Question

Question 1

You are interested in buying shares in a new technology company. Since you believe the shares are going to appreciate, you are going to buy shares in your margin account. Your brokerage account requires an initial minimum margin of 50% and a maintenance margin level of 25%. The annual interest rate charged on margin borrowings is 3%.

You buy 1,000 shares of ABC Corp. at $50 per share using the maximum borrowing amount allowed by your margin account. If you hold the stock for one year and sell it at $65 per share, including interest expense, what was your annual return?

If the stock goes down to $30 will you get a margin call? Why or why not?

Question 2

You believe shares in XYZ Co. are in for some tough times ahead. You believe the price for XYZ stock is going to go down. You decide to sell shares in XYZ short. XYZ is not currently paying any dividends.

XYZ shares are selling for $75 per share and you decide to sell 1,000 shares short. Your broker requires an initial margin deposit of 50%. If you “cover” the short at $60, what was your return on the transaction? What would your return be if you “cover” the short at $80?

Answer 1