Chapter 3

Securities Markets
 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%
2. 18.5%
3. 17%
4. 8.5 %
5. None of the above

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 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.
(a) If share price increases by 10%, compute the rate of
return.
(b) How far must the price fall for you to get a margin call if
MMR is 30%? Assume price fall happens immediately.
1. (a) 12%, (b) $35.71
2. (a) 20%, (b) $35.71
3. (a) 12%, (b) $71.43
4. (a) 20%, (b) $71.43
5. None of the above

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 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%
2. 20%
3. 30%
4. 40%
5. None of the above

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 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

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 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 is the
investor's rate of return?

1. 23.83%
2. 17.50%
3. 19.67%
4. 25.75%
5. None of the above

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