Buying and Selling Securities - Review Questions Flashcards
Asami is going to purchase 500 shares of Suki Electronics for $25 per share. With a 60% initial margin requirement, how much would Asami need to pay?
The round lot would cost $12,500 (500 × $25).Therefore, Asami will need to put up $7,500 ($12,500 × 60%).
Antonio bought a 100-share block of Tomorrow’s Toys Corp. for $20/share. The initial margin is 65%. If the price of the stock goes to $30/share, what is the actual margin on Antonio’s account?
1) 23.33%
2) 65%
3) 66.67%
4) 76.67%
4) 76.67%
Initial purchase was for $2,000. At 65% initial margin, $1,300 was paid in cash and $700 was a loan. When assets increase to $3,000, the loan is still $700 and the equity is $2,300. The actual margin = $2,300/$3,000 = 76.67%.
Cash vs. margin account: If Donna buys 100 shares of Toothwhite Co. for $50/share using a cash account, she would pay $5,000 for them. If she buys those shares in a margin account with an initial margin of 60%, then she would pay $3,000 for them. If the price went to $60/share, then Donna’s return for the cash account is (6,000-5,000)/5,000 = 20%. But if she bought the shares in a margin account, then her return would be (6000−5000−220)/3000 = 26%. Therefore, through leverage, Donna can earn a greater return on her margin account.
What would Donna’s return on her cash and margin accounts be if the price per share went to $40?
Answer:
If the price went to $40/share, then Donna’s return for the cash account is (4000−5000)/5000=−20%
. But if she bought the shares in a margin account, then her return would be (4000−5000−220)/3000=−41%
. Therefore, through leverage, Donna also takes on more risk in her margin account.
Mei Ling sells short 200 shares of WheelsRUs at $50/share. The initial margin is 60% and the maintenance margin is 50%. If the price per share goes to $57, would Mei Ling receive a margin call from her broker?
The short sale proceeds are $10,000. The initial margin would be $6,000. Therefore, the loan amount is $11,400. So the actual maintenance is 40.35%. Mei Ling will receive a margin call and she has to either add cash or securities, or buy back stock to pay off part of her short position.
Actual Margin=(short sale proceeds+initial margin)−loan / loan
Actual Margin =( ($10,000 + $6,000 ) - $11,400) / $11,400 = 40.35% < maintenance margin is 50% –> Mei Ling will receive a margin call
Consider XYZ Company, where Ms. Smith short sold its stock at a price of $100 per share. If she later repays the short loan when the stock is selling for $75 per share and just after XYZ has paid a $1 per share cash dividend, then what is her rate of return if the initial margin requirement is 60%?
HoldingPeriodReturn=$100−$75−$1 / (60%)($100)=40%
Consider XYZ Company, where Ms. Smith short sold its stock at a price of $100 per share. However, if Ms. Smith incorrectly predicted the future price movement of XYZ and it went up to $120 per share just after paying a $1 per share cash dividend, then what is her rate of return if the initial margin requirement is 60%?
HoldingPeriodReturn=$100−$120−$1 / (60%)($100)=−35%
Consider XYZ Company, where Ms. Smith short sold its stock at a price of $100 per share and XYZ fell to $75, and assume that the short seller earned 5% on the initial margin deposit and 4% on the short proceeds what is her rate of return if the initial margin requirement is 60%?
HoldingPeriodReturn=$100−$75−$1+[(5%)(60%)($100)]+[(4%)($100)] / (60%)($100)=51.7%
[(5%)(60%)($100)] –> 5% interest earnings on 60% of Initial Margin amount
[(4%)($100)] – > 4% interest earning during the holding period for the Short sale proceeds held by Brokerage company
Purchase price of stock $55.00
Commission charged on transaction $20.00
Number of shares purchased 400
Initial payment sent to broker $11,010
Initial margin requirement 50%
Maintenance margin requirement 40%
In 3 weeks, stock suddenly fails to: $40
What is the stock price that will trigger a margin call?
1) $45.48
2) $45.58
3) $45.68
4) $45.88
4) $45.88
The first step is to calculate the “fully loaded” purchase price per share, which is the price per share including commissions paid: ($11,010)(2)/400= $55.05. Then, apply the margin call formula: $55.05*(1-0.50/1-0.40)= $45.88. The investor will receive a margin call at all prices equal to or less than $45.88 per share.
Purchase price of stock $55.00
Commission charged on transaction $20.00
Number of shares purchased 400
Initial payment sent to broker $11,010
Initial margin requirement 50%
Maintenance margin requirement 40%
In 3 weeks, stock suddenly fails to: $40
What is the amount of the margin call at the new sudden low price of $40.00 per share?
1) $1400
2) $1410
3) $1420
4) $1430
2) $1410
First determine how much debt was originally created by comparing the initial payment that was sent to the broker and the total transaction amount. The total transaction amount is $22,020. The initial payment sent to the broker is $11,010. The original debt (borrowed by the broker) is also $11,010. The next step is to determine the amount of debt allowed based on the new sudden low price (1-maintenance margin). That amount equates to $9,600. The actual debt less the maximum debt at this new low price is $1,410.
John Anderson recently received a margin call from his broker in the amount of $2,062. This was necessary because the stock had recently fallen to a price of $70.00. John purchased 300 shares of the stock a couple of weeks ago for $105 per share and also had a commission charged of $12. If the initial requirement was 50%, and John sent in a payment of $15,800 for the purchase, what is the broker’s maintenance margin?
1) 25%
2) 30%
3) 35%
4) 40%
3) 35%
Margin call is the difference between current debt and maximum debt amount, given the recent low price. Since the initial debt was $15,712 (transaction amount of $31,512 less the $15,800 that John paid) and the margin call was $2,062, the maximum debt allowed at the price of $70 is $13,650 ($15,712 -$2,062). Finally, the maximum debt divided by the market value of security at the current price of $70 ($13,650/$21,000) = the maximum debt percentage = 65%. Therefore, the maintenance margin is 35% (1- maximum debt percentage).
Marc wants to make a short sale of 100 shares of Walmart common stock, currently trading at $108 per share. Immediately after Marc places his market order, the following are the prices at which Walmart trades: $107, $106, $103, $104, and $101. If Marc later repurchases the Walmart stock at $102, what will his profit be?
1) $600
2) $200
3) $0
4) $500
4) $500
Since the uptick rule has been repealed, the short sale may be immediately implemented at $107 per share. Therefore, Marc sold at $107 and bought at $102 per share, locking in a profit of $5 per share, for a total of a $500 profit.
Stephanie buys 100 shares of XYZ stock on margin when the initial margin rate is 50%, and the stock is trading for $50 per share. Interest on the margin account is 7% per year and brokerage fees total $50. If Stephanie sells the stock at $57 per share after one year, what is Stephanie’s return on investment (ROI) on the margined stock?
1) 19%
2) 18%
3) 16%
4) 15%
1) 19%
The total cost of the investment= $5,000 price of the stock + $175 interest (amount borrowed is $2,500 X 0.07 = $175) + $50 in brokerage fees= $5,225. Sales proceeds are $5,700 minus total costs of $5,225= $475. Net profit divided by total out-of-pocket investment= $475/$2,500= 19%.
