You have just borrowed $67,500 on margin to buy shares in BCE, which is currently quoting as
Question:
You have just borrowed $67,500 on margin to buy shares in BCE, which is currently quoting as the bid price of $29.99 bid and the ask price of $30.00 ask per share. The minimum margin is 35%, and your initial margin requirement is 55%. Assume that BCE will pay no dividends before you return the loan and that that you pay no interest on your loan.
1.If you buy BCE in margin, what is the maximum number of shares you can buy?
2.Suppose you bought the maximum number of shares of BCE as in (1).
a.Assume that immediately after your purchase, BCE's share price drops to $26.00 per share. Calculate your new margin. Will you receive a margin call?
b.What is the maximum price at which you will receive a margin call?
c.If the stock price falls to $20, you would get a margin call. If that happens, how much in additional funds would you need to add to your account to respond to the margin call?
Hints:
New fund needed = Original loan - Maximum Loan given market value
Maximum loan = (1 - minimum margin) (Market value of shares
When margin call occurs, the margin balance is bumped up to the minimum (maintenance) margin.
Expert Answer:
1 To determine the maximum number of shares you can buy on margin we need to calculate the maximum l... View the full answer
