7.You have $500 to invest. You decide to open a margin account with your brokera

Question

7.You have $500 to invest. You decide to open a margin account with your brokerage. The account has an 80% initial margin requirement. You have decided to invest in Firewood Inc. stock when the price is $5 per share.

What is the value of your account?

8.You have $500 to invest. You decide to open a margin account with your brokerage. The account has an 80% initial margin requirement. You have decided to invest in Firewood Inc. stock when the price is $5 per share.

When the price rises to $6 per share, what will the debit on your account be?

9.You have $500 to invest. You decide to open a margin account with your brokerage. The account has an 80% initial margin requirement. You have decided to invest in Firewood Inc. stock when the price is $5 per share.

When the price rises to $6 per share, what will the equity on your account be?

10.You have $500 to invest. You decide to open a margin account with your brokerage. The account has an 80% initial margin requirement. You have decided to invest in Firewood Inc. stock when the price is $5 per share.

When the price rises to $6 per share, what will the margin on your account be? (Enter as a percentage, round to two decimal places

11.You have $500 to invest. You decide to open a margin account with your brokerage. The account has an 80% initial margin requirement. You have decided to invest in Firewood Inc. stock when the price is $5 per share.

When the price rises to $6 per share you decide to sell., What was your rate of return on this investment?

Explanation / Answer

1.
Value of account=500
2.
Debit on account=(500/(0.8*5))*(6-5)=125
3.
Equity account becomes=500/(0.8*5)*6-500/(0.8*5)*5*0.2=625
4.
Margin becomes=625/(500/(0.8*5)*6)=83.33%
5.
=(500/(5*0.8)*6-500/(0.8*5)*5*(1-0.8)-500)/500=25%

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