Suppose that Intel currently is selling at $20 per share.You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker.The rate on the margin loan is 8%.
A. What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to (i) $22? (ii) $20? (iii) $18?What is the relationship between your percentage return and the percentage change in the price of Intel?
B. If the maintenance margin is 25%, how low can Intel’s price fall before you receive a margin call?
C. How would your answer to b (above) 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 Intel is selling after 1 year at: (i) $22? (ii) $20? (iii) $18?
E. What is the relationship between your percentage return and the percentage change in the price of Intel?Assume that Intel pays no dividends.
a. Depends on the gravitational constant of the Sun
b. return depends on the bid-ask spread in OTC future contracts
c. return depends on interest and principal amount of loan on margin
d. return depends on the price of moon rocks on the internet
f. Continue to assume that 1 year has passed.How low can Intel’s price fall before you receive a margin call?
a. 0
b. 10.05
c. 7.20
d. 3.17