Problem: Suppose you are bullish on Stock X and instruct your broker to buy 1,000 shares on margin, with a margin of 60%. The current price of a share of Stock X is $30, the interest on loans is 5%, and the maintenance margin is 40%.
a) How much do you borrow from your broker?
b) How far can the stock price fall before a margin call?
c) If the price falls to $15 and your broker issues a margin call. What can you do to solve this problem?
d) If the price of the stock rises to $35 (falls to $25) after one year and you decide to sell, how much is your profit? How much is your rate of return?