FINANCIAL
bkmsol_ch03

# D by the end of the year the amount of the loan owed

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d. By the end of the year, the amount of the loan owed to the broker grows to: \$5,000 × 1.08 = \$5,400 The equity in your account is (500P – \$5,400). Initial equity was \$15,000. Therefore, your rate of return after one year is as follows: (i) 000 , 15 \$ 000 , 15 \$ 400 , 5 \$ ) 44 \$ 500 ( × = 0.1067 = 10.67% (ii) 000 , 15 \$ 000 , 15 \$ 400 , 5 \$ ) 40 \$ 500 ( × = –0.0267 = –2.67% (iii) 000 , 15 \$ 000 , 15 \$ 400 , 5 \$ ) 36 \$ 500 ( × = –0.1600 = –16.00% The relationship between the percentage return and the percentage change in the price of Intel is given by: % return = × equity initial s Investor' investment Total price in change % × equity initial s Investor' borrowed Funds % 8 For example, when the stock price rises from \$40 to \$44, the percentage change in price is 10%, while the percentage gain for the investor is: × 000 , 15 \$ 000 , 20 \$ % 10 × 000 , 15 \$ 000 , 5 \$ % 8 =10.67% e. The value of the 500 shares is 500P. Equity is (500P – \$5,400). You will receive a margin call when: P 500 400 , 5 \$ P 500 = 0.25 when P = \$14.40 or lower 3-4

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10. a. The gain or loss on the short position is: (–500 × Δ P) Invested funds = \$15,000 Therefore: rate of return = (–500 × Δ P)/15,000 The rate of return in each of the three scenarios is: (i) rate of return = (–500 × \$ 4 )/\$15,000 = –0.1333 = –13.33% (ii) rate of return = (–500 × \$ 0 )/\$15,000 = 0% (iii) rate of return = [–500 × (–\$4)]/\$15,000 = +0.1333 = +13.33% b. Total assets in the margin account are: \$20,000 (from the sale of the stock) + \$15,000 (the initial margin) = \$35,000 Liabilities are 500P. A margin call will be issued when: P 500 P 500 000 , 35 \$ = 0.25 when P = \$56 or higher c. With a \$1 dividend, the short position must now pay on the borrowed shares: (\$1/share × 500 shares) = \$500. Rate of return is now: [(–500 × Δ P) – 500]/15,000 (i) rate of return = [(–500 × \$4) – \$500]/\$15,000 = –0.1667 = –16.67% (ii) rate of return = [(–500 × \$0) – \$500]/\$15,000 = –0.0333 = –3.33% (iii) rate of return = [(–500) × (–\$4) – \$500]/\$15,000 = +0.1000 = +10.00% Total assets are \$35,000, and liabilities are (500P + 500). A margin call will be issued when: P 500 500 P 500 000 , 35 = 0.25 when P = \$55.20 or higher 11. Answers to this problem will vary. 12. The broker is instructed to attempt to sell your Marriott stock as soon as the Marriott stock trades at a bid price of \$38 or less. Here, the broker will attempt to execute, but may not be able to sell at \$38, since the bid price is now \$37.85. The price at which you sell may be more or less than \$38 because the stop-loss becomes a market order to sell at current market prices.
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• Spring '13
• Ohk

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