Fnce401 Assignment 1 Unanswered

Assignment 1

Instructions

Assignment 1 should be submitted after you have completed Unit 2. This assignment is worth

15 percent of your final grade.

Assignment 1 contains five problems. The maximum mark for each problem is noted at the beginning of the problem. This assignment has a total of 100 marks.

Read the requirements for each problem and plan your responses carefully. Although your responses should be concise, ensure that you answer each of the required components as completely as possible. If supporting calculations are required, present them in good form.

When you receive your graded assignment, carefully review the comments the marker has made. This review component is an important step in your learning process. If you have any questions or concerns about the evaluation, please contact the Student Support Centre.

Problem 1 (15 marks)

You have $30,000 in your margin account, and you want to invest in BMO stock. The minimum margin requirement for BMO is 30%. You just got a quote on BMO as follows:

Bid: 55.25

Ask: 55.26

The interest rate on the margin loan is 6% per annum.

1) If you want to buy BMO in margin, what is the maximum number of shares can you buy?

2) Suppose you want to buy 1200 shares of BMO in margin. Answer the following questions:

a. What is the initial margin ratio?

b. Suppose you are going to hold the shares for one year. At what price at the end of next year will your investment break even? (assuming no margin calls in the year)

c. How far could the stock price fall before getting a margin call?

d. If the stock price falls to $40, you would get a margin call. If this happens, how much new fund would you need to add to your account to respond the margin call?

Problem 2 (15 marks)

Assume you sell short 100 shares of common stock at $70 per share, with initial margin at 55%. The minimum margin requirement is 30%. The stock will pay...