978-0134083308 Chapter 2 Part 4

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7) The minimum initial margin requirement for both long and short positions is set by the

Federal Reserve Board and currently is 50%.

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8) A brokerage firm may set a higher margin requirement than that set by the Federal Reserve

Board.

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9) The purchase of stock with cash in the hope of earning a capital gain is known as taking a

A) long position in the stock.

B) short position in the stock.

C) long, margined position in the stock.

D) short, margined position in the stock.

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10) Which one of the following statements about margin trading is correct?

A) The Federal Reserve sets the minimum margin requirement for margin trading.

B) If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $400 in cash to

make the purchase.

C) Purchasing stocks on margin is less risky than purchasing stocks by paying cash for the

entire purchase.

D) Margin trading increases the potential profits while lowering the potential losses on a

percentage basis.

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11) Which one of the following statements about margin trading is correct?

A) The Securities Exchange Commission sets the minimum margin requirement for margin

trading.

B) If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $600 in cash to

make the purchase.

C) Margin traders are willing to accept lower return to reduce their risk.

D) Margin traders are pessimistic about the future price of the stock.

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12) Megan bought 200 shares of stock at a price of $10 a share. She used her 70% margin

account to make the purchase. Megan sold her stock after a year for $12 a share. Ignoring

margin interest and trading costs, what is Megan’s return on investor’s equity for this

investment?

A) 67%

B) 29%

C) 14%

D) 10%

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13) Joseph bought 100 shares of stock at a price of $24 a share. He used his 70% margin

account to make the purchase. Joseph sold his stock after a year for $20 a share. Ignoring

margin interest and trading costs, what is Joseph’s return on investor’s equity for this

investment?

A) -17%

B) -24%

C) 24%

D) -56%

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14) Michael purchased 1000 shares of stock at a price of $16 a share. He utilized his 50%

margin account to make the purchase. What is Michael’s initial equity in this investment?

A) -$16,000

B) $16,000

C) $8,000

D) -$8,000

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15) Jessica purchased 200 shares of stock at $38 using her 70% margin account. Her

maintenance margin is 40%. Jessica has no other securities in her account. At what price will

she receive a margin call?

A) $26.60

B) $19.00

C) $11.40

D) $7.60

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16) A restricted account is defined as a margin account wherein the equity is

A) less than the initial margin amount.

B) greater than the initial margin amount.

C) less than the maintenance margin amount.

D) greater than the maintenance margin amount.

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17) Emily bought 200 shares of ABC Co. stock for $29.00 per share on 60% margin. Assume

she holds the stock for one year and that her interest costs will be $80 over the holding period.

Ignoring commissions, what is her percentage return (loss) on invested capital if the stock price

went down 10%?

A) -32%

B) -19%

C) -16%

D) -10%

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18) Gerry bought 100 shares of stock for $30.00 per share on 70% margin. Assume Gerry holds

the stock for one year and that his interest costs will be $45 over the holding period. Gerry also

received dividends amounting to $0.30 per share. Ignoring commissions, what is his percentage

return on invested capital if he sells the stock for $34 a share?

A) 106.17%

B) 20.48%

C) 18.33

D) 9.16%

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19) Justin just made a margin purchase of 100 shares of DEF Corp. for $22.50 per share. The

initial margin is 70%. The maintenance margin is 30%. How low can the price of each share of

DEF be before Justin will have to add equity to his account?

A) $4.73

B) $5.25

C) $6.75

D) $9.64

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20) Maintenance margin is the

A) minimum amount of loan that can be used for margin trading.

B) initial amount of equity required for a margin purchase.

C) minimum amount of equity that an investor can have to avoid a margin call.

D) amount of additional funds that need to be added to an account to meet minimal equity

requirements.

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21) If an investor does not respond to a margin call, the broker will

A) sell enough of the investor’s holdings that the margin account can be closed.

B) sell some of the investor’s holdings to cover the margin call.

C) notify the Federal Reserve so they can cover the call.

D) sell all of the investor’s holdings and close their brokerage account.

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22) Which one of the following is a major advantage of margin trading?

A) increase in potential diversification

B) increase in potential profits on a percentage basis

C) possibility of increased gains on a dollar basis

D) interest free loans

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23) Which of the following are characteristics of short selling?

I. borrowing shares of stock from a brokerage firm or other investors

II. selling shares of stock you do not own

III. betting the stock price will increase

IV. limiting losses per share to the price at which the stock was sold

A) I and II only

B) III and IV only

C) I, II and IV only

D) I, II, III only

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24) Jocelyn sells short 1000 shares of JKLO stock at $31.25 per share and six months later

purchases the shares at $29.00 each. Ignoring margin interest and brokerage fees, Nancy will

A) earn a total profit of $3,125.

B) lose a total of $2,900.

C) earn a total profit of $2,250.

D) Lose a total of $2,250.

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25) Which of the following statements about short selling is (are) true?

I. Short selling requires an initial margin deposit.

II. Short sellers begin a transaction with a sale and end it with a purchase.

III. Short sellers profit when the stock prices rises.

IV. Short selling can be a risky strategy.

A) IV only

B) I and II only

C) I, II and IV only

D) I, II, III and IV

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26) Last week, Seward Company stock was selling at $66 a share when Ryan sold 300 shares

of the stock short. Today Ryan bought 300 shares of the same stock at a price of $70.00 share

to cover his position. Ignoring trading costs, what is the dollar return on Ryan’s investment?

A) $1,200

B) -$400

C) $400

D) $-1,200

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27) Aria has heard a rumor that a major food company will be forced to recall millions of jars

of peanut butter. due to contamination If the rumors are true, the company’s stock price will

decline sharply. Which one of the following strategies would allow Jennifer to earn a profit if

the rumor proves to be true?

A) Take a long position in the stock today.

B) Sell the stock short today.

C) Buy the stock on margin today.

D) Take a long position in the stock one month from today.

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