"Equity Investments":Primary market transactions

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Questions 1:

A market has the following limit orders standing on its book for a particular stock:

Equity Investments:Primary market transactions

If a trader submits an immediate-or-cancel limit buy order for 700 shares at a price of $20.50, the average price the trader would pay is closest to:

A、 $20.35.

B 、$20.58.

C 、$20.50.

Questions 2:

Which of the following is most likely a primary market transaction?

A、 A private placement of shares

B 、A market order sale of bonds

C、 The exercise of an exchange-traded call option

View answer resolution

【Answer to question 1】A

【analysis】

A is correct. 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 = [(200 × $20.20) + (300 × $20.35) + (200 ×$20.50)]/700 = $20.35.

C is incorrect. It simply uses the sell limit price that is exactly equal to the limit buy order.

B is incorrect. It starts filling the order with the highest limit sell price and moves downward. Average price = [(200 × $20.70) + (100 × $20.65) + (400 × $20.50)]/700 = $20.58

【Answer to question 2】A

【analysis】

A is correct. Private placements qualify as primary market transactions because they are sales of securities by issuers directly to a small group of qualified investors.

B is incorrect. Market order sales take place in secondary markets.

C is incorrect. The exercise of an exchange-traded call option is a secondary market transaction involving the purchase by option owner of previously issued security.

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