14/04/2021

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Week8 Equity Mkt 2

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1. You want to purchase GM stock at $10 from your broker using as little of your own money as
possible. If initial margin is 60% and you have $2400 to invest, how many shares can you buy?

(1 mark)
You scored 1 / 1 mark

200 shares

300 shares

400 shares

600 shares

800 shares

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Response Rationale
Please provide a rationale for your answer.

No rationale provided.

General Comments

2400/0.6 = $4000; $4000/$10 = 400 shares

2.
Fill in the blanks

(4 marks)
You scored 4 / 4 marks

Bob opens a brokerage account and purchases 500 shares of Company ABC at $30 per share.
He borrows $6,000 from his broker to help pay for the purchase.

(1) The initial margin is 1. 60.0 OR 60 percent (1 d.p.).

(2) If the share price falls to $20 per share, Bod's equity would be worth $ 2. 4000
(integer only).
(3) If the requirement for maintenance margin is 35%, would he receive a margin call then?
Answer: 3. No (Yes or No).
(4) If he sells the shares at $25, his return would be 4. -27.78 percent (2 d.p.).

Enter the correct answer below.

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Response Rationale
Please provide a rationale for your answer.

No rationale provided.

General Comments

(1) The initial margin is 9000/15000 = 60.0%.

(2) If the share price falls to $20 per share, Bod's equity would be worth $20*5000 -
$6000 = $4000.
(3) If the requirement for maintenance margin is 35%, would he receive a margin call
then? Answer: No. Because margin = 4000/(20*500) = 40% > 35% maintenance margin.
(4) If he sells the shares at $25, he loses $5*500 = 2500; and his return = -2500/9000 =
-27.78%.

3. Suppose you sold short 100 shares of Orange stock currently selling for $50 per share, giving
your broker $2,000 to establish your margin account. If the share price rose to $55, how much
do you need to top up if the maintenance margin is 30%?

(1 mark)
You scored 1 / 1 mark

$0

$150

$500

$700

Response Rationale
Please provide a rationale for your answer.

No rationale provided.
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General Comments

Initial margin = 2000/(50*100) = 40%;

When price is 55, equity = 2000+(5000-5500) = 1500; margin = 1500/5500 = 27.27% <
30%, thus margin call.

Equity needed = 5500 * 40% = 2200;

Equity to top up = 2200 - 1500 = 700.

3/3 QUESTIONS ANSWERED CORRECTLY

1 2 3

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