# Homework Margin Purchases. Dr. Patrick Toche

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1 Homework Margin Purchases Dr. Patrick Toche

5 margin call? 9. An investor buys \$150,000 of stock at \$50 per share, contributing \$90,000 and borrowing \$60,000 from a broker. The broker s annual interest rate is 10% and maintenance margin 40%. (b) The investor is bullish on the stock and believes there is an 80% probability that the stock price will rise overnight by 10% and a 20% probability that it will fall by 10%. What is the expected rate of return overnight? (c) The stock price falls overnight to \$40. Calculate the account s margin percentage after the fall. (d) One year later, the stock price is still \$40. However, the stock has paid quarterly dividends of \$2 per share. What is the annual rate of return? 10. An investor buys 3, 000 shares of stock at \$50 per share, contributing 60% of the total and borrowing the rest from a broker. The investor holds the stock long for one year. The stock has paid quarterly dividends of \$2 per share. The broker s annual interest rate is 10% and maintenance margin 40%. The stock price has risen to \$60. (a) Calculate the account s margin percentage at the year end. (b) Calculate the annual rate of return at the year end. 11. An investor buys 3, 000 shares of stock at \$50 per share, contributing 60% of the total and borrowing the rest from a broker. The investor holds the stock long for one year. The stock has paid quarterly dividends of \$2 per share. The broker s annual interest rate is 10% and maintenance margin 40%. The stock price is back to \$50 at the year end. (a) Calculate the account s margin percentage at the year end. (b) Calculate the annual rate of return at the year end. 5

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