Question
At the beginning of the year Donald opens a margin account and purchases 500 shares of FIN Corp at $40. Donald borrows $5000 from his
At the beginning of the year Donald opens a margin account and purchases 500 shares of FIN Corp at $40. Donald borrows $5000 from his broker at an annual interest rate of 10% to fund the purchase.
a) What is the initial margin?
b) What would be the margin if the price of FIN Corp fell to $30 at the end of the year?
c) What is the annual return that Donald would make from his investment if the price of FIN Corp fell to $30 at the end of the year?
d) What is the annual return that Donald would make from his investment if the price of FIN Corp rose to $50 at the end of the year?
e) Discuss the implications of margin trading for the risk of Donald's portfolio.
f) What is the stock price of FIN Corp that would lead to Donald receiving a margin call? Assume that the price decline happens immediately. A margin of 30% will lead to a margin call.
Step by Step Solution
3.45 Rating (155 Votes )
There are 3 Steps involved in it
Step: 1
a Initial Margin Initial margin is the amount of money that an investor must deposit into their margin account to buy stocks using margin It is typica...
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
