Investments

Chapter 3

6. Dee Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.

a. What is the margin in Dee’s account when she first purchases the stock?

300 shares * $40 per share= $12,000

$4320/$12,000= 36% margin

36% Of the investment is debt so the Supplied Equity is 64%.

b. If the share price falls to $30.00 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30%, will she receive a margin call?

Borrows: $4,000* 8% Loan interest= $4320 or $320 Interest Expense

The new value of the stock is $30.00 or 300 Shares * $30.00=$9,000

$9,000-$4320=$4680

$4680/$9,000= 52%

c. What is the rate of return on her investment?

($4,680-$8,000)/$8,000= .415 or 41.50%

8. Consider the following limit order book of a specialist. The last trade in the stock occurred as a price of $50.00.

a. If a market buy order for 100 shares comes in, at what price will it be filled?

The best limit-sell order would be $50. 25

b. At what price would the next market buy order be filled?

$51.50 100=$5,150

c. If you were the specialist, would you want to increase or decrease your inventory of this stock?

I would increase my inventory because I last purchased it at $50.00 and it has made me .25 cents per share. Risk lowers.

9. You are a bullish on Telecom stock. The current Market price is $50.00 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock.

a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? The stock currently pays no dividends.

Rate of Return will be ($1000 - $400) / $5000

Rate of Return=.12 or 12%

$10,000/$50.00= 200 shares

$5,000*8%= $400 or $5,400

$10,000-$5,400=$4,400

$4,400

54% Margin...