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Student: ___________________________________________________________________________

1. A brokerage account in which purchases can only be made if sufficient funds are available is called a(n)
_____ account.
A. clearing
B. access available
C. cash
D. call
E. margin
2. The call money rate is the:
A. rate at which you borrow money to make a margin purchase.
B. percentage of a security's value which must be paid to a broker when you receive a margin call.
C. percentage interest rate which must be paid on any margin shortfall until the brokerage firm receives
the funds requested in a margin call.
D. rate at which the brokerage firm borrows funds which are subsequently loaned to margin customers.
E. minimum percentage rate of equity which must be maintained at all times.
3. Jennifer is buying $21,000 worth of a stock. She is paying 65 percent in cash and borrowing the
remaining 35 percent of the cost. The 65 percent is referred to as the:
A. call premium.
B. initial margin.
C. maintenance margin.
D. call money.
E. financial margin.
4. Initial margin is the term used to define the amount of money which:
A. is being borrowed to purchase a security.
B. represents the maximum amount which your brokerage firm will lend to purchase a security.
C. represents the maximum amount which the Federal Reserve allows as a loan for a security purchase.
D. represents the minimum equity which must be maintained in a security at all times.
E. must be paid in cash to purchase a security.
5. The minimum equity that must be maintained at all times in a margin account is called the:
A. initial margin.
B. initial equity position.
C. maintenance margin.
D. call requirement.
E. margin call.
6. When your equity position in a security is less than the required amount, your brokerage firm will issue
a:
A. margin call.
B. maintenance margin statement.
C. cash certificate.
D. debtor's lien.
E. leverage call.

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7. The return on an investment expressed on an annualized basis is called the:
A. earned return.
B. leveraged return.
C. holding period percentage return.
D. annual percentage rate.
E. effective annual return.
8. Martha pledged 400 shares of ABC stock as collateral against her margin loan. This process is called:
A. street naming.
B. hypothecation.
C. leveraging.
D. maintaining the margin.
E. cash accounting.
9. Leo owns 500 shares of XYZ stock but his brokerage firm is listed as the registered owner of the
securities. Under this arrangement, the securities are said to be held in:
A. transit.
B. record ownership status.
C. street name.
D. a wrap account.
E. a discretionary account.
10. Alita is selling a stock which she does not currently own. This is known as a:
A. margin sale.
B. long position.
C. wrap trade.
D. hypothecated sale.
E. short sale.
11. Short interest is the number of shares of common stock:
A. for which sell orders are outstanding.
B. for which buy orders are outstanding.
C. held in short positions.
D. held in margin accounts.
E. pledged as security for margin loans.
12. Market timing is the:
A. hours during which margin trades can be placed.
B. period of time between the placement of a short sale and the purchase of the security.
C. buying and selling of securities in anticipation of the overall direction of the market.
D. staggering of buy and sell orders so that they do not all occur on the same trading day.
E. placing of trades just prior to the opening bell which starts trading for the day.
13. Asset allocation is the:
A. buying and selling of securities in response to anticipated moves in the overall market.
B. division of a purchase price between a cash payment and a margin loan.
C. division of a portfolio into short and long positions.
D. construction of a balance sheet to determine how securities are divided between equity and debt
positions.
E. distribution of investment funds among various broad categories of assets.

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14. Amanda is reviewing pharmaceutical firms to determine which firm's stock to purchase. This process is
known as:
A. asset allocation.
B. security selection.
C. market timing.
D. shorting.
E. diversification.
15. The amount by which the interest rate on your margin account exceeds your broker's call money rate is
called the:
A. margin rate.
B. short rate.
C. spread.
D. straddle.
E. cash rate.
16. Rose Marie recently inherited $284,000 which she wishes to invest in the stock and bond markets.
However, Rose Marie has no investment experience and wants a knowledgeable professional to make all
of her investment decisions for her. Rose Marie most likely needs the services offered by a(n):
A. deep-discount broker.
B. discount broker.
C. full-service broker.
D. on-line broker.
E. cyberbroker.
17. Which one of the following statements is correct?
A. Advice received from your broker is guaranteed to be accurate.
B. Most brokerage agreements require disputes to be settled in a court of law.
C. Arbitration is the legal process of settling a case without a jury.
D. The churning of a customer's account is a recommended brokerage activity.
E. Commission brokers always have a potential conflict of interest with their clients.
18. You have an investment account with a brokerage firm that is SIPC insured. The account consists of
$40,000 in cash and $170,000 in securities. Which one of the following statements is true about this
account?
A. Only $100,000 of the account is insured against fraud.
B. The $40,000 of cash and $60,000 of the securities are insured against loss from any source.
C. The entire account is guaranteed safe by the U.S. government agency issuing the SIPC insurance.
D. The $40,000 in cash plus the first $100,000 in securities is guaranteed by the private insurance fund
backing the SIPC insurance.
E. The entire account is protected by a private fund but only for losses resulting from fraud or other
failures of the brokerage firm.
19. Scott is buying $5,000 worth of a stock with $4,000 in cash plus a $1,000 margin loan. If you
constructed a balance sheet reflecting this transaction, the total assets would be:
A. $1,000.
B. $4,000.
C. $5,000.
D. $6,000.
E. $9,000.

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20. Joe is buying $10,000 worth of stock by putting up $6,000 in cash and borrowing the balance. This is an
example of a transaction in a(n) _____ account.
A. cash
B. wrap
C. margin
D. short
E. asset allocation
21. Mary Ellen wants to buy $10,000 of securities in her margin account. Her advisor has informed her that
she must pay a minimum of $6,500, or 65 percent, of the purchase price in cash and thereafter maintain a
minimum equity position of 30 percent. The initial margin requirement is _____ percent and the
maintenance margin is _____ percent.
A. 35; 30
B. 35; 70
C. 65; 30
D. 65; 35
E. 65; 70
22. The absolute minimum initial margin requirement is set by the:
A. individual investor.
B. brokerage firm.
C. individual broker.
D. SEC.
E. Federal Reserve.
23. You open a margin account with a local broker and purchase shares of ABC stock. The maintenance
margin on your purchase is established by:
A. you when you open your account.
B. your brokerage firm.
C. the SEC.
D. the SIPC.
E. the Federal Reserve.
24. By utilizing a margin account rather than a cash account you will potentially _____ your sizeable
positive returns and _____ your sizeable negative returns.
A. decrease; decrease
B. decrease; increase
C. increase; decrease
D. increase; increase
E. increase; not effect
25. Which one of the following formulas is used to determine the lowest possible price for a stock to avoid a
margin call?
A. P* = (Amount borrowed / Number of shares) / (Maintenance margin)
B. P* = (Amount borrowed / Number of shares) / (Initial margin - Maintenance margin)
C. P* = (Amount borrowed / Number of shares) / (1 + Initial margin)
D. P* = (Amount borrowed / Number of shares) / (1 - Maintenance margin)
E. P* = (Amount borrowed / Number of shares) / (1 + Maintenance margin)

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26. You will receive a margin call every time your margin:
A. exceeds the required maintenance margin.
B. is less than the required maintenance margin.
C. is less than the initial margin.
D. increases.
E. decreases.
27. If you ignore a margin call, your broker:
A. will create a loan on your behalf to cover the call amount.
B. will sell all of your securities and close your account.
C. may place a short sale on your behalf to cover the amount of the call.
D. may sell some of your securities.
E. will increase both your margin loan and the rate of interest on that loan.
28. The annualized return is equal to:
A. (the holding period percentage return)m , where m is the number of holding periods in a year.
B. (the holding period percentage return)m , where m is the number of months in a holding period.
C. (1 + holding period percentage return)m , - 1 where m is the number of holding periods in a year.
D. (1 + holding period percentage return)mm, - 1 where m is the number of months in a holding period.
E. (1 - holding period percentage return) , + 1 where m is the number of months in a holding period.
29. Leo purchased 600 shares of Kilo Industries stock and held it for 2 years before selling it. What is the
value of "m" when computing the annualized return on this investment?
A. -1
B. -.50
C. .50
D. 1.0
E. The value of "m" cannot be determined from the information provided.
30. Jackie has an investment account with Sam, who is a broker with DR Brokers. Jackie believes that Sam
has mishandled her account by churning it. If she files a complaint against Sam seeking compensation
for Sam's actions, her case will most likely be decided by:
A. the chief compliance officer for DR Brokers.
B. a civil suit judge.
C. a jury in a civil court.
D. an arbitration panel.
E. the SEC Hearing Board.
31. Kate Smith, wife of Terry Smith, has a margin account with a local brokerage firm, Financial Strength
Securities. Kate recently purchased 600 shares of T.L. Rex common stock which trades on the New
York Stock Exchange (NYSE). These shares are held in street name and are registered under the name
of:
A. Kate Smith.
B. Terry Smith.
C. Financial Strength Securities.
D. New York Stock Exchange.
E. The registration name can not be determined from the information provided.

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32. Marti has a brokerage account with M.N. Brokers. She pays a set fee for her account but does not have
to pay any commissions or expenses for buying or selling securities. Marti has a(n) _____ account.
A. discretionary
B. cash basis only
C. asset management
D. mutual
E. wrap
33. If you authorize your broker to trade for you, you have a(n) _____ account.
A. discretionary
B. margin
C. asset management
D. mutual
E. wrap
34. If you own a security and make money if the price of the security increases you are said to have a _____
position.
A. cash
B. margin
C. short
D. long
E. discretionary
35. Which one of the following describes a short position?
A. purchasing a security on margin
B. selling a security which you originally purchased on margin
C. loaning a security to your broker so that it can be loaned to another brokerage client
D. having less equity than required in your margin account
E. selling a security which you do not own
36. On March 19 of this year, Zeta sold 300 shares of Delta Cabinets stock for $18 a share. On March 24 of
this year, Zeta purchased 300 shares of Delta Cabinets to cover her position. The transaction on March
19:
A. was a short sale.
B. was a margin trade.
C. was a wrap transaction.
D. created a long transaction.
E. was a pooling transaction.
37. A short sale:
A. is a guaranteed method of earning a profit.
B. involves the borrowing of securities.
C. is the purchase of less than 100 shares of a stock.
D. puts the investor in a position of earning a profit if the security price increases.
E. is the selling of a security within 24 hours of purchase.

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38. If you benefit when a security in your account decreases in value, you have a _____ position in the
security.
A. long
B. margined
C. short
D. covered
E. wrapped
39. An investor who has a resource constraint:
A. requires his or her securities to be sold quickly with minimal loss in value.
B. has insufficient funds to purchase a security.
C. has a relatively high tax rate which significantly reduces his or her aftertax rate of return.
D. should only purchase short-term securities.
E. will only invest in socially acceptable securities.
40. Stephen is a day trader who constantly buys and sells only medical-related stocks. Stephen has _____
asset allocation strategy and a(n) _____ security selection strategy.
A. an active; active
B. an active; passive
C. a passive; active
D. a passive; passive
E. no; active
41. Which one of the following is NOT an investor constraint?
A. time horizon
B. liquidity
C. resources
D. taxes
E. asset allocation
42. To be considered liquid a security must:
A. be held in a cash account.
B. have a dividend yield in excess of 5 percent.
C. be able to be sold on short notice.
D. be sold within 30 days of purchase.
E. be able to be sold quickly with little, if any, loss in value.
43. Jan is trying to decide whether she wants to purchase shares in K-Mart, Wal-Mart, or Target, all of
which are retail stores. Jan is making a(n) _____ decision.
A. passive strategy
B. security selection
C. tax-advantaged
D. active strategy
E. asset allocation
44. Joshua has decided to invest 40 percent of his money in large company stocks, 35 percent in small
company stocks, and the balance in bonds. This is a(n) _____ decision.
A. market timing
B. security selection
C. tax-advantaged
D. active strategy
E. asset allocation

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45. Lucas has a taxable investment portfolio comprised of multiple stocks and bonds. Lucas makes no
attempt to time the market and sells securities only as he needs to supplement his retirement income.
Lucas has a(n) ______ investment strategy.
A. active
B. passive
C. purely liquid
D. preferential tax
E. liquidity based
46. You want to buy shares of Delta stock which is selling for $19 a share. Your margin account currently
has available cash of $4,800. What is the maximum number of shares you can purchase if the initial
margin requirement is 70 percent?
A. 176 shares
B. 252 shares
C. 333 shares
D. 360 shares
E. 408 shares
47. Maxine is opening a margin account with $12,500 in cash. The initial margin is 60 percent and the
maintenance margin is 40 percent. What is the maximum number of shares she can purchase of a stock
which is priced at $42 a share?
A. 496 shares
B. 550 shares
C. 698 shares
D. 744 shares
E. 842 shares
48. Bill has a margin account with a 65 percent initial margin and a 30 percent maintenance margin. What is
the maximum amount he can spend to purchase shares of stock if his cash balance in the account is
$14,600?
A. $19,710.00
B. $22,461.54
C. $24,090.00
D. $41,714.29
E. $48,666.67
49. You recently purchased 700 shares of Adelp stock for $21 a share. Your broker required a cash payment
of $11,025, plus trading costs, for this purchase. What was the initial margin requirement?
A. 60 percent
B. 65 percent
C. 70 percent
D. 75 percent
E. 80 percent
50. Terry recently purchased 200 shares of Magna Corp. stock for $36.50 a share. His broker required a cash
payment of $6,570, plus trading costs, for the purchase. What was the initial margin requirement on this
particular stock?
A. 70 percent
B. 75 percent
C. 80 percent
D. 90 percent
E. 100 percent

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51. Walt recently purchased 800 shares of Hi-Tek, Inc., stock for $6.80 a share. His broker required a cash
payment of $5,440, plus trading costs, for the purchase. What was the initial margin requirement on this
particular stock?
A. 70 percent
B. 75 percent
C. 80 percent
D. 90 percent
E. 100 percent
52. Wilma recently purchased 600 shares of Driveway Repair, Inc., stock for $31.20 a share. What is the
minimum amount of cash the Federal Reserve will require for this purchase?
A. $8,424
B. $9,360
C. $10,296
D. $11,232
E. $12,168
53. Toni purchased 300 shares of Mega Motors, Inc., stock on margin when the stock was selling for $24 a
share. The stock is currently selling for $28 a share. What is the minimum amount of equity Toni must
have in this security to avoid a margin call if the maintenance margin is 40 percent?
A. $2,880
B. $2,910
C. $3,155
D. $3,245
E. $3,360
54. You purchased 300 shares of stock at $41 a share. The stock is currently selling for $45 a share. The
initial margin was 60 percent and the maintenance margin is 35 percent. What is the required minimum
dollar amount which you must have as equity in this stock today?
A. $4,305
B. $4,725
C. $7,995
D. $8,100
E. $8,775
55. You own 300 shares of a stock which you purchased on margin. The stock is currently valued at $19 a
share. Your broker advised you today that your minimum equity position for this purchase is $1,710 as
of today. What is the maintenance margin percentage?
A. 25 percent
B. 30 percent
C. 35 percent
D. 40 percent
E. 50 percent
F. MAINTENANCE MARGIN

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56. Jessica purchased 400 shares of RTF stock for $14 a share. The stock was purchased with an initial
margin of 55 percent. The maintenance margin is 30 percent. The stock is currently selling for $12 a
share. What is the minimum dollar amount of equity which Jessica must have today to avoid a margin
call?
A. $1,440
B. $1,680
C. $2,640
D. $3,360
E. $3,920
57. Sue purchased 700 shares of a stock for $21 a share. Today, the stock is selling for $16 a share. The
initial margin was 70 percent and the maintenance margin is 30 percent. Sue had to pay _____ in cash to
purchase the stock and must have at least _____ in equity today.
A. $4,410; $3,360
B. $4,410; $7,840
C. $7,840; $3,360
D. $7,840; $10,290
E. $10,290; $3,360
58. Tom purchased 200 shares of stock for $28 a share and sold them 4 months later for $30 a share. The
initial margin was 60 percent. He received no dividend income. His holding period percentage return
was _____ percent while it would have been _____ percent had he not used margin for the purchase.
Ignore margin interest and trading costs.
A. 7.14; 11.90
B. 7.14; 17.86
C. 11.90; 7.14
D. 11.90; 8.77
E. 11.90; 17.86
59. Jill purchased 100 shares of ABC stock at $22 a share. On the same day, her twin sister Jan also
purchased 100 shares of ABC stock at $22 a share. Jill paid cash for her purchase while Jan used margin.
The broker has a 70 percent initial margin and a 35 percent maintenance margin on this stock. Both Jill
and Jan sold their shares after 7 months at a price of $26 a share. The stock pays no dividends. Jill had a
holding period percentage return of _____ percent as compared to Jan's _____ percent return. Ignore
margin interest and trading costs.
A. 18.18; 18.18
B. 18.18; 25.97
C. 18.18; 30.30
D. 19.99; 25.97
E. 19.99; 30.30
60. Tori purchased 200 shares of a stock at $33 a share. She sold those shares 3 months later for $17 a share.
Tori paid 70 percent of the purchase price in cash and borrowed the rest on margin. Ignoring margin
interest and trading costs, Tori earned a holding period percentage return which is _____ percent lower
than her return would have been if the purchase had been totally
paid in cash.
A. 14.14
B. 16.42
C. 20.78
D. 21.03
E. 23.65

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61. A stock was purchased for $19 a share and sold 6 months later for $21 a share. The holding period
percentage return would have been _____ percent if the purchase was 100 percent paid in cash as
compared to a return of _____ percent if the purchase was made with 60 percent margin. Ignore trading
costs and margin interest.
A. 8.67; 9.08
B. 9.15; 14.23
C. 10.53; 17.54
D. 10.72; 13.33
E. 11.60; 15.40
62. You purchased a stock for $24 a share with 60 percent margin. You sold the stock two months later for
$26 a share. You did not receive any dividend income. What was your holding period percentage return
on this investment?
A. 8.33 percent
B. 11.92 percent
C. 13.89 percent
D. 15.28 percent
E. 16.67 percent
63. Tom purchased 200 shares of stock for $28 a share and sold them 4 months later for $30 a share. The
initial margin was 60 percent. He received no dividend income. His holding period percentage return
was _____ percent.
A. 11.90
B. 12.01
C. 14.50
D. 15.11
E. 17.86
64. Tori purchased 200 shares of Flagler Enterprises stock at a price of $22 a share. The initial margin was
60 percent and the maintenance margin is 25 percent. What is the lowest that the stock price can go
before Tori receives a margin call?
A. $11.73
B. $13.48
C. $14.00
D. $14.29
E. $15.10
65. You purchased 1,200 shares of stock for $54 a share. The initial margin was 70 percent and the
maintenance margin is 35 percent. What is the lowest that the stock price can go before you receive a
margin call?
A. $10.80
B. $24.92
C. $31.40
D. $37.78
E. $46.29

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66. Kathryn purchased 300 shares of stock for $29 a share. The initial margin is 60 percent and the
maintenance margin is 30 percent. If the stock price falls below _____ Kathryn will receive a margin
call.
A. $11.60
B. $12.13
C. $12.44
D. $15.08
E. $16.57
67. You purchased 500 shares of stock for $60 a share. The initial margin is 60 percent and the maintenance
margin is 30 percent. What is the maximum percentage decline that can occur before you receive a
margin call?
A. 37 percent
B. 43 percent
C. 48 percent
D. 57 percent
E. 63 percent
68. Maulin purchased 700 shares of stock for $47 a share. The initial margin is 65 percent and the
maintenance margin is 25 percent. What is the maximum percentage decline that can occur before he
receives a margin call?
A. 41 percent
B. 47 percent
C. 53 percent
D. 59 percent
E. 62 percent
69. You obtain a margin loan of $18,000 to purchase some stock. The effective interest rate on the loan is
7.8 percent. How much interest will you pay if your repay the loan in 3 months?
A. $335.00
B. $337.26
C. $341.18
D. $346.90
E. $351.00
70. Ruth purchased 200 shares of Amos Industries stock at a price of $42 a share. Her initial margin was 60
percent. The effective interest rate on the margin loan is 6.9 percent. How much margin interest will she
pay if she repays the loan in 6 months?
A. $109.18
B. $113.99
C. $115.92
D. $171.47
E. $173.88
71. Micha-Ann paid $660 interest on a 9 month, $15,000 margin loan. What was the effective interest rate
on the loan?
A. 5.87 percent
B. 5.91 percent
C. 8.96 percent
D. 9.00 percent
E. 9.03 percent

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72. Bonita just sold a stock which returned 5.6 percent over a 3 month period. What was her annualized rate
of return?
A. 21.67 percent
B. 22.40 percent
C. 23.49 percent
D. 24.35 percent
E. 25.10 percent
73. You purchased a stock two years ago for $36 a share. Today, you sold that stock for $58 a share. The
stock pays no dividends. What was your annualized rate of return?
A. 26.93 percent
B. 27.08 percent
C. 29.32 percent
D. 30.03 percent
E. 30.56 percent
74. Three months ago, you purchased 700 shares of a stock for $22 a share. Today, you sold those shares for
$24 a share. What was your annualized rate of return on this investment?
A. 9.09 percent
B. 19.01 percent
C. 36.36 percent
D. 38.80 percent
E. 41.63 percent
75. You owned a stock for 2 months and earned an annualized rate of return of 13.28 percent. What was
your rate of return for the 2 month period?
A. 2.10 percent
B. 2.26 percent
C. 2.60 percent
D. 3.08 percent
E. 3.32 percent
76. You purchased 100 shares of Biegely, Inc., stock for $67 a share. Three months later, you sold those
shares for $71 a share. You also received a dividend of $.60 a share. What was your annualized rate of
return on this investment?
A. 25.41 percent
B. 27.46 percent
C. 28.87 percent
D. 30.42 percent
E. 32.36 percent
77. You short sold 400 shares of a stock at $51 a share. The initial margin is 50 percent and the maintenance
margin is 25 percent. What is the amount of your total liability for this transaction as initially shown on
your account balance sheet?
A. $5,100
B. $7,650
C. $10,200
D. $15,300
E. $20,400

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78. Kathryn short sold 500 shares of stock at $24 a share. One month later, she covered the short at a price
of $25. What was her total dollar return on this investment? Ignore margin interest, trading costs, and
taxes.
A. -$500
B. -$250
C. -$100
D. $250
E. $500
79. Today, you short sold 200 shares of Wynot stock at $34 a share. The initial margin is 60 percent and the
maintenance margin is 30 percent. Which one of the following is correct concerning your account
balance sheet for this transaction?
A. You have an asset of $4,080 from the sale proceeds.
B. You have a liability from the short position of $2,720.
C. Your account equity is $4,080.
D. Your initial margin deposit is $2,720.
E. Your total assets are $6,800.
80. Lester short sold 800 shares of Nu-Tek stock at $13 a share. The initial margin was 50 percent and the
maintenance margin is 25 percent. Nu-Tek is currently selling for $11 a share. What is the amount of
Lester's account equity currently?
A. $1,600
B. $5,200
C. $6,800
D. $8,800
E. $10,400
81. You short sold 200 shares of Jasper stock at $56 a share at an initial margin of 50 percent. What is the
highest the stock price can go before you receive a margin call if the maintenance margin is 35 percent?
A. $60.18
B. $62.22
C. $65.43
D. $68.00
E. $70.69
82. Casper thought that ACAP stock was ready to decline so he short sold 600 shares at $22 a share on
margin. The initial margin was 60 percent and the maintenance margin is 40 percent. What is the highest
the stock price can go before he receives a margin call?
A. $23.08
B. $24.27
C. $25.14
D. $26.11
E. $27.47
83. Louisa short sold 300 shares of Celpa stock at $37 a share at an initial margin of 60 percent. The
maintenance margin is 30 percent. What is the highest the stock price can go before she receives a
margin call?
A. $44.22
B. $45.54
C. $48.06
D. $50.39
E. $52.67

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84. The short interest on LAK stock was 516,500 when the market opened this morning. During the day,
267,000 shares were covered and 198,000 shares were sold short. What was the short interest on LAK
stock at the end of the trading day?
A. 249,500 shares
B. 338,500 shares
C. 447,500 shares
D. 585,500 shares
E. 714,500 shares
85. Soo Lee purchased 500 shares of a stock 2 years ago for $19 a share. Today, she sold those shares for
$24 a share. The stock paid a total of $.40 a share in dividends over the 2 years. The tax rate on
dividends is 28 percent and the tax rate on capital gains with holding periods in excess of 1 year is 15
percent. What is the aftertax dollar profit on this investment?
A. $2,222
B. $2,269
C. $2,307
D. $2,360
E. $2,409
86. You purchased 900 shares of a stock 18 months ago for $46 a share. Today, you sold those shares for
$47 a share. The stock paid a total of $1.60 a share in dividends over the 18 months. The tax rate on
dividends is 28 percent and the tax rate on capital gains with holding periods in excess of 1 year is 15
percent. What is the aftertax dollar profit on this investment?
A. $1,684.80
B. $1,747.20
C. $1,801.80
D. $1,850.20
E. $1,989.00
87. You purchased 600 shares of a stock at $33 a share 3 months ago. Today, you sold the shares for $35 a
share. You also received a total of $150 in dividends. Dividends and short-term (less than 1 year) capital
gains are taxed at your 28 percent marginal tax rate. Capital gains on securities held for more than 1 year
are taxed at 15 percent. What is your aftertax holding period return on this investment?
A. 1.91 percent
B. 2.38 percent
C. 3.67 percent
D. 4.91 percent
E. 5.28 percent
88. Ilona purchased 100 shares of a stock at $8 a share 6 months ago. Today, she sold the shares for $12 a
share. She also received a total of $10 in dividends. Dividends and short-term (less than 1 year) capital
gains are taxed at 28 percent. Capital gains on securities held for more than 1 year are taxed at 15
percent. What is Ilona's aftertax holding period return on this investment?
A. 32.27 percent
B. 32.56 percent
C. 33.33 percent
D. 34.18 percent
E. 36.90 percent

15
 ch2 Key
1. A brokerage account in which purchases can only be made if sufficient funds are available is called
a(n) _____ account.
A. clearing
B. access available
C. cash
D. call
E. margin
Jordan - Chapter 02 #1
Topic: CASH ACCOUNT
Type: DEFINITIONS

2. The call money rate is the:

A. rate at which you borrow money to make a margin purchase.
B. percentage of a security's value which must be paid to a broker when you receive a margin call.
C. percentage interest rate which must be paid on any margin shortfall until the brokerage firm
receives the funds requested in a margin call.
D. rate at which the brokerage firm borrows funds which are subsequently loaned to margin
customers.
E. minimum percentage rate of equity which must be maintained at all times.
Jordan - Chapter 02 #2
Topic: CALL MONEY RATE
Type: DEFINITIONS

3. Jennifer is buying $21,000 worth of a stock. She is paying 65 percent in cash and borrowing the
remaining 35 percent of the cost. The 65 percent is referred to as the:
A. call premium.
B. initial margin.
C. maintenance margin.
D. call money.
E. financial margin.
Jordan - Chapter 02 #3
Topic: MARGIN
Type: DEFINITIONS

4. Initial margin is the term used to define the amount of money which:
A. is being borrowed to purchase a security.
B. represents the maximum amount which your brokerage firm will lend to purchase a security.
C. represents the maximum amount which the Federal Reserve allows as a loan for a security
purchase.
D. represents the minimum equity which must be maintained in a security at all times.
E. must be paid in cash to purchase a security.
Jordan - Chapter 02 #4
Topic: INITIAL MARGIN
Type: DEFINITIONS

1
5. The minimum equity that must be maintained at all times in a margin account is called the:
A. initial margin.
B. initial equity position.
C. maintenance margin.
D. call requirement.
E. margin call.
Jordan - Chapter 02 #5
Topic: MAINTENANCE MARGIN
Type: DEFINITIONS

6. When your equity position in a security is less than the required amount, your brokerage firm will
issue a:
A. margin call.
B. maintenance margin statement.
C. cash certificate.
D. debtor's lien.
E. leverage call.
Jordan - Chapter 02 #6
Topic: MARGIN CALL
Type: DEFINITIONS

7. The return on an investment expressed on an annualized basis is called the:

A. earned return.
B. leveraged return.
C. holding period percentage return.
D. annual percentage rate.
E. effective annual return.
Jordan - Chapter 02 #7
Topic: EFFECTIVE ANNUAL RETURN
Type: DEFINITIONS

8. Martha pledged 400 shares of ABC stock as collateral against her margin loan. This process is
called:
A. street naming.
B. hypothecation.
C. leveraging.
D. maintaining the margin.
E. cash accounting.
Jordan - Chapter 02 #8
Topic: HYPOTHECATION
Type: DEFINITIONS

9. Leo owns 500 shares of XYZ stock but his brokerage firm is listed as the registered owner of the
securities. Under this arrangement, the securities are said to be held in:
A. transit.
B. record ownership status.
C. street name.
D. a wrap account.
E. a discretionary account.
Jordan - Chapter 02 #9
Topic: STREET NAME
Type: DEFINITIONS

2
10. Alita is selling a stock which she does not currently own. This is known as a:
A. margin sale.
B. long position.
C. wrap trade.
D. hypothecated sale.
E. short sale.
Jordan - Chapter 02 #10
Topic: SHORT SALE
Type: DEFINITIONS

11. Short interest is the number of shares of common stock:

A. for which sell orders are outstanding.
B. for which buy orders are outstanding.
C. held in short positions.
D. held in margin accounts.
E. pledged as security for margin loans.
Jordan - Chapter 02 #11
Topic: SHORT INTEREST
Type: DEFINITIONS

12. Market timing is the:

A. hours during which margin trades can be placed.
B. period of time between the placement of a short sale and the purchase of the security.
C. buying and selling of securities in anticipation of the overall direction of the market.
D. staggering of buy and sell orders so that they do not all occur on the same trading day.
E. placing of trades just prior to the opening bell which starts trading for the day.
Jordan - Chapter 02 #12
Topic: MARKET TIMING
Type: DEFINITIONS

13. Asset allocation is the:

A. buying and selling of securities in response to anticipated moves in the overall market.
B. division of a purchase price between a cash payment and a margin loan.
C. division of a portfolio into short and long positions.
D. construction of a balance sheet to determine how securities are divided between equity and debt
positions.
E. distribution of investment funds among various broad categories of assets.
Jordan - Chapter 02 #13
Topic: ASSET ALLOCATION
Type: DEFINITIONS

14. Amanda is reviewing pharmaceutical firms to determine which firm's stock to purchase. This process
is known as:
A. asset allocation.
B. security selection.
C. market timing.
D. shorting.
E. diversification.
Jordan - Chapter 02 #14
Topic: SECURITY SELECTION
Type: DEFINITIONS

3
15. The amount by which the interest rate on your margin account exceeds your broker's call money rate
is called the:
A. margin rate.
B. short rate.
C. spread.
D. straddle.
E. cash rate.
Jordan - Chapter 02 #15
Topic: SPREAD
Type: DEFINITIONS

16. Rose Marie recently inherited $284,000 which she wishes to invest in the stock and bond markets.
However, Rose Marie has no investment experience and wants a knowledgeable professional to make
all of her investment decisions for her. Rose Marie most likely needs the services offered by a(n):
A. deep-discount broker.
B. discount broker.
C. full-service broker.
D. on-line broker.
E. cyberbroker.
Jordan - Chapter 02 #16
Topic: BROKERAGE FIRMS
Type: CONCEPTS

17. Which one of the following statements is correct?

A. Advice received from your broker is guaranteed to be accurate.
B. Most brokerage agreements require disputes to be settled in a court of law.
C. Arbitration is the legal process of settling a case without a jury.
D. The churning of a customer's account is a recommended brokerage activity.
E. Commission brokers always have a potential conflict of interest with their clients.
Jordan - Chapter 02 #17
Topic: BROKER-CUSTOMER RELATIONS
Type: CONCEPTS

18. You have an investment account with a brokerage firm that is SIPC insured. The account consists of
$40,000 in cash and $170,000 in securities. Which one of the following statements is true about this
account?
A. Only $100,000 of the account is insured against fraud.
B. The $40,000 of cash and $60,000 of the securities are insured against loss from any source.
C. The entire account is guaranteed safe by the U.S. government agency issuing the SIPC insurance.
D. The $40,000 in cash plus the first $100,000 in securities is guaranteed by the private insurance
fund backing the SIPC insurance.
E. The entire account is protected by a private fund but only for losses resulting from fraud or other
failures of the brokerage firm.
Jordan - Chapter 02 #18
Topic: SIPC
Type: CONCEPTS

4
19. Scott is buying $5,000 worth of a stock with $4,000 in cash plus a $1,000 margin loan. If you
constructed a balance sheet reflecting this transaction, the total assets would be:
A. $1,000.
B. $4,000.
C. $5,000.
D. $6,000.
E. $9,000.
Jordan - Chapter 02 #19
Topic: ACCOUNT BALANCE SHEET
Type: CONCEPTS

20. Joe is buying $10,000 worth of stock by putting up $6,000 in cash and borrowing the balance. This is
an example of a transaction in a(n) _____ account.
A. cash
B. wrap
C. margin
D. short
E. asset allocation
Jordan - Chapter 02 #20
Topic: MARGIN ACCOUNT
Type: CONCEPTS

21. Mary Ellen wants to buy $10,000 of securities in her margin account. Her advisor has informed her
that she must pay a minimum of $6,500, or 65 percent, of the purchase price in cash and thereafter
maintain a minimum equity position of 30 percent. The initial margin requirement is _____ percent
and the maintenance margin is _____ percent.
A. 35; 30
B. 35; 70
C. 65; 30
D. 65; 35
E. 65; 70
Jordan - Chapter 02 #21
Topic: MARGIN ACCOUNT
Type: CONCEPTS

22. The absolute minimum initial margin requirement is set by the:

A. individual investor.
B. brokerage firm.
C. individual broker.
D. SEC.
E. Federal Reserve.
Jordan - Chapter 02 #22
Topic: INITIAL MARGIN
Type: CONCEPTS

23. You open a margin account with a local broker and purchase shares of ABC stock. The maintenance
margin on your purchase is established by:
A. you when you open your account.
B. your brokerage firm.
C. the SEC.
D. the SIPC.
E. the Federal Reserve.
Jordan - Chapter 02 #23
Topic: MAINTENANCE MARGIN
Type: CONCEPTS

5
24. By utilizing a margin account rather than a cash account you will potentially _____ your sizeable
positive returns and _____ your sizeable negative returns.
A. decrease; decrease
B. decrease; increase
C. increase; decrease
D. increase; increase
E. increase; not effect
Jordan - Chapter 02 #24
Topic: EFFECTS OF MARGIN
Type: CONCEPTS

25. Which one of the following formulas is used to determine the lowest possible price for a stock to
avoid a margin call?
A. P* = (Amount borrowed / Number of shares) / (Maintenance margin)
B. P* = (Amount borrowed / Number of shares) / (Initial margin - Maintenance margin)
C. P* = (Amount borrowed / Number of shares) / (1 + Initial margin)
D. P* = (Amount borrowed / Number of shares) / (1 - Maintenance margin)
E. P* = (Amount borrowed / Number of shares) / (1 + Maintenance margin)
Jordan - Chapter 02 #25
Topic: MARGIN CALL
Type: CONCEPTS

26. You will receive a margin call every time your margin:
A. exceeds the required maintenance margin.
B. is less than the required maintenance margin.
C. is less than the initial margin.
D. increases.
E. decreases.
Jordan - Chapter 02 #26
Topic: MARGIN CALL
Type: CONCEPTS

27. If you ignore a margin call, your broker:

A. will create a loan on your behalf to cover the call amount.
B. will sell all of your securities and close your account.
C. may place a short sale on your behalf to cover the amount of the call.
D. may sell some of your securities.
E. will increase both your margin loan and the rate of interest on that loan.
Jordan - Chapter 02 #27
Topic: MARGIN CALL
Type: CONCEPTS

28. The annualized return is equal to:

A. (the holding period percentage return)m , where m is the number of holding periods in a year.
B. (the holding period percentage return)m , where m is the number of months in a holding period.
C. (1 + holding period percentage return)m , - 1 where m is the number of holding periods in a year.
D. (1 + holding period percentage return)mm, - 1 where m is the number of months in a holding period.
E. (1 - holding period percentage return) , + 1 where m is the number of months in a holding period.
Jordan - Chapter 02 #28
Topic: ANNUALIZED RETURN
Type: CONCEPTS

6
29. Leo purchased 600 shares of Kilo Industries stock and held it for 2 years before selling it. What is the
value of "m" when computing the annualized return on this investment?
A. -1
B. -.50
C. .50
D. 1.0
E. The value of "m" cannot be determined from the information provided.
Jordan - Chapter 02 #29
Topic: ANNUALIZED RETURN
Type: CONCEPTS

30. Jackie has an investment account with Sam, who is a broker with DR Brokers. Jackie believes that
Sam has mishandled her account by churning it. If she files a complaint against Sam seeking
compensation for Sam's actions, her case will most likely be decided by:
A. the chief compliance officer for DR Brokers.
B. a civil suit judge.
C. a jury in a civil court.
D. an arbitration panel.
E. the SEC Hearing Board.
Jordan - Chapter 02 #30
Topic: ARBITRATION
Type: CONCEPTS

31. Kate Smith, wife of Terry Smith, has a margin account with a local brokerage firm, Financial
Strength Securities. Kate recently purchased 600 shares of T.L. Rex common stock which trades on
the New York Stock Exchange (NYSE). These shares are held in street name and are registered under
the name of:
A. Kate Smith.
B. Terry Smith.
C. Financial Strength Securities.
D. New York Stock Exchange.
E. The registration name can not be determined from the information provided.
Jordan - Chapter 02 #31
Topic: STREET NAME
Type: CONCEPTS

32. Marti has a brokerage account with M.N. Brokers. She pays a set fee for her account but does not
have to pay any commissions or expenses for buying or selling securities. Marti has a(n) _____
account.
A. discretionary
B. cash basis only
C. asset management
D. mutual
E. wrap
Jordan - Chapter 02 #32
Topic: WRAP ACCOUNT
Type: CONCEPTS

7
33. If you authorize your broker to trade for you, you have a(n) _____ account.
A. discretionary
B. margin
C. asset management
D. mutual
E. wrap
Jordan - Chapter 02 #33
Topic: DISCRETIONARY ACCOUNT
Type: CONCEPTS

34. If you own a security and make money if the price of the security increases you are said to have a
_____ position.
A. cash
B. margin
C. short
D. long
E. discretionary
Jordan - Chapter 02 #34
Topic: LONG POSITION
Type: CONCEPTS

35. Which one of the following describes a short position?

A. purchasing a security on margin
B. selling a security which you originally purchased on margin
C. loaning a security to your broker so that it can be loaned to another brokerage client
D. having less equity than required in your margin account
E. selling a security which you do not own
Jordan - Chapter 02 #35
Topic: SHORT POSITION
Type: CONCEPTS

36. On March 19 of this year, Zeta sold 300 shares of Delta Cabinets stock for $18 a share. On March 24
of this year, Zeta purchased 300 shares of Delta Cabinets to cover her position. The transaction on
March 19:
A. was a short sale.
B. was a margin trade.
C. was a wrap transaction.
D. created a long transaction.
E. was a pooling transaction.
Jordan - Chapter 02 #36
Topic: SHORT SALE
Type: CONCEPTS

37. A short sale:

A. is a guaranteed method of earning a profit.
B. involves the borrowing of securities.
C. is the purchase of less than 100 shares of a stock.
D. puts the investor in a position of earning a profit if the security price increases.
E. is the selling of a security within 24 hours of purchase.
Jordan - Chapter 02 #37
Topic: SHORT SALE
Type: CONCEPTS

8
38. If you benefit when a security in your account decreases in value, you have a _____ position in the
security.
A. long
B. margined
C. short
D. covered
E. wrapped
Jordan - Chapter 02 #38
Topic: SHORT POSITION
Type: CONCEPTS

39. An investor who has a resource constraint:

A. requires his or her securities to be sold quickly with minimal loss in value.
B. has insufficient funds to purchase a security.
C. has a relatively high tax rate which significantly reduces his or her aftertax rate of return.
D. should only purchase short-term securities.
E. will only invest in socially acceptable securities.
Jordan - Chapter 02 #39
Topic: INVESTOR CONSTRAINTS
Type: CONCEPTS

40. Stephen is a day trader who constantly buys and sells only medical-related stocks. Stephen has _____
asset allocation strategy and a(n) _____ security selection strategy.
A. an active; active
B. an active; passive
C. a passive; active
D. a passive; passive
E. no; active
Jordan - Chapter 02 #40
Topic: INVESTOR CONSTRAINTS
Type: CONCEPTS

41. Which one of the following is NOT an investor constraint?

A. time horizon
B. liquidity
C. resources
D. taxes
E. asset allocation
Jordan - Chapter 02 #41
Topic: INVESTOR CONSTRAINT
Type: CONCEPTS

42. To be considered liquid a security must:

A. be held in a cash account.
B. have a dividend yield in excess of 5 percent.
C. be able to be sold on short notice.
D. be sold within 30 days of purchase.
E. be able to be sold quickly with little, if any, loss in value.
Jordan - Chapter 02 #42
Topic: LIQUIDITY
Type: CONCEPTS

9
43. Jan is trying to decide whether she wants to purchase shares in K-Mart, Wal-Mart, or Target, all of
which are retail stores. Jan is making a(n) _____ decision.
A. passive strategy
B. security selection
C. tax-advantaged
D. active strategy
E. asset allocation
Jordan - Chapter 02 #43
Topic: SECURITY SELECTION
Type: CONCEPTS

44. Joshua has decided to invest 40 percent of his money in large company stocks, 35 percent in small
company stocks, and the balance in bonds. This is a(n) _____ decision.
A. market timing
B. security selection
C. tax-advantaged
D. active strategy
E. asset allocation
Jordan - Chapter 02 #44
Topic: ASSET ALLOCATION
Type: CONCEPTS

45. Lucas has a taxable investment portfolio comprised of multiple stocks and bonds. Lucas makes no
attempt to time the market and sells securities only as he needs to supplement his retirement income.
Lucas has a(n) ______ investment strategy.
A. active
B. passive
C. purely liquid
D. preferential tax
E. liquidity based
Jordan - Chapter 02 #45
Topic: PASSIVE STRATEGY
Type: CONCEPTS

46. You want to buy shares of Delta stock which is selling for $19 a share. Your margin account
currently has available cash of $4,800. What is the maximum number of shares you can purchase if
the initial margin requirement is 70 percent?
A. 176 shares
B. 252 shares
C. 333 shares
D. 360 shares
E. 408 shares

Maximum cost = $4,800 / .7 = $6,857.14Maximum number of shares $6,857.14 / $19 = 360.90 = 360
shares, rounded down to the last full share

Jordan - Chapter 02 #46

Topic: MARGIN PURCHASE
Type: Problems

10
47. Maxine is opening a margin account with $12,500 in cash. The initial margin is 60 percent and the
maintenance margin is 40 percent. What is the maximum number of shares she can purchase of a
stock which is priced at $42 a share?
A. 496 shares
B. 550 shares
C. 698 shares
D. 744 shares
E. 842 shares

Maximum cost = $12,500 / .6 = $20,833.33

Jordan - Chapter 02 #47

Topic: MARGIN PURCHASE
Type: Problems

48. Bill has a margin account with a 65 percent initial margin and a 30 percent maintenance margin.
What is the maximum amount he can spend to purchase shares of stock if his cash balance in the
account is $14,600?
A. $19,710.00
B. $22,461.54
C. $24,090.00
D. $41,714.29
E. $48,666.67

Maximum cost = $14,600 / .65 = $22,461.54

Jordan - Chapter 02 #48

Topic: MARGIN PURCHASE
Type: Problems

49. You recently purchased 700 shares of Adelp stock for $21 a share. Your broker required a cash
payment of $11,025, plus trading costs, for this purchase. What was the initial margin requirement?
A. 60 percent
B. 65 percent
C. 70 percent
D. 75 percent
E. 80 percent

Purchase cost = 700 × $21 = $14,700

Jordan - Chapter 02 #49

Topic: INITIAL MARGIN
Type: Problems

11
50. Terry recently purchased 200 shares of Magna Corp. stock for $36.50 a share. His broker required a
cash payment of $6,570, plus trading costs, for the purchase. What was the initial margin requirement
on this particular stock?
A. 70 percent
B. 75 percent
C. 80 percent
D. 90 percent
E. 100 percent

Purchase cost = 200 × $36.50 = $7,300

Jordan - Chapter 02 #50

Topic: INITIAL MARGIN
Type: Problems

51. Walt recently purchased 800 shares of Hi-Tek, Inc., stock for $6.80 a share. His broker required a
cash payment of $5,440, plus trading costs, for the purchase. What was the initial margin requirement
on this particular stock?
A. 70 percent
B. 75 percent
C. 80 percent
D. 90 percent
E. 100 percent

Purchase cost = 800 × $6.80 = $5,440

Jordan - Chapter 02 #51

Topic: INITIAL MARGIN
Type: Problems

52. Wilma recently purchased 600 shares of Driveway Repair, Inc., stock for $31.20 a share. What is the
minimum amount of cash the Federal Reserve will require for this purchase?
A. $8,424
B. $9,360
C. $10,296
D. $11,232
E. $12,168

Minimum cash required = .50 × 600 × $31.20 = $9,360

Jordan - Chapter 02 #52

Topic: INITIAL MARGIN
Type: Problems

12
53. Toni purchased 300 shares of Mega Motors, Inc., stock on margin when the stock was selling for $24
a share. The stock is currently selling for $28 a share. What is the minimum amount of equity Toni
must have in this security to avoid a margin call if the maintenance margin is 40 percent?
A. $2,880
B. $2,910
C. $3,155
D. $3,245
E. $3,360

Minimum equity = 300 × $28 × .40 = $3,360

Jordan - Chapter 02 #53

Topic: MAINTENANCE MARGIN
Type: Problems

54. You purchased 300 shares of stock at $41 a share. The stock is currently selling for $45 a share. The
initial margin was 60 percent and the maintenance margin is 35 percent. What is the required
minimum dollar amount which you must have as equity in this stock today?
A. $4,305
B. $4,725
C. $7,995
D. $8,100
E. $8,775

Minimum equity = 300 × $45 × .35 = $4,725

Jordan - Chapter 02 #54

Topic: MAINTENANCE MARGIN
Type: Problems

55. You own 300 shares of a stock which you purchased on margin. The stock is currently valued at $19
a share. Your broker advised you today that your minimum equity position for this purchase is $1,710
as of today. What is the maintenance margin percentage?
A. 25 percent
B. 30 percent
C. 35 percent
D. 40 percent
E. 50 percent
F. MAINTENANCE MARGIN

Maintenance margin percentage = $1,710 / (300 × $19) = .30 = 30 percent

Jordan - Chapter 02 #55

Type: Problems

13
56. Jessica purchased 400 shares of RTF stock for $14 a share. The stock was purchased with an initial
margin of 55 percent. The maintenance margin is 30 percent. The stock is currently selling for $12 a
share. What is the minimum dollar amount of equity which Jessica must have today to avoid a margin
call?
A. $1,440
B. $1,680
C. $2,640
D. $3,360
E. $3,920

Minimum equity = 400 × $12 × .30 = $1,440

Jordan - Chapter 02 #56

Topic: MAINTENANCE MARGIN
Type: Problems

57. Sue purchased 700 shares of a stock for $21 a share. Today, the stock is selling for $16 a share. The
initial margin was 70 percent and the maintenance margin is 30 percent. Sue had to pay _____ in
cash to purchase the stock and must have at least _____ in equity today.
A. $4,410; $3,360
B. $4,410; $7,840
C. $7,840; $3,360
D. $7,840; $10,290
E. $10,290; $3,360

Initial cash requirement = 700 × $21 × .70 = $10,290

Jordan - Chapter 02 #57

Topic: MAINTENANCE MARGIN
Type: Problems

58. Tom purchased 200 shares of stock for $28 a share and sold them 4 months later for $30 a share. The
initial margin was 60 percent. He received no dividend income. His holding period percentage return
was _____ percent while it would have been _____ percent had he not used margin for the purchase.
Ignore margin interest and trading costs.
A. 7.14; 11.90
B. 7.14; 17.86
C. 11.90; 7.14
D. 11.90; 8.77
E. 11.90; 17.86

Holding period percentage return without margin = [200 × ($30 - $28)] / (200 × $28) = $400 / $5,600
= .07143 = 7.14 percent

Jordan - Chapter 02 #58

Topic: MARGIN AND LEVERAGE
Type: Problems

14
59. Jill purchased 100 shares of ABC stock at $22 a share. On the same day, her twin sister Jan also
purchased 100 shares of ABC stock at $22 a share. Jill paid cash for her purchase while Jan used
margin. The broker has a 70 percent initial margin and a 35 percent maintenance margin on this
stock. Both Jill and Jan sold their shares after 7 months at a price of $26 a share. The stock pays no
dividends. Jill had a holding period percentage return of _____ percent as compared to Jan's _____
percent return. Ignore margin interest and trading costs.
A. 18.18; 18.18
B. 18.18; 25.97
C. 18.18; 30.30
D. 19.99; 25.97
E. 19.99; 30.30

Jill's holding period percentage return without margin = ($26 - $22) / $22 = .18182 = 18.18 percent

Jordan - Chapter 02 #59

Topic: MARGIN AND LEVERAGE
Type: Problems

60. Tori purchased 200 shares of a stock at $33 a share. She sold those shares 3 months later for $17 a
share. Tori paid 70 percent of the purchase price in cash and borrowed the rest on margin. Ignoring
margin interest and trading costs, Tori earned a holding period percentage return which is _____
percent lower than her return would have been if the purchase had been totally
paid in cash.
A. 14.14
B. 16.42
C. 20.78
D. 21.03
E. 23.65

Holding period percentage return without margin = ($17 - $33)] / $33 = -.484848 = -48.48 percent

Jordan - Chapter 02 #60

Topic: MARGIN AND LEVERAGE
Type: Problems

61. A stock was purchased for $19 a share and sold 6 months later for $21 a share. The holding period
percentage return would have been _____ percent if the purchase was 100 percent paid in cash as
compared to a return of _____ percent if the purchase was made with 60 percent margin. Ignore
trading costs and margin interest.
A. 8.67; 9.08
B. 9.15; 14.23
C. 10.53; 17.54
D. 10.72; 13.33
E. 11.60; 15.40

Holding period percentage return without margin = ($21 - $19) / $19 = $2 / $19 = .10526 = 10.53
percent

Jordan - Chapter 02 #61

Topic: MARGIN AND LEVERAGE
Type: Problems

15
62. You purchased a stock for $24 a share with 60 percent margin. You sold the stock two months later
for $26 a share. You did not receive any dividend income. What was your holding period percentage
return on this investment?
A. 8.33 percent
B. 11.92 percent
C. 13.89 percent
D. 15.28 percent
E. 16.67 percent

Holding period percentage return = ($26 - $24) / ($24 × .60) = $2 / $14.40 = .13889 = 13.89 percent

Jordan - Chapter 02 #62

Topic: MARGIN RETURN
Type: Problems

63. Tom purchased 200 shares of stock for $28 a share and sold them 4 months later for $30 a share. The
initial margin was 60 percent. He received no dividend income. His holding period percentage return
was _____ percent.
A. 11.90
B. 12.01
C. 14.50
D. 15.11
E. 17.86

Holding period percentage return = ($30 - $28) / ($28 × .60) = $2 / $16.80 = .119048 = 11.90 percent

Jordan - Chapter 02 #63

Topic: MARGIN RETURN
Type: Problems

64. Tori purchased 200 shares of Flagler Enterprises stock at a price of $22 a share. The initial margin
was 60 percent and the maintenance margin is 25 percent. What is the lowest that the stock price can
go before Tori receives a margin call?
A. $11.73
B. $13.48
C. $14.00
D. $14.29
E. $15.10

P* = {[200 × $22 × (1 - .60)] / 200} / (1 - .25) = $8.80 / .75 = $11.73

Jordan - Chapter 02 #64

Topic: MARGIN CALL
Type: Problems

16
65. You purchased 1,200 shares of stock for $54 a share. The initial margin was 70 percent and the
maintenance margin is 35 percent. What is the lowest that the stock price can go before you receive a
margin call?
A. $10.80
B. $24.92
C. $31.40
D. $37.78
E. $46.29

P* = {[1,200 × $54 × (1 - .70)] / 1,200} / (1 - .35) = $16.20 / .65 = $24.92

Jordan - Chapter 02 #65

Topic: MARGIN CALL
Type: Problems

66. Kathryn purchased 300 shares of stock for $29 a share. The initial margin is 60 percent and the
maintenance margin is 30 percent. If the stock price falls below _____ Kathryn will receive a margin
call.
A. $11.60
B. $12.13
C. $12.44
D. $15.08
E. $16.57

P* = {[300 × $29 × (1 - .60)] / 300} / (1 - .30) = $11.60 / .70 = $16.57

Jordan - Chapter 02 #66

Topic: MARGIN CALL
Type: Problems

67. You purchased 500 shares of stock for $60 a share. The initial margin is 60 percent and the
maintenance margin is 30 percent. What is the maximum percentage decline that can occur before
you receive a margin call?
A. 37 percent
B. 43 percent
C. 48 percent
D. 57 percent
E. 63 percent

P* = {[500 × $60 × (1 - .60)] / 500} / (1 - .30) = $24.00 / .70 = $34.28571

Jordan - Chapter 02 #67

Topic: MARGIN CALL
Type: Problems

17
68. Maulin purchased 700 shares of stock for $47 a share. The initial margin is 65 percent and the
maintenance margin is 25 percent. What is the maximum percentage decline that can occur before he
receives a margin call?
A. 41 percent
B. 47 percent
C. 53 percent
D. 59 percent
E. 62 percent

P* = {[700 × $47 × (1 - .65)] / 700} / (1 - .25) = $16.45 / .75 = $21.93333

Jordan - Chapter 02 #68

Topic: MARGIN CALL
Type: Problems

69. You obtain a margin loan of $18,000 to purchase some stock. The effective interest rate on the loan is
7.8 percent. How much interest will you pay if your repay the loan in 3 months?
A. $335.00
B. $337.26
C. $341.18
D. $346.90
E. $351.00

Margin interest = [(1 + .078)3/12 - 1] × $18,000 = $341.177 = $341.18

Jordan - Chapter 02 #69

Topic: MARGIN INTEREST
Type: Problems

70. Ruth purchased 200 shares of Amos Industries stock at a price of $42 a share. Her initial margin was
60 percent. The effective interest rate on the margin loan is 6.9 percent. How much margin interest
will she pay if she repays the loan in 6 months?
A. $109.18
B. $113.99
C. $115.92
D. $171.47
E. $173.88

Margin interest = [(1 + .069)6/12 - 1] × [200 × $42 × (1 - .60)] = .033924562 × $3,360 = $113.987 =
$113.99

Jordan - Chapter 02 #70

Topic: MARGIN INTEREST
Type: Problems

18
71. Micha-Ann paid $660 interest on a 9 month, $15,000 margin loan. What was the effective interest
rate on the loan?
A. 5.87 percent
B. 5.91 percent
C. 8.96 percent
D. 9.00 percent
E. 9.03 percent

Holding period percentage return = $660 / $15,000 = .044

Jordan - Chapter 02 #71

Topic: ANNUALIZED RETURN
Type: Problems

72. Bonita just sold a stock which returned 5.6 percent over a 3 month period. What was her annualized
rate of return?
A. 21.67 percent
B. 22.40 percent
C. 23.49 percent
D. 24.35 percent
E. 25.10 percent

Annualized rate of return = (1 + .056)12/3 - 1 = .24353 = 24.35 percent

Jordan - Chapter 02 #72

Topic: ANNUALIZED RETURN
Type: Problems

73. You purchased a stock two years ago for $36 a share. Today, you sold that stock for $58 a share. The
stock pays no dividends. What was your annualized rate of return?
A. 26.93 percent
B. 27.08 percent
C. 29.32 percent
D. 30.03 percent
E. 30.56 percent

Holding period percentage return = ($58 - $36) / $36 = .61111

Jordan - Chapter 02 #73

Topic: ANNUALIZED RETURN
Type: Problems

19
74. Three months ago, you purchased 700 shares of a stock for $22 a share. Today, you sold those shares
for $24 a share. What was your annualized rate of return on this investment?
A. 9.09 percent
B. 19.01 percent
C. 36.36 percent
D. 38.80 percent
E. 41.63 percent

Holding period percentage return = ($24 - $22) / $22 = .090909

Jordan - Chapter 02 #74

Topic: ANNUALIZED RETURN
Type: Problems

75. You owned a stock for 2 months and earned an annualized rate of return of 13.28 percent. What was
your rate of return for the 2 month period?
A. 2.10 percent
B. 2.26 percent
C. 2.60 percent
D. 3.08 percent
E. 3.32 percent

Holding period return = (1 + x)12/2 - 1 = .1328; x = 1.13281/6 - 1; .0210 = 2.10 percent

Jordan - Chapter 02 #75

Topic: ANNUALIZED RETURN
Type: Problems

76. You purchased 100 shares of Biegely, Inc., stock for $67 a share. Three months later, you sold those
shares for $71 a share. You also received a dividend of $.60 a share. What was your annualized rate
of return on this investment?
A. 25.41 percent
B. 27.46 percent
C. 28.87 percent
D. 30.42 percent
E. 32.36 percent

Holding period percentage return = ($71 - $67 + $.60) / $67 = .068657

Jordan - Chapter 02 #76

Topic: ANNUALIZED RETURN
Type: Problems

20
77. You short sold 400 shares of a stock at $51 a share. The initial margin is 50 percent and the
maintenance margin is 25 percent. What is the amount of your total liability for this transaction as
initially shown on your account balance sheet?
A. $5,100
B. $7,650
C. $10,200
D. $15,300
E. $20,400

Liability = 400 × $51 = $20,400

Jordan - Chapter 02 #77

Topic: SHORT SALE
Type: Problems

78. Kathryn short sold 500 shares of stock at $24 a share. One month later, she covered the short at a
price of $25. What was her total dollar return on this investment? Ignore margin interest, trading
costs, and taxes.
A. -$500
B. -$250
C. -$100
D. $250
E. $500

Total dollar return = 500 × ($24 - $25) = -$500

Jordan - Chapter 02 #78

Topic: SHORT SALE
Type: Problems

79. Today, you short sold 200 shares of Wynot stock at $34 a share. The initial margin is 60 percent and
the maintenance margin is 30 percent. Which one of the following is correct concerning your account
balance sheet for this transaction?
A. You have an asset of $4,080 from the sale proceeds.
B. You have a liability from the short position of $2,720.
C. Your account equity is $4,080.
D. Your initial margin deposit is $2,720.
E. Your total assets are $6,800.

Sale proceeds (an asset) = 200 × $34 = $6,800

Jordan - Chapter 02 #79

Topic: SHORT SALE
Type: Problems

21
80. Lester short sold 800 shares of Nu-Tek stock at $13 a share. The initial margin was 50 percent and
the maintenance margin is 25 percent. Nu-Tek is currently selling for $11 a share. What is the
amount of Lester's account equity currently?
A. $1,600
B. $5,200
C. $6,800
D. $8,800
E. $10,400

Account equity = (800 × $13) + (800 × $13 × .50) - (800 × $11) = $10,400 + $5,200 - $8,800 =
$6,800

Jordan - Chapter 02 #80

Topic: SHORT SALE
Type: Problems

81. You short sold 200 shares of Jasper stock at $56 a share at an initial margin of 50 percent. What is the
highest the stock price can go before you receive a margin call if the maintenance margin is 35
percent?
A. $60.18
B. $62.22
C. $65.43
D. $68.00
E. $70.69

P* = {[(200 × $56) + (200 × $56 × .50)] / 200} / (1 + .35) = [($11,200 + $5,600) / 200] / 1.35 =
$62.22

Jordan - Chapter 02 #81

Topic: MARGIN CALL ON SHORT SALE
Type: Problems

82. Casper thought that ACAP stock was ready to decline so he short sold 600 shares at $22 a share on
margin. The initial margin was 60 percent and the maintenance margin is 40 percent. What is the
highest the stock price can go before he receives a margin call?
A. $23.08
B. $24.27
C. $25.14
D. $26.11
E. $27.47

P* = {[(600 × $22) + (600 × $22 × .60)] / 600} / (1 + .40) = [($13,200 + $7,920) / 600] / 1.40 =
$25.14

Jordan - Chapter 02 #82

Topic: MARGIN CALL ON SHORT SALE
Type: Problems

22
83. Louisa short sold 300 shares of Celpa stock at $37 a share at an initial margin of 60 percent. The
maintenance margin is 30 percent. What is the highest the stock price can go before she receives a
margin call?
A. $44.22
B. $45.54
C. $48.06
D. $50.39
E. $52.67

P* = {[(300 × $37) + (300 × $37 × .60)] / 300} / (1 + .30) = [($11,100 + $6,660) / 300] / 1.30 =
$45.54

Jordan - Chapter 02 #83

Topic: MARGIN CALL ON SHORT SALE
Type: Problems

84. The short interest on LAK stock was 516,500 when the market opened this morning. During the day,
267,000 shares were covered and 198,000 shares were sold short. What was the short interest on
LAK stock at the end of the trading day?
A. 249,500 shares
B. 338,500 shares
C. 447,500 shares
D. 585,500 shares
E. 714,500 shares

End of day short interest = 516,500 - 267,000 + 198,000 = 447,500 shares

Jordan - Chapter 02 #84

Topic: SHORT INTEREST
Type: Problems

85. Soo Lee purchased 500 shares of a stock 2 years ago for $19 a share. Today, she sold those shares for
$24 a share. The stock paid a total of $.40 a share in dividends over the 2 years. The tax rate on
dividends is 28 percent and the tax rate on capital gains with holding periods in excess of 1 year is 15
percent. What is the aftertax dollar profit on this investment?
A. $2,222
B. $2,269
C. $2,307
D. $2,360
E. $2,409

Aftertax long-term capital gains = 500 × ($24 - $19) × (1 - .15) = $2,125

Jordan - Chapter 02 #85

Topic: TAXES AND RETURNS
Type: Problems

23
86. You purchased 900 shares of a stock 18 months ago for $46 a share. Today, you sold those shares for
$47 a share. The stock paid a total of $1.60 a share in dividends over the 18 months. The tax rate on
dividends is 28 percent and the tax rate on capital gains with holding periods in excess of 1 year is 15
percent. What is the aftertax dollar profit on this investment?
A. $1,684.80
B. $1,747.20
C. $1,801.80
D. $1,850.20
E. $1,989.00

Aftertax long-term capital gains = 900 × ($47 - $46) × (1 - .15) = $765

Jordan - Chapter 02 #86

Topic: TAXES AND RETURNS
Type: Problems

87. You purchased 600 shares of a stock at $33 a share 3 months ago. Today, you sold the shares for $35
a share. You also received a total of $150 in dividends. Dividends and short-term (less than 1 year)
capital gains are taxed at your 28 percent marginal tax rate. Capital gains on securities held for more
than 1 year are taxed at 15 percent. What is your aftertax holding period return on this investment?
A. 1.91 percent
B. 2.38 percent
C. 3.67 percent
D. 4.91 percent
E. 5.28 percent

Total aftertax return = {[600 × ($35 - $33)] + $150)} × (1 - .28) = $972

Jordan - Chapter 02 #87

Topic: TAXES AND RETURNS
Type: Problems

88. Ilona purchased 100 shares of a stock at $8 a share 6 months ago. Today, she sold the shares for $12
a share. She also received a total of $10 in dividends. Dividends and short-term (less than 1 year)
capital gains are taxed at 28 percent. Capital gains on securities held for more than 1 year are taxed at
15 percent. What is Ilona's aftertax holding period return on this investment?
A. 32.27 percent
B. 32.56 percent
C. 33.33 percent
D. 34.18 percent
E. 36.90 percent

Total aftertax return = {[100 × ($12 - $8)] + $10)} × (1 - .28) = $295.20

Jordan - Chapter 02 #88

Topic: TAXES AND RETURNS
Type: Problems

24
 ch2 Summary
Category # of Questions
Jordan - Chapter 02 88
Topic: ACCOUNT BALANCE SHEET 1
Topic: ANNUALIZED RETURN 8
Topic: ARBITRATION 1
Topic: ASSET ALLOCATION 2
Topic: BROKER-CUSTOMER RELATIONS 1
Topic: BROKERAGE FIRMS 1
Topic: CALL MONEY RATE 1
Topic: CASH ACCOUNT 1
Topic: DISCRETIONARY ACCOUNT 1
Topic: EFFECTIVE ANNUAL RETURN 1
Topic: EFFECTS OF MARGIN 1
Topic: HYPOTHECATION 1
Topic: INITIAL MARGIN 6
Topic: INVESTOR CONSTRAINT 1
Topic: INVESTOR CONSTRAINTS 2
Topic: LIQUIDITY 1
Topic: LONG POSITION 1
Topic: MAINTENANCE MARGIN 6
Topic: MARGIN 1
Topic: MARGIN ACCOUNT 2
Topic: MARGIN AND LEVERAGE 4
Topic: MARGIN CALL 9
Topic: MARGIN CALL ON SHORT SALE 3
Topic: MARGIN INTEREST 2
Topic: MARGIN PURCHASE 3
Topic: MARGIN RETURN 2
Topic: MARKET TIMING 1
Topic: PASSIVE STRATEGY 1
Topic: SECURITY SELECTION 2
Topic: SHORT INTEREST 2
Topic: SHORT POSITION 2
Topic: SHORT SALE 7
Topic: SIPC 1
Topic: SPREAD 1
Topic: STREET NAME 2
Topic: TAXES AND RETURNS 4
Topic: WRAP ACCOUNT 1
Type: CONCEPTS 30
Type: DEFINITIONS 15
Type: Problems 43