Question
An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan
An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In one year the investor gets a
margin call.
1. Calculate the price the stock must have had at the time of the margin call.
2. Calculate the return the stock had at the time of the margin call.
3. Calculate the return the investor had at the time of the margin call. (Be careful, the interest charge on the margin loan must be included in this calculation.)
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Answer Explanation 1 3029 Stepbystep explanation Margin call level will occur when the level is at 3...Get Instant Access to Expert-Tailored Solutions
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Fundamentals of Corporate Finance
Authors: Berk, DeMarzo, Harford
2nd edition
132148234, 978-0132148238
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