WHAT R DOZE 2

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.

500($40)(.40) = $8,000

Maintenance requirements for margin accounts are set by ____.

Brokerage Firms, Therefore making them firm specific and possibly different form firm to firm

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

Equity = 200P - 5,000 Margin = (200P - 5,000)/200P = .30 200P - 5,000 = 60P 140P = 5,000 P = $35.71429

__________ often accompany short sales and are used to limit potential losses from the short position

Stop-Buy Orders

What is Short Selling?

(From Investopedia) -when an investor goes short, he or she is anticipating a decrease in share price. -Here's the skinny: when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)

200*25=5000 50% margin is 2500, 5000+2500=7500, therefore, .3=($7500-200p)/200p 60p=$7500-200p 260p= $7500 p= $28.84615

An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been

A margin call will occur if Equity/Market value = .30 or less .3 = (200P - 4,000 - 240)/200P 60P = 200P - 4,240 -140P = -4,240 P = $30.29

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.

Amount received from short sale = 200 × $50 = $10,000 Loss = $2,500 = 200P - 10,000 $12,500 = 200P, so P = $62.50

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?

Explanation: Max gain= proceeds- min possible replacements =200($50)- 200($0) =$10,000

An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return?

Explanation: Value of Stock in 1 yr= $18,400 Dividends received = 400 Interest Due = (512) Loan Payoff = (6400) Ending account Balance = 11,888 Return= (11888/9600)-1= 23.83%

An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was ____.

Formula: ((28-25)400- .07(5000))/5000 =.17

You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.

Formula: (32-25)/ (25* 0.65) = .43 or 43%

Which of the following are true concerning short sales of exchange-listed stocks? I. Proceeds from the short sale must be kept on deposit with the broker. II. Short-sellers must post margin with their broker to cover potential losses on the position. III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

I and II only, I. Proceeds from the short sale must be kept on deposit with the broker. II. Short-sellers must post margin with their broker to cover potential losses on the position.

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

Loss=(22-25)100 =-300 Amount invested=(.25 x 25)*100=625 Return= -300/625= -48%

Initial margin requirements on stocks are set by _________.

The Federal Reserve

Initial Margin

The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or marginable securities. Also called the "initital margin requirement."

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

There is no upper limit to the price of a share of stock and, therefore, no upper limit to the price you will have to pay to replace the 200 shares of Tuckerton. therefore potential losses are UNLIMITED