Podcast
Questions and Answers
How much margin interest will Sarah pay if she repays the loan in seven months?
How much margin interest will Sarah pay if she repays the loan in seven months?
What will be the annualized rate of return if you sell stock for $37 per share after buying it at $35?
What will be the annualized rate of return if you sell stock for $37 per share after buying it at $35?
What is the annualized rate of return for the shares sold at $18 after purchasing at $16 with a 60% margin requirement?
What is the annualized rate of return for the shares sold at $18 after purchasing at $16 with a 60% margin requirement?
If Freda sells her shares for $37.50 after purchasing at $35 with a 70% margin requirement, what is her annualized rate of return?
If Freda sells her shares for $37.50 after purchasing at $35 with a 70% margin requirement, what is her annualized rate of return?
Signup and view all the answers
What total dollar return will Trevor achieve if he sells his stock at $63.40 after purchasing at $64.20 on margin?
What total dollar return will Trevor achieve if he sells his stock at $63.40 after purchasing at $64.20 on margin?
Signup and view all the answers
What is the effective interest rate paid if the call money rate is 4.5% and a charge of 1.6% is added?
What is the effective interest rate paid if the call money rate is 4.5% and a charge of 1.6% is added?
Signup and view all the answers
What is the effective margin loan amount if Sarah bought 600 shares at $60 per share with a 70% margin requirement?
What is the effective margin loan amount if Sarah bought 600 shares at $60 per share with a 70% margin requirement?
Signup and view all the answers
What is the total investment cost for buying 100 shares at $35 each with a 70% margin requirement?
What is the total investment cost for buying 100 shares at $35 each with a 70% margin requirement?
Signup and view all the answers
What is the holding period return for Rudolfo if he sold 900 shares at $64.60 after buying them for $62.20?
What is the holding period return for Rudolfo if he sold 900 shares at $64.60 after buying them for $62.20?
Signup and view all the answers
What is the lowest stock price Mary can tolerate before receiving a margin call?
What is the lowest stock price Mary can tolerate before receiving a margin call?
Signup and view all the answers
What is the lowest stock price you can encounter before receiving a margin call after purchasing 800 shares for $49.20?
What is the lowest stock price you can encounter before receiving a margin call after purchasing 800 shares for $49.20?
Signup and view all the answers
If Aaron purchased 300 shares at $16.80, what is the lowest stock price he can have before a margin call occurs?
If Aaron purchased 300 shares at $16.80, what is the lowest stock price he can have before a margin call occurs?
Signup and view all the answers
What is the maximum percentage decrease in stock price before you receive a margin call after purchasing 500 shares at $28.50?
What is the maximum percentage decrease in stock price before you receive a margin call after purchasing 500 shares at $28.50?
Signup and view all the answers
What is the maximum percent decline in stock price for Nelson who bought 1,600 shares at $18.75?
What is the maximum percent decline in stock price for Nelson who bought 1,600 shares at $18.75?
Signup and view all the answers
How much interest will you pay on a margin loan if you purchase 500 shares at $22 with a 6.4 percent interest rate over four months?
How much interest will you pay on a margin loan if you purchase 500 shares at $22 with a 6.4 percent interest rate over four months?
Signup and view all the answers
What is the maintenance margin for Mary, who purchased shares at a 65 percent initial margin?
What is the maintenance margin for Mary, who purchased shares at a 65 percent initial margin?
Signup and view all the answers
What is the total dollar return for Robin after selling 800 shares of stock?
What is the total dollar return for Robin after selling 800 shares of stock?
Signup and view all the answers
What is the current margin position for someone who purchased 200 shares at a cost of $32.50 with the stock now valued at $35.00?
What is the current margin position for someone who purchased 200 shares at a cost of $32.50 with the stock now valued at $35.00?
Signup and view all the answers
If you bought 1,300 shares at $54.10 and the current value is $42.30, what is your current margin position?
If you bought 1,300 shares at $54.10 and the current value is $42.30, what is your current margin position?
Signup and view all the answers
What is Yvette's current margin position if she purchased 500 shares at $43.50 and the stock is now $44.75?
What is Yvette's current margin position if she purchased 500 shares at $43.50 and the stock is now $44.75?
Signup and view all the answers
What is the total liability for a trader who short sold 700 shares at $25 each with a 75 percent initial margin requirement?
What is the total liability for a trader who short sold 700 shares at $25 each with a 75 percent initial margin requirement?
Signup and view all the answers
How much did Elizabeth earn after short selling 400 shares at $72 and covering at $68?
How much did Elizabeth earn after short selling 400 shares at $72 and covering at $68?
Signup and view all the answers
If the initial margin requirement is 60 percent and the stock is valued at a price requiring a margin call, what is the minimum price the stock can drop to avoid reaching the maintenance margin?
If the initial margin requirement is 60 percent and the stock is valued at a price requiring a margin call, what is the minimum price the stock can drop to avoid reaching the maintenance margin?
Signup and view all the answers
What is the maintenance margin percentage required for the stock if the initial requirement is 75 percent?
What is the maintenance margin percentage required for the stock if the initial requirement is 75 percent?
Signup and view all the answers
What is the total dollar amount you would owe after selling 1,200 shares short at a price of $13.50 each?
What is the total dollar amount you would owe after selling 1,200 shares short at a price of $13.50 each?
Signup and view all the answers
What is the required equity to meet an initial margin of 60% on a short sale of $21,400?
What is the required equity to meet an initial margin of 60% on a short sale of $21,400?
Signup and view all the answers
If the stock price increases to $28 after initially selling 300 shares for a total of $6,300, what is your current margin position?
If the stock price increases to $28 after initially selling 300 shares for a total of $6,300, what is your current margin position?
Signup and view all the answers
After selling 1,000 shares of stock for $21,400, the stock climbs to $27.50 per share. What is your current margin position?
After selling 1,000 shares of stock for $21,400, the stock climbs to $27.50 per share. What is your current margin position?
Signup and view all the answers
How many shares of Neshoba Industries stock can you buy with $7,000 if the stock price is $33 and the initial margin requirement is 65%?
How many shares of Neshoba Industries stock can you buy with $7,000 if the stock price is $33 and the initial margin requirement is 65%?
Signup and view all the answers
What is the total short position if you sold 500 shares at $16.60 each and the stock is now $17.80?
What is the total short position if you sold 500 shares at $16.60 each and the stock is now $17.80?
Signup and view all the answers
For a short sale with an initial margin requirement of 70%, how much equity is needed to sell $6,300 worth of stock?
For a short sale with an initial margin requirement of 70%, how much equity is needed to sell $6,300 worth of stock?
Signup and view all the answers
What is the maintenance margin if the initial margin requirement is 30%?
What is the maintenance margin if the initial margin requirement is 30%?
Signup and view all the answers
What is the initial margin deposit if you short sold 1,100 shares of Jasper Industrial stock at $48 per share with a 60 percent initial margin?
What is the initial margin deposit if you short sold 1,100 shares of Jasper Industrial stock at $48 per share with a 60 percent initial margin?
Signup and view all the answers
If Mark short sold 500 shares at $12.50 and now the stock price is $9.80, what is the account equity, assuming the initial margin is 80 percent?
If Mark short sold 500 shares at $12.50 and now the stock price is $9.80, what is the account equity, assuming the initial margin is 80 percent?
Signup and view all the answers
What price must Jasper stock reach for a margin call if you initially short sold at $41 with a 60 percent initial margin and 40 percent maintenance margin?
What price must Jasper stock reach for a margin call if you initially short sold at $41 with a 60 percent initial margin and 40 percent maintenance margin?
Signup and view all the answers
In Jennifer's short sale of 1,000 shares at $32, what is the maximum price before she receives a margin call if her initial margin is 70 percent and maintenance margin is 30 percent?
In Jennifer's short sale of 1,000 shares at $32, what is the maximum price before she receives a margin call if her initial margin is 70 percent and maintenance margin is 30 percent?
Signup and view all the answers
What is the highest price DeSoto Lumber stock can reach before Mike receives a margin call if he short sold at $22 with a 70 percent initial margin?
What is the highest price DeSoto Lumber stock can reach before Mike receives a margin call if he short sold at $22 with a 70 percent initial margin?
Signup and view all the answers
What was the short interest on Blue Water Cruisers stock at the end of the trading day given the opening short interest was 351,900, with 288,500 shares covered and 151,600 shares sold short?
What was the short interest on Blue Water Cruisers stock at the end of the trading day given the opening short interest was 351,900, with 288,500 shares covered and 151,600 shares sold short?
Signup and view all the answers
What is the liability from the short position if you short sold 500 shares at $12.50 per share?
What is the liability from the short position if you short sold 500 shares at $12.50 per share?
Signup and view all the answers
If the maintenance margin is 50 percent and the stock currently costs $9.80, what happens to Mark's account if it falls below this threshold?
If the maintenance margin is 50 percent and the stock currently costs $9.80, what happens to Mark's account if it falls below this threshold?
Signup and view all the answers
Study Notes
Margin Accounts
- A margin account allows investors to borrow money from a brokerage firm to purchase securities
- The initial margin requirement is the percentage of the purchase price that the investor must pay upfront
- The maintenance margin is the minimum percentage of equity that the investor must maintain in the account
- If the account equity falls below the maintenance margin, the investor will receive a margin call
Margin Call
- When an investor receives a margin call, they must deposit additional funds into their account to bring the equity up to the maintenance margin requirement
- The margin call is triggered when the value of the securities purchased on margin falls below the maintenance margin
- If the investor does not meet the margin call, the brokerage firm may sell some of the securities in the account to cover the margin deficit
Margin Interest
- Investors pay interest on the borrowed funds
- Interest rates on margin loans are typically higher than other types of loans
- The interest rate on the margin loan is generally the call money rate plus a spread
- The call money rate is the interest rate that banks charge brokerage firms for borrowing money
Short Selling
- Short selling involves borrowing securities from a brokerage firm and immediately selling them in the market
- Short selling is a strategy that benefits when the price of the security declines
- The initial margin requirement for short selling is the percentage of the proceeds from the short sale that the investor must deposit in the account
- The maintenance margin for short selling is the minimum percentage of equity that the investor must maintain in the account
- If the account equity falls below the maintenance margin, the investor will receive a margin call
Short Sale Proceeds
- Investors receive the proceeds from the short sale
- The proceeds from the short sale are used to cover the initial margin requirement
- Short selling involves selling borrowed securities
- The investor is expected to return the borrowed securities to the lender at a later date
Short Sale Liability
- The investor is liable for any losses incurred on the short sale
- The investor is also liable for any dividends paid on the borrowed securities
Short Sale Margin Call
- When an investor receives a margin call on a short sale, they must deposit additional funds into their account to bring the equity up to the maintenance margin requirement
- The margin call is triggered when the value of the securities borrowed for the short sale rises above the maintenance margin requirement
- If the investor does not meet the margin call, the brokerage firm may buy the securities to cover the margin deficit
Margin Position
- The margin position in an account reflects the percentage of equity in the account
- The margin position is calculated by dividing the equity in the account by the value of the securities
- The margin position is an indicator of the leverage in an account
Short Interest
- The short interest is the number of shares that have been sold short
- Short interest is reported by the exchanges
- High short interest can be an indicator of bearish sentiment for the stock
Short Sale Margin Equity
- The margin equity is the difference between the total proceeds from the short sale and the required margin
- The required margin is calculated by multiplying the initial margin percentage by the proceeds from the short sale
Maximum Shares to Purchase
- The maximum number of shares that an investor can purchase on margin is limited by the available cash in their account and the initial margin requirement
- The maximum number of shares is calculated by dividing the available cash by the initial margin requirement
- The calculation is then divided by the current market share price
Holding Period Return
- The holding period return is the percentage return earned on an investment over a specific period of time
- The holding period return is calculated by dividing the total profit or loss on the investment by the initial investment and then multiplying by 100
Example Margin Calculation
- If an investor purchases 100 shares of stock at $50 per share with an initial margin requirement of 60%, the investor must pay $3,000 upfront
- The brokerage firm will lend the investor the remaining $2,000
- The initial margin is $3,000 (60% of $5,000)
- The amount borrowed is $2,000 (40% of $5,000)
- This is calculated by 1 (100% of) - (60% margin requirement) = .40 (40%)
- .4 * $5,000 = $2,000
- The value of the securities is $5,000 (100 shares x $50)
Margin Requirements
- Minimum margin requirements are set by the Federal Reserve Board
- The initial margin requirement on most stocks is typically 50%
- The maintenance margin requirement on most stocks is typically 25%
Importance of Understanding Margin Accounts
- Understanding margin accounts is important for investors because they can help them leverage their investments
- Investors should be aware of the risks associated with margin accounts, such as the risk of margin calls and the potential for large losses
Short Selling Risks
- Short selling is a risky strategy
- Investors can lose more money than they have invested in a short sale
- Investors should understand the risks associated with short selling before they attempt to execute this strategy
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers key concepts related to margin accounts, including initial and maintenance margins, margin calls, and the implications of margin interest. Understand how to manage borrowed funds in brokerage accounts and the responsibilities that come with it. Test your knowledge on how margin trading can affect your investment strategy.
