Margin Accounts and Calls

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Questions and Answers

How much margin interest will Sarah pay if she repays the loan in seven months?

$387.29

$530.42

$404.12 (correct)

$647.96

What will be the annualized rate of return if you sell stock for $37 per share after buying it at $35?

8.03 percent (correct)

6.42 percent

5.55 percent

7.49 percent

What is the annualized rate of return for the shares sold at $18 after purchasing at $16 with a 60% margin requirement?

42.77 percent

56.87 percent

33.35 percent (correct)

26.15 percent

If Freda sells her shares for $37.50 after purchasing at $35 with a 70% margin requirement, what is her annualized rate of return?

12.70 percent 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?

$-300 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?

6.50 percent 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?

$18,000 Signup and view all the answers

What is the total investment cost for buying 100 shares at $35 each with a 70% margin requirement?

$1,050 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?

5.14 percent Signup and view all the answers

What is the lowest stock price Mary can tolerate before receiving a margin call?

$33.00 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?

$17.22 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?

$8.33 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?

57 percent 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?

50 percent 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?

$2.56 Signup and view all the answers

What is the maintenance margin for Mary, who purchased shares at a 65 percent initial margin?

30 percent Signup and view all the answers

What is the total dollar return for Robin after selling 800 shares of stock?

$1,164.93 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?

76.79 percent 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?

48.84 percent 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?

75.70 percent 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?

$37,440 Signup and view all the answers

How much did Elizabeth earn after short selling 400 shares at $72 and covering at $68?

$800 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?

$40.00 Signup and view all the answers

What is the maintenance margin percentage required for the stock if the initial requirement is 75 percent?

40 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?

$16,200 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?

$12,840 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?

48.33 percent 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?

24.51 percent 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%?

326 shares 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?

$10,362 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?

$4,410 Signup and view all the answers

What is the maintenance margin if the initial margin requirement is 30%?

40% 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?

$15,840 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?

$2,070 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?

$47.08 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?

$41.85 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?

$27.70 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?

215,000 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?

$6,250 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?

He has to deposit additional funds to maintain his position. 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

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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.