SECURITIES MARKETS

 CHAPTER TWO: SECURITIES MARKETS

PROBLEMS

1. An investor purchased on margin Orange Computer for $30 a share. The stock’s price subsequently increased to $50 a share at which time the investor sold the stock. If the margin requirement is 60 percent and the interest rate on borrowed funds was 7 percent, what would be the percentage earned on the investor’s funds (excluding commissions)? What would have been the return if the investor had not bought the stock on margin?

2. An investor bought on margin 100 shares of Copier Corp. for $85 a share. The firm paid an annual dividend of $4 a share; the margin requirement was 60 percent with an interest rate of 8 percent on borrowed funds, and commissions on the purchase and sale were $75. The price of the stock rose to $120 in one year.

1. What is the percentage earned on the investment if the stock is bought for cash (i.e., the investor did not use margin)?
2. What is the percentage earned on the investment if the stock is bought on margin?

3. An investor sells 100 shares short at $43. The sale requires a margin deposit equal to 60 percent of the proceeds of the sale. If the investor closes the position at $49, what was the percentage earned or lost on the investment? If the position had been closed when the price of the stock was $27, what would have been the percent earned or lost on the position?

4. An investor sells 100 shares short at $43. The sale requires a margin deposit equal to 60 percent of the proceeds of the sale. The company paid a cash dividend of $2 per share. If the investor closed the position at $36, what was the percentage earned or lost on the investment?