Lecture 1 Practice Questions
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NYARE Fernand RichardLecture 1 Practice Questions
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NYARE Fernand RichardLecture 1: Market Organization and Structure
Practice Questions
Theme: Positions and Investor can take
Questions
1. You have bought a share for R65. You are required to deposit an initial margin of
25% and your maintenance margin is 1.5 times your initial margin. Calculate the
price at which you will receive a margin call?
A. R54.17
B. R57.35
*C. R78.00
2. You have decided to purchase 100 shares in ABC Corporation which is currently
trading at R50 per share. You have decided that you will borrow R2500 to fund your
purchase. What is your leverage ratio?
A. 0.50
B. 1.00
*C. 2.00
3. An investor buys 200 shares at $18 each and sells the shares after one year for $22
each. Purchase commission is $0.4 per share, and the purchase is done with a
leverage ratio of 3. On the day of sale the investor receives dividends of $0.6 per
share. If the call money rate (margin interest rate) is 6% and there is no sales
commission, calculate the one-year return that the investor makes on the
investment.
(investor borrows (2/3) of the shares and invests (1/3) of his own money)
Initial investment =
((1/leverage ratio) x number of shares x purchase price) + purchase commission
= ((1/3) x 200 x 18) + (200 x 0.4)
= $1280
Payoff loan
= (1-(1/leverage ratio)) x number of shares x purchase price
= (1 – (1/3)) x 200 x 18
= $2400
Remaining equity
= proceeds on sale – payoff loan – margin interest paid + dividends received – sales
commission
= (200 x 22) – 2400 – (0.06 x 2400) + (200 x 0.6) – 0
= $1976
Total return on Investment = (Remaining Equity – Initial investment)/ Initial investment
= (1976 – 1280)/ (1280)
= 0.544
54.4%
4. An investor buys an $82 stock with a 50% initial margin and a maintenance margin
(minimum) of 30%. Calculate the price for a margin call?
= Price for a margin call =P0((1-initial)/(1 -maintenance)) =30%
= 82 x ((1-0.5)/(1-0.3))
= $58.57
5. The current price of a stock is $25 per share. You have $10 000 to invest. You borrow
an additional $10 000 from your broker and invest the $20 000 in the stock. If the
maintenance margin is 30%, at what price will a margin call first occur?
a. $9.62
b. $17.86*
c. $19.71
= Price for a margin call =P0((1-initial)/(1 -maintenance))
= 25 x ((1-0.5)/(1-0.3))
= $17.86
6. Assume you sell short 1000 shares of common stock at $35 per share, with initial
margin at 50%. What would be your rate of return if you repurchase the stock at
$25/share? The stock paid no dividends during the period, and you did not remove
any money from the account before making the offsetting transaction.
A. 57.14%*
B. – 57.14%
C. 28.57%
D. – 28.57%
Profit on stock = ($35 - $25)(1,000) = $10,000;
initial investment = ($35)(1,000)(.5) = $17,500;
return =$10,000/$17,500 = 57.14%.
