Reference no: EM132632543
Suppose that Intel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker.
The rate on the margin loan is 8%.
a) What is the percentage change in the net worth of your brokerage account if the price of Intel immediately changes to: (i) $22; (ii) $20; (iii) $18?
b) If the maintenance margin is 25%, how low can Intel's price fall before you get a margin call?
c) How would your answer to part b) change if you had financed the initial purchase with only $10,000 of your own money?
d) What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Intel is selling after 1 year at: (i) $22; (ii) $20; (iii) $18? Assume that Intel pays no dividends.
e) Continue to assume that a year has passed. How low can Intel's price fall before you get a margin call?
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