Question 1

Nelson purchased 1,600 shares of stock for $18.75 a share. The initial margin requirement is 70% and the maintenance margin is 40%. What is the maximum percent by which the stock price can decline before he receives a margin call?

Accepted Answer

The answer of Nelson purchased 1,600 shares of stock for...

Question 2

Mary purchased 100 shares of Best Foods stock on margin at a price of $37 a share. The initial margin requirement is 60% and the maintenance margin is 35%. What is the lowest the stock price can go before Mary receives a margin call?

Accepted Answer

The lowest price before a margin call can be calculated using the formula: $P = \frac{D}{N \times (1 - MM)}$, where $P$ is the price at which the margin call occurs, $D$ is the amount borrowed, $N$ is the number of shares, and $MM$ is the maintenance margin. Mary's initial investment is 60% of the total value, so she borrows 40% of the money. For 100 shares at $37 each, the total value is $3700, and she borrows $1480 (40% of $3700). The maintenance margin is 35%, so plugging into the formula gives $P = \frac{1480}{100 \times (1 - 0.35)} = \frac{1480}{65} = $22.77$.

Question 3

Stacy purchased 400 shares of stock for $38 a share. She sold those shares six months later for $34 a share. The initial margin requirement is 80% and the maintenance margin is 40%. Ignore margin interest and trading costs. If she purchased the shares for cash, her holding period return would be ________% as compared to ________% if she had used margin.

Accepted Answer

For cash purchase, the holding period return (HPR) is calculated as (Sale Price - Purchase Price) / Purchase Price. Here, it is (34 - 38) / 38 = -4 / 38 = -10.53%. For the margin purchase, the equity investment is 80% of the purchase price, so the investment is 0.8 * 38 = $30.40 per share. The loss is still $4 per share, but now it's over the initial investment of $30.40 per share, so the HPR is -4 / 30.40 = -13.16%.

Question 4

Robin sold 800 shares of a non-dividend paying stock this morning for a total of $29,440. She had purchased these shares on margin nine months ago at a cost per share of $35. The initial margin requirement on this stock is 60% and the maintenance margin is 30%. Robin pays 1.2% over the call money rate of 4.9%. What is her total dollar return on this investment?

Accepted Answer

Robin's total dollar return is calculated by finding the difference between the selling price and the purchase price, adjusting for the interest paid on the borrowed amount. She sold the shares for $29,440 and bought them for $28,000 (800 shares * $35). She borrowed 40% of the purchase price, which is $11,200, and paid interest on this amount for 9 months at an annual rate of 6.1% (4.9% + 1.2%). The interest paid is $11,200 * 6.1% * (9/12) = $510.59. Her total dollar return is $29,440 - $28,000 - $510.59 = $931.41.

Question 5

Sarah purchased 700 shares of Detroit Motors stock at a price of $55 a share. The initial margin requirement is 60% and the maintenance margin is 35%. The effective interest rate on the margin loan is 4.5%. How much margin interest will she pay if she repays the loan in four months?

Accepted Answer

To calculate the margin interest, first determine the amount borrowed. Sarah bought 700 shares at $55 each, so the total cost is 700 * $55 = $38,500. With a 60% initial margin requirement, Sarah paid 60% of $38,500 = $23,100 herself, meaning she borrowed $38,500 - $23,100 = $15,400. The annual interest on this amount at 4.5% is $15,400 * 0.045 = $693. The question asks for the interest for four months, so $693 * (4/12) = $231. The closest answer to this calculation is $227.62.

Question 6

You recently purchased 1,300 shares of stock at a cost per share of $54.10. The initial margin requirement on this stock is 60% and the maintenance margin is 30%. The stock is currently valued at $42.30 a share. What is your current margin position? Ignore margin interest.

Accepted Answer

The current value of the stock is 1,300 shares * $42.30 = $54,990. The initial investment was 1,300 shares * $54.10 = $70,330. The initial margin requirement means you financed 60% of this purchase, so your equity was 40% of $70,330 = $28,132. Now, your equity is the current value of the stock ($54,990) minus the amount borrowed ($70,330 - $28,132 = $42,198). So, your equity is $54,990 - $42,198 = $12,792. Your current margin position is your equity divided by the current value of the stock, which is $12,792 / $54,990 = 0.2326 or 23.26%. However, since none of the options match this calculation, it appears there was a mistake in the calculation process. Let's correct it:The correct calculation for the current margin position is to find the equity in the investment and then divide by the current market value of the stock. The initial investment was 1,300 * $54.10 = $70,330. The amount borrowed is 40% of this, as 60% was the initial margin (the question wording might have been misinterpreted; the initial margin requirement means you must put down 60%, not borrow 60%). Therefore, you actually financed $70,330 * 40% = $28,132, and your own money in the investment was $70,330 - $28,132 = $42,198.With the stock's value now at $42.30 per share, the current market value of the shares is 1,300 * $42.30 = $54,990. Your equity in the investment is the current value of the shares ($54,990) minus what you owe ($28,132), which equals $26,858. Therefore, your current margin position is $26,858 / $54,990 = 0.4884 or 48.84%.

Question 7

You purchased 800 shares of stock for $49.20 a share. The initial margin requirement is 65% and the maintenance margin is 35%. What is the lowest the stock price can go before you receive a margin call?

Accepted Answer

The answer of You purchased 800 shares of stock for...

Question 8

A stock was purchased for $45 a share and sold ten months later for $48 a share. If the shares were purchased totally with cash the holding period return would be ________% as compared to ________% if the purchase was made using 70% margin. Ignore trading costs and margin interest.

Accepted Answer

The holding period return when purchased with cash is ((48-45)/45)*100 = 6.67%. When purchased with 70% margin, the investor's equity is 30% of $45, so the return is ((48-45)/13.5)*100 = 9.52%.

Question 9

You purchased a stock for $18.45 a share using 70% margin. You sold the stock seven months later for $19.85 a share. You did not receive any dividend income. What was your holding period percentage return on this investment? Ignore trading costs and margin interest.

Accepted Answer

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Question 10

You short sold 600 shares of a stock at $52 a share. The initial margin requirement is 75% and the maintenance margin is 35%. What is the amount of your total liability for this transaction as initially shown on your account balance sheet?

Accepted Answer

The total liability for the transaction is calculated by multiplying the number of shares short sold by the price per share, which is 600 shares * $52 = $31,200. This represents the total value of the stock that was sold short and must be repaid to close the position, regardless of the margin requirements.

Question 11

Today, you are purchasing 100 shares of stock on margin. The purchase price per share is $35. The initial margin requirement is 70% and the maintenance margin is 30%. The call money rate is 4.5% and you are charged 1.6% over that rate. What will your rate of return be if you sell your shares one year from now for $37 a share? Ignore dividends.

Accepted Answer

The correct answer is A.The rate of return is calculated as follows:Rate of return = (Selling price - Purchase price + Margin interest) / Purchase priceSelling price = $37 per sharePurchase price = $35 per shareInitial margin requirement = 70%Maintenance margin = 30%Call money rate = 4.5%Margin interest rate = 4.5% + 1.6% = 6.1%Margin interest = (Purchase price * Initial margin requirement * Margin interest rate * Time) / 360Margin interest = ($35 * 0.7 * 0.061 * 1) / 360 = $0.0341 per shareRate of return = ($37 - $35 + $0.0341) / $35 = 5.55%

Question 12

Aaron purchased 200 shares of a technology stock for $13.30 a share. The initial margin requirement on this stock is 75% and the maintenance margin is 50%. What is the lowest the stock price can go before he receives a margin call?

Accepted Answer

The lowest price before a margin call occurs can be calculated using the formula: $P = \frac{D}{N \times (1 - MM)}$, where $P$ is the price of the stock at the margin call, $D$ is the amount borrowed, $N$ is the number of shares, and $MM$ is the maintenance margin. Aaron's initial investment is $200 \times $13.30 = $2660$, and with a 75% margin requirement, he borrows 25% of this amount, which is $0.25 \times 2660 = $665$. Substituting these values into the formula gives $P = \frac{665}{200 \times (1 - 0.5)} = $6.65$.

Question 13

Three months ago, Trevor purchased 500 shares of stock at a cost per share of $64.20. The purchase was made on margin with an initial margin requirement of 65%. Trevor pays 1.6% over the call money rate of 4.8%. What will his total dollar return be on this investment if he sells his shares today at a price per share of $63.40? Ignore dividends.

Accepted Answer

The answer of Three months ago, Trevor purchased 500 shares...

Question 14

Yvette recently purchased 500 shares of stock at a cost per share of $34.50. The initial margin requirement on this stock is 75% and the maintenance margin is 40%. The stock is currently valued at $36.75 a share. What is her current margin position? Ignore margin interest.

Accepted Answer

The current margin position is calculated as (Current Value of Shares - Loan) / Current Value of Shares. The current value is 500 shares * $36.75 = $18,375. The initial investment was 75% of 500 shares * $34.50 = $12,937.50, so the loan was $18,375 - $12,937.50 = $5,437.50. The margin position is ($18,375 - $5,437.50) / $18,375 = 76.53%.

Question 15

Seven months ago, you purchased 400 shares of stock on margin. The initial margin requirement on your account is 60% and the maintenance margin is 30%. The call money rate is 4.8% and you pay 1.85% above that rate. The purchase price was $16 a share. Today, you sold these shares for $18.00 each. What is your annualized rate of return?

Accepted Answer

The initial investment was $3,840 (60% of $6,400), and the loan was $2,560. The interest paid on the loan is $2,560 * (4.8% + 1.85%) * (7/12). The profit is ($18 - $16) * 400 - interest. The annualized rate of return is calculated based on the profit and initial investment over 7 months, annualized to 12 months.

Question 16

You purchase 500 shares of stock on margin at a cost per share of $22. The initial margin requirement is 60%. The effective interest rate on the margin loan is 6.4%. How much interest will you pay if you repay the loan in four months?

Accepted Answer

To calculate the interest paid on the margin loan, first determine the amount borrowed. With a 60% initial margin requirement, you're covering 60% of the purchase with your own funds, and borrowing the remaining 40%. The total cost of the 500 shares at $22 each is $11,000 (500 shares * $22/share). The amount borrowed is 40% of this, or $4,400 (0.40 * $11,000). The annual interest rate is 6.4%, but since the loan is repaid in four months, you'll pay interest for 1/3 of a year (4/12 months). The interest paid is thus $4,400 * 0.064 * (4/12) = $91.93.

Question 17

You recently purchased 200 shares of stock at a cost per share of $23.50. The initial margin requirement on this stock is 75% and the maintenance margin is 50%. The stock is currently valued at $25.00 a share. What is your current margin position? Ignore margin interest.

Accepted Answer

The current margin position is calculated as (Current Value - Loan) / Current Value. The current value is 200 shares * $25 = $5000. The initial investment was 75% of 200 shares * $23.50 = $3525, so the loan was $4700 - $3525 = $1175. Thus, the margin position is ($5000 - $1175) / $5000 = 76.50%.

Question 18

Rudolfo purchased 900 shares of stock for $62.20 a share and sold them ten months later for $64.60 a share. The initial margin requirement on this stock is 75% and the maintenance margin is 40%. Ignoring dividends and costs, what is his holding period return?

Accepted Answer

The answer of Rudolfo purchased 900 shares of stock for...

Question 19

You purchased 400 shares of stock for $28.50 a share. The initial margin requirement is 60% and the maintenance margin is 30%. What is the maximum percentage decrease that can occur in the stock price before you receive a margin call?

Accepted Answer

To calculate the maximum percentage decrease, we need to first find the total value of the stock purchased:
Total value = 400 x $28.50 = $11,400

The initial margin requirement is 60%, so the amount borrowed is 40% of the total value:
Borrowed amount = 0.4 x $11,400 = $4,560

This means that the equity in the investment is $6,840 (i.e. $11,400 - $4,560).

The maintenance margin is 30%, so the minimum equity required in the investment is:
Min. equity = 0.3 x $11,400 = $3,420

Therefore, the maximum percentage decrease in stock price can occur when the stock value falls from $28.50 to a level where the equity is equal to the maintenance margin:
$3,420 = (400 x P) - ($4,560)
P = ($3,420 + $4,560) / 400 = $18.45

The maximum percentage decrease is the difference divided by the original value:
($28.50 - $18.45) / $28.50 = 35.01%

Therefore, the maximum percentage decrease before a margin call is 42.86% (100% - 57.14%).

Question 20

Eight months ago, Freda purchased 500 shares of stock on margin at a price per share of $26. The initial margin requirement on her account is 60% and the maintenance margin is 40%. The call money rate is 2.5% and she pays 2% above that rate. Today, she sold these shares for $27.22 each. What is her annualized rate of return?

Accepted Answer

The answer of Eight months ago, Freda purchased 500 shares...

Quiz 2: The Investment Process