LiquidAssets10

Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50% and the maintenance margin is 25%. CSC stock price has fallen dramatically in recent months and it closed today with a sharp decline bringing the closing price to $40 per share. Will Jensen receive a margin call?

A) No, he meets the minimum maintenance margin requirement.

B) Yes, he does not meet the minimum maintenance margin requirement.

C) No, he meets the minimum initial margin requirement.

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Total original value held by Jensen is 400 x $60 = $24,000.
Amount of equity is 50% ($24,000) = $12,000.
Current total value is 400 x $40 = $16,000.
So Jensen’s equity is $16,000 - $12,000 = $4,000 which is 4,000/16,000 = 25% of the total market value.

LiquidAssets10

Which of the following statements about the maintenance margin requirement is least accurate?

A) The Federal Reserve sets the maximum maintenance margin.

B) The purpose of the maintenance margin requirement is to protect the broker in the event of a large stock decline.

C) Generally the maintenance margin requirement is lower than the initial margin requirement.

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The Federal Reserve sets the minimum maintenance margin and individual investment companies may set higher margins if they wish.

LiquidAssets10

An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40% and the maintenance margin requirement is 25%.
At what price will the investor get a margin call?

A) $112.

B) $48.

C) $80.

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In a long stock position, the equation to use to determine a margin call is:
long = [(original price)(1 − initial margin %)] / [1 − maintenance margin %]
       = $100(1 − 0.4) / (1 − 0.25) = $80

LiquidAssets10

An investor purchases 100 shares of Lloyd Computer at $26 a share. The initial margin requirement is 50%, and the maintenance margin requirement is 25%. The price below which the investor would receive a margin call is closest to:

A) 17.33.

B) 19.45.

C) 15.25.

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26 * (1 - 0.5)/(1 - 0.25) = $17.33.

LiquidAssets10

An investor buys 400 shares of a stock for $25 a share. The initial margin requirement is 50%, and the maintenance margin requirement is 25%. At what price would an investor receive a margin call?

A) $16.67.

B) $21.88.

C) $30.00.

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Margin call trigger price = [25(1 - 0.5)] / (1 - 0.25) = 16.67.

LiquidAssets10

An investor buys 1,000 shares of a non-dividend-paying stock for $18. The initial margin requirement is 40% and the maintenance margin is 30%. After one year the investor sells the stock for $24 per share. The investor's rate of return on this investment (ignoring borrowing and transactions costs and taxes), and the price at which the investor would receive a margin call, are closest to:

Rate of return

Margin call

A) 83%    $15.43

B) 83%    $21.00

C) 33%    $15.43

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To obtain the result:

Part 1: Calculate Margin Return:

Margin Return % = [((Ending Value  - Loan Payoff) / Beginning Equity Position) – 1] * 100 =

= [(([$24 × 1,000] – [$18 × 1,000 × 0.60]) /  ($18 × 0.40 × 1,000)) – 1] × 100 =

= 83.33%

Alternative (Check): Calculate the all cash return and multiply by the margin leverage factor.

                          = [(24,000 – 18,000)/18,000] × [1 / 0.40] = 33.33% × 2.5 = 83.33%

Part 2: Calculate Margin Call Price:

Since the investor is long (purchased the stock), the formula for the margin call price is:

          Margin Call = (original price) × (1 – initial margin) / (1 – maintenance margin)

   = $18 × (1 – 0.40) / (1 – 0.30) = $15.43

manchester88

An investor purchases stock on 25% initial margin, posting $10 of the original stock price of $40 as equity. The position has a required maintenance margin of 20%. The investor later sells the stock for $45. Ignoring transaction costs and margin loan interest, which of the following statements is most accurate?

A) Return on investment is 50%.

B) Leverage ratio is 3:1.

C) Margin call price is $36.

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Return on invested equity is ($45 – $40) / $10 – 1 = 50%.
The leverage ratio is purchase price / equity = $40 / $10 = 4.
Margin call price is $40 × [(1 – 0.25) / (1 – 0.20)] = $37.50.

manchester88

Sonia Fennell purchases 1,000 shares of Xpressoh Inc. for $35 per share. One year later, she sells the stock for $42 per share. Xpressoh Inc. pays no dividends. The initial margin requirement is 50%. Fennell's one-year return assuming an all-cash transaction, and if she buys on margin (assume she pays no transaction or borrowing costs and has not had to post additional margin), are closest to:

All-cash

50% margin

A) 20% 40%

B) 20% 80%

C) 40% 80%

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All-cash return = 42/35 − 1 = 20%
Margin return = (42 − 35)/[(35)(0.5)] = 40%

manchester88

Assume 100 shares purchased at $75/share with an initial margin of 50%. The initial cost to the investor is:

A) $3,750.

B) $7,500.

C) $0.

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$75/share × 100 shares = $7,500
50% margin means investor only pays ½ of the $7,500
= $3,750.

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

A) 50%.

B) 200%.

C) 100%.

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(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.)

manchester88

An investor bought a stock on margin. The margin requirement was 60%, the current price of the stock is $80, and the investor paid $50 for the stock 1 year ago. If margin interest is 5%, how much equity did the investor have in the investment at year-end?

A) 67.7%.

B) 60.6%.

C) 73.8%.

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Margin debt = 40% × $50 = $20; Interest = $20 × 0.05 = $1.
Equity % = [Value – (margin debt + interest)] / Value
$80 - $21 / $80 = 73.8%