Problem 3 (25 marks) . Suppose that Intel currently is selling at $20 per share. You buy
Question:
Problem 3 (25 marks). Suppose that Intel 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 change in the net worth of your brokerage account if the price of Intel immediately changes to: (i) $22; (ii) $20; (iii) $18?
b) If the maintenance margin is 25%, how low can Intel's price fall before you get a margin call?
c) How would your answer to part b) change if you had fifinanced 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 Intel is selling after 1 year at: (i) $22; (ii) $20; (iii) $18? Assume that Intel pays no dividends.
e) Continue to assume that a year has passed. How low can Intel's price fall before you get a margin call?
Problem 4 (20 marks). Suppose that you sell short 1,000 shares of Intel, currently selling for $20 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 after 1 year if Intel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Intel pays no dividends.
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 also has 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.
Problem 5 On January 1, you sold short one round lot (that is, 100 shares) of Four Sisters stock at $21 per share. On March 1, a dividend of $2 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $15 per share. You paid 50 cents per share in commissions for each transaction. What is the value of your account on April 1?