Question

If Harley Davidson stock is trading for $25/share and you want to buy 100 shares in your brokerage account which has an initial margin requirement of 50%, what dollar amount will the stock purchase cost you?

Select one:

a. $25

b. $1,250

c. $2,500

d. $5,000

Clear my choice

Question 3

Refer again to question 2 (see below) supposing that you bought the Harley Davidson (HOG) stock on margin and then sold it for $30/share. What would be your return on investment? (You may assume a zero percent interest rate on the margin loan.)

(Question 2 read as follows: If Harley Davidson stock is trading for $25/share and you want to buy 100 shares in your brokerage account which has an initial margin requirement of 50%, what dollar amount will the stock purchase cost you?)

Select one:

a. 20%

b. 40%

c. 50%

d. 60%

Answer 1

2

If the initial margin is 50%, then half of the investment is financed by a loan from the broker.

The investment costs = 100*25 = $2500

So the dollar amount will the stock purchase cost you is 50%*$2500 = $1250

Loan from broker = $2500- $1250 = $1250

3

Return on investment when the HOG stock is sold at $30/share (zero percent interest rate on the margin loan):

Return = {(current price of stock*no. of share purchased - loan from broker) - dollar amount cost investor} / dollar amount cost investor

= {(30*100 - 1250) -1250} / 1250 = 0.40

Return on investment = 40%