Frank has $50,000 of his own money to invest. He approached his bank for a margin loan to add to his money. He intends on purchasing Australian shares. The bank’s loan-to-value ratio (LVR) is 72%. As a result, Frank borrows $130,000. After five months, Frank’s portfolio value has dropped from $180,000 to $150,000.
a. Calculate the LVR using the reduced portfolio value. b. Assume the bank issues a margin call. Suggest to Frank at least two different ways that he could return his portfolio to a 72% LVR. c. What are some of the risks involved with this type of gearing?