Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams from the

previous question. The initial margin requirement was 50%. (The margin account pays no interest.) A
year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of
$2 per share.

a. What is the remaining margin in the account?

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

c. What is the rate of return on the investment?

a. The initial margin was: 0.50 x 1,000 x $40 = $20,000

As a result of the increase in the stock price, Old Economy Traders loses:

$10 x 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: (Total Margin / Total Price) %= $8,000/$50,000 = 0.16 = 16%

Because the percentage margin falls below the maintenance level of 30%, there will be a margin call, so
there will be a margin call.

c. The equity in the account decreased from $20,000 to $8,000 in one year, for a rate of return of:
Ending equity – Initial equity / Initial equity

= (-$12,000/$20,000)% = - 0.60 = - 60%

Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share.
She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.

a. What is the margin in Dée’s account when she first purchases the stock?

b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her
account? If the maintenance margin requirement is 30%, will she receive a margin call?

c. What is the rate of return on her investment?

a. The stock is purchased for: 300 shares x $40 = $12,000

The amount borrowed from broker = $4,000.

Investors’ margin = $12000 - $8000 = $8000

Therefore, the investor puts up equity, or margin, of $8,000.

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: Principal x (1 + Interest
rate)

= $4,000 x 1.08 = $4,320

Therefore, the remaining margin in the investor’s account is: Margin on Long position = Equity in
account / Value of Stock

= $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%

You are in a 30% tax bracket and your investments yield 12%, while inflation runs at the rate of 8%

What is after tax real interest rate?

after taxes a real return of 4%(1 -.3) = 2.8%.

An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6%.
What is the offering price?

The offering price includes a 6% front-end load, or sales commission, meaning that every dollar paid
results in only $0.94 going towards purchase of shares.

Therefore: Offering price = NAV/ 1 – Load

= $10.70/1 - 0.06 = $ 11.38

What would be the profit or loss per share to an investor who bought the July 2022 expiration IBM
call option with exercise price $100 if the stock price at the expiration of the option was $110? And
the call cost was $2 ?What about a purchaser of the put option with the same exercise

price and expiration, the cost of the put was $1.5?

-purchase call option:

the payoff to the call options: $110-$100=$10

the call cost was $2:

the profit is: $10-$2=$8 per share

-purchase put option:

The put will pay off zero-it expires worthless since the stock price exceed the exercise price.

The loss is the cost of the put $1.5

A municipal bond carries a coupon rate of 12% and is trading at par. What is the equivalent taxable
yield to a taxpayer in a combined federal plus state 30% tax bracket?

R=Rmuni/1-t

You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of
your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per
year and invest $10,000 in the stock.

a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year?
(Ignore the expected dividend.)

b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance
margin is 30%? Assume the price fall happens immediately.

a. You buy 200 shares of Telecom at the rate of $50 for $10,000.

These shares increase in value by 10%, or $1,000.

Paid interest of = 0.08 x 5,000 = $400

The rate of return will be: (Price increase – Interest paid) / borrowed investment

= $1000 - $400 / $5000

= 0.12 = 12%

b. The value of the 200 shares is 200P. Equity is (200P – $5,000).

The margin call will be received when: equity is divided by the value of shares

= 200P - $5000 / 200P

= 0.30 when P = $35.71 or lower

On January 1, you sold short one round lot (that is, 100 shares) of Snow’s stock at $21 per share. On
March 1, a dividend of $3 per share was paid. On April 1, you covered the short sale by buying the
stock at a price of $15 per share. You paid 50 cents per share in commissions for each transaction.
What is the value of your account on April 1?

The proceeds from the short sale (net of commission):

Net Proceeds = ((market price x Total number of shares) – Commission)

= ($21 x 100) – $5

= $2,050

The proceeds from the buying (net of commission):

Net Proceeds = ((market price x Total number of shares) – Commission)

= ($15 x 100) – $50

= $1,45
A dividend payment of $300 was withdrawn from the account.

Therefore, the value of your account is equal to the net proceeds of short sale – net proceeds from
buying - Dividends:

$2050 – $300 – $1450 = $300

So the value of stock = $ 300

Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of 0.75%. Economy Fund
charges a front-end load of 2%, but has no 12b-1 fee and an expense ratio of 0.25%. Assume the rate
of return on both funds’ portfolios (before any fees) is 6% per year. How much will an investment of
$1,000 in each fund grow to after:

a. 1 year?

b. 3 years?

c. 10 years?

Loaded-Up

True Expense Ratio = Fees + Expense Ratio

= 1% + 0.75% = 1.75%

Year1= Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * ( 1 + 6% - 1.75%) ^ 1= $1,042.50

Year3 = 1,000 * ( 1 + 6% - 1.75%) ^ 3= $1,133.00

Year 10= 1,000 * ( 1 + 6% - 1.75%) ^ 10 = $ 1,516.21

Economy fund:

Year1= Investment*(1-front end load)*(1+r-true expense ratio)^t

= 1,000 * (1 - 2%) * ( 1 + 6% - 0.25%) ^ 1

= 1,000 * 98% * ( 1 + 6% - 0.25%) ^ 1 = $1,036.35

Year 3= 1,000 * (1 - 2%) * ( 1 + 6% - 0.25%) ^ 3

= 1,000 * 98% * ( 1 + 6% - 0.25%) ^ 3= $1,158.96

Year10= 1,000 * (1 - 2%) * ( 1 + 6% - 0.25%) ^ 10

= 1,000 * 98% * ( 1 + 6% - 0.25%) ^ 10 = $1,714.08