1. Long Purchase with Margin You open a brokerage account and deposit $18,000. F
ID: 1171064 • Letter: 1
Question
1. Long Purchase with Margin You open a brokerage account and deposit $18,000. For your first trade you buy 500 shares of Micron Technology (Ticker:MU). You place a market order and Your execution is filled at $59.10. (ignore commissions for this problem). A. Compute the cost of the trade. B. Compute the equity percentage in the account immediately after your purchase. C. After 3 months MU has declined by 30%. How much equity do you have in the account in dollar terms and What is the equity percentage in the account? D. The maintenance margin is 25%. Compute the Price at which you will receive a margin call. 2.) Long Purchase with Margin You place market order purchase 500 Shares of Bojangles Inc. (Ticker: BOJA). The order is executed when the market is: BID 134.98 X 1000 ASK 135.00 X 1000 A. The Initial Margin is 50%. How much equity (cash) would you need in your account to execute this trade? B. The interest on the margin loan is 7%. You hold the stock for 1 year and then place a market order to sell 500 shares when the market is: BID: 168.75 X 800 ASK 168.79 X 700 What is your rate of return?Explanation / Answer
(1) Investor Contribution = $ 18000, The initial investor contribution is the equity value or own investment value of the brokerage account. The investor purchases 500 shares of MU at a price of $ 59.1
Therefore, cost of trade = 59.1 x 500 = $ 29550
(2) Equity = $ 18000 and Total Account Value = $ 29550
% of Equity = (18000/29550) x 100 = 60.914 %
(3) Initial Equity = $ 18000 and Initial Market Value of MU = $ 29550
Initial Borrowing = 29550 - 18000 = $ 11550
If MU price drops by 30% , new price of MU per share = 59.1 x 0.7 = $ 41.37
Account Value = 41.37 x 500 = $ 20685, Initial Borrowing = $ 11550
New Equity Value = 20685 - 11550 = $ 9135
New % of Equity = (9135/20685) x 100 = 44,162 %
(d) Let the margin call price be $ K per share
Maintenance Margin = 25 % of Initial Account Value = 0.25 x 29550 = $ 7387.5 $
Therefore, K x 500 - 11550 = 7387.5
K = (11550 + 7387.5) / 500 = $ 37.875
NOTE: Please raise a separate query for the solution to the next unrelated question.
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