Would you expect a typical open-end fixed-income mutual fund to have higher or lower operating expenses than a fixed-income unit investment trust? Why?
Unit Investment Fund
Open-end fixed-income mutual fund and fixed-income unit investment trust are subsets of mutual fund categorized by investment policy.
An open-end fund will have higher fees since they are actively marketing and managing their investor base. On the other hand, a unit investment trust need not spend too much time on such matters since investors find each other.
Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.
a. What is the margin in Dée’s account when she first purchases the stock?
b. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30%, will she receive a margin call?
c. What is the rate of return on her investment?
Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account.
a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Intel stock is selling at (i) $44; (ii) $40; (iii) $36? Assume that Intel pays no dividends.
b. If the maintenance margin is 25%, how high can Intel’s price rise before you get a margin call?
c. Redo parts ( a ) and ( b ), but now assume that Intel also has paid a year-end dividend of $1 per share. The prices in part ( a ) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
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