or all problems presented below, assume that the initial margin is 45% and the m
ID: 2825295 • Letter: O
Question
or all problems presented below, assume that the initial margin is 45% and the maintenance margin is 35%, and restoration margin is 40%. 1. You purchased 500 shares of ABC stock today @$120/share. You purchased the stock on 45% initial margin. Compute the actual margin (%), and the rate of return or ROR (96) on your investment when you close out your position on a future date if the st price is: ock a. $95 b. $110 c. $140 d. Corresponding to each of the 3 prices shown above, compute the rate of returrm to purchasing the stock on cash (i.e., employing no margin)Explanation / Answer
Current market price of ABC stock = $120 per share
Number of share’s purchased = 500 shares
The initial margin = 45%
The maintenance margin = 35%
Restoration margin = 40%
Total investment on purchase of ABC stock = Current market price of ABC stock * Number of shares
= $120 *500
= $60,000
The initial margin amount (your own investment) = Current market price of ABC stock * Number of shares * initial margin
= $120 *500 *45%
=$27,000
Therefore borrowed fund = Total investment on purchase of ABC stock - initial margin
= $60,000 - $27,000
= $33,000
a. If ABC's price on a future date is $95, then
Value of total investment = 500 * $95
= $47,500
And actual initial margin = Value of total investment - borrowed fund
=$47,500 - $33,000 = $14,500
Actual margin (%) = $14,500 / $47,500 = 30.53% (you will get a margin call as it is below 35%)
Rate of return or ROR on your investment = {(Value of investment - borrowed fund) - your initial investment} / your initial investment
= {$14,500 -$27,000} /$27,000
= -46.30%
b. If ABC's price on a future date is $110, then
Value of total investment = 500 * $110
= $55,000
And actual initial margin = Value of total investment - borrowed fund
=$55,000 - $33,000 = $22,000
Actual margin (%) = $22,000 / $55,000 = 40% (you will not get a margin call as it is above 35%)
Rate of return or ROR on your investment = {(Value of investment - borrowed fund) - your initial investment} / your initial investment
= {$22,000 -$27,000} /$27,000
=-18.52%
c. If ABC's price on a future date is $140, then
Value of total investment = 500 * $140
= $70,000
And actual initial margin = Value of total investment - borrowed fund
=$70,000 - $33,000 = $37,000
Actual margin (%) = $37,000 / $70,000 = 52.86% (you will not get a margin call as it is above 35%)
Rate of return or ROR on your investment = {(Value of investment - borrowed fund) - your initial investment} / your initial investment
= {$37,000 -$27,000} /$27,000
= 37.04%
d. Rate of return without margin –
Initial investment = $120 *500 = $60,000
Value of total investment = 500 * $95 = $47,500
Rate of return = (Value of total investment - Initial investment)/ Initial investment
= ($47,500 -$60,000) /$60,000
= -20.83%
Value of total investment = 500 * $110 = $55,000
Rate of return = (Value of total investment - Initial investment)/ Initial investment
= ($55,000 -$60,000) /$60,000
= -8.33%
Value of total investment = 500 * $140 = $70,000
Rate of return = (Value of total investment - Initial investment)/ Initial investment
= ($70,000 -$60,000) /$60,000
= 16.67%
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