Question

You have purchased 500 shares of MSFT (Microsoft) at $100 per share using the maximum percentage of borrowed (marained) funds per FRB Regulation T. The maintenance margin can Tevel on your brokerage account is 25%. When will you receive a margin call on your account 2. Relative to question 1. If the maintenance margin call level on your account was 35% rather than 25%, what would your new margin call level be? 3. Relative to question 1, assume that the broker call rate (the interest rate you pay to borrow money from your broker) is equal to 7.00%. The broker call rate is an annual rate. Assume one year has passed and the current price of MSFT is $125 per share. What is the rate of return on your equity? 4. Relative to question 3, if after one-year MSFT is trading at $100 per share, what is the rate of return on your equity? 5. Relative to question 3, if after one-year MSFT is trading at $80 per share, what is the rate of return on your equity? 6. You have sold 1,000 shares of EXC (Exelon) short at $50 per share. Your maintenance margin level is 30%. At what EXC price will a margin call occur?

need help with questions 3,4,5,6 please

Answer 1

According to Regulation T an investor may borrow upto 50% of the purchase price of securities that can be bought using a loan from a broker or dealer. The remaining 50% of the price must be funded with cash.

(3) Number of shares purchased = 500

Purchase price = $100

Margin available = 50%

Interest on borrowings = 7%

Purchase value = 500 * $100 = $50,000

Initial investment = Purchase value - margin used = 50,000 - 25,000 = 25,000

Borrowings from broker or margin used = 25,000

Interest to be paid at the end of the year on borrowings = 25,000 * 0.07 = 1,750

Stock price at the end of the year = $125

Capital gain = value of the position at the year end - purchase value

Value at year end = $125 * 500 = $62,500

Capital gain = 62,500 - 50,000 = 12,500

Return earned at the end of year = (Capital gain - interest paid) / Initial investment

Return = (12500 - 1750) / 25000 = 10750 / 25000 = 0.43 or 43%

(4) Stock Price at the end of year = $100

Value of position at the end of the year = 100 * 500 = $50,000

Purchase value = $50,000

Capital gain = value of the position at the year end - purchase value

Capital gain = 50,000 - 50,000 = 0

Interest to be paid at the end of the year = $1,750

Return earned at the end of year = (Capital gain - interest paid) / Initial investment

Return = ( 0 - 1750 ) / 25000 = -1750 / 25000 = -0.07 or - 7%

(5) Stock Price at the end of year = $80

Value of position at the end of the year = 80 * 500 = $40,000

Purchase value = $50,000

Capital gain = value of the position at the year end - purchase value

Capital gain = 40,000 - 50,000 = - $10,000

Interest to be paid at the end of the year = $1,750

Return earned at the end of year = (Capital gain - interest paid) / Initial investment

Return = ( - 10000 - 1750 ) / 25000 = -11750 / 25000 = -0.47 or - 47%

(6) Number of shares shorted = 1000

Price = $50

Value of position = 50 * 1000 = $50,000

Margin used = 50% or $25,000

Maintenance margin = 30% or $7,500

Price for a margin call can be calculated by calculating the loss required to reach maintenance margin.

So, Loss required to reach a margin of $7,500 = 25000 - 7500 = $17,500

So, if the account incurs a loss of $17,500 or more, then the broker will give a margin call because the margin will reach the maintenance margin of 30% and the investor is required to maintain a margin of 30% at all times.

Price for margin call = 50 + (17500 / 1000) = $67.5

*Note:17,500 / 1000 or loss per share will be added to the initial shorting price because this is a short position and the investor has sold the shares on a margin.