Question

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

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

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