Basic Finance An Introduction to Fi
J J J J J
nancial Institutions, Investments an
J J J
d Management J
13th Edition by Herbert B. Mayo
J J J J J
Chapter Solutions Manual are included
J J J J J
(Ch 1 to 29) J J J
* There is no Solution for Ch. 1,2,3,5,12
J J J J J J J
** Immediate Download
J J
** Swift Response
J J
** Exercise Solutions
J J
,Solution and Answer Guide
J J J
Mayo/Lavelle,JBasicJFinance:JAnJIntroductionJtoJFinancialJInstitution
s,JInvestments,JandJManagement
ChapterJ4:JSecuritiesJMarkets
EXERCISE SOLUTIONS J
1. YouJpurchaseJ100JsharesJforJ$50JperJshareJ($5,000),JandJafterJaJyearJtheJpriceJrisesJtoJ$60.JWhatJwillJbeJtheJpe
rcentageJreturnJonJyourJinvestmentJifJyouJboughtJtheJstockJonJmarginJandJtheJmarginJrequirementJwas
(a)J25Jpercent,J(b)J50Jpercent,JandJ(c)J75Jpercent?J(IgnoreJcommissions,Jdividends,JandJinterestJexpense.)
Solution
IfJtheJstockJrisesJfromJ$50JtoJ$60,JtheJgainJisJ$1,000JonJtheJpurchaseJofJ100Jshares.JTheJreturnJonJtheJindivid
ual'sJinvestmentJdependsJonJtheJamountJofJmargin.
a. IfJtheJmarginJrequirementJisJ25Jpercent,JtheJamountJtheJinvestorJmustJputJupJisJ$1,250J(0.25JxJ$5,000),Jso
JtheJreturnJisJ$1,000/$1,250 J=J80%.
b. IfJtheJmarginJrequirementJisJ50Jpercent,JtheJreturnJisJ40JpercentJ($1,000/$2,500).
c. IfJtheJmarginJrequirementJisJ75Jpercent,JtheJrequiredJmarginJisJ$3,750JandJtheJreturnJisJ26.7JpercentJ($
1,000/$3,750).
BeJcertainJtoJpointJoutJtheJ$1,000JcapitalJgainJisJtheJsameJinJallJthreeJcasesJbutJthatJtheJpercentageJreturnJdiff
ersJbecauseJtheJamountJputJupJbyJtheJinvestorJdiffersJinJeachJcase.
2. RepeatJExerciseJ1JtoJdetermineJtheJpercentageJreturnJonJyourJinvestment,JbutJinJthisJcaseJsupposeJtheJpriceJofJ
theJstockJfallsJtoJ$40JperJshare.JWhatJgeneralizationJcanJbeJinferredJfromJyourJanswersJtoJProblemsJ1JandJ2?
Solution
IfJtheJstockJdeclinesJfromJ$50JtoJ$40,JtheJlossJisJ$1,000JonJtheJpurchaseJofJ100Jshares.JTheJreturnJonJtheJindi
vidual'sJinvestmentJonceJagainJdependsJonJtheJamountJofJmargin.
a. IfJtheJmarginJrequirementJisJ25Jpercent,JtheJamountJtheJinvestorJmustJputJupJisJ$1,250,JandJtheJreturnJis
$1,000/$1,250J=J−80%.
b. IfJtheJmarginJrequirementJisJ50Jpercent,JtheJreturnJisJ−40JpercentJ($1,000/$2,500).
c. IfJtheJmarginJrequirementJisJ75Jpercent,JtheJpercentageJlossJisJ−26.73JpercentJ($1,000/$3,750).
TheJgeneralizationJfromJProblemsJ(1)JandJ(2)JisJthatJtheJpercentageJreturnJisJaffectedJbyJtheJamountJofJmar
ginJandJthatJtheJlowerJtheJmarginJrequirement,JtheJgreaterJisJtheJpotentialJswingJinJtheJreturnJonJtheJinvestor'
sJfunds.
3. AJstockJisJcurrentlyJsellingJforJ$45JperJshare.JWhatJisJtheJgainJorJlossJonJtheJfollowingJtransactions?
Solution
a. $41.50J−J$45J=J−$3.50
b. $45J−J$41.50J=J$3.50
c. $54J−J$45J=J$9
d. $45J−J$54J=J−$9
, InJeachJcase,JtheJsaleJpriceJisJsubtractedJfromJtheJpurchaseJpriceJtoJdetermineJtheJprofitJorJloss.JBeJcertainJtoJ
pointJoutJthatJtheJsaleJmayJoccurJbeforeJtheJpurchase,JwhichJisJtheJcaseJinJeachJofJtheJshortJsales.
4. AJsophisticatedJinvestor,JB.JGraham,JsoldJ500JsharesJshortJofJAmwell,JInc.JatJ$42JperJshare.JTheJpriceJofJth
eJstockJsubsequentlyJfellJtoJ$38JbeforeJrisingJtoJ$49JatJwhichJtimeJGrahamJcoveredJtheJpositionJ(thatJis,Jpurc
hasedJsharesJtoJcloseJtheJshortJposition).JWhatJwasJtheJpercentageJgainJorJlossJonJthisJinvestment?
Solution
Unfortunately,JinvestorJGrahamJdidJnotJcoverJtheJshortJsaleJafterJtheJstockJdeclinedJbutJwaitedJuntilJtheJpric
eJofJtheJstockJroseJandJthusJsustainedJaJlossJofJ$7JperJshareJforJaJtotalJlossJofJ$3,500.
5. AJyearJago,JKimJAltmanJpurchasedJ200JsharesJofJBLK,JInc.JforJ$25.50JonJmargin.JAtJthatJtimeJtheJmarginJre
quirementJwasJ40Jpercent.JIfJtheJinterestJrateJonJborrowedJfundsJwasJ9JpercentJandJsheJsoldJtheJstockJfor
$34,JwhatJisJtheJpercentageJreturnJonJtheJfundsJsheJinvestedJinJtheJstock?
Solution
CostJofJtheJshares:J200J×J$25.50J=J$5,100JMargin
:J$5,100J×J0.40J=J$2,040
FundsJborrowed:J$5,100J−J$2,040J=J$3,060JInter
estJpaid:J$3,060J×J0.09J=J$275.40
ProfitJonJtheJstock:J$6,800J−J$5,100J=J$1,700
ReturnJonJtheJinvestment:J($1,700J−J$275.40)/$2,040J=J69.8%
6. BarbaraJbuysJ100JsharesJofJDEMJatJ$35JperJshareJandJ200JsharesJofJGOPJatJ$40JperJshare.JTheyJbuyJonJm
arginJandJtheJbrokerJchargesJinterestJofJ10JpercentJonJtheJloan.
Solution
100JsharesJofJDEMJatJ$35 $3,500
200JsharesJofJGOPJatJ$40 $8,000
TotalJcostJofJsecurities $11,500
a. RequiredJmargin:J0.55J×J$11,500J=J$6,325JAm
ountJborrowed:J$11,500J−J$6,325J=J$5,175
b. InterestJexpense:J0.10J×J$5,175J=J$517.50
c. LossJonJDEMJstock:J$2,900J−J$3,500J=J−$600JL
ossJonJGOPJstock:J$6,400J−J$8,000J=J−$1,600JN
etJloss:J−$2,200
d. PercentageJlossJincludingJinterest:
−($2,200J+J$517.50)/$6,325J=J−43%
, 7. AfterJanJanalysisJofJLion/Bear,JInc.,JKarlJO’GradyJhasJconcludedJthatJtheJfirmJwillJfaceJfinancialJdifficultyJw
ithinJaJyear.JTheJstockJisJcurrentlyJsellingJforJ$5JandJO’GradyJwantsJtoJsellJitJshort.JHisJbrokerJisJwillingJtoJex
ecuteJtheJtransaction,JbutJonlyJifJO’GradyJputsJupJcashJasJcollateralJequalJtoJtheJamountJofJtheJshortJsale.JIfJO
’GradyJdoesJsellJtheJstockJshort,JwhatJisJtheJpercentageJreturnJheJlosesJifJtheJpriceJofJtheJstockJrisesJtoJ$7?JW
hatJwouldJbeJtheJpercentageJreturnJifJtheJfirmJwentJbankruptJandJfolded?
Solution
SinceJtheJstockJisJsoldJshort,JtheJpriceJincreaseJcausesJaJlossJofJ$2J($5J−J$7)JperJshare.JSinceJMr.JO'Grady
putJupJ100JpercentJmargin,JtheJpercentageJlossJis
−$2/$5J=J−40.0%
IfJtheJpriceJofJtheJstockJdeclinedJtoJ$0,JtheJpercentageJreturnJisJ100Jpercent.
BeJcertainJtoJpointJoutJthatJtheJlargestJgainJtoJtheJshortJsellerJoccursJifJtheJpriceJofJtheJstockJdeclinesJtoJzero,J
whileJinJaJlongJpositionJthereJisJnoJlimitJtoJtheJpossibleJpriceJincrease.JOfJcourse,JinJmostJcases,JtheJpriceJofJt
heJstockJdoesJnotJdeclineJtoJzero,JnorJdoesJitJriseJindefinitely.
8. LisaJLasherJbuysJ400JsharesJofJstockJonJmarginJatJ$18JperJshare.JIfJtheJmarginJrequirementJisJ50Jpercent,Jho
wJmuchJmustJtheJstockJriseJforJthemJtoJrealizeJa
25-
percentJreturnJonJtheirJinvestedJfunds?J(IgnoreJdividends,Jcommissions,JandJinterestJonJborrowedJfunds.)
Solution
TheJinitialJinvestmentJisJ$18J×J400J×J0.50J=J$3,600.JToJrealizeJaJ25JpercentJreturn,JtheJvalueJofJtheJpositionJinJ
theJstockJmustJriseJbyJ$900J(0.25J×J$3,600).JTheJstockJmustJincreaseJbyJ$2.25JperJshareJ($900/400JsharesJ=J$
2.25).
9. AJbrokerJquotesJGameStopJstockJ(GME)JwithJaJbid-askJofJ$93.52–
$93.62.JYouJbuyJ10JsharesJandJthenJimmediatelyJdecideJtoJsellJyourJ10Jshares.JTheJstockJpriceJhasJnotJch
angedJatJall,JandJthereJareJnoJcommissionsJorJtaxes.JHowJmuchJmoneyJdoJyouJlose?
Solution
YouJbuyJatJtheJhigherJpriceJthatJtheJbrokerJisJasking:J10JsharesJ×J$93.62J=J$936.20.JYouJsellJatJtheJlowerJpri
ceJthatJtheJbrokerJisJbidding:J10JsharesJ×J$93.52J=J$935.20.JYouJreceiveJonlyJ$935.20JafterJpaying
$936.20,JsoJyouJloseJ$1.00.
10. AJbrokerJquotesJAMCJEntertainmentJHoldingsJ(AMC),JaJmovieJtheaterJchain,JatJaJbid-askJofJ$15.94–
$16.14JandJyouJdecideJtoJbuyJ100Jshares.JTheJnextJdayJtheJstockJpriceJhasJchanged,JandJtheJbrokerJquotesJaJbi
d-askJofJ$14.52–$14.72,JandJyouJsellJyourJ100Jshares.JHowJmuchJhaveJyouJgainedJorJlost?
Solution
YouJbuyJatJtheJhigherJaskJpriceJonJtheJfirstJday:J100JsharesJ×J$16.41J=J$1,641.JYouJsellJatJtheJlowerJbidJprice
JtheJnextJday:J100JsharesJ×J14.52J=J$1,452.J$1,452J−J$1,641J=JaJlossJofJ$189.
J J J J J
nancial Institutions, Investments an
J J J
d Management J
13th Edition by Herbert B. Mayo
J J J J J
Chapter Solutions Manual are included
J J J J J
(Ch 1 to 29) J J J
* There is no Solution for Ch. 1,2,3,5,12
J J J J J J J
** Immediate Download
J J
** Swift Response
J J
** Exercise Solutions
J J
,Solution and Answer Guide
J J J
Mayo/Lavelle,JBasicJFinance:JAnJIntroductionJtoJFinancialJInstitution
s,JInvestments,JandJManagement
ChapterJ4:JSecuritiesJMarkets
EXERCISE SOLUTIONS J
1. YouJpurchaseJ100JsharesJforJ$50JperJshareJ($5,000),JandJafterJaJyearJtheJpriceJrisesJtoJ$60.JWhatJwillJbeJtheJpe
rcentageJreturnJonJyourJinvestmentJifJyouJboughtJtheJstockJonJmarginJandJtheJmarginJrequirementJwas
(a)J25Jpercent,J(b)J50Jpercent,JandJ(c)J75Jpercent?J(IgnoreJcommissions,Jdividends,JandJinterestJexpense.)
Solution
IfJtheJstockJrisesJfromJ$50JtoJ$60,JtheJgainJisJ$1,000JonJtheJpurchaseJofJ100Jshares.JTheJreturnJonJtheJindivid
ual'sJinvestmentJdependsJonJtheJamountJofJmargin.
a. IfJtheJmarginJrequirementJisJ25Jpercent,JtheJamountJtheJinvestorJmustJputJupJisJ$1,250J(0.25JxJ$5,000),Jso
JtheJreturnJisJ$1,000/$1,250 J=J80%.
b. IfJtheJmarginJrequirementJisJ50Jpercent,JtheJreturnJisJ40JpercentJ($1,000/$2,500).
c. IfJtheJmarginJrequirementJisJ75Jpercent,JtheJrequiredJmarginJisJ$3,750JandJtheJreturnJisJ26.7JpercentJ($
1,000/$3,750).
BeJcertainJtoJpointJoutJtheJ$1,000JcapitalJgainJisJtheJsameJinJallJthreeJcasesJbutJthatJtheJpercentageJreturnJdiff
ersJbecauseJtheJamountJputJupJbyJtheJinvestorJdiffersJinJeachJcase.
2. RepeatJExerciseJ1JtoJdetermineJtheJpercentageJreturnJonJyourJinvestment,JbutJinJthisJcaseJsupposeJtheJpriceJofJ
theJstockJfallsJtoJ$40JperJshare.JWhatJgeneralizationJcanJbeJinferredJfromJyourJanswersJtoJProblemsJ1JandJ2?
Solution
IfJtheJstockJdeclinesJfromJ$50JtoJ$40,JtheJlossJisJ$1,000JonJtheJpurchaseJofJ100Jshares.JTheJreturnJonJtheJindi
vidual'sJinvestmentJonceJagainJdependsJonJtheJamountJofJmargin.
a. IfJtheJmarginJrequirementJisJ25Jpercent,JtheJamountJtheJinvestorJmustJputJupJisJ$1,250,JandJtheJreturnJis
$1,000/$1,250J=J−80%.
b. IfJtheJmarginJrequirementJisJ50Jpercent,JtheJreturnJisJ−40JpercentJ($1,000/$2,500).
c. IfJtheJmarginJrequirementJisJ75Jpercent,JtheJpercentageJlossJisJ−26.73JpercentJ($1,000/$3,750).
TheJgeneralizationJfromJProblemsJ(1)JandJ(2)JisJthatJtheJpercentageJreturnJisJaffectedJbyJtheJamountJofJmar
ginJandJthatJtheJlowerJtheJmarginJrequirement,JtheJgreaterJisJtheJpotentialJswingJinJtheJreturnJonJtheJinvestor'
sJfunds.
3. AJstockJisJcurrentlyJsellingJforJ$45JperJshare.JWhatJisJtheJgainJorJlossJonJtheJfollowingJtransactions?
Solution
a. $41.50J−J$45J=J−$3.50
b. $45J−J$41.50J=J$3.50
c. $54J−J$45J=J$9
d. $45J−J$54J=J−$9
, InJeachJcase,JtheJsaleJpriceJisJsubtractedJfromJtheJpurchaseJpriceJtoJdetermineJtheJprofitJorJloss.JBeJcertainJtoJ
pointJoutJthatJtheJsaleJmayJoccurJbeforeJtheJpurchase,JwhichJisJtheJcaseJinJeachJofJtheJshortJsales.
4. AJsophisticatedJinvestor,JB.JGraham,JsoldJ500JsharesJshortJofJAmwell,JInc.JatJ$42JperJshare.JTheJpriceJofJth
eJstockJsubsequentlyJfellJtoJ$38JbeforeJrisingJtoJ$49JatJwhichJtimeJGrahamJcoveredJtheJpositionJ(thatJis,Jpurc
hasedJsharesJtoJcloseJtheJshortJposition).JWhatJwasJtheJpercentageJgainJorJlossJonJthisJinvestment?
Solution
Unfortunately,JinvestorJGrahamJdidJnotJcoverJtheJshortJsaleJafterJtheJstockJdeclinedJbutJwaitedJuntilJtheJpric
eJofJtheJstockJroseJandJthusJsustainedJaJlossJofJ$7JperJshareJforJaJtotalJlossJofJ$3,500.
5. AJyearJago,JKimJAltmanJpurchasedJ200JsharesJofJBLK,JInc.JforJ$25.50JonJmargin.JAtJthatJtimeJtheJmarginJre
quirementJwasJ40Jpercent.JIfJtheJinterestJrateJonJborrowedJfundsJwasJ9JpercentJandJsheJsoldJtheJstockJfor
$34,JwhatJisJtheJpercentageJreturnJonJtheJfundsJsheJinvestedJinJtheJstock?
Solution
CostJofJtheJshares:J200J×J$25.50J=J$5,100JMargin
:J$5,100J×J0.40J=J$2,040
FundsJborrowed:J$5,100J−J$2,040J=J$3,060JInter
estJpaid:J$3,060J×J0.09J=J$275.40
ProfitJonJtheJstock:J$6,800J−J$5,100J=J$1,700
ReturnJonJtheJinvestment:J($1,700J−J$275.40)/$2,040J=J69.8%
6. BarbaraJbuysJ100JsharesJofJDEMJatJ$35JperJshareJandJ200JsharesJofJGOPJatJ$40JperJshare.JTheyJbuyJonJm
arginJandJtheJbrokerJchargesJinterestJofJ10JpercentJonJtheJloan.
Solution
100JsharesJofJDEMJatJ$35 $3,500
200JsharesJofJGOPJatJ$40 $8,000
TotalJcostJofJsecurities $11,500
a. RequiredJmargin:J0.55J×J$11,500J=J$6,325JAm
ountJborrowed:J$11,500J−J$6,325J=J$5,175
b. InterestJexpense:J0.10J×J$5,175J=J$517.50
c. LossJonJDEMJstock:J$2,900J−J$3,500J=J−$600JL
ossJonJGOPJstock:J$6,400J−J$8,000J=J−$1,600JN
etJloss:J−$2,200
d. PercentageJlossJincludingJinterest:
−($2,200J+J$517.50)/$6,325J=J−43%
, 7. AfterJanJanalysisJofJLion/Bear,JInc.,JKarlJO’GradyJhasJconcludedJthatJtheJfirmJwillJfaceJfinancialJdifficultyJw
ithinJaJyear.JTheJstockJisJcurrentlyJsellingJforJ$5JandJO’GradyJwantsJtoJsellJitJshort.JHisJbrokerJisJwillingJtoJex
ecuteJtheJtransaction,JbutJonlyJifJO’GradyJputsJupJcashJasJcollateralJequalJtoJtheJamountJofJtheJshortJsale.JIfJO
’GradyJdoesJsellJtheJstockJshort,JwhatJisJtheJpercentageJreturnJheJlosesJifJtheJpriceJofJtheJstockJrisesJtoJ$7?JW
hatJwouldJbeJtheJpercentageJreturnJifJtheJfirmJwentJbankruptJandJfolded?
Solution
SinceJtheJstockJisJsoldJshort,JtheJpriceJincreaseJcausesJaJlossJofJ$2J($5J−J$7)JperJshare.JSinceJMr.JO'Grady
putJupJ100JpercentJmargin,JtheJpercentageJlossJis
−$2/$5J=J−40.0%
IfJtheJpriceJofJtheJstockJdeclinedJtoJ$0,JtheJpercentageJreturnJisJ100Jpercent.
BeJcertainJtoJpointJoutJthatJtheJlargestJgainJtoJtheJshortJsellerJoccursJifJtheJpriceJofJtheJstockJdeclinesJtoJzero,J
whileJinJaJlongJpositionJthereJisJnoJlimitJtoJtheJpossibleJpriceJincrease.JOfJcourse,JinJmostJcases,JtheJpriceJofJt
heJstockJdoesJnotJdeclineJtoJzero,JnorJdoesJitJriseJindefinitely.
8. LisaJLasherJbuysJ400JsharesJofJstockJonJmarginJatJ$18JperJshare.JIfJtheJmarginJrequirementJisJ50Jpercent,Jho
wJmuchJmustJtheJstockJriseJforJthemJtoJrealizeJa
25-
percentJreturnJonJtheirJinvestedJfunds?J(IgnoreJdividends,Jcommissions,JandJinterestJonJborrowedJfunds.)
Solution
TheJinitialJinvestmentJisJ$18J×J400J×J0.50J=J$3,600.JToJrealizeJaJ25JpercentJreturn,JtheJvalueJofJtheJpositionJinJ
theJstockJmustJriseJbyJ$900J(0.25J×J$3,600).JTheJstockJmustJincreaseJbyJ$2.25JperJshareJ($900/400JsharesJ=J$
2.25).
9. AJbrokerJquotesJGameStopJstockJ(GME)JwithJaJbid-askJofJ$93.52–
$93.62.JYouJbuyJ10JsharesJandJthenJimmediatelyJdecideJtoJsellJyourJ10Jshares.JTheJstockJpriceJhasJnotJch
angedJatJall,JandJthereJareJnoJcommissionsJorJtaxes.JHowJmuchJmoneyJdoJyouJlose?
Solution
YouJbuyJatJtheJhigherJpriceJthatJtheJbrokerJisJasking:J10JsharesJ×J$93.62J=J$936.20.JYouJsellJatJtheJlowerJpri
ceJthatJtheJbrokerJisJbidding:J10JsharesJ×J$93.52J=J$935.20.JYouJreceiveJonlyJ$935.20JafterJpaying
$936.20,JsoJyouJloseJ$1.00.
10. AJbrokerJquotesJAMCJEntertainmentJHoldingsJ(AMC),JaJmovieJtheaterJchain,JatJaJbid-askJofJ$15.94–
$16.14JandJyouJdecideJtoJbuyJ100Jshares.JTheJnextJdayJtheJstockJpriceJhasJchanged,JandJtheJbrokerJquotesJaJbi
d-askJofJ$14.52–$14.72,JandJyouJsellJyourJ100Jshares.JHowJmuchJhaveJyouJgainedJorJlost?
Solution
YouJbuyJatJtheJhigherJaskJpriceJonJtheJfirstJday:J100JsharesJ×J$16.41J=J$1,641.JYouJsellJatJtheJlowerJbidJprice
JtheJnextJday:J100JsharesJ×J14.52J=J$1,452.J$1,452J−J$1,641J=JaJlossJofJ$189.
