margind Flashcards
HF purchases 250 shares at $50 per share using $7,000 of own money, borrowing the remainder of the purchase price from the prime broker. The rate on the margin loan is 6%. The maintenance margin is 40%. What is the HF’s rate of return if the price of the stock goes up 15% during the next year? The stock currently pays no dividend.
Rate of return = (End of period value – margin loan – (margin loan * interest rate) – beginning of period value)/beginning of period value
Margin loan = 250*50 – 7000 = $5,500
Rate of return = [((250*50*1.15) – 5,500 – (5,500*.06)) – 7,000] / 7,000 = 22%
HF purchases 500 shares at $60 per share using $20,000 of own money, borrowing the remainder of the purchase price from the prime broker. The rate on the margin loan is 7%. The maintenance margin is 35%. How low can the stock price fall before the HF gets a margin call from the prime broker?
% Margin = (# Shares(Price) – Margin Loan)/# Shares(Price) The margin is the equity position in the investment. If you enter into a position that is (500 shares *$60 each) = $30,000, $20,000 of the investment is your own money, (20,000/30,000)= 66.6% is the current margin.
Margin loan = 500($60) - $20,000 = $10,000
If the margin drops below 35%, you will have a margin call. To find at what price this will occur:
Solve for P:
(500P – 10,000) / 500P = .35 500P – 10,000 = 175P 325P = 10,000 P = $30.77
HF purchases 600 shares at $75 per share using $25,000 of own money, borrowing the remainder of the purchase price from the prime broker. The rate on the margin loan is 9%. The maintenance margin is 40%.
What is the HF’s rate of return if the price of the stock goes up 25% during the next year?
The stock currently pays no dividend. How low can the stock price fall before the HF gets a margin call from the prime broker?
a) Rate of return = (End of period value – margin loan – (margin loan * interest rate) – beginning of period value)/beginning of period value Margin loan = 600*75 – 25,000 = $20,000 Rate of return = [((600*75*1.25) – 20,000 –(20,000*.09) – 25,000] / 25,000 = 38%
b) % Margin = (# Shares(Price) – Margin Loan)/# Shares(Price) Margin loan = 600(75) - 25,000 = $20,000 If the margin drops below 40%, you will have a margin call. To find at what price this will occur: (600P – 20,000) / 600P = .40 600P – 20,000 = 240P 360P = 20,000 P = $55.56
