Question
Suppose that Apple currently is selling at $165 per share. You buy 400 shares using $25,000 of your own money, borrowing the remainder of the
Suppose that Apple currently is selling at $165 per share. You buy 400 shares using $25,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%.
What is the percentage increase in the net worth of your brokerage account if the price of Apple immediately changes to (i) $170; (ii) $180; (iii) $200? What is the relationship between your percentage return and the percentage change in the price of Apple?
If the maintenance margin is 25%, how low can Apples price fall before you get a margin call?
How would your answer to (b) change if you had financed the initial purchase with only $20,000 of your own money?
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