Assume you borrow $25,000 to buy a stock selling for $50 a share. Your account starts with an initial margin requirement of 50% and has a maintenance margin of 25%.
A. At what price would you receive a margin call?
B. If the price were to rise to $56 a share after one year and you are charged an interest rate of 6%, what would be your rate of return?
C. Compared to an investor who purchased the same number of shares but used their own cash (so they did not borrow to buy the stock), would you earn a higher or lower return? Explain. What about if the stock price had fallen?