FIN 300 Midterm 1

Initial Margin

percentage of shares you pay using your own money

Leverage

amplification of return; the inverse of margin

Maintenance Margin

a level below which the fraction of your equity to the total amount in the account is not supposed to drop

Margin Call

If maintenance margin drops, you are issued a margin call. You have to continue contributing money to your account so that your equity goes back to the initial margin

Margin Call Equation

P = Loan Amount/(# of shares)(1 - Maintenance Margin)

or

Pm = Share Price x ((1 - initial margin)/(1 - maintenance margin)

Holding-Period Return

The rate of return over a given investment; sum of the dividend yield and the capital gains yield

Holding-Period Return Equation

((Pending - Pbeg) + CashDiv)/Pbeg

or

(Cap gain/cap loss)/stock price + div/stock price