3. You are bullish on Apple stock, which is currently selling at $110 per share. You...

3. You are bullish on Apple stock, which is currently selling at $110 per share. You contribute $11,000 and borrow an additional $2,750 from your broker at an interest rate of 6% per year and invest $13,750 in the stock.

(a) What is your rate of return if the stock price increases 10% during the next year?

(b) How far does the stock price have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

Solutions

Expert Solution

Value of Position = $13,750

After one year

Value of Position = 13,750(1.10) = $15,125

Interest paid = 2,750(0.06) = $165

Rate of Return = (15,125 - 13,750 - 165)/11,000

Rate of Return = 11.00%

Initial Margin = 11,000/13,750 = 80%

Margin Call Price = 110(1 - 0.80)/(1 - 0.30)

Margin Call Price = $31.43

jeff jeffy answered 2 years ago

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