A trader has purchased 1,000 shares of a non-dividend-paying stock on margin at a price of $40 per share using the maximum leverage permissible under FRB Regulation T.  One-year later, the trader sells these shares at $43.00 per share.

a. What is the leverage ratio associated with this transaction?

b. Ignoring any interest paid on the amount borrowed and transaction costs, what was the annualized rate of return during the one-year holding period on the trader’s initial equity?

c. If the broker-call rate on the leveraged transaction in question 3 was 6.00% annually, what would the annualized rate of return on this transaction be. (Assume zero transaction or commission costs).

d. If the maintenance margin level is 30 percent (30%), at what price per share will a margin call occur against this investor?

Answer rating: 100% (QA)

a Maximum permissible leverage is 50 under regulation ... View the full answer