Question

Suppose that Intel currently is selling at $44 per share. You buy 500 shares using $18,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 7%.

  

a.

What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to: (i) $50.60; (ii) $44; (iii) $37.40? 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 $11,000 of your own money? (Round your answer to 2 decimal places. Omit the "$" 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 $18,000 of your own money) if Intel is selling after 1 year at: (i) $50.60; (ii) $44; (iii) $37.40? 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

Answer 1