Question

Use the following information to solve for FOUR QUESTIONS BELOW. USE AT LEAST 4 DECIMALS FOR ACCURATE RESULTS.

Six months ago, you purchased 500 shares of stock on margin. The initial margin requirement on your account is 60% and the maintenance margin is 40%. The call money rate plus the spread is 4.7%. The purchase price was $15 per share. Today, you sold these shares for $18 each.

#1) How much did you borrow? That is, what is the margin loan?

#2) What is your new margin?

#3) What is your Effective Annual Return (EAR)?

#4) At what price (P*) would you receive a margin call?

		#1) MARGIN LOAN = $3,000
		#1) MARGIN LOAN = $4,500
		#1) MARGIN LOAN = $6,000
		#1) MARGIN LOAN = $7,500
		#2) NEW MARGIN = 43.43%
		#2) NEW MARGIN = 55.55%
		#2) NEW MARGIN = 66.67%
		#2) NEW MARGIN = 72.72%
		#3) EAR = 11.22%
		#3) EAR = 33.35%
		#3) EAR = 43.45%
		#3) EAR = 73.67%
		#4) Price that would lead to margin call = $8.5 or lower
		#4) Price that would lead to margin call = $10 or lower
		#4) Price that would lead to margin call = $11.5 or lower
		#4) Price that would lead to margin call = $14 or lower

Answer 1