Question 1

Eight hundred shares of stock were purchased at a price of $82 per share and an initial margin of 60 percent. If the stock was sold when the price was $89, what was the investment return for the period you own the stocks? Ignore transaction costs and margin interest.
A) 9.78%
B) 14.23%
C) 8.54%
D) 16.21%
E) 12.87%

Accepted Answer

The answer of Eight hundred shares of stock were purchased...

Question 2

You purchased 200 shares of a stock for $28 a share and sold them 4 months later for $30 a share. The initial margin was 60%. You received no dividend income. Your holding period return was _____ while it would have been ____ if not used margin for the purchase. Ignore interest and trading costs.
A) 10.29%; 6.99%
B) 10.95%; 9.06%
C) 11.90%; 7.14%
D) 11.90%; 17.87%
E) 10.45%; 11.90%

Accepted Answer

The holding period return using margin is calculated as [(Selling Price - Purchase Price) / (Purchase Price * Initial Margin)] * 100 = [(30 - 28) / (28 * 0.6)] * 100 = 11.90%. Without using margin, it is [(30 - 28) / 28] * 100 = 7.14%.

Question 3

You purchase 800 shares of stock at a price of $102 and an initial margin of 50 percent. The call money rate is 5.2 percent and you pay a spread of 1.7 percent. A year later, you close your position at a stock price of $94. With an annual dividend of $1.80 per share, what was your return?
A) - 14.32%
B) - 22.59%
C) - 19.06%
D) - 6.08%
E) - 12.64%

Accepted Answer

Initial purchase cost = 800 x $102 = $81,600
Initial margin = 50% x $81,600 = $40,800
Therefore, loan amount = $40,800

Interest on loan = ($40,800 x 5.2%) + 1.7% = $2,133.60
Dividend received = 800 x $1.80 = $1,440

Closing price = 800 x $94 = $75,200
Profit/loss on sale = $75,200 - $81,600 = -$6,400

Adjusting for interest and dividend:
Total return = -$6,400 - $2,133.60 + $1,440 = -$7,093.60

Percentage return = (-$7,093.60/$40,800) x 100% = - 17.36%
Therefore, the closest option is (C) -19.06%

Question 4

You deposit $10,000 into an account and purchase 600 shares of stock at a price of $29 per share on margin. What is your initial margin?
A) 46%
B) 65%
C) 57%
D) 50%
E) 43%

Accepted Answer

The answer of You deposit $10,000 into an account and...

Question 5

You purchase 900 shares of stock at a price of $45 and an initial margin of 60 percent. The call money rate is 6.3 percent and you pay a spread of 2.1 percent. One year later, you close your position at a stock price of $53. If the stock paid an annual dividend of $0.78 per share, what was your return?
A) 29.01%
B) 26.92%
C) 30.62%
D) 27.89%
E) 24.03%

Accepted Answer

First, let's calculate the initial investment:

900 shares x $45 per share x 60% initial margin = $24,300

The remaining 40% is the loan from the broker, which is $16,200.

Next, let's calculate the interest expense for the year:

$16,200 x (6.3% + 2.1%) = $1,518.

Now, let's calculate the total return:

Proceeds from sale = 900 shares x $53 per share = $47,700

Dividends received = 900 shares x $0.78 per share = $702

Initial investment = $24,300

Interest expense = $1,518

Total return = ($47,700 + $702 - $24,300 - $1,518) / $24,300 = 0.2692, or 26.92%.

Therefore, the correct answer is choice B.

Question 6

You obtain a margin loan of $18,000 to purchase stocks. The effective interest rate on the loan is 7.8 percent. If you repay the loan in 3 months, how much interest will you pay?
A) $275.00
B) $243.13
C) $341.18
D) $326.34
E) $376.54

Accepted Answer

The answer of You obtain a margin loan of $18,000...

Question 7

You purchased 700 shares of a stock for $21 a share. Today, the stock is selling for $16 a share. The initial margin was 70% and the maintenance margin is 30%. You had to pay ____ in cash to purchase the stock and must have at least ____ in equity today.
A) $10,290; $3,360
B) $7,840; $10,290
C) $7,840; $3,360
D) $3,360; $7,840
E) $4,410; $3,360

Accepted Answer

The answer of You purchased 700 shares of a stock...

Question 8

A margin loan for $20,000 is charged an effective interest rate of 8.5 percent. If the loan is repaid in 9 months, how much interest is charged?
A) $1,275.00
B) $1,243.13
C) $1,261.91
D) $1,226.34
E) $1,276.54

Accepted Answer

The interest charged is calculated using the formula for simple interest: Interest = Principal x Rate x Time. Here, Principal = $20,000, Rate = 8.5% (or 0.085), and Time = 9/12 years. Thus, Interest = $20,000 x 0.085 x (9/12) = $1,261.91.

Question 9

The call money rate is 6.5 percent, and you pay a 1.3 percent spread above that. You buy 1,500 shares at a price of $56, and an initial margin of 50 percent. You close the position one year later at a stock price of $61. What was your return?
A) 8.93%
B) 12.34%
C) 11.83%
D) 9.65%
E) 10.06%

Accepted Answer

The total cost of buying the shares is 1,500 * $56 = $84,000. With an initial margin of 50%, you borrow $42,000. The interest on this loan for one year at a rate of 6.5% + 1.3% = 7.8% is $42,000 * 7.8% = $3,276. When you sell the shares at $61, you receive 1,500 * $61 = $91,500. The return on the investment is calculated as (Ending Value - Initial Value - Interest Paid) / Initial Value. Plugging in the numbers: ($91,500 - $84,000 - $3,276) / $42,000 = 0.1006, or 10.06%.

Question 10

You short sell 500 shares of stock at $24 a share. One month later, you covered the short at a price of $25. What was your total dollar return on this investment? Ignore margin interest, trading costs and taxes.
A) - $500
B) - $250
C) - $100
D) $500
E) $250

Accepted Answer

When you short sell, you profit if the stock price goes down. In this case, you sold at $24 and bought back at $25, meaning you lost $1 per share. For 500 shares, that's a $500 loss.

Question 11

You purchase 1,000 shares of stock at a price of $56 with an initial margin or 50 percent. If you sell the stock when the price is $63 per share, what was your holding period return? Ignore transaction costs and margin interest.
A) 22.50%
B) 16.25%
C) 12.50%
D) 18.75%
E) 25.00%

Accepted Answer

The holding period return is calculated as the profit divided by the initial investment. The profit is ($63 - $56) * 1,000 = $7,000. The initial investment is 50% of $56,000, which is $28,000. The holding period return is $7,000 / $28,000 = 25.00%.

Question 12

You purchase 200 shares of stock at a price of $42 per share on a 60 percent initial margin. If you are charged an effective rate of 6.9 percent on the margin loan, how much interest will you be charged if you repay the loan in 6 months?
A) $109.18
B) $113.99
C) $115.92
D) $171.47
E) $173.88

Accepted Answer

To calculate the interest charged on the margin loan, first determine the amount borrowed. With a 60% initial margin on a purchase of 200 shares at $42 each, the total purchase is $8,400. The amount borrowed is 40% of this (100% - 60% = 40%), which is $3,360. The interest for 6 months (0.5 years) at an annual rate of 6.9% on $3,360 is calculated as $3,360 * 6.9% * 0.5 = $113.99.

Question 13

You short sell 400 shares of stock at $51 a share. The initial margin of 50 percent and the maintenance margin is 25%. What is the amount of your total liability for this transaction as initially shown on your account balance sheet?
A) $8,500
B) $19,000
C) $17,000
D) $9,500
E) $20,400.

Accepted Answer

The answer of You short sell 400 shares of stock...

Question 14

You owned a stock for 2 months and earned an annualized return of 13.28%. What was the rate of return for the 2-month period?
A) 2.10%
B) 1.12%
C) 2.59%
D) 1.71%
E) 2.87%

Accepted Answer

The annualized return can be converted to a 2-month return by dividing the annual rate by 12 (to get a monthly rate) and then multiplying by 2, or more accurately, by taking the 12th root of 1 plus the annual rate, raising it to the power of 2 (for 2 months), and subtracting 1. The formula for converting an annualized return to a period return is: $(1 + annualized\ return)^{\frac{period\ length}{12}} - 1$. Plugging in the given annualized return: $(1 + 0.1328)^{\frac{2}{12}} - 1 = 0.0210$ or 2.10%.

Question 15

You paid $600 interest on a 9-month $15,000 margin loan. What was the effective interest rate on the loan?
A) 6.67%
B) 5.91%
C) 5.49%
D) 4.35%
E) 5.10%

Accepted Answer

To find the effective interest rate on the loan, we need to use the following formula:

Effective interest rate = (total interest paid / principal) x (12 / n)

where n is the number of months in the loan term.

Plugging in the given values, we get:

Effective interest rate = (600 / 15,000) x (12 / 9)
Effective interest rate = 0.04 x 1.33
Effective interest rate = 0.0532 or 5.32%

Therefore, the effective interest rate on the loan was 5.32%, which is closest to option B, 5.91%.

Question 16

You purchase 700 shares of stock at a price of $98 per share on a 50 percent initial margin. If you are charged an effective rate of 7.3 percent on the margin loan, how much interest will you be charged if you repay the loan in 4 months?
A) $834.63
B) $829.64
C) $804.62
D) $814.30
E) $802.14

Accepted Answer

The answer of You purchase 700 shares of stock at...

Question 17

You buy 800 shares of stock at a price of $57 per share on 70 percent margin. How much money did you borrow?
A) $45,600
B) $18,300
C) $21,200
D) $31,920
E) $13,680

Accepted Answer

When buying on margin, you are borrowing money to purchase stock. A 70 percent margin means you are putting down 70% of the purchase price and borrowing the remaining 30%. The total cost of the 800 shares at $57 per share is $45,600. Therefore, the amount borrowed is 30% of $45,600, which is $13,680.

Question 18

You have $25,000 to invest and want to purchase stock on margin. If the stock currently sells for $110 per share, and the initial margin is 60 percent, how many shares can you purchase?
A) 378 shares
B) 346 shares
C) 294 shares
D) 227 shares
E) 362 shares

Accepted Answer

The answer of You have $25,000 to invest and want...

Question 19

You purchased 100 shares of a stock for $22 a share and sold them 7 months later for $26 a share. The initial margin was 70% and the maintenance margin was 35%. You received no dividend income. Your holding period return was _____ while it would have been ____ if not used margin for the purchase. Ignore interest and trading costs.
A) 10.29%; 6.99%
B) 18.18%; 25.97%
C) 25.97%; 18.18%
D) 11.90%; 17.87%
E) 10.45%; 11.90%

Accepted Answer

The holding period return using margin is calculated as the profit divided by the initial investment. Without margin, the return is calculated based on the total cost of the shares.

Question 20

You sold a stock that returned 5.6% over a 3-month period. What was your annualized rate of return?
A) 21.67%
B) 22.40%
C) 23.49%
D) 24.35%
E) 25.105%

Accepted Answer

The answer of You sold a stock that returned 5.6%...

Quiz 3: The Investment Process

Eight hundred shares of stock were purchased at a price of $82 per share and an initial margin of 60 percent. If the stock was sold when the price was $89, what was the investment return for the period you own the stocks? Ignore transaction costs and margin interest.

You purchased 200 shares of a stock for $28 a share and sold them 4 months later for $30 a share. The initial margin was 60%. You received no dividend income. Your holding period return was _ while it would have been if not used margin for the purchase. Ignore interest and trading costs.

You purchase 800 shares of stock at a price of $102 and an initial margin of 50 percent. The call money rate is 5.2 percent and you pay a spread of 1.7 percent. A year later, you close your position at a stock price of $94. With an annual dividend of $1.80 per share, what was your return?

You deposit $10,000 into an account and purchase 600 shares of stock at a price of $29 per share on margin. What is your initial margin?

You obtain a margin loan of $18,000 to purchase stocks. The effective interest rate on the loan is 7.8 percent. If you repay the loan in 3 months, how much interest will you pay?

You purchased 700 shares of a stock for $21 a share. Today, the stock is selling for $16 a share. The initial margin was 70% and the maintenance margin is 30%. You had to pay in cash to purchase the stock and must have at least in equity today.

A margin loan for $20,000 is charged an effective interest rate of 8.5 percent. If the loan is repaid in 9 months, how much interest is charged?

The call money rate is 6.5 percent, and you pay a 1.3 percent spread above that. You buy 1,500 shares at a price of $56, and an initial margin of 50 percent. You close the position one year later at a stock price of $61. What was your return?

You short sell 500 shares of stock at $24 a share. One month later, you covered the short at a price of $25. What was your total dollar return on this investment? Ignore margin interest, trading costs and taxes.

You purchase 1,000 shares of stock at a price of $56 with an initial margin or 50 percent. If you sell the stock when the price is $63 per share, what was your holding period return? Ignore transaction costs and margin interest.

You purchase 200 shares of stock at a price of $42 per share on a 60 percent initial margin. If you are charged an effective rate of 6.9 percent on the margin loan, how much interest will you be charged if you repay the loan in 6 months?

You short sell 400 shares of stock at $51 a share. The initial margin of 50 percent and the maintenance margin is 25%. What is the amount of your total liability for this transaction as initially shown on your account balance sheet?

You owned a stock for 2 months and earned an annualized return of 13.28%. What was the rate of return for the 2-month period?

You paid $600 interest on a 9-month $15,000 margin loan. What was the effective interest rate on the loan?

You purchase 700 shares of stock at a price of $98 per share on a 50 percent initial margin. If you are charged an effective rate of 7.3 percent on the margin loan, how much interest will you be charged if you repay the loan in 4 months?

You buy 800 shares of stock at a price of $57 per share on 70 percent margin. How much money did you borrow?

You have $25,000 to invest and want to purchase stock on margin. If the stock currently sells for $110 per share, and the initial margin is 60 percent, how many shares can you purchase?

You sold a stock that returned 5.6% over a 3-month period. What was your annualized rate of return?