Question
You bought on margin 200 shares of XYZ stock at $4 per share. The initial margin requirement is 60%. The maintenance margin requirement is 30%.
You bought on margin 200 shares of XYZ stock at $4 per share. The initial margin requirement is 60%. The maintenance margin requirement is 30%. Suppose the stock value increases to $15 per share 1 month later: a. What is your margin contribution (in dollars) required in order to purchase the stock? b. What is your % margin after the stock price increases to $15? c. Instead of closing your position, you decide to keep riding the price up. A broker allows you to increase the size of the loan (i.e., withdraw funds from your margin account) as long as you maintain the minimum margin amount. The increase in the loan amount can then be withdrawn. What is the most you can withdraw from your margin account and still meet the maintenance margin requirements? d. Over the month, the stock pays a $0.10 dividend, which you receive because you bought the stock. If you close your position on the stock, what is your return on the investment? e. Assume that the company declares bankruptcy overnight before the broker can close your position. What is the maximum loss (in percent) that would occur?
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