Question
Suppose that GE is selling at $40 per share. You buy 500 shares, using $15,000 of your own money and borrowing the remainder of the
Suppose that GE is selling at $40 per share. You buy 500 shares, using $15,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. What is the percentage increase in the net worth of your brokerage account if the price of GE immediately changes to $44? What is the relationship between the percentage change in your account and the percentage change in the price of Intel? If the maintenance margin is 25%, how low can GE price fall before you get a margin call? Assume a year has passed and GE is currently selling for $44. Assume that Intel pays no dividends. What is the relationship between your accounts percentage return and GE?
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