Solution Manual & Test
Bank for Basic Finance
13th Edition by Herbert B.
Mayo & Michael J. Lavelle |
Chapter 4: Securities
Markets
Master the core concepts of Chapter 4 (Securities
Markets) with this premium study bundle featuring
verified practice questions, answers, and
comprehensive mathematical rationales mapped
directly onto margin requirements and trading
mechanics. Formatted perfectly for rapid review and
maximum retention, this resource is your ultimate
tool to secure an A+ grade.
,Question 1
An investor purchases 100 shares of stock at $50 per share on margin. If the initial
margin requirement is 25%, how much equity (cash) must the investor personally
contribute to initiate the position?
A) $5,000
B) $3,750
C) $2,500
D) $1,250
Answer: D) $1,250
Rationale: The total investment value is 100 shares × $50 = $5,000. With a 25% margin
requirement, the investor must put up 25% of the total value in cash: 0.25 × $5,000 =
$1,250. The remaining $3,750 is borrowed from the broker.
Question 2
An investor buys 100 shares of stock at $50 per share on a 25% margin requirement.
After one year, the price rises to $60 per share. Ignoring commissions, dividends, and
interest, what is the percentage return on the investor's funds?
A) 20%
B) 40%
C) 80%
D) 100%
Answer: C) 80%
Rationale: The total capital gain is ($60 - $50) × 100 shares = $1,000. The investor's
initial cash outlay (margin) was 25% of $5,000 = $1,250. The percentage return is
calculated as the dollar gain divided by the investor's cash outlay: $1,000 / $1,250 =
80%.
Question 3
If an investor purchases 100 shares at $50 per share under a 50% margin requirement
and the stock price increases to $60, what is the percentage return on the investment?
A) 20%
B) 40%
C) 60%
D) 80%
Answer: B) 40%
Rationale: The capital gain remains $1,000 [($60 - $50) × 100]. At a 50% margin
requirement, the initial cash put up is 0.50 × $5,000 = $2,500. The percentage return is
$1,000 / $2,500 = 40%.
Question 4
An investor utilizes a 75% margin requirement to buy 100 shares of stock at $50 per
share. If the stock price advances to $60, what is the exact percentage return?
A) 20.0%
B) 26.7%
,C) 40.0%
D) 75.0%
Answer: B) 26.7%
Rationale: The dollar gain is $1,000. Under a 75% margin requirement, the investor
provides 0.75 × $5,000 = $3,750 in cash equity. The percentage return is equal to
$1,000 / $3,750 = 26.67%, rounded to 26.7%.
Question 5
When comparing identical capital gains across different margin requirements (25%,
50%, and 75%), which of the following generalizations can be made regarding
percentage returns?
A) The percentage return is constant because the capital gain is identical.
B) The percentage return decreases as the margin requirement decreases.
C) The percentage return increases as the amount of equity put up decreases.
D) Margin requirements have no mathematical mathematical impact on returns.
Answer: C) The percentage return increases as the amount of equity put up
decreases.
Rationale: Although the absolute dollar capital gain ($1,000) is identical in all cases, the
percentage return differs significantly because the initial cash capital put up by the
investor varies based on the margin requirement.
Question 6
An investor purchases 100 shares of stock at $50 per share on margin. If the price
subsequently falls to $40 per share, what is the total absolute dollar loss on the
transaction?
A) $500
B) $1,000
C) $1,250
D) $2,500
Answer: B) $1,000
Rationale: The loss is computed as the change in price per share multiplied by the total
number of shares held: ($50 - $40) × 100 shares = $1,000 total loss.
Question 7
An investor buys 100 shares of stock at $50 per share with a 25% margin requirement.
If the price declines to $40 per share, what is the percentage return (loss) on the
investor's cash funds?
A) -20%
B) -40%
C) -80%
D) -100%
Answer: C) -80%
Rationale: The absolute dollar loss is $1,000. The initial cash equity provided by the
investor was 0.25 × $5,000 = $1,250. The percentage return on equity is -$1,000 /
$1,250 = -80%.
, Question 8
Suppose an investor faces a 50% margin requirement to buy 100 shares of stock at $50
per share. If the stock price drops to $40, what is the percentage loss on the equity
funds?
A) -20%
B) -40%
C) -50%
D) -80%
Answer: B) -40%
Rationale: The total loss is $1,000. At a 50% margin level, the initial cash investment is
0.50 × $5,000 = $2,500. The percentage loss on the investor's capital is -$1,000 /
$2,500 = -40%.
Question 9
An investor buys 100 shares of stock at $50 per share using a 75% initial margin. If the
stock price drops to $40, what is the percentage performance return?
A) -20.00%
B) -26.73%
C) -40.00%
D) -75.00%
Answer: B) -26.73%
Rationale: The dollar loss is $1,000. The initial cash equity required is 0.75 × $5,000 =
$3,750. The resulting percentage performance on funds is -$1,000 / $3,750 = -26.73%.
Question 10
Based on financial calculations for margin positions, what is the relationship between
the initial margin requirement and the potential volatility (swing) of returns?
A) The higher the margin requirement, the greater the potential swing in percentage
return.
B) The lower the margin requirement, the greater the potential swing in percentage
return.
C) Margin requirements change absolute dollar losses but leave percentage volatility
flat.
D) Lower margin requirements insulate the investor from large downward losses.
Answer: B) The lower the margin requirement, the greater the potential swing in
percentage return.
Rationale: A lower margin requirement increases financial leverage. This means that a
small percentage change in the asset's price produces a much larger percentage swing
(magnified gains or losses) in the investor's personal capital.
Question 11
An investor enters a long position in a stock currently trading at $45 per share. If the
stock price falls to $41.50, what is the financial outcome per share?
A) A gain of $3.50
B) A loss of $3.50
Bank for Basic Finance
13th Edition by Herbert B.
Mayo & Michael J. Lavelle |
Chapter 4: Securities
Markets
Master the core concepts of Chapter 4 (Securities
Markets) with this premium study bundle featuring
verified practice questions, answers, and
comprehensive mathematical rationales mapped
directly onto margin requirements and trading
mechanics. Formatted perfectly for rapid review and
maximum retention, this resource is your ultimate
tool to secure an A+ grade.
,Question 1
An investor purchases 100 shares of stock at $50 per share on margin. If the initial
margin requirement is 25%, how much equity (cash) must the investor personally
contribute to initiate the position?
A) $5,000
B) $3,750
C) $2,500
D) $1,250
Answer: D) $1,250
Rationale: The total investment value is 100 shares × $50 = $5,000. With a 25% margin
requirement, the investor must put up 25% of the total value in cash: 0.25 × $5,000 =
$1,250. The remaining $3,750 is borrowed from the broker.
Question 2
An investor buys 100 shares of stock at $50 per share on a 25% margin requirement.
After one year, the price rises to $60 per share. Ignoring commissions, dividends, and
interest, what is the percentage return on the investor's funds?
A) 20%
B) 40%
C) 80%
D) 100%
Answer: C) 80%
Rationale: The total capital gain is ($60 - $50) × 100 shares = $1,000. The investor's
initial cash outlay (margin) was 25% of $5,000 = $1,250. The percentage return is
calculated as the dollar gain divided by the investor's cash outlay: $1,000 / $1,250 =
80%.
Question 3
If an investor purchases 100 shares at $50 per share under a 50% margin requirement
and the stock price increases to $60, what is the percentage return on the investment?
A) 20%
B) 40%
C) 60%
D) 80%
Answer: B) 40%
Rationale: The capital gain remains $1,000 [($60 - $50) × 100]. At a 50% margin
requirement, the initial cash put up is 0.50 × $5,000 = $2,500. The percentage return is
$1,000 / $2,500 = 40%.
Question 4
An investor utilizes a 75% margin requirement to buy 100 shares of stock at $50 per
share. If the stock price advances to $60, what is the exact percentage return?
A) 20.0%
B) 26.7%
,C) 40.0%
D) 75.0%
Answer: B) 26.7%
Rationale: The dollar gain is $1,000. Under a 75% margin requirement, the investor
provides 0.75 × $5,000 = $3,750 in cash equity. The percentage return is equal to
$1,000 / $3,750 = 26.67%, rounded to 26.7%.
Question 5
When comparing identical capital gains across different margin requirements (25%,
50%, and 75%), which of the following generalizations can be made regarding
percentage returns?
A) The percentage return is constant because the capital gain is identical.
B) The percentage return decreases as the margin requirement decreases.
C) The percentage return increases as the amount of equity put up decreases.
D) Margin requirements have no mathematical mathematical impact on returns.
Answer: C) The percentage return increases as the amount of equity put up
decreases.
Rationale: Although the absolute dollar capital gain ($1,000) is identical in all cases, the
percentage return differs significantly because the initial cash capital put up by the
investor varies based on the margin requirement.
Question 6
An investor purchases 100 shares of stock at $50 per share on margin. If the price
subsequently falls to $40 per share, what is the total absolute dollar loss on the
transaction?
A) $500
B) $1,000
C) $1,250
D) $2,500
Answer: B) $1,000
Rationale: The loss is computed as the change in price per share multiplied by the total
number of shares held: ($50 - $40) × 100 shares = $1,000 total loss.
Question 7
An investor buys 100 shares of stock at $50 per share with a 25% margin requirement.
If the price declines to $40 per share, what is the percentage return (loss) on the
investor's cash funds?
A) -20%
B) -40%
C) -80%
D) -100%
Answer: C) -80%
Rationale: The absolute dollar loss is $1,000. The initial cash equity provided by the
investor was 0.25 × $5,000 = $1,250. The percentage return on equity is -$1,000 /
$1,250 = -80%.
, Question 8
Suppose an investor faces a 50% margin requirement to buy 100 shares of stock at $50
per share. If the stock price drops to $40, what is the percentage loss on the equity
funds?
A) -20%
B) -40%
C) -50%
D) -80%
Answer: B) -40%
Rationale: The total loss is $1,000. At a 50% margin level, the initial cash investment is
0.50 × $5,000 = $2,500. The percentage loss on the investor's capital is -$1,000 /
$2,500 = -40%.
Question 9
An investor buys 100 shares of stock at $50 per share using a 75% initial margin. If the
stock price drops to $40, what is the percentage performance return?
A) -20.00%
B) -26.73%
C) -40.00%
D) -75.00%
Answer: B) -26.73%
Rationale: The dollar loss is $1,000. The initial cash equity required is 0.75 × $5,000 =
$3,750. The resulting percentage performance on funds is -$1,000 / $3,750 = -26.73%.
Question 10
Based on financial calculations for margin positions, what is the relationship between
the initial margin requirement and the potential volatility (swing) of returns?
A) The higher the margin requirement, the greater the potential swing in percentage
return.
B) The lower the margin requirement, the greater the potential swing in percentage
return.
C) Margin requirements change absolute dollar losses but leave percentage volatility
flat.
D) Lower margin requirements insulate the investor from large downward losses.
Answer: B) The lower the margin requirement, the greater the potential swing in
percentage return.
Rationale: A lower margin requirement increases financial leverage. This means that a
small percentage change in the asset's price produces a much larger percentage swing
(magnified gains or losses) in the investor's personal capital.
Question 11
An investor enters a long position in a stock currently trading at $45 per share. If the
stock price falls to $41.50, what is the financial outcome per share?
A) A gain of $3.50
B) A loss of $3.50
