Ch003

# Ch003 - CHAPTER 3 HOW SECURITIES ARE TRADED PROBLEM SETS 1...

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b. If the share price falls to \$30, then the value of the stock falls to \$9,000. By the end of the year, the amount of the loan owed to the broker grows to: \$4,000 × 1.08 = \$4,320 Therefore, the remaining margin in the investor’s account is: \$9,000 - \$4,320 = \$4,680 The percentage margin is now: \$4,680/\$9,000 = 0.52 = 52% Therefore, the investor will not receive a margin call. c. The rate of return on the investment over the year is: (Ending equity in the account - Initial equity)/Initial equity = (\$4,680 - \$8,000)/\$8,000 = - 0.415 = - 41.5% 7. a.The initial margin was: 0.50 × 1,000 × \$40 = \$20,000 As a result of the increase in the stock price Old Economy Traders loses: \$10 × 1,000 = \$10,000 Therefore, margin decreases by \$10,000. Moreover, Old Economy Traders must pay the dividend of \$2 per share to the lender of the shares, so that the margin in the account decreases by an additional \$2,000. Therefore, the remaining margin is: \$20,000 – \$10,000 – \$2,000 = \$8,000 b. The percentage margin is: \$8,000/\$50,000 = 0.16 = 16% So there will be a margin call.
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