Explanation of the Buying on Margin and Aggregate Buying on Margin
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Buying on Margin and Aggregate Buying on Margin
First:
Assume that the investor give an order to his broker to buy on margin 200 shares from stock (A) which has a purchasing price $ 80 per share if you know that the initial marging is 60% show the investor balance sheet.
Second:
If the stock price decline to $ 48 show the investor balance sheet and calculate the Actual Margin (AM).
Third:
If the maintenance margin = 30% and the stock price declined to be $ 40 do you think that the investors will receive a margin call from the broker?
Fourth:
If the maintenance margin = 30% how far can the stock price fall before the investor get a margin call?
Fifth:
If the maintenance margin = 40% how far can the stock price fall before the investor get a margin call?
Sixth:
If the market price increased to be $ 104 show the investor balance sheet and what is the type of this account in both cases (if the maintenance margin is 30% OR 40%)? (i.e. which of the following types? :-
SEE ATTACHED
Seventh:
Calculate the rate of return if the stock price increased to %96 and the interest rate is 10% and the dividends is $1.6 per share and the fees is $ 1 per share.
Eighth:
Recalculate the rate of return assuming that the investor bought the stocks in cash.
Aggregate Buying on Margin
First:
Assume that the investor give an order to his broker to buy on margin 200 shares from stock (A) which has a price of $ 80 per share and another order to buy on margin 200 share from stock (B) with the market price of $ 48.
1) Prepare a balance sheet for this investor if the initial margin is 60%.
2) Assume that the price of stock (A) goes up to $88, and the price of stock (B) decline to $ 20, do you think that the investor will receive a margin call if the maitenance marging (MM) is 30%?
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Solution Summary
An explanation of buying on margin and aggregate buying on margins is provided.
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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