Suppose an investor initially pays $4,000 towards the purchase of $10,000 worth of stock (200 share...

Suppose an investor initially pays $4,000 towards the purchase of $10,000 worth of stock (200 share at $50 per share), borrowing the remaining from a broker with an interest rate of 6% p.a.? i) What is the initial margin? ii) If the price declines to $40 by the end of the year, what is the percentage margin (equity position) and the return on investment (ROI)? iii) If the price increases to $60 by the end of the year, what is the percentage margin (equity position) and the return on investment (ROI)? iv) Suppose the maintenance margin is 20%. How far could the stock price fall before the investor would get a margin call? v) Suppose the maintenance margin is 30%. How far could the stock price fall before the investor would get a margin call?

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

AS NOTHING IS MENTIONED, FOR LAST 2 OPTIONS, WE FIND PRICE ASSUMING IMMEDIATE EFFECT AND NOT AFTER A YEAR. INTEREST COMPONENT IS NOT TAKEN INTO ACCOUNT

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

An investor buys $10,000 worth of a stock priced at $10 per share using 60% initial...

An investor buys $10,000 worth of a stock priced at $10 per share using 60% initial margin. The broker charges 8% interest on the margin loan. If stock price remains unchanged, investors rate of return is A. Positive B. Zero C. Negative D. Sufficient information is not provided to answer this question

An investor buys $10,000 worth of a stock priced at $10 per share using 60% initial...

An investor pays $10,000 today to purchase an investment that returns $5,000 at the end of...

An investor pays $10,000 today to purchase an investment that returns $5,000 at the end of each of years 2, 4, and 5. The returns are immediately reinvested at an annual interest rate of 5%. Calculate the annual effective yield rate for the investor at the end of the fifth year. (a) 9.91% (b) 12.00% (c) 12.45% (d) 13.11% (e) 15.13%

An investor purchased 200 shares of stock at $100 per share on 65% margin. Suppose the...

An investor purchased 200 shares of stock at $100 per share on 65% margin. Suppose the maintance margin is 40% at what price does the investor get a margin call? Regarding the previous question, if the price declines to $70 per share whats the return to the investors equity? What if the stock price rises to $150 per share? ignore interest and transaction costs.

Investor buys 200 shares of stock at $27.25 per share. Investor sells the stock after one...

Investor buys 200 shares of stock at $27.25 per share. Investor sells the stock after one year. 1. What is the dollar amount of gain and the percent of return if the stock is sold for $32.60 per share? How much does the yield percentage increase to if the stock received a per share dividend of $1.15 during the year? 2. What is the dollar amount of loss and percentage of return if the stock received a per share dividend...

Investor A makes a cash purchase of 200 shares of AB&C common stock for $60 a...

Investor A makes a cash purchase of 200 shares of AB&C common stock for $60 a share. Investor B also buys 200 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $6 a share are distributed. Commissions are 3 percent of the value of a purchase or sale; the margin requirement is 60 percent, and the interest rate is 10 percent annually on borrowed funds. A. What is the percentage earned by...

You execute a margin purchase of 200 shares of a stock at $52 per share. The...

You execute a margin purchase of 200 shares of a stock at $52 per share. The initial margin requirement is 60% and the maintenance margin is 35%. a. On a per share basis, what is the minimum amount you must you put up and how much can you borrow from the brokerage house? b. If the price of the stock increases to $64 per share, what is the actual margin in your account? Assume you borrowed the...

An individual initially deposits $4,000 into an account that pays interest at 8% per year compounded...

An individual initially deposits $4,000 into an account that pays interest at 8% per year compounded quarterly. A $200 deposit is made in the first month of the second year with deposits increasing by $40 per month until the end of the third year. Beginning in the first month of the fifth year, withdrawals of $100 per month are taken out of the account until the end of the fifth year. Compute the amount of money in the account to...

An investor holds one share of Tesla stock. The investor purchased the stock at $125. The...

An investor holds one share of Tesla stock. The investor purchased the stock at $125. The current price is now $136. If the investor also purchased an option at the time he bought the share, at a premium of $1, with a strike price of $125, what would the investor prefer to be holding right now? (Please Explain Answer). call option put option either call or put, they have the same profit $0

At the end of every year an investor pays £2,000 towards additional voluntary contributions to build...

At the end of every year an investor pays £2,000 towards additional voluntary contributions to build up a private pension fund. The investor intends to retire in 30 years and wants the pension fund to contain at least £100,000 at the date of retirement. What is the annual effective rate at which the contributions should accumulate? (Perform few steps of both the bisection method and the interpolation method with suitable starting values)

Subjects