1. Assume you buy 800 shares of a stock selling for $15 a share, borrowing $4,00

Question

1. Assume you buy 800 shares of a stock selling for $15 a share, borrowing $4,000 at an interest rate of 6% to help finance the purchase. Your account has a maintenance margin of 40%.

A. At what price would you receive a margin call?

B. If, after one year, the price increased to $20 a share, what would be your rate of return?

2. Assume you buy a $1,000 face value bond with 7 years until maturity, a coupon rate of 5% paid semiannually, and a yield to maturity of 8%.

A) What is the price of this bond?

B) Assume that the yield to maturity falls to 7% after one year, and the investor decides to sell the bond. What would be the holding period return for the investor?

Explanation / Answer

1)

2)

Maintenance margin = Minimum Equity /Value of shares Equity = (800 x p) - $4000 Value of shares = 800P 40% = (800P - 4000)/800P P = 4000 = (800P - $320P) $8.33 $8.33 or lower will receive margin call B) The stock is purchased for = 800 shares x $15 $12,000.00 Amount Borrowed @ 6% 4000 Equity (12000 - 4000) $8,000.00 Stock Price increased = 800 shares x $20 $16,000.00 Rate of Return = ($16000 - $12000 - (4000 x 6%)/$8000 47.00%

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