Price per share
Equity invested
Borrowed funds
Interest rate
Total investment –$
Price change
Margin required
Solution
a. Shares bought #DIV/0!
Value change –$
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 $10,000 in the stock.
a. What will be your rate of return if the price of Telecom stock goes
up by 10% during the next year? (Ignore the expected dividend.)
b. How far does the price of Telecom stock have to fall for you to get
a margin call if the maintenance margin is 30%? Assume the price
fall happens immediately.
Borrowed funds
Price per share
Initial margin
Maintenance margin
New stock price
Solution
a. Total investment –$
Shares purchased #DIV/0!
New value #DIV/0!
You’ve borrowed $20,000 on margin to buy shares in Ixnay, which is
now selling at $40 per share. Your account starts at the initial margin
requirement of 50%. The maintenance margin is 35%. Two days later,
the stock price falls to $35 per share.
a. Will you receive a margin call?
b. How low can the price of Ixnay shares fall before you receive a
margin call?
Shares short sell
Price per share
Dividend
Buyback price
Commission / share
Solution
Net proceeds from short sale –$
On January 1, you sold short one round lot (that is, 100
shares) of Snow’s stock at $21 per share. On March 1, a
dividend of $3 per share was paid. On April 1, you covered the
short sale by buying the stock at a price of $15 per share. You
paid 50 cents per share in commissions for each transaction.
What is the value of your account on April 1?
Price per share Price per share –$
Shares short sell Shares short sell –
Equity in margin acct Equity in margin acct –$
Maintenance margin Maintenance margin 0.00%
Dividend Dividend
Share value –$ Share value –$
Borrowed funds –$ Borrowed funds –$
Solution
a. c.
i. New stock price = i. New stock price = –$
Suppose that you sell short 500 shares of XTel, currently selling for $40 per share,
and give your broker $15,000 to establish your margin account.
a. If you earn no interest on the funds in your margin account, what will be your
rate of return after one year if Intel stock is selling at (i) $44; (ii) $40; (iii) $36?
Assume that XTel pays no dividends.
b. If the maintenance margin is 25%, how high can XTel’s price rise before you get
a margin call?
c. Redo parts (a) and (b), but now assume that XTel also has paid a year-end
dividend of $1 per share. The prices in part (a) should be interpreted as ex-
dividend, that is, prices after the dividend has been paid.