Question 1

You purchased 1,200 shares of stock at $52 a share. The stock is currently selling for $54 a share. The initial margin was 70 percent and the maintenance margin is 30 percent. What is your current margin position?

Accepted Answer

The current margin position is calculated as (Current Value of Shares - Loan) / Current Value of Shares. The initial investment was 70% of 1,200 shares at $52, which is $43,680. The loan amount is 30% of $62,400 (1,200 shares at $52), which is $18,720. The current value of shares is 1,200 shares at $54, which is $64,800. The current margin position is ($64,800 - $18,720) / $64,800 = 71.11%.

Question 2

An investor with a long position in a security will make money:

Accepted Answer

An investor with a long position in a security will make money if the price of the security increases. This is because they will be able to sell the security for a higher price than they purchased it for, resulting in a profit.

Question 3

You own 700 shares of a stock that you purchased on margin at a price per share of $20.12. The stock is currently valued at $23 a share. Your broker advised you today that your minimum equity position for this purchase is $5,635 as of today. What is the maintenance margin percentage?

Accepted Answer

To find the maintenance margin percentage, we need to first calculate the total value of the purchase, which would be:
700 shares x $20.12 = $14,084

Next, we need to calculate the amount of the loan taken out to purchase the stock, which would be:
$14,084 - ($20.12 x 700) = $1,768

Finally, we can calculate the maintenance margin percentage by dividing the minimum equity position by the total value of the purchase:
$5,635 / $14,084 = 0.4 or 40%

Therefore, the correct answer is C) 35 percent.

Question 4

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

Accepted Answer

A "short" position in a security means that you are betting on the value of the security decreasing. It is the opposite of a "long" position, which means you are betting on the value increasing. "Margined," "covered," and "wrapped" are not relevant terms in this context.

Question 5

Taylor Industries stock is selling for $36 a share. You would like to purchase as many shares of this stock as you can. Your margin account currently has available cash of $6,200 and the initial margin requirement is 60 percent. What is the maximum number of shares you can buy?

Accepted Answer

The answer of Taylor Industries stock is selling for $36...

Question 6

Sun Lee purchased 1,100 shares of Franklin Metals stock for $16.80 a share. The stock was purchased with an initial margin of 65 percent. The maintenance margin is 30 percent. The stock is currently selling for $17.60 a share. What is the minimum dollar amount of equity that he must have in this stock today to avoid a margin call?

Accepted Answer

Step 1: Calculate the initial investment
Initial investment = 1,100 shares × $16.80 per share = $18,480

Step 2: Calculate the initial margin
Initial margin = 65% × $18,480 = $12,012

Step 3: Calculate the current value of the investment
Current value of investment = 1,100 shares × $17.60 per share = $19,360

Step 4: Calculate the current equity
Current equity = current value of investment - loan = $19,360 - $12,012 = $7,348

Step 5: Calculate the minimum equity required to avoid a margin call
Minimum equity required = maintenance margin × current value of investment
Minimum equity required = 30% × $19,360 = $5,808

Therefore, the minimum dollar amount of equity that he must have in this stock today to avoid a margin call is $5,808. The correct answer is option D.

Question 7

Allan purchased 600 shares of stock on margin for $41 a share and sold the shares five months later for $42.50 a share. The initial margin requirement was 65 percent and the maintenance margin was 30 percent. The interest rate on the margin loan was 10 percent. He received no dividend income. What was his holding period return?

Accepted Answer

The answer of Allan purchased 600 shares of stock on...

Question 8

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?

Accepted Answer

Purchase cost = 300 × $4.40 = $1,320
Initial margin percentage = $1,320 / $1,320 = 100 percent

Question 9

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

Accepted Answer

Maximum purchase = $17,400 / 0.7 = $24,857.14
Maximum number of shares = $24,857.14 / $44 = 564 shares, rounded down to the last full share

Question 10

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:

Accepted Answer

Brent sold 500 shares of ADO stock, which means he did not own the shares he sold. This is a short sale - selling borrowed securities with the intention of buying them back at a lower price to profit from the difference.

Question 11

Rosita purchased 300 shares of a stock for $37 a share. Today, the stock is selling for $41 a share. The initial margin requirement is 70 percent and the maintenance margin is 30 percent. Rosita had to pay _____ in cash to purchase the stock and must have at least _____ in equity today.

Accepted Answer

- Rosita paid 70% of the cost of the stock as the initial margin requirement, so the amount paid in cash is 300 * 37 * 0.7 = $7,770.
- The current value of the stock is 300 * 41 = $12,300.
- The minimum equity required to meet the maintenance margin is 30% of the current value of the stock, so Rosita must have at least 0.3 * 12,300 = $3,690 in equity.
Therefore, the answer is D.

Question 12

Which one of the following describes a short position?

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 known as short selling or taking a short position.

Question 13

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

Accepted Answer

The maximum loss you can incur on a short sale is unlimited. This is because there is no limit to how much the price of the asset being shorted could rise. If the price rises significantly, you would have to buy the asset at a higher price to close out your short position, resulting in a loss.

Question 14

Alfonso purchased 600 shares of Crosswinds, Inc., stock on 60% margin when the stock was selling for $37 a share. The stock is currently selling for $32 a share. What is his current equity position?

Accepted Answer

Margin loan = 600 × $37 × (1 - .60) = $8,880Current equity = (600 × $32) - $8,880 = $10,320

Question 15

You recently purchased 900 shares of Western Timber stock for $38 a share. Your broker required a cash payment of $25,650, plus trading costs, for this purchase. What was the initial margin requirement?

Accepted Answer

Purchase cost = 900 × $38 = $34,200Initial margin percentage = $25,650/$34,200 = 75 percent

Question 16

Theresa has a margin account with a 60 percent initial margin requirement and a 35 percent maintenance margin. What is the maximum dollar amount of stock she can purchase if her cash balance in the account is $33,400?

Accepted Answer

The maximum dollar amount of stock she can purchase is calculated by dividing her cash balance by the initial margin requirement: $33,400 / 0.60 = $55,666.67.

Question 17

Stephen is purchasing 800 shares of KPT, Inc., stock at a price per share of $26.00. What is the minimum amount the Federal Reserve will require Stephen to pay in cash for this purchase?

Accepted Answer

The minimum amount the Federal Reserve will require Stephen to pay in cash is the initial margin requirement, which is currently set at 50%. Thus, Stephen will need to pay 50% of the total cost of the purchase in cash, which is calculated as follows:

800 shares * $26.00 per share = $20,800 total cost 
$20,800 * 50% = $10,400

Therefore, the correct answer is C) $10,400.

Question 18

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

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 19

A short sale:

Accepted Answer

A short sale involves borrowing securities in order to sell them, with the intention of buying them back later at a lower price to make a profit. This creates a short position in a stock, which is a bearish outlook towards a security. Option A is incorrect because a short sale creates a short position, not a long position. Option C is incorrect because the number of shares involved in a short sale can vary and is not limited to less than 100. Option D is incorrect because a short sale is a bearish outlook, not a bullish outlook. Option E is incorrect because there is no specific time frame for the resale of a security in relation to a short sale.

Question 20

Donna recently purchased 500 shares of Deltona stock for $28.60 a share. Her broker required a cash payment of $10,725, plus trading costs, for the purchase. What is the initial margin requirement on this particular stock?

Accepted Answer

The initial margin requirement is calculated by dividing the cash payment by the total cost of the shares. The total cost of the shares is 500 shares * $28.60 = $14,300. The initial margin requirement is $10,725 / $14,300 = 0.75 or 75 percent.

Quiz 2: The Investment Process