Question 1

Neshoba Industries stock is selling for $33 a share. You would like to purchase as many shares of this stock as you can. Your margin account currently has available cash of $7,000 and the initial margin requirement is 65%. What is the maximum number of shares you can buy?

Accepted Answer

The answer of Neshoba Industries stock is selling for $33...

Question 2

You short sold 500 shares of Jasper stock at $41 a share at an initial margin of 60%. What is the highest the stock price can go before you receive a margin call if the maintenance margin is 40%.?

Accepted Answer

The highest the stock price can go before you receive a margin call is $46.86. This is because the maintenance margin is 40%, which means that you must maintain a minimum equity of 40% of the value of the stock. If the stock price goes above $46.86, your equity will fall below 40% and you will receive a margin call.

Question 3

Last week, you sold 800 shares of Ace stock for $24,000. The sale was a short sale with an initial margin requirement of 70%. The maintenance margin is 40%. Some positive news concerning the company was released last night and the stock price jumped this morning to $35 a share. What is your current margin position in this stock?

Accepted Answer

Initially, you sold 800 shares for $24,000, so your selling price was $30 per share ($24,000 ÷ 800). With an initial margin requirement of 70%, you would have deposited $16,800 ($24,000 × 0.7) and borrowed $7,200 ($24,000 - $16,800). 
To calculate the maintenance margin, we can use the formula: 
Maintenance margin = (Market value of the stock - Loan balance) ÷ Market value of the stock 
At the current stock price of $35, the 800 shares are worth $28,000 ($35 × 800). 
Your loan balance would be the initial loan balance of $7,200 - the profit from the short sale, which is ($30 - $35) × 800 = -$4,000 (negative because the stock price went up). So, your loan balance is now $7,200 - (-$4,000) = $11,200. 
So your margin position is: 
(28,000 - 11,200) ÷ 28,000 = 0.6 = 60% 
Since this is lower than the maintenance margin of 40%, your margin position is now 45.71% [(28,000 - 11,200) ÷ 28,000] ÷ 0.4.

Question 4

Louis purchased 300 shares of stock on margin for $22.15 a share and sold the shares eleven months later for $24.50 a share. The initial margin requirement was 75% 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?

Accepted Answer

The answer of Louis purchased 300 shares of stock on...

Question 5

Rylee short sold 600 shares of stock at $16.25 a share. The initial margin is 75% and the maintenance margin is 50%. The stock is currently selling for $19.50 a share. What is Rylee's account equity at this time? Ignore margin interest.

Accepted Answer

The total value of the short sale is 600 shares x $16.25/share = $9,750.
Since the initial margin is 75%, Rylee had to deposit 75% x $9,750 = $7,312.50 to open the position.
The maintenance margin is 50%, so the account equity must be at least 50% x $9,750 = $4,875 to avoid a margin call.
If the stock is currently selling for $19.50 a share, the total value of the short sale is 600 shares x $19.50/share = $11,700.
Rylee's loan value is the difference between the total value of the short sale and the initial margin: $11,700 - $7,312.50 = $4,387.50.
Rylee's current account equity is the total value of the short sale ($11,700) minus the loan value ($4,387.50): $11,700 - $4,387.50 = $7,312.50.
Therefore, Rylee's account equity at this time is $7,312.50.

Question 6

Last week, you sold 300 shares of ABC stock for $6,300. The sale was a short sale with an initial margin requirement of 70%. The maintenance margin is 40%. Some positive news concerning the company was released last night and the stock price jumped this morning to $28 a share. What is your current margin position in this stock?

Accepted Answer

The answer of Last week, you sold 300 shares of...

Question 7

Today, you short sold 1,100 shares of Jasper Industrial stock at $48 a share. The initial margin is 60% and the maintenance margin is 30%. Which one of the following is correct concerning your account balance sheet for this transaction?

Accepted Answer

The answer of Today, you short sold 1,100 shares of...

Question 8

Elizabeth short sold 500 shares of stock at $25 a share. One month later, she covered the short at a price of $22. What was her total dollar return on this investment?

Accepted Answer

The answer of Elizabeth short sold 500 shares of stock...

Question 9

You just sold 1,200 shares of stock short at a price per share of $13.50. The initial margin requirement is 60% and the maintenance margin is 30%. What is your initial equity position?

Accepted Answer

The initial equity position is calculated as the amount of money borrowed to buy the stocks plus the initial margin. Since this is a short sale, the calculation is based on the sale price of the stocks. The sale price of 1,200 shares at $13.50 per share is $16,200. The initial margin requirement is 60%, so the initial equity position is 60% of $16,200, which is $16,200 * 0.60 = $9,720.

Question 10

Mark short sold 500 shares of stock at $12.50 a share. The initial margin is 80% and the maintenance margin is 50%. The stock is currently selling for $9.80 a share. What is Matt's account equity at this time? Ignore margin interest.

Accepted Answer

The answer of Mark short sold 500 shares of stock...

Question 11

Jennifer believes that Northern Wine stock is going to decline in value so she is short selling 1,000 shares at $22 a share. Her initial margin requirement is 70% and the maintenance margin is 30%. What is the highest the stock price can go before she receives a margin call?

Accepted Answer

The highest stock price before a margin call can be calculated using the formula: $$P = \frac{P_0 \times (1 + IM)}{1 + MM}$$ where $P_0$ is the initial stock price, $IM$ is the initial margin requirement, and $MM$ is the maintenance margin. Substituting the given values: $$P = \frac{22 \times (1 + 0.70)}{1 + 0.30} = \frac{22 \times 1.70}{1.30} = \frac{37.4}{1.30} = 28.7692...$$ Rounded to two decimal places, the highest stock price before receiving a margin call is $28.77.

Question 12

Sam is purchasing 800 shares of RPT, Inc., stock at a price per share of $24.50. What is the minimum amount the Federal Reserve will require Sam to pay in cash for this purchase?

Accepted Answer

The minimum amount that the Federal Reserve requires an investor to pay in cash is 50% of the purchase price. Therefore, Sam needs to pay 50% x $24.50 x 800 = $9,800 in cash. Therefore, the correct option is C.

Question 13

Recently, you sold 1,000 shares of stock for $21,400. The sale was a short sale with an initial margin requirement of 60%. The maintenance margin is 30%. The stock is currently trading at $27.50 a share. What is your current margin position in this stock?

Accepted Answer

The initial margin was 60% of $21,400, which is $12,840. The stock is now worth $27,500 (1,000 shares * $27.50). The equity in the account is the initial margin plus the difference between the sale price and the current price: $12,840 + ($21,400 - $27,500) = $6,740. The margin position is equity divided by the current value of the stock: $6,740 / $27,500 = 24.51%.

Question 14

Sarah purchased 700 shares of Detroit Motors stock at a price of $45 a share. The initial margin requirement is 70% and the maintenance margin is 30%. The effective interest rate on the margin loan is 6.5%. How much margin interest will she pay if she repays the loan in five months?

Accepted Answer

The answer of Sarah purchased 700 shares of Detroit Motors...

Question 15

Recently, you sold 600 shares of stock for $17.60 a share. The sale was a short sale with an initial margin requirement of 70%. The maintenance margin is 35%. The stock is currently trading at $18.80 a share. What is your current short position in this stock?

Accepted Answer

The current short position in the stock is calculated by multiplying the current stock price by the number of shares sold short. Therefore, it is $18.80 * 600 = $11,280.

Question 16

Marcia purchased 100 shares of Hyde Foods stock on margin at a price of $35 a share. The initial margin requirement is 65% and the maintenance margin is 35%. What is the lowest the stock price can go before Marcia receives a margin call?

Accepted Answer

The lowest price before a margin call occurs can be calculated using the formula: $P = \frac{B}{(1 - M)}$, where $P$ is the price of the stock at the margin call, $B$ is the amount borrowed, and $M$ is the maintenance margin. Marcia's initial investment is 65% of the total value, so she borrows 35% of the total value. For 100 shares at $35 each, the total value is $3500, and Marcia borrows $1225 (35% of $3500). The maintenance margin is 35%, so plugging into the formula gives $P = \frac{1225}{(1 - 0.35)} = \frac{1225}{0.65} = $1884.62$ for 100 shares, or $18.85 per share.

Question 17

You recently purchased 200 shares of stock at a cost per share of $22.25. The initial margin requirement on this stock is 75% and the maintenance margin is 50%. The stock is currently valued at $24.00 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 initial investment is 200 shares * $22.25 = $4,450. The initial margin requirement is 75%, so the loan is 25% of $4,450 = $1,112.50. The current value is 200 shares * $24.00 = $4,800. The current margin position is ($4,800 - $1,112.50) / $4,800 = 76.82%.

Question 18

Mike short sold 400 shares of DeSoto Lumber stock at $22 a share at an initial margin of 70%. The maintenance margin is 35%. What is the highest the stock price can go before he receives a margin call?

Accepted Answer

The answer of Mike short sold 400 shares of DeSoto...

Question 19

John just used $15,000 of cash plus a $6,000 margin loan to purchase $21,000 worth of Walmart (WMT)stock. This is the only transaction he has made in this account. What is his current account margin?

Accepted Answer

The answer of John just used $15,000 of cash plus...

Question 20

The short interest on Blue Water Cruisers stock was 234,500 when the market opened this morning. During the day, 190,500 shares were covered and 166,100 shares were sold short. What was the short interest on this stock at the end of the trading day?

Accepted Answer

The short interest at the end of the day is calculated by taking the opening short interest, subtracting the shares covered, and adding the shares sold short. So, it's 234,500 - 190,500 + 166,100 = 210,100 shares.

Quiz 2: The Investment Process