Basic Finance An Introduction to Fi
g g g g g
nancial Institutions, Investments a
g g g
nd Management g
13th Edition by Herbert B. Mayo
g g g g g
Chapter Solutions Manual are included
g g g g
(Ch 1 to 29) g g g g
* There is no Solution for Ch. 1,2,3,5,12
g g g g g g g
** Immediate Download
g g
** Swift Response
g g
** Exercise Solutions
g g
,Solution and Answer Guide
g g g
Mayo/Lavelle,gBasicgFinance:gAngIntroductiongtogFinancialgInstitutio
ns,gInvestments,gandgManagement
Chapterg4:gSecuritiesgMarkets
EXERCISE SOLUTIONS G
1. Yougpurchaseg100gsharesgforg$50gpergshareg($5,000),gandgaftergagyeargthegpricegrisesgtog$60.gWhatgwillgbegtheg
percentagegreturngongyourginvestmentgifgyougboughtgthegstockgongmargingandgthegmargingrequirementgwas
(a)g25gpercent,g(b)g50gpercent,gandg(c)g75gpercent?g(Ignoregcommissions,gdividends,gandginterestgexpense.)
Solution
Ifgthegstockgrisesgfromg$50gtog$60,gtheggaingisg$1,000gongthegpurchasegofg100gshares.gThegreturngongthegindi
vidual'sginvestmentgdependsgongthegamountgofgmargin.
a. Ifgthegmargingrequirementgisg25gpercent,gthegamountgtheginvestorgmustgputgupgisg$1,250g(0.25gxg$5,000),g
sogthegreturngisg$1,000/$1,250g=g80%.
b. Ifgthegmargingrequirementgisg50gpercent,gthegreturngisg40gpercentg($1,000/$2,500).
c. Ifgthegmargingrequirementgisg75gpercent,gthegrequiredgmargingisg$3,750gandgthegreturngisg26.7gpercent
g($1,000/$3,750).
Begcertaingtogpointgoutgtheg$1,000gcapitalggaingisgthegsamegingallgthreegcasesgbutgthatgthegpercentagegreturng
differsgbecausegthegamountgputgupgbygtheginvestorgdiffersgingeachgcase.
2. RepeatgExerciseg1gtogdeterminegthegpercentagegreturngongyourginvestment,gbutgingthisgcasegsupposegthegpriceg
ofgthegstockgfallsgtog$40gpergshare.gWhatggeneralizationgcangbeginferredgfromgyourganswersgtogProblemsg1ga
ndg2?
Solution
Ifgthegstockgdeclinesgfromg$50gtog$40,gtheglossgisg$1,000gongthegpurchasegofg100gshares.gThegreturngongthegi
ndividual'sginvestmentgoncegagaingdependsgongthegamountgofgmargin.
a. Ifgthegmargingrequirementgisg25gpercent,gthegamountgtheginvestorgmustgputgupgisg$1,250,gandgthegreturngis
$1,000/$1,250g=g−80%.
b. Ifgthegmargingrequirementgisg50gpercent,gthegreturngisg−40gpercentg($1,000/$2,500).
c. Ifgthegmargingrequirementgisg75gpercent,gthegpercentageglossgisg−26.73gpercentg($1,000/$3,750).
TheggeneralizationgfromgProblemsg(1)gandg(2)gisgthatgthegpercentagegreturngisgaffectedgbygthegamountgofgm
argingandgthatgtheglowergthegmargingrequirement,gtheggreatergisgthegpotentialgswinggingthegreturngongtheginve
stor'sgfunds.
3. Agstockgisgcurrentlygsellinggforg$45gpergshare.gWhatgisgtheggaingorglossgongthegfollowinggtransactions?
Solution
a. $41.50g−g$45g=g−$3.50
b. $45g−g$41.50g=g$3.50
c. $54g−g$45g=g$9
d. $45g−g$54g=g−$9
, Ingeachgcase,gthegsalegpricegisgsubtractedgfromgthegpurchasegpricegtogdeterminegthegprofitgorgloss.gBegcertain
gtogpointgoutgthatgthegsalegmaygoccurgbeforegthegpurchase,gwhichgisgthegcasegingeachgofgthegshortgsales.
4. Agsophisticatedginvestor,gB.gGraham,gsoldg500gsharesgshortgofgAmwell,gInc.gatg$42gpergshare.gThegpricegofg
thegstockgsubsequentlygfellgtog$38gbeforegrisinggtog$49gatgwhichgtimegGrahamgcoveredgthegpositiong(thatgis,g
purchasedgsharesgtogclosegthegshortgposition).gWhatgwasgthegpercentageggaingorglossgongthisginvestment?
Solution
Unfortunately,ginvestorgGrahamgdidgnotgcovergthegshortgsalegaftergthegstockgdeclinedgbutgwaitedguntilgthegpr
icegofgthegstockgrosegandgthusgsustainedgaglossgofg$7gpergsharegforgagtotalglossgofg$3,500.
5. Agyeargago,gKimgAltmangpurchasedg200gsharesgofgBLK,gInc.gforg$25.50gongmargin.gAtgthatgtimegthegmarging
requirementgwasg40gpercent.gIfgtheginterestgrategongborrowedgfundsgwasg9gpercentgandgshegsoldgthegstockgfor
$34,gwhatgisgthegpercentagegreturngongthegfundsgsheginvestedgingthegstock?
Solution
Costgofgthegshares:g200g×g$25.50g=g$5,100gMargi
n:g$5,100g×g0.40g=g$2,040
Fundsgborrowed:g$5,100g−g$2,040g=g$3,060gInte
restgpaid:g$3,060g×g0.09g=g$275.40
Profitgongthegstock:g$6,800g−g$5,100g=g$1,700
Returngongtheginvestment:g($1,700g−g$275.40)/$2,040g=g69.8%
6. Barbaragbuysg100gsharesgofgDEMgatg$35gpergsharegandg200gsharesgofgGOPgatg$40gpergshare.gTheygbuygon
gmargingandgthegbrokergchargesginterestgofg10gpercentgongthegloan.
Solution
100gsharesgofgDEMgatg$35 $3,500
200gsharesgofgGOPgatg$40 $8,000
Totalgcostgofgsecurities $11,500
a. Requiredgmargin:g0.55g×g$11,500g=g$6,325gAm
ountgborrowed:g$11,500g−g$6,325g=g$5,175
b. Interestgexpense:g0.10g×g$5,175g=g$517.50
c. LossgongDEMgstock:g$2,900g−g$3,500g=g−$600g
LossgongGOPgstock:g$6,400g−g$8,000g=g−$1,600
gNetgloss:g−$2,200
d. Percentageglossgincludingginterest:
−($2,200g+g$517.50)/$6,325g=g−43%
, 7. AfterganganalysisgofgLion/Bear,gInc.,gKarlgO’Gradyghasgconcludedgthatgthegfirmgwillgfacegfinancialgdifficulty
gwithingagyear.gThegstockgisgcurrentlygsellinggforg$5gandgO’Gradygwantsgtogsellgitgshort.gHisgbrokergisgwilling
gtogexecutegthegtransaction,gbutgonlygifgO’Gradygputsgupgcashgasgcollateralgequalgtogthegamountgofgthegshortgs
ale.gIfgO’Gradygdoesgsellgthegstockgshort,gwhatgisgthegpercentagegreturngheglosesgifgthegpricegofgthegstockgrise
sgtog$7?gWhatgwouldgbegthegpercentagegreturngifgthegfirmgwentgbankruptgandgfolded?
Solution
Sincegthegstockgisgsoldgshort,gthegpricegincreasegcausesgaglossgofg$2g($5g−g$7)gpergshare.gSincegMr.gO'Grady
putgupg100gpercentgmargin,gthegpercentageglossgis
−$2/$5g=g−40.0%
Ifgthegpricegofgthegstockgdeclinedgtog$0,gthegpercentagegreturngisg100gpercent.
Begcertaingtogpointgoutgthatgtheglargestggaingtogthegshortgsellergoccursgifgthegpricegofgthegstockgdeclinesgtogze
ro,gwhilegingaglonggpositiongtheregisgnoglimitgtogthegpossiblegpricegincrease.gOfgcourse,gingmostgcases,gthegpri
cegofgthegstockgdoesgnotgdeclinegtogzero,gnorgdoesgitgrisegindefinitely.
8. LisagLashergbuysg400gsharesgofgstockgongmargingatg$18gpergshare.gIfgthegmargingrequirementgisg50gpercent,g
howgmuchgmustgthegstockgrisegforgthemgtogrealizega
25-
percentgreturngongtheirginvestedgfunds?g(Ignoregdividends,gcommissions,gandginterestgongborrowedgfunds.)
Solution
Theginitialginvestmentgisg$18g×g400g×g0.50g=g$3,600.gTogrealizegag25gpercentgreturn,gthegvaluegofgthegpositiong
ingthegstockgmustgrisegbyg$900g(0.25g×g$3,600).gThegstockgmustgincreasegbyg$2.25gpergshareg($900/400gshare
sg=g$2.25).
9. AgbrokergquotesgGameStopgstockg(GME)gwithgagbid-askgofg$93.52–
$93.62.gYougbuyg10gsharesgandgthengimmediatelygdecidegtogsellgyourg10gshares.gThegstockgpriceghasgnotg
changedgatgall,gandgtheregaregnogcommissionsgorgtaxes.gHowgmuchgmoneygdogyouglose?
Solution
Yougbuygatgtheghighergpricegthatgthegbrokergisgasking:g10gsharesg×g$93.62g=g$936.20.gYougsellgatgtheglowerg
pricegthatgthegbrokergisgbidding:g10gsharesg×g$93.52g=g$935.20.gYougreceivegonlyg$935.20gaftergpaying
$936.20,gsogyougloseg$1.00.
10. AgbrokergquotesgAMCgEntertainmentgHoldingsg(AMC),gagmoviegtheatergchain,gatgagbid-askgofg$15.94–
$16.14gandgyougdecidegtogbuyg100gshares.gThegnextgdaygthegstockgpriceghasgchanged,gandgthegbrokergquotesgag
bid-askgofg$14.52–$14.72,gandgyougsellgyourg100gshares.gHowgmuchghavegyouggainedgorglost?
Solution
Yougbuygatgtheghighergaskgpricegongthegfirstgday:g100gsharesg×g$16.41g=g$1,641.gYougsellgatgtheglowergbidgp
ricegthegnextgday:g100gsharesg×g14.52g=g$1,452.g$1,452g−g$1,641g=gaglossgofg$189.
g g g g g
nancial Institutions, Investments a
g g g
nd Management g
13th Edition by Herbert B. Mayo
g g g g g
Chapter Solutions Manual are included
g g g g
(Ch 1 to 29) g g g g
* There is no Solution for Ch. 1,2,3,5,12
g g g g g g g
** Immediate Download
g g
** Swift Response
g g
** Exercise Solutions
g g
,Solution and Answer Guide
g g g
Mayo/Lavelle,gBasicgFinance:gAngIntroductiongtogFinancialgInstitutio
ns,gInvestments,gandgManagement
Chapterg4:gSecuritiesgMarkets
EXERCISE SOLUTIONS G
1. Yougpurchaseg100gsharesgforg$50gpergshareg($5,000),gandgaftergagyeargthegpricegrisesgtog$60.gWhatgwillgbegtheg
percentagegreturngongyourginvestmentgifgyougboughtgthegstockgongmargingandgthegmargingrequirementgwas
(a)g25gpercent,g(b)g50gpercent,gandg(c)g75gpercent?g(Ignoregcommissions,gdividends,gandginterestgexpense.)
Solution
Ifgthegstockgrisesgfromg$50gtog$60,gtheggaingisg$1,000gongthegpurchasegofg100gshares.gThegreturngongthegindi
vidual'sginvestmentgdependsgongthegamountgofgmargin.
a. Ifgthegmargingrequirementgisg25gpercent,gthegamountgtheginvestorgmustgputgupgisg$1,250g(0.25gxg$5,000),g
sogthegreturngisg$1,000/$1,250g=g80%.
b. Ifgthegmargingrequirementgisg50gpercent,gthegreturngisg40gpercentg($1,000/$2,500).
c. Ifgthegmargingrequirementgisg75gpercent,gthegrequiredgmargingisg$3,750gandgthegreturngisg26.7gpercent
g($1,000/$3,750).
Begcertaingtogpointgoutgtheg$1,000gcapitalggaingisgthegsamegingallgthreegcasesgbutgthatgthegpercentagegreturng
differsgbecausegthegamountgputgupgbygtheginvestorgdiffersgingeachgcase.
2. RepeatgExerciseg1gtogdeterminegthegpercentagegreturngongyourginvestment,gbutgingthisgcasegsupposegthegpriceg
ofgthegstockgfallsgtog$40gpergshare.gWhatggeneralizationgcangbeginferredgfromgyourganswersgtogProblemsg1ga
ndg2?
Solution
Ifgthegstockgdeclinesgfromg$50gtog$40,gtheglossgisg$1,000gongthegpurchasegofg100gshares.gThegreturngongthegi
ndividual'sginvestmentgoncegagaingdependsgongthegamountgofgmargin.
a. Ifgthegmargingrequirementgisg25gpercent,gthegamountgtheginvestorgmustgputgupgisg$1,250,gandgthegreturngis
$1,000/$1,250g=g−80%.
b. Ifgthegmargingrequirementgisg50gpercent,gthegreturngisg−40gpercentg($1,000/$2,500).
c. Ifgthegmargingrequirementgisg75gpercent,gthegpercentageglossgisg−26.73gpercentg($1,000/$3,750).
TheggeneralizationgfromgProblemsg(1)gandg(2)gisgthatgthegpercentagegreturngisgaffectedgbygthegamountgofgm
argingandgthatgtheglowergthegmargingrequirement,gtheggreatergisgthegpotentialgswinggingthegreturngongtheginve
stor'sgfunds.
3. Agstockgisgcurrentlygsellinggforg$45gpergshare.gWhatgisgtheggaingorglossgongthegfollowinggtransactions?
Solution
a. $41.50g−g$45g=g−$3.50
b. $45g−g$41.50g=g$3.50
c. $54g−g$45g=g$9
d. $45g−g$54g=g−$9
, Ingeachgcase,gthegsalegpricegisgsubtractedgfromgthegpurchasegpricegtogdeterminegthegprofitgorgloss.gBegcertain
gtogpointgoutgthatgthegsalegmaygoccurgbeforegthegpurchase,gwhichgisgthegcasegingeachgofgthegshortgsales.
4. Agsophisticatedginvestor,gB.gGraham,gsoldg500gsharesgshortgofgAmwell,gInc.gatg$42gpergshare.gThegpricegofg
thegstockgsubsequentlygfellgtog$38gbeforegrisinggtog$49gatgwhichgtimegGrahamgcoveredgthegpositiong(thatgis,g
purchasedgsharesgtogclosegthegshortgposition).gWhatgwasgthegpercentageggaingorglossgongthisginvestment?
Solution
Unfortunately,ginvestorgGrahamgdidgnotgcovergthegshortgsalegaftergthegstockgdeclinedgbutgwaitedguntilgthegpr
icegofgthegstockgrosegandgthusgsustainedgaglossgofg$7gpergsharegforgagtotalglossgofg$3,500.
5. Agyeargago,gKimgAltmangpurchasedg200gsharesgofgBLK,gInc.gforg$25.50gongmargin.gAtgthatgtimegthegmarging
requirementgwasg40gpercent.gIfgtheginterestgrategongborrowedgfundsgwasg9gpercentgandgshegsoldgthegstockgfor
$34,gwhatgisgthegpercentagegreturngongthegfundsgsheginvestedgingthegstock?
Solution
Costgofgthegshares:g200g×g$25.50g=g$5,100gMargi
n:g$5,100g×g0.40g=g$2,040
Fundsgborrowed:g$5,100g−g$2,040g=g$3,060gInte
restgpaid:g$3,060g×g0.09g=g$275.40
Profitgongthegstock:g$6,800g−g$5,100g=g$1,700
Returngongtheginvestment:g($1,700g−g$275.40)/$2,040g=g69.8%
6. Barbaragbuysg100gsharesgofgDEMgatg$35gpergsharegandg200gsharesgofgGOPgatg$40gpergshare.gTheygbuygon
gmargingandgthegbrokergchargesginterestgofg10gpercentgongthegloan.
Solution
100gsharesgofgDEMgatg$35 $3,500
200gsharesgofgGOPgatg$40 $8,000
Totalgcostgofgsecurities $11,500
a. Requiredgmargin:g0.55g×g$11,500g=g$6,325gAm
ountgborrowed:g$11,500g−g$6,325g=g$5,175
b. Interestgexpense:g0.10g×g$5,175g=g$517.50
c. LossgongDEMgstock:g$2,900g−g$3,500g=g−$600g
LossgongGOPgstock:g$6,400g−g$8,000g=g−$1,600
gNetgloss:g−$2,200
d. Percentageglossgincludingginterest:
−($2,200g+g$517.50)/$6,325g=g−43%
, 7. AfterganganalysisgofgLion/Bear,gInc.,gKarlgO’Gradyghasgconcludedgthatgthegfirmgwillgfacegfinancialgdifficulty
gwithingagyear.gThegstockgisgcurrentlygsellinggforg$5gandgO’Gradygwantsgtogsellgitgshort.gHisgbrokergisgwilling
gtogexecutegthegtransaction,gbutgonlygifgO’Gradygputsgupgcashgasgcollateralgequalgtogthegamountgofgthegshortgs
ale.gIfgO’Gradygdoesgsellgthegstockgshort,gwhatgisgthegpercentagegreturngheglosesgifgthegpricegofgthegstockgrise
sgtog$7?gWhatgwouldgbegthegpercentagegreturngifgthegfirmgwentgbankruptgandgfolded?
Solution
Sincegthegstockgisgsoldgshort,gthegpricegincreasegcausesgaglossgofg$2g($5g−g$7)gpergshare.gSincegMr.gO'Grady
putgupg100gpercentgmargin,gthegpercentageglossgis
−$2/$5g=g−40.0%
Ifgthegpricegofgthegstockgdeclinedgtog$0,gthegpercentagegreturngisg100gpercent.
Begcertaingtogpointgoutgthatgtheglargestggaingtogthegshortgsellergoccursgifgthegpricegofgthegstockgdeclinesgtogze
ro,gwhilegingaglonggpositiongtheregisgnoglimitgtogthegpossiblegpricegincrease.gOfgcourse,gingmostgcases,gthegpri
cegofgthegstockgdoesgnotgdeclinegtogzero,gnorgdoesgitgrisegindefinitely.
8. LisagLashergbuysg400gsharesgofgstockgongmargingatg$18gpergshare.gIfgthegmargingrequirementgisg50gpercent,g
howgmuchgmustgthegstockgrisegforgthemgtogrealizega
25-
percentgreturngongtheirginvestedgfunds?g(Ignoregdividends,gcommissions,gandginterestgongborrowedgfunds.)
Solution
Theginitialginvestmentgisg$18g×g400g×g0.50g=g$3,600.gTogrealizegag25gpercentgreturn,gthegvaluegofgthegpositiong
ingthegstockgmustgrisegbyg$900g(0.25g×g$3,600).gThegstockgmustgincreasegbyg$2.25gpergshareg($900/400gshare
sg=g$2.25).
9. AgbrokergquotesgGameStopgstockg(GME)gwithgagbid-askgofg$93.52–
$93.62.gYougbuyg10gsharesgandgthengimmediatelygdecidegtogsellgyourg10gshares.gThegstockgpriceghasgnotg
changedgatgall,gandgtheregaregnogcommissionsgorgtaxes.gHowgmuchgmoneygdogyouglose?
Solution
Yougbuygatgtheghighergpricegthatgthegbrokergisgasking:g10gsharesg×g$93.62g=g$936.20.gYougsellgatgtheglowerg
pricegthatgthegbrokergisgbidding:g10gsharesg×g$93.52g=g$935.20.gYougreceivegonlyg$935.20gaftergpaying
$936.20,gsogyougloseg$1.00.
10. AgbrokergquotesgAMCgEntertainmentgHoldingsg(AMC),gagmoviegtheatergchain,gatgagbid-askgofg$15.94–
$16.14gandgyougdecidegtogbuyg100gshares.gThegnextgdaygthegstockgpriceghasgchanged,gandgthegbrokergquotesgag
bid-askgofg$14.52–$14.72,gandgyougsellgyourg100gshares.gHowgmuchghavegyouggainedgorglost?
Solution
Yougbuygatgtheghighergaskgpricegongthegfirstgday:g100gsharesg×g$16.41g=g$1,641.gYougsellgatgtheglowergbidgp
ricegthegnextgday:g100gsharesg×g14.52g=g$1,452.g$1,452g−g$1,641g=gaglossgofg$189.
