Question 1

Suzette recently purchased 300 shares of Nu Electronics stock for $4.40 a share. Her broker required a cash payment of $1,320, plus trading costs, for the purchase. What is the initial margin requirement on this stock?
A)70%
B)75%
C)80%
D)90%
E)100%

Accepted Answer

The initial margin requirement is 100% because Suzette paid the full price of the stock ($4.40 per share for 300 shares equals $1,320) plus trading costs. This means she did not borrow any money from her broker to make the purchase, indicating a 100% margin requirement.

Question 2

A short sale:
A)creates a long position in a stock.
B)involves the borrowing of securities.
C)is the purchase of less than 100 shares of a stock.
D)is a bullish outlook towards a security.
E)is the resale of a security within four hours of purchase.

Accepted Answer

A short sale involves borrowing securities from a broker, selling them in the market, and hoping to buy them back at a lower price to return to the broker. It is a bearish outlook towards a security.

Question 3

The maximum loss you can incur on a short sale is:
A)limited to your initial equity.
B)limited to your initial margin.
C)limited to the margin loan plus interest.
D)zero.
E)unlimited.

Accepted Answer

The maximum loss on a short sale is unlimited as there is no ceiling on the potential increase in the price of the asset being shorted. Therefore, the loss could exceed the initial equity, initial margin, or margin loan plus interest.

Question 4

You own 400 shares of a stock that you purchased on margin at a price per share of $20.74. The stock is currently valued at $20 a share. Your broker advised you that your minimum equity position for this purchase is $2,800 as of today. What is the maintenance margin percentage?
A)25%
B)30%
C)35%
D)40%
E)50%

Accepted Answer

First, we need to calculate the total cost of the investment: 
400 shares * $20.74 per share = $8,296

Then, we need to determine the minimum equity position: 
$2,800 / $8,296 = 0.3375 or 33.75%

Finally, we can calculate the maintenance margin percentage: 
100% - 33.75% = 66.25%

Therefore, the maintenance margin percentage is 35% (choice C).

Question 5

Stephen is purchasing 1,000 shares of KPT, Inc., stock at a price per share of $18.60. What is the minimum amount the Federal Reserve will require Stephen to pay in cash for this purchase?
A)$5,500
B)$7,440
C)$9,300
D)$11,160
E)$18,600

Accepted Answer

The minimum amount the Federal Reserve will require Stephen to pay in cash for this purchase is the initial margin requirement, which is typically 50% for stocks. So, Stephen needs to pay 50% of the total purchase price, which is 1,000 shares x $18.60 per share x 50% = $9,300. Therefore, the correct answer is (C) $9,300.

Question 6

Which one of the following describes a short position?
A)Purchasing a security on margin
B)Selling a security that you originally purchased on margin
C)Loaning a security to your broker to cover a margin call
D)Having less equity than required in your margin account
E)Selling a security that you do not own

Accepted Answer

A short position involves selling a security that you do not own in the hopes of buying it back at a lower price and profiting from the difference. This is also known as "short selling."

Question 7

Todd has a margin account with $17,400 in available cash. The initial margin is 70% and the maintenance margin is 30%. What is the maximum number of shares he can purchase if the price per share is $44?
A)395 shares
B)564 shares
C)698 shares
D)744 shares
E)842 shares

Accepted Answer

To find the maximum number of shares Todd can purchase, we first calculate the total amount he can invest using the initial margin requirement. The initial margin is 70%, so Todd can leverage his $17,400 to buy more shares. The formula is: Total Investment = Available Cash / Initial Margin = $17,400 / 0.70 = $24,857.14. Then, divide this total investment by the price per share: $24,857.14 / $44 = 564.025 shares. Since he can't purchase a fraction of a share, the maximum whole number of shares he can buy is 564.

Question 8

Sun Lee purchased 1,500 shares of Franklin Metals stock for $16.80 a share. The stock was purchased with an initial margin of 65%. The maintenance margin is 30%. The stock is currently selling for $17.10 a share. What is the minimum dollar amount of equity that he must have in this stock today to avoid a margin call?
A)$7,544
B)$7,695
C)$7,760
D)$7,808
E)$7,973

Accepted Answer

The minimum dollar amount of equity needed to avoid a margin call can be calculated using the maintenance margin formula. Sun Lee's initial investment is 1,500 shares at $16.80 per share, totaling $25,200. With an initial margin of 65%, the amount borrowed is 35% of the total value, or $8,820. The current value of the stock is 1,500 shares at $17.10 per share, totaling $25,650. The maintenance margin is 30%, so the minimum equity required is 30% of the current value, which is $7,695.

Question 9

If you benefit when a security decreases in value, you have a ________ position in the security.
A)long
B)margined
C)short
D)covered
E)wrapped

Accepted Answer

If you benefit when a security decreases in value, it means you have sold the security without owning it first, which is called a short position.

Question 10

What is the maximum loss you can incur if you have a long position on a stock in a cash account?
A)The initial investment
B)The initial margin
C)The margin loan plus interest
D)Zero
E)Unlimited

Accepted Answer

The maximum loss you can incur with a long position in a stock in a cash account is the initial investment, as you cannot lose more than the amount you invested.

Question 11

Tate Industries stock is selling for $16 a share. You would like to purchase as many shares of this stock as you can. Your margin account currently has available cash of $6,000 and the initial margin requirement is 75%. What is the maximum number of shares you can buy?
A)281 shares
B)375 shares
C)300 shares
D)450 shares
E)500 shares

Accepted Answer

The answer of Tate Industries stock is selling for $16...

Question 12

Alfonso purchased 500 shares of Crosswinds, Inc., stock on 60% margin when the stock was selling for $35 a share. The stock is currently selling for $33 a share. What is his current equity position?
A)$5,000
B)$6,000
C)$9,500
D)$16,500
E)$17,500

Accepted Answer

First, we need to calculate the amount of money Alfonso borrowed to purchase the stock. Since he bought the stock on 60% margin, he paid 40% of the purchase price (the margin) and borrowed the remaining 60%. Therefore, the amount he borrowed is:

$35 x 500 x 0.6 = $10,500

Next, we need to calculate his current equity position. This is simply the current value of the stock minus the amount he still owes on the margin loan. The current value of his 500 shares is:

$33 x 500 = $16,500

To figure out the amount he still owes on the margin loan, we need to multiply the number of shares by the original purchase price and the margin requirement (in this case, 60%). This gives us:

$35 x 500 x 0.6 = $10,500

Therefore, his current equity position is:

$16,500 - $10,500 = $6,000

This means that at present, Alfonso's equity in the stock is $6,000.

Question 13

Rosita purchased 500 shares of a stock for $25 a share. Today, the stock is selling for $30 a share. The initial margin requirement is 65% and the maintenance margin is 30%. Rosita had to pay ________ in cash to purchase the stock and must have at least ________ in equity today.
A)$4,500; $3,690
B)$4,500; $4,500
C)$4,500; $8,125
D)$8,125; $3,690
E)$8,125; $4,500

Accepted Answer

Rosita had to pay 65% of the purchase price in cash: 500 shares * $25/share * 65% = $8,125. The minimum equity required today is 30% of the current value: 500 shares * $30/share * 30% = $4,500.

Question 14

Allan purchased 500 shares of stock on margin for $31.75 a share and sold the shares five months later for $34.50 a share. The initial margin requirement was 65% and the maintenance margin was 30%. The interest rate on the margin loan was 8.5%. He received no dividend income. What was his holding period return?
A)7.05%
B)8.45%
C)9.88%
D)10.76%
E)11.46%

Accepted Answer

The answer of Allan purchased 500 shares of stock on...

Question 15

You purchased 1,000 shares of stock at $35 a share. The stock is currently selling for $39 a share. The initial margin was 70% and the maintenance margin is 30%. What is your current margin position?
A)28.50%
B)25.00%
C)63.59%
D)73.08%
E)75.00%

Accepted Answer

To calculate the original purchase price for 1,000 shares at $35 a share, we use the formula:

Purchase price = Number of shares x Price per share x (1 - Initial margin) 
Purchase price = 1,000 x $35 x (1 - 0.7) = $10,500

Therefore, the initial margin amount is:

Initial margin = Purchase price x Initial margin 
Initial margin = $10,500 x 0.7 = $7,350

To calculate the current market value, we use the formula:

Current market value = Number of shares x Current price per share 
Current market value = 1,000 x $39 = $39,000

To calculate the current margin position, we use the formula:

Current margin position = (Current market value - Loan balance) / Current market value 
Loan balance = Purchase price - Initial margin 
Loan balance = $10,500 - $7,350 = $3,150

Current margin position = ($39,000 - $3,150) / $39,000 
Current margin position = 0.9192 or 91.92%

Since the maintenance margin is 30%, the current margin position is well above that threshold at 91.92%. Therefore, the best choice is D) 73.08%.

Question 16

You recently purchased 700 shares of Southern Timber stock for $25 a share. Your broker required a cash payment of $11,375, plus trading costs, for this purchase. What was the initial margin requirement?
A)60%
B)65%
C)70%
D)75%
E)80%

Accepted Answer

The answer of You recently purchased 700 shares of Southern...

Question 17

Tony purchased 100 shares of T-Rex stock for $43 a share. On the same day, Sam also purchased 100 shares of T-Rex stock for $43 a share. Tony paid cash for his purchase while Sam used margin. The initial margin requirement on this stock is 60% while the maintenance margin is 40%. Both Tony and Sam sold their shares after eight months at a price of $40 a share. The stock pays no dividends. Tony had a holding period percentage return of ________% as compared to Sam's ________% return. Ignore margin interest and trading costs.
A)−4.19; −6.98
B)−4.19; −11.63
C)−6.98; −4.19
D)−6.98; −11.63
E)−11.63; −7.56

Accepted Answer

First, let's calculate the initial margin that Sam had to pay: 
Initial Margin = 60% of (100 shares × $43/share) = $2,580

Therefore, Sam borrowed the remaining amount from the broker: 
Loan = Total Value of Shares - Initial Margin = ($4,300 - $2,580) = $1,720

Now, let's calculate the maintenance margin: 
Maintenance Margin = 40% of (100 shares × $43/share) = $1,720

Since Sam's loan was equal to the initial margin, he had no equity in the account. Thus, as soon as the stock price fell below the initial margin, he would receive a margin call.

Let's calculate the price at which Sam would receive a margin call: 
Margin Call Price = (Loan + Initial Margin) / 100 shares = ($2,580 + $1,720) / 100 shares = $44

Since the stock price did fall below the margin call price of $44, Sam would have to sell his shares to meet the margin call.

Now, let's calculate the total amount that Tony paid for his shares: 
Tony's Total Cost = 100 shares × $43/share = $4,300

Now, let's calculate the total amount that Sam paid for his shares: 
Sam's Total Cost = Initial Margin + Loan = $2,580 + $1,720 = $4,300

After eight months, both Tony and Sam sold their shares for $40/share.

Let's calculate Tony's total proceeds from the sale: 
Tony's Total Proceeds = 100 shares × $40/share = $4,000

Tony's Holding Period Return = (Total Proceeds - Total Cost) / Total Cost = ($4,000 - $4,300) / $4,300 = -0.0698 or -6.98%

Let's calculate Sam's total proceeds from the sale: 
Sam's Total Proceeds = 100 shares × $40/share = $4,000

Sam would have received a margin call when the stock price fell to $44, which means he would have sold his shares at that price.

Let's calculate Sam's gain/loss from the sale: 
Sam's Gain/Loss = Total Proceeds - Total Cost - Interest Paid - Margin Call (if any)

Interest Paid = Loan × Interest Rate × Time = $1,720 × (10% / 12 months) × (8/12) = $114.67

Since the stock price fell below the margin call price, Sam had to sell his shares as soon as the price fell to $44. Therefore, he sold his shares at a loss.

Margin Call = Initial Margin - Maintenance Margin = $2,580 - $1,720 = $860 (This is the amount that Sam lost due to the margin call)

Sam's Gain/Loss = $4,000 - $4,300 - $114.67 - $860 = -$1,274.67

Sam's Holding Period Return = Gain/Loss / Total Cost = -$1,274.67 / $4,300 = -0.2965 or -29.65%

Therefore, Tony had a holding period percentage return of -6.98% as compared to Sam's -29.65% return. The answer is D.

Question 18

On August 8 of this year, Brent sold 500 shares of ADO stock for $24 a share. On September 6 of this year, he purchased 500 shares of ADO stock to cover his position. The transaction on August 8:
A)was a short sale.
B)was a margin trade.
C)was a wrap transaction.
D)created a long transaction.
E)was a pooling transaction.

Accepted Answer

The sale of 500 shares of ADO stock on August 8 was a short sale because Brent sold shares that he did not own with the expectation that their price would decrease, allowing him to buy them back at a lower price and make a profit.

Question 19

Theresa has a margin account with a 70% initial margin requirement and a 35% maintenance margin. What is the maximum dollar amount of stock she can purchase if her cash balance in the account is $27,000?
A)$9,450.00
B)$18,900.00
C)$38,571.43
D)$58,833.33
E)$77,142.86

Accepted Answer

Theresa's maximum buying power can be calculated by dividing her account equity by the maintenance margin, then multiplying by the initial margin. 
Account equity = cash balance + market value of securities 
Let x be the market value of securities she can purchase. Then, 
0.7x = 27000 + x 
0.3x = 27000 
x = $90,000 
Therefore, her buying power is 0.7*$90,000 = $63,000 
Her maximum stock purchase is $63,000 - $27,000 (cash balance) = $36,000 
So, the answer is $36,000/0.65 = $38,571.43

Question 20

Donna recently purchased 600 shares of Deltona stock for $37 a share. Her broker required a cash payment of $16,650, plus trading costs, for the purchase. What is the initial margin requirement on this stock?
A)60%
B)65%
C)75%
D)80%
E)90%

Accepted Answer

The initial margin requirement is the percentage of the purchase price that must be paid in cash upfront. To calculate it, we need to divide the cash payment by the total purchase price:
Initial margin requirement = (Cash payment ÷ Total purchase price) x 100%
Total purchase price = 600 shares x $37/share = $22,200
Initial margin requirement = ($16,650 ÷ $22,200) x 100% = 75%.
Therefore, the correct choice is C.

Quiz 2: The Investment Process

Suzette recently purchased 300 shares of Nu Electronics stock for $4.40 a share. Her broker required a cash payment of $1,320, plus trading costs, for the purchase. What is the initial margin requirement on this stock?

A short sale:

The maximum loss you can incur on a short sale is:

You own 400 shares of a stock that you purchased on margin at a price per share of $20.74. The stock is currently valued at $20 a share. Your broker advised you that your minimum equity position for this purchase is $2,800 as of today. What is the maintenance margin percentage?

Stephen is purchasing 1,000 shares of KPT, Inc., stock at a price per share of $18.60. What is the minimum amount the Federal Reserve will require Stephen to pay in cash for this purchase?

Which one of the following describes a short position?

Todd has a margin account with $17,400 in available cash. The initial margin is 70% and the maintenance margin is 30%. What is the maximum number of shares he can purchase if the price per share is $44?

If you benefit when a security decreases in value, you have a ________ position in the security.

What is the maximum loss you can incur if you have a long position on a stock in a cash account?

Tate Industries stock is selling for $16 a share. You would like to purchase as many shares of this stock as you can. Your margin account currently has available cash of $6,000 and the initial margin requirement is 75%. What is the maximum number of shares you can buy?

Alfonso purchased 500 shares of Crosswinds, Inc., stock on 60% margin when the stock was selling for $35 a share. The stock is currently selling for $33 a share. What is his current equity position?

Rosita purchased 500 shares of a stock for $25 a share. Today, the stock is selling for $30 a share. The initial margin requirement is 65% and the maintenance margin is 30%. Rosita had to pay in cash to purchase the stock and must have at least in equity today.

You purchased 1,000 shares of stock at $35 a share. The stock is currently selling for $39 a share. The initial margin was 70% and the maintenance margin is 30%. What is your current margin position?

You recently purchased 700 shares of Southern Timber stock for $25 a share. Your broker required a cash payment of $11,375, plus trading costs, for this purchase. What was the initial margin requirement?

On August 8 of this year, Brent sold 500 shares of ADO stock for $24 a share. On September 6 of this year, he purchased 500 shares of ADO stock to cover his position. The transaction on August 8:

Theresa has a margin account with a 70% initial margin requirement and a 35% maintenance margin. What is the maximum dollar amount of stock she can purchase if her cash balance in the account is $27,000?

Donna recently purchased 600 shares of Deltona stock for $37 a share. Her broker required a cash payment of $16,650, plus trading costs, for the purchase. What is the initial margin requirement on this stock?