Suppose that Intel currently is selling at $46 per share. You buy 250 shares using $8,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6%.
a. What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to: (i) $48.76; (ii) $46; (iii) $43.24? What is the relationship between your percentage return and the percentage change in the price of Intel? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" sign in your response.)
(i) Percentage gain %
(ii) Percentage gain %
(iii) Percentage gain %
b. If the maintenance margin is 25%, how low can Intel’s price fall before you get a margin call? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Margin call will be made at price $ or lower
c. How would your answer to (b) change if you had financed the initial purchase with only $5,750 of your own money? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Margin call will be made at price $ or lower
d. What is the rate of return on your margined position (assuming again that you invest $8,000 of your own money) if Intel is selling after 1 year at: (i) $48.76; (ii) $46; (iii) $43.24? What is the relationship between your percentage return and the percentage change in the price of Intel? Assume that Intel pays no dividends. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" sign in your response.)
(i) Rate of return %
(ii) Rate of return %
(iii) Rate of return %
e. Continue to assume that a year has passed. How low can Intel’s price fall before you get a margin call? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Margin call will be made at price $ or lower