FIN $3100$: Basic Investing Problem Set #$1($Part B$)$ Concordia University Wisconsin

$2)$ You are bearish on AT&T stock and decide to sell short $100$ shares at the current market price of $$50$ per share.

a$)$ How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is $50\%$ of the value of the short position?

b$)$ How high can the price of AT&T stock go before you get a margin call if the maintenance margin is $30\%$ of the value of the short position? Assume AT&T stock does not pay a dividend.

$3)$ Suppose that Intel is currently 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 $8\%.$

a$)$ What will be your holding period return if the price of Intel stock immediately changes to: i$)$ $$44$ ii$)$ $$40($i$.$e$.,$ the price doesn't change$)$ iii$)$ $$36$ What is the relationship between your holding period return and the percentage change in the price of Intel?

b$)$ If the maintenance margin is $25\%,$ how low can Intel's price fall before you get a margin call?

c$)$ What will be your holding period return if the price of Intel stock one year later changes to: i$)$ $$44$ ii$)$ $$40($i$.$e$.,$ the price doesn't change$)$ iii$)$ $$36$ What is the relationship between your holding period return and the percentage change in the price of Intel? Assume Intel does not pay a dividend. d$)$ Continue to assume that a year has passed. If the maintenance margin is $25\%,$ how low can Intel's price fall before you get a margin call? e$)$ How would your answer to b$)$ change if you invested only $$10,000$ of your own money? $4)$ Suppose that you sell short $500$ shares of Intel, currently selling for $$40$ per share, and give your broker $$15,000$ to establish your margin account. a$)$ If you earn no interest on the funds in your margin account, what will be your rate of return if the price of Intel stock one year later changes to: i$)$ $$44$ ii$)$ $$40($i$.$e$.,$ the price doesn't change$)$ iii$)$ $$36$ Assume Intel does not pay a dividend. b$)$ If the maintenance margin is $25\%,$ how high can Intel's price rise before you get a margin call? c$)$ Redo parts a$)$ and b$),$ but now assume that Intel has also paid a year$-$end dividend of $$1$ per share. The prices in part a$)$ should be interpreted as ex$-$dividend $($that is$,$ prices after the dividend has been paid out$).$