1. (0.75 pts.) A $100,000 face value T-bill matures in 75 days and has a Bond Eq
ID: 2808082 • Letter: 1
Question
1. (0.75 pts.) A $100,000 face value T-bill matures in 75 days and has a Bond Equivalent Yield (BEY) of 5.57%. What is the current value (price) of the bond?
2. (1 pts) Suppose there are only three stocks in the market and the following information is given:
Company
Shares Outstanding
Price per Share
A
10 million
$60
B
30 million
$40
C
20 million
$50
2.1 (0.25 pts.) What is the weight of Stock A in the price-weighted index?
2.2 (0.75 pts.) Suppose the current divisor is 2.5. If the next day, stock A undergoes a 2-for-1 stock split, what is the new post-split divisor for the price-weighted index?
Lecture 3 Questions:
3. (0.75 pts.) Tori purchased 500 shares of Flagler Enterprises stock at a price of $25 a share. The initial margin was 60% and the maintenance margin is 35%. After the purchase, the stock price drops to $22. What is the margin now (ignore interest)? Will this trigger a margin call?
4. (0.75 pts.) You invested in stock ABC at $50 per share. The purchase was made with 60% margin at 10% annual interest rate on the borrowing. You sold your shares one year later at $60 per share. What is your holding period return?
5. (0.75 pts.) You short sold stock XYZ at $20 per share at an initial margin of 50%; and collected $200,000 sale proceeds. The broker requires maintenance margin of 30%. If the price increases to $25, would it trigger a margin call?
Note: Please make sure to show your work.
Company
Shares Outstanding
Price per Share
A
10 million
$60
B
30 million
$40
C
20 million
$50
Explanation / Answer
1. Current Price = 100000/(1+5.57%)75/365 = $ 98892.40
2.1 Weight of stock A in price weighted index = 60/(60+40+50) = 40%
2.2 The current divisor of 2.5 is same as 40% weightage - 40% = 40/100 = 1/2.5 . With 2 - 1 split, the Stock price will become $30 and all else remaining same, the weightage will be = 30 / (30+40+50) = 25% or divisor of 4.
3. Tori purchased 500 shares for $25 which is total of $12500 and initial margin at 60% is 7500 and maintenance margin at 35% is $4375. When the price falls to $22, the decline in value is = (12500 - 500*22) = $ 1500. The margin will stand reduced to (7500-1500) = $6000 which is still higher than the maintenance margin, hence no margin call wil be issued.
4. Purchase price = $50 ; Margin paid = 60% which is $30. Interest cost on margin for 1 year = $3. Pay off after 1 year = 60 - interest cost = $ 57 Hence holding period return = (57-30)/30 = 90%
5. At $20, number of shares shorted would be 10000. Usually the sale proceeds of short is also blocked with the broker hence no pay out to the trader. The initial margin is 50% which is $ 100000 and maintenance margin = $60000. When the price increased to $25, the value of the trade is = $250,000. The margin would decrease to (250000-200000-100000) = $50000 which is less than the maintenance margin, hence the person will be required to bring in additional margin of atleast $10000.
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