Homework I

To be submitted in the next class.

Late submissions or electronic submissions will NOT be accepted.

Suppose that $x$ tel currently is selling at $$20$ per share. You buy $1,000$ shares using $$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

Xtel immediately changes to: $($i$)$ $$22$; $($ii$)$ $$20$; $($iii$)$ $$18?$ What is the relationship between

your percentage return and the percentage change in the price of Xtel?

b$.$ If the maintenance margin is $25\%,$ how low can Xtel's 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

$$10,000$ of your own money?

d$.$ What is the rate of return on your margined position $($assuming again that you invest $$15,000$

of your own money$)$ if Xtel is selling after $1$ year at: $($i$)$ $$22$; $($ii$)$ $$20$; $($iii$)$ $$18?$ What is the

relationship between your percentage return and the percentage change in the price of Xtel?

Assume that Xtel pays no dividends.

$e.$ Continue to assume that a year has passed. How low can Xtel's price fall before you get a

margin call?