(Answered)-What is the initial margin ratio

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Problem 1 (15 marks)You have $30,000 in your margin account, and you want to invest in BMO stock. The minimum margin requirement for BMO is 30%. You just got a quote on BMO as follows:Bid: 55.25Ask: 55.26The interest rate on the margin loan is 6% per annum.If you want to buy BMO in margin, what is the maximum number of shares can you buy? Suppose you want to buy 1200 shares of BMO in margin. Answer the following questions:What is the initial margin ratio?Suppose you are going to hold the shares for one year. At what price at the end of next year will your investment break even? (assuming no margin calls in the year)How far could the stock price fall before getting a margin call?If the stock price falls to $40, you would get a margin call. If this happens, how much new fund would you need to add to your account to respond the margin call?

 

Solution ID:10036751 | Question answered on 16-Oct-2016

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