LOS g, (Part 1): Describe the process of buying a stock on margin, and compute the rate of return on a margin transaction.

Q1. Assume 100 shares purchased at $75/share with an initial margin of 50%.

The initial cost to the investor is:

A)   $7,500.

B)   $0.

C)   $3,750.

Q2. Now, assume that the stock rose to $112.50. The return on investment to the investor is:

A)   50%.

B)   100%.

C)   200%.

Q3. Which of the following statements regarding margin accounts is most accurate?

A)   The total equity in the margin account cannot fall below the initial margin requirement.

B)   Margin accounts can be used to purchase securities by borrowing part of the purchase price.

C)   Maintenance margin refers to the amount of funds the investor can borrow.

Q4. The initial margin is the:

A)   equity represented in the margin account at any time.

B)   amount of cash that an investor must maintain in his/her margin account.

C)   minimum amount of funds that must be supplied when purchasing a security on margin.

Q5. Becky Kirk contacted her broker and placed an order to purchase 1,000 shares of Bricko Corp. stock at a price of $60 per share. Kirk wishes to buy on margin. Assuming the margin requirement is 40%, how much money does Kirk have to pay up front to make the purchase?

A)   $24,000.

B)   $60,000.

C)   $36,000.

Q6. If an investor buys 100 shares of a $50 stock on margin when the initial margin requirement is 40%, how much money must she borrow from her broker?

A)   $2,000.

B)   $4,000.

C)   $3,000.

LOS g, (Part 1): Describe the process of buying a stock on margin, and compute the rate of return on a margin transaction.fficeffice" />

Q1. Assume 100 shares purchased at $75/share with an initial margin of 50%.

The initial cost to the investor is:

A)   $7,500.

B)   $0.

C)   $3,750.

Correct answer is C)

$75/share × 100 shares = $7,500

50% margin means investor only pays ? of the $7,500

= $3,750.

Q2. Now, assume that the stock rose to $112.50. The return on investment to the investor is:

A)   50%.

B)   100%.

C)   200%.

Correct answer is B)

(market value-initial own investment - margin loan repayment)/initial equity=($11,250 – $3,750 - $3,750) / $3,750 = 100%. (Assuming no interest on the call loan and no transactions fees.)

Q3. Which of the following statements regarding margin accounts is most accurate?

A)   The total equity in the margin account cannot fall below the initial margin requirement.

B)   Margin accounts can be used to purchase securities by borrowing part of the purchase price.

C)   Maintenance margin refers to the amount of funds the investor can borrow.

Correct answer is B)

Margin accounts are brokerage accounts that allow investors to borrow part of the purchase price from the broker.

Q4. The initial margin is the:

A)   equity represented in the margin account at any time.

B)   amount of cash that an investor must maintain in his/her margin account.

C)   minimum amount of funds that must be supplied when purchasing a security on margin.

Correct answer is C)        

Margin is the amount of equity in the account at a given time. Initial margin is the amount of equity required initially to execute an order.

Q5. Becky Kirk contacted her broker and placed an order to purchase 1,000 shares of Bricko Corp. stock at a price of $60 per share. Kirk wishes to buy on margin. Assuming the margin requirement is 40%, how much money does Kirk have to pay up front to make the purchase?

A)   $24,000.

B)   $60,000.

C)   $36,000.

Correct answer is A)

The margin requirement represents the amount of money an investor must put down on the purchase. So Kirk must put $24,000 down ($60,000 x .40 = $24,000) and can borrow the balance.

Q6. If an investor buys 100 shares of a $50 stock on margin when the initial margin requirement is 40%, how much money must she borrow from her broker?

A)   $2,000.

B)   $4,000.

C)   $3,000.

Correct answer is C)

An initial margin requirement of 40% would mean that the investor must put up 40% of the funds and brokerage firm may lend the 60% balance. Therefore, for this example (100 shares) * ($50) = $5,000 total cost. $5,000 * 0.60 = $3,000.

thanks

3ks