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  • Chapter 03 Question 1

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    Daria Lang
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    You invest $5,000 of your own money and borrow $5,000 at 8% interest to buy $10,000 worth of Telecom stock priced at $50 per share. If the stock price increases 10% to $55 per share, your return would be 12% after accounting for the $400 interest payment. The stock price would need to fall below $35.71 per share for you to face a margin call, as maintenance margin is 30%.

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    Chapter 03 Question 1(1)

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    You invest $5,000 of your own money and borrow $5,000 at 8% interest to buy $10,000 worth of Telecom stock priced at $50 per share. If the stock price increases 10% to $55 per share, your return would be 12% after accounting for the $400 interest payment. The stock price would need to fall below $35.71 per share for you to face a margin call, as maintenance margin is 30%.

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    Download as XLSX, PDF, TXT or read online from Scribd
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    6 views3 pages

    Chapter 03 Question 1

    Uploaded by

    Daria Lang
    You invest $5,000 of your own money and borrow $5,000 at 8% interest to buy $10,000 worth of Telecom stock priced at $50 per share. If the stock price increases 10% to $55 per share, your return would be 12% after accounting for the $400 interest payment. The stock price would need to fall below $35.71 per share for you to face a margin call, as maintenance margin is 30%.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    You are bullish on Telecom stock.

    The current market price is $50


    per share, and you have $5,000 of your own to invest. You borrow
    an additional $5,000 from your broker at an interest rate of 8% per
    year and invest $10,000 in the stock.
    a. What will be your rate of return if the price of Telecom stock goes
    up by 10% during the next year? (Ignore the expected dividend.)
    b. How far does the price of Telecom stock have to fall for you to ge
    a margin call if the maintenance margin is 30%? Assume the price
    fall happens immediately.

    Price per share $ 50


    Equity invested $ 5,000
    Borrowed funds $ 5,000
    Interest rate 8.00%
    Total investment $ 10,000
    Price change 10.00%
    Margin required 30.00%

    Solution

    a. Shares bought 200


    Value change $ 1,000
    Interest payment $ 400.00
    Rate of return 12.00%

    b. Margin call price $ 35.71


    market price is $50
    nvest. You borrow
    rest rate of 8% per

    Telecom stock goes


    ected dividend.)
    e to fall for you to get
    Assume the price

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