Suppose that XTel currently is selling at $40 per share. You buy 500 shares using $15000 of your own money, borrowing the remainder of the purchase price from your broker. The rate of the margin loan is 8%.
a) What is the percentage increase in the net worth of you brokerage account if the price of XTel immediatly changes to (i) $44, (ii) $40, (iii) $36 ? What is the relationship between your percentage return and the percentage change in the price of XTel ?
b) If the maintenance margin is 25%, how low can XTel's 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 XTel is selling after one year at (i) $44, (ii) $40, (iii) $36 ? What is the relationship between your percentage return and the percentage change in the price of XTel ? Assume that XTel pays no dividends.
e) Continue to assume that a year has passed. How low can XTel's price fall before you get a margin call ?