Problem: Buying on Margin
Use the following information for questions I - V.
You open a brokerage account with Western Securities and purchases 200 shares of ABC Company at $60 per share on the first business day of the year. You borrow 30 percent of the purchase amount from your broker to help pay for the investment.
I. What is the initial dollar margin?
II. What is the initial percentage margin?
III. If the maintenance margin is 30%, how far could the stock price fall before you would get a margin call? Assume the price fall happens immediately.
IV. Assuming an interest rate on the margin loan of 5% per year, what will be your rate of return (ignoring dividends and taxes) if the stock goes up by 20% by year's end?
V. Assuming an interest rate on the margin loan of 5% per year, what will be your rate of return (ignoring dividends and taxes) if the stock goes down by 20% by year's end?