What is the percentage increase in the net worth

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Reference no: EM132178225

Question - Suppose that XYZ currently is selling at $18 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 increase in the net worth of your brokerage account if the price of XYZ immediately changes to: (i) $20; (ii) $22; (ii) $15? What is the relationship between your percentage return and the percentage change in the price of XYZ?

b. If the maintenance margin is 25%, how low can XYZ price fall before you get a margin call?

c. How would your answer to (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 XYZ is selling after 1 year at: (i) $22; (ii) $20; (ii) $18? What is the relationship between your percentage return and the percentage change in the price of XYZ? Assume that XYZ pays no dividends.

e. Continue to assume that a year has passed. How low can XYZ price fall before you get a margin call?

Reference no: EM132178225

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