Question

Holly buys 500 shares of Untimely, Inc. at $44 on a 60% initial margin requirement. Maintenance margin is 35% and interest rates on margin loans are 11%.  In 9 months, the stock is at $68.  

A. What is Holly's margin at 68?

B. What is the excess and buying power at 68?

C. When will she get a margin call?

D. If she sells at 68, what is her HPR?

E. If she had done the same trade on a cash basis, would would her HPR be?

Answer 1

1. Borrowed amount = Shares purchased * Share price * (1 - initial margin)

Borrowed amount = 500 * 44 * 0.40

Borrowed amount = $8800

2. Initial margin = shares Cost - borrowed amount = 500 * 44 - 8800 = $13200

A. What is Holly's margin at 68?

margin at 68 = Shares purchased * share price - borrowed amount

margin at 68 = 500 * 68 - 8800

Margin at 68 = $25200

Margin % = margin in $ / total share value

Margin % = 25200 / 500*68

Margin % = 74.12%

B. What is the excess and buying power at 68?

the excess and buying power at 68 = Margin at 68 - initial margin

the excess and buying power at 68 = 25200 - 13200

the excess and buying power at 68 = 12000

C. When will she get a margin call?

(shares * price - borrowed amount) / shares * price = maintenance margin

(500* price - 8800) / 500 * price = 0.35

(500* price - 8800) = 175 * Price

325 * price = 8800

Price = $27.08

Margin call price = $27.08

D. If she sells at 68, what is her HPR?

HPR = (Sale Value - purchase value - interest) / initial investment

HPR = (500*68 - 500*44 - 8800*11%*9/12) / 13200

HPR = (11274) / 13200

HPR = 85.41%

E. If she had done the same trade on a cash basis, would would her HPR be?

HPR = (Sale Value - purchase value ) / initial investment

HPR = (500*68 - 500*44) / 500*44

HPR = 12000 / 22000

HPR = 54.55%
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