Chapter 8 Questions for Course FM

Fall 2005

Corrected May 4, 2006

  1. Thomas sells a stock short for 1000. The margin rate is 60%. The stock does not pay dividends. After one year, Thomas purchases the stock for 880 which results in a yield of 25%.

Calculate the interest rate earned on the margin account.

  1. 0.01
  2. 0.05
  3. 0.07
  4. 0.08
  5. 0.10
  1. Kathy and Megan each sell short the same stock. Kathy is required to maintain a margin requirement of 50% while Megan is required to maintain a margin requirement of 75%. Assume that the gain on the short sale exceeds any dividend paid on the stock.

Which of the following are true:

  1. If no interest is paid on either margin account, Kathy’s yield will be 150% of Megan’s yield.
  2. If the same interest rate is paid on both margin accounts, Megan’s yield will exceed 2/3 of Kathy’s yield
  3. If the same interest rate is paid on both margin accounts, Megan’s yield could never exceed Kathy’s yield.
  1. All are true except i.
  2. All are true except ii.
  3. All are true except iii.
  4. All are true
  5. The correct answer is not given by a., b., c., or d.

  1. Jenna sells short a stock for 1000. One year later she buys the stock for 1000. The stock pays a dividend of 10. Jenna earns 10% on her margin requirement of 60%.
    Jordan sells short a stock for 500. Jordan’s stock does not pay a dividend. Jordan earns 5% on his margin requirement of 60%. When Jordan buys the stock one year later, he earns a yield that is twice that earned by Jenna.
    Determine the price that Jordan paid to purchase his stock.
  1. 430
  2. 455
  3. 465
  4. 480
  5. 500
  1. James sells a stock short for 1000. The margin requirement is 60% and James earns 10% on the margin account. One year later he buys the stock for 790.
    Jacque sells a stock short for 600. The margin requirement is 50% and Jacque earns 10% on the margin account. One year later she sells the stock for 450.
    Both stocks pay the same dividend.
    James and Jacque both earn the same yield.
    Determine the dividend paid on each stock.
  1. 15
  2. 30
  3. 45
  4. 60
  5. 90

  1. (Corrected) Rachel sells a stock short for 2000. The margin requirement is 50%. During the year, Rachel’s stock pays a dividend of 25. Rachel purchases the stock for 2050.
    Danielle sells a stock short for 1500. Her margin requirement is 60%. During the year, Danielle’s stock pays a dividend of 10. Danielle purchases the stock one year later for 1535.
    Danielle earns a return on her transaction that is twice the return that Rachel earns on her transaction. Both Rachel and Danielle are paid the same interest rate on the margin account.
    Calculate the interest rate earned on the margin account.
  2. 10.0%
  3. 10.5%
  4. 11.0%
  5. 11.5%
  6. 12.0%
  1. Adam has a yield on a short sale of the stock of 30%. The interest rate on the margin account is 10%. If the margin requirement had been doubled with no other changes to the transaction, determine the yield on Adam’s transaction.
  2. 0.20
  3. 0.25
  4. 0.30
  5. 0.40
  6. 0.50
  1. On the short sale of a stock, James realizes a yield of 22%. The margin requirement was 50% and he earned 10% on the margin. If the margin had been increased to 60%, but the interest earned on the margin is still 10%, calculate James’ yield.
  1. 16%
  2. 18%
  3. 20%
  4. 22%
  5. 24%