Why an increase in the margin requirement does not affect (no change) the present value of...

Why an increase in the margin requirement does not affect (no change) the present value of an annuity ?

Solutions

Expert Solution

Answer - Margin requirement is the percentage of a security's value that may be used as a collateral loan to finance the purchase. An increase in margin requirements would stop the borrower to take loan as the value of its security would not lend him the amount he need and therefore it will happen for all general public and would lead to decrease in money supply.

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. In case of inflation, the margin requirement is increased so that demand for loans are decreased and in case of deflation, margin requirements are decreased so that demand for loans are increased.

The present value of an annuity is the current value of future payments from an annuity, given a specified rate of return, or discount rate. The higher the discount rate, the lower the present value of the annuity.

The present value of an annuity is based on a concept called the time value of money. Payments scheduled decades in the future are worth less today because of uncertain economic conditions. In contrast, current payments have more value because they can be invested in the meantime.

So we can say that an increse in the margin requirement does not affect the present value of an annuity.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

What does change in (PV) present value mean to a company?

Suppose a margin account has an initial margin requirement of 50% and a maintenance margin requirement...

Suppose a margin account has an initial margin requirement of 50% and a maintenance margin requirement of 25%. The account currently has a balance of $10000, so the initial buying power is $ ___ Suppose the total leverage is used to buy a stock at the price of $5.00/share. When the stock price falls below the critical price of $ ___ /share, a margin call will be sent to the account holder

why does lung compliance increase as pressure increase? or in another words, how come change in...

why does lung compliance increase as pressure increase? or in another words, how come change in lung volume is higher as pressure increases? Provide literature to support answer.

How does an increase in dividend payouts affect the sustainable growth rate of a firm? Why?

1. An increase in the discount rate: A) will increase the present value of future cash...

1. An increase in the discount rate: A) will increase the present value of future cash flows. B) will have no effect on net present value. C) will reduce the present value of future cash flows. D) is one method of compensating for reduced risk. 2. Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the...

Why does ventilation increase non-linearly (break away) with increasing intensity of exercise? Does exercise training affect...

Why does ventilation increase non-linearly (break away) with increasing intensity of exercise? Does exercise training affect the "ventilatory break point"? If so, how?

How does global climate change affect agriculture?

How does global climate change affect agriculture? Give details

How does a change in price or a change in income affect the optimal consumption bundle?...

How does a change in price or a change in income affect the optimal consumption bundle? For example, if the substitution effect outweighs the income effect, how does the optimal consumption bundle change?

In your opinion, does law create social change, or does social change affect law? Use at...

In your opinion, does law create social change, or does social change affect law? Use at least three (3) specific examples to illustrate your answer.

An investor opens a margin account with a discount broker. The initial margin requirement is 50%....

An investor opens a margin account with a discount broker. The initial margin requirement is 50%. The maintenance margin is 30%. The investor intends to buy 1000 shares of XYZ at $40. An interest rate on the margin loan is 4% per year. The stock does not pay any dividends. How much money must the investor deposit? Assuming the investor deposits $30,000 (NOT the amount you calculated in part (a) and buys the shares. How far could the stock price...

Subjects