Seminar 2 Presentation Questions

Seminar 2:
Securities
Markets
1. Pandit Sonakshi (U2211460C)
2. Xiao Yezhou (U2210819E)
3. Jennifer Chenni Yoshuara (U2231060A)
4. Chong Ka Yee (U2210416L)
5. Pan Jiani (U2211551D)
TEAM DELTA
Pandit Sonakshi
Q1
An investor puts up $5,000 but borrows an equal
amount of money from their broker to double the
amount invested to $10,000. The broker charges
7% on the loan. The stock was originally purchased
at $25 per share and in one year the investor sells
the stock for $28. The investor's rate of return was
____.
1) 24% 4) 48.5 %
2) 18.5% 5) None of the above
3) 17%
Given Information:
Initial Position
Stock @ $25 per 25*400 =$10,000 Borrowed $5,000

share
Equity $5,000
{# of shares = $(5000+5000)/25 = $10,000/25= 400}
According to question:
New Position
Stock @ $28 per 28*400 =$11,200 Borrowed $5,000

share
Equity $6,200
➢ Amount Borrowed = $5,000
➢ Interest on Loan = 7% * 5,000 = $350
➢ Investment Value at the beginning (to the investor)= $5,000

➢ Investment Value at the end (to the investor)
○ = Market value of stock position - Loan - Interest on Loan
○ = $11,200 - $5,000 - $350
○ = $5,850
➢ Rate of return
○ = (Investment value at the end/ Investment Value at the
beginning) - 1
○ = 5850/5000 - 1
○ 17% ----(3)
Xiao Yezhou
Q2
You are bullish on Telecom stock. The

current market price is $50 per share and
you have $5000 of your own to invest.
You borrow an addition $5000 from your
broker at 8% interest rate per year and
invest $10000 in the stock.
Q2. You are bullish on Telecom stock. The current market price is $50 per
share and you have $5000 of your own to invest. You borrow an addition $5000
from your broker at 8% interest rate per year and invest $10000 in the stock.
Initial position
Stock 10,000 Borrowed 5000
Equity 5000
(a) If after one year share price increases by 10%, compute the rate of return.
New position
Stock 10,000*(1+10%) = Borrowed 5000*(1+8%)= 5400

11,000
Equity 11,000-5400 = 5600
Rate of return = (change in equity / initial equity)*100%
= (5600-5000)/5000 * 100%
= 12%
(b) How far (what is the stock price) must the price fall for you to get a margin
call if MMR is 30%? Assume price fall happens immediately
Margin call occurs when the current value of equity equals or is less than MMR.
Market Value = Borrowed / (1 – MMR)
Market Value = $5400/ (1 – 0.30) = $7142
With 200 shares, the stock price at which we receive a margin call is $7142 / 200
= $35.71
Since price fall happen immediately, interest rate is yet to be incurred

Jennifer Chenni Yoshuara
Q3
You sell short 300 shares of Microsoft which are
currently selling at $30 per share. You post the 50%
margin required on the short sale. If you earn no
interest on the funds in your margin account, what
will be your rate of return after one year if
Microsoft is selling at $27? (Ignore any dividends)
1) 10% 4) 40 %
2) 20% 5) None of the above
3) 30%
Short Sale:
● An investor borrows a share of stock from a broker and sells it. Later, the
short-seller must purchase a share of the same stock in order to replace
the one that was borrowed.
● Allows investors to profit from a decline in a security’s price
Q3. You sell short 300 shares of Microsoft which are currently selling at $30 per
share. You post the 50% margin required on the short sale. If you earn no
interest on the funds in your margin account, what will be your rate of return
after one year if Microsoft is selling at $27? (Ignore any dividends)
➢ Proceeds from sale = 300 shares * $30/share

= $9000
➢ Covering position = 300 shares * $27/share
= $8100
➢ Profit = $9000 - $8100
= $900
➢ Initial investment = 300 shares * $30/share * 50% margin

= $4500
➢ Rate of return = Profit/Initial investment * 100%

= $900/$4500 * 100%
= 20%
Chong Ka Yee
Q4
On Jan 1, you sold short one round lot (i.e. 100
shares) of Zenith stock at $14 per share. On Mar 1,
a dividend of $2 per share was paid. On Apr 1, you
covered the short sale by buying the stock at a
price of $9 per share. You paid 50 cents per share
in commissions for each transaction. What is the
value of your account on Apr 1?
1) $200
2) $400
3) $250
4) $450
5) None of the above
➢ January 1: sold 100 shares at $14 per share & paid $0.50 per share in
commissions
Account value = (100 x $14) - (100 x $0.50) = $1350
➢ March 1: paid dividend of $2 per share
Account value = $1350 - (100 x $2) = $1150
➢ April 1: covered short sale by buying the stock at $9 per share & paid
$0.50 per share in commissions
Account value = net profit = $1150 - (100 x $9) - (100 x $0.50) = $200
The value of your account on April 1 is $200 (option 1).

Pan Jiani
Q5
An investor buys $16,000 worth of a stock priced at
$20 per share using 60% initial margin. The broker
charges 8% on the margin loan and requires a 35%
maintenance margin.
The stock pays a $0.50 per share dividend in one

year and then the stock is sold at $23 per share.
What was the investor's rate of return?
1) 23.83% 2) 17.50%
3) 19.67% 4) 25.75%
5) None of the above

Initial Position
Stock @ $20 per $20*800 =$16,000 Borrowed $6,400

share
Equity $9,600
# shares bought = $16,000/$20 = 800
Initial investment = 60%×$16000 = $9600
Amount borrowed = $16,000 - $9600 = $6400
New Position
Stock @ $23 per $23*800 =$18,400 Borrowed $6,400

share
Equity $12,000
Investment Value at the beginning (to the investor)= $9,600
Interest = interest rate × loan amount = 8% × $6400 = $512
Dividend to pay out = $0.50*800 = $400
Investment Value at the end (to the investor)
= Market value of stock position - Loan - Interest on Loan + Dividend
= $18,400 - $6,400 - $512 + $400
= $11,888
Rate of return
= (Investment value at the end/ Investment Value at the beginning) - 1
= $11,888 / $9,600 - 1
= 23.83%
Thank You!

Seminar 2 Presentation Questions

Uploaded by

Copyright:

Available Formats

Seminar 2 Presentation Questions

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Seminar 2 Presentation Questions

Uploaded by

Copyright:

Available Formats

Seminar 2:

2) 18.5% 5) None of the above

Stock @ $25 per 25*400 =$10,000 Borrowed $5,000

{# of shares = $(5000+5000)/25 = $10,000/25= 400}

Stock @ $28 per 28*400 =$11,200 Borrowed $5,000

➢ Investment Value at the beginning (to the investor)= $5,000

You are bullish on Telecom stock. The

Stock 10,000 Borrowed 5000

Stock 10,000*(1+10%) = Borrowed 5000*(1+8%)= 5400

Equity 11,000-5400 = 5600

Rate of return = (change in equity / initial equity)*100%

Market Value = Borrowed / (1 – MMR)

Market Value = $5400/ (1 – 0.30) = $7142

Since price fall happen immediately, interest rate is yet to be incurred

2) 20% 5) None of the above

➢ Proceeds from sale = 300 shares * $30/share

➢ Initial investment = 300 shares * $30/share * 50% margin

➢ Rate of return = Proﬁt/Initial investment * 100%

Account value = (100 x $14) - (100 x $0.50) = $1350

➢ March 1: paid dividend of $2 per share

Account value = $1350 - (100 x $2) = $1150

The value of your account on April 1 is $200 (option 1).

The stock pays a $0.50 per share dividend in one

5) None of the above

Stock @ $20 per $20*800 =$16,000 Borrowed $6,400

# shares bought = $16,000/$20 = 800

Initial investment = 60%×$16000 = $9600

Amount borrowed = $16,000 - $9600 = $6400

Stock @ $23 per $23*800 =$18,400 Borrowed $6,400

Interest = interest rate × loan amount = 8% × $6400 = $512

Dividend to pay out = $0.50*800 = $400

Investment Value at the end (to the investor)

= Market value of stock position - Loan - Interest on Loan + Dividend

= $18,400 - $6,400 - $512 + $400

= (Investment value at the end/ Investment Value at the beginning) - 1

You might also like

Stock 10,000(1+10%) = Borrowed 5000(1+8%)= 5400