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1、ANSWERSTOQUESTIONSFORCHAPTER17(Questionsareinboldprintfollowedbyanswers.)1.Whatarethethreefactorscontributingtothesignificantchangesinthecommonmarketoverthepast50years?Thestockmarketshavealsochangedsincetheearly1960s,dueto(1)institutionalization(smallinvestorsnowplayonlyaminorrole);(2)changesi
2、ngovernmentregulations,e.g.disclosure,typesoftrades,marginrequirements;(3)innovations,e.g.computertechnologypermitsprogramtrading.2.a.Howdoescommonstockdifferfrompreferredstock?b.Whyispreferredstockviewedasaseniorcorporatesecurity?a.Preferredstockisentitledtoafixedparticipationintheformofdivid
3、endsoftheearningsofthecompany.Dividendsmustbedeclaredandordinarilytheyareatthediscretionoftheboard.Commonstockisentitledtotheresidualcashflow,andisjuniortothepreferredstockbothintermsofdistributionandliquidationpreference.b.Preferredstockisconsideredaseniorinstrumentbecausedividendsmustbepaidb
4、eforeanydistributionofdividendscanbemadetothecommonstockholders.Also,inaliquidation,thepreferredstockholdersarepaidbeforethecommonstockholders,whoareconsideredresidualclaimants.3.Whatisthedifferencebetweenordinarydividendsandqualifieddividendsandhowiseachtreatedfortaxpurposes?Ordinarydividends
5、aretaxedattheincometaxbracket.Qualifieddividendsreceivepreferentialtaxrate,either5%or15%,dependingontheindividual’sregularincometaxrate.4.Whatismeantbyalong-termcapitalgainandhowisittreatedfortaxpurposes?Long-termcapitalgainsareappreciationsinvalueofthestockthathasbeenheldformorethanoneyear.It
6、isentitledtopreferentialtaxrate,either5%or15%dependingontheindividual’sregularincometaxrate.5.ThefollowingquoteistakenfromWayneH.Wagner,“TheTaxonomyofTradingStrategies,”inKatrinaF.Sherrerd(ed.),TradingStrategiesandExecutionCosts(Charlottesville,VA:TheInstituteofCharteredFinancialAnalysts,1988)
7、.Whenatraderdecideshowtobringanordertothemarket,heorshemustdealwithsomeveryimportantissues;tome,themostimportantis:Whatkindoftradeisthis?Itcouldbeeitheranactiveorapassivetrade.Thetypeoftradewilldictatewhetherspeedofexecutionismoreorless
