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Suppose that AB currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the
Suppose that AB currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. a. What is the percentage increase in the net worth of your brokerage account if the price of AB immediately changes to (1) $42; (2) $38; (3) $32? What is the relationship between your percentage return and the percentage change in the price of AB? b. If the maintenance margin is 35%, how low can ABs price fall before you get a margin call? c. How would your answer to (b) change if you had financed the initial purchase with only $11,000
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