HomeWork 1

 

1. Suppose that you sell short 100 shares of IBX, now selling at $70 per share.

†† a. What is your maximum loss?

†† b. What happens to the maximum loss if you simultaneously place a stop-buy
†††††† order at $78 ?

 

2. OldEconomy Traders opened an account to short sell 1,000 shares of Internet Dreams from the previous problem. The initial margin requirement was 50%.(The margin account pays no interest ).A year later the price ofInternet Dreams has risen from $40 to $50 and the stock has paid a dividend of $2 per share.

 

  1. What is the remaining margin in the account?
  2. If the maintenance margin requirement is 30% will Old Economy receive a margin call?
  3. What is the rate of return on the investment?

 

3. Suppose that Intel currentlyis selling at $40 per share. You buy 500 shares using your own money of $15,000 and borrow the restfrom your broker .The rate on the margin loan is 8%.

 

a. What is the percentage increase in the net worth of your brokerage a/c if the price on Intel immediately changes to 1)$44†† 2)$40†† 3)$36 ? What is the relationship between your percentage return and the percentage change in the price of Intel?

 

b. If the maintenance margin is 25%, how low can Intel price fall before you get a margin call.

 

c. How would your answer to (b) change if you had financed the initial purchase with††
††† only $10,000 of your own money.

 

d. What is the rate of return on your margined position (assuming that you invest $15,000 of your own money) if Intel is selling after 1 year at 1)$44†† 2)$40 ††3)$36 ?

 

What is the relationship between your percentage return and the percentage change in the price of Intel? Assume that Intel pays no dividends.

 

 

4. Suppose that you sell short 500 shares of Intel currently selling at $40 per share and give your broker $15,000 to establish your margin a/c .

 

a. If you earn no interest on the funds in your margin a/c what will be your rate of return after 1 year if Intel stock is selling at 1)$44†† 2) $40†† 3)$36 ? Assume that Intel pays no dividend

 

b. If the maintenance margin is 25% how high can Intel price rise before you get a margin call ?

c. Redo parts (a) and (b)†† now assuming that Intelís dividend paid at year end is $1 per share .

 

5. Her is some price information on Fincorpstock .Suppose first that Fincorp trades in a dealer mkt.

††††††††††† Bid†††††††††† Asked

55.25                55.50

 

a.       Supposeyou have submitted an order to your broker to buy at mkt. At what price will your trade be executed ?

b.      Suppose you have submitted an order to sell at mkt. At what price will your trade be executed ?

c.       Suppose an investor has submitted a limit order to sell at$55.38? What will happen

d.      Suppose an investor has submitted a limit order to buy at$55.38? What will happen

 

 

6. You are bullish on AT&T stock. The current mkt price is $25 per share and you have $5000 of your own money to invest. You borrow an additional $5000 from your broker at an interest rate of 8% per year and invest $10000 in the stock.

 

a.       What will be your rate of return if the price of AT&T goes up by 10% during the next year.(Ignore expected dividend)

b.      How far does the price ofAT&T stock have to fall for you to get yourmargin call if the maintenance margin is 30% ?

 

7. You are bearish on AT&T stock and decide to sell short 100 shares at the current mkt
†††† price of $25 per share.

 

a.       How much in cash or securities must you put into your brokerage a/c if the brokerageís initial margin requirement is 50% of the value of the short position?

 

8. If the offeringprice of an open end fund is $12.30 per share and the fund is sold with a front-end load of 5% , what is the net asset value ?

 

9. The composition of the Fingroup Fund portfolio is as follows.

 

STOCK

SHARES

PRICE

 

 

 

A

200,000

$35

B

300,000

$40

C

400,000

$20

D

600,000

$25

 

The fund has not borrowed any funds but its accrued management fee with the portfolio manager currently totals $30,000. There are 4 million shares outstanding.what is the net asset value of the fund.