You are bullish on Telecom stock. The current market price is $45 per share, and

Question

You are bullish on Telecom stock. The current market price is $45 per share, and you have $5,200 of your own to invest. You borrow an additional $7,400 from your broker at an interest rate of 8.5% per year and invest $12,600 in the stock.

a. What will be your rate of return if the price of Telecom stock goes up by 25% during the next year?

b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

Thanks!!

Explanation / Answer

a) rate of return=(0.25*(5200+7400)-0.085*7400)/5200

=34.06%

b) price for margin call =price*(1-initial margin)/(1-maintainance margin0

=45*(1-5200/12600)/(1-0.3)

=$37.75

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