Reference no: EM132799745
1. You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock.
a) What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? The stock currently pays no dividends.
b) How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.
2. You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share.
a) How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position?
b) How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?
3. You've borrowed $20,000 on margin to buy shares in Ixnay, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share.
a) Will you receive a margin call?
b) How low can the price of Ixnay shares fall before you receive a margin call?