Question
Elaine opens a margin account with BG Securities Ltd to purchase 500 shares of AMG stock at $55 per share. She borrows $10,000 from the
Elaine opens a margin account with BG Securities Ltd to purchase 500 shares of AMG stock at $55 per share. She borrows $10,000 from the brokerage firm to help pay for the purchase. The interest rate is 1% per month.
a. Briefly discuss the pros and cons of buying stocks on margin.
b. What is the margin in Elaine’s account when she first purchases AMG stock?
c. What is the remaining margin in her account if AMG share price falls to $40 per share after a month? Will she receive a margin call if the maintenance margin requirement is 35%?
d. Determine the rate of return on her investment.
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Fundamentals of Investments Valuation and Management
Authors: Bradford D. Jordan, Thomas W. Miller
5th edition
978-007728329, 9780073382357, 0077283295, 73382353, 978-0077283292
