d) Assuming you have opened an account, and have bought 3 lots of Stock K a year ago. During this year, you do not receive any margin call, no dividend was given, and no interest was paid to the margin loan. Today, you receive $1 dividend per share for the shares, and you sell all shares at $60, and repay the loan obligation with $1000 total interest for the loan. Calculate the returns for your investment. (4 marks) 2 Question 3 (16 marks)