What do you conclude about the short-run relationship between trading activity and the value of a seat?

13. Suppose that Intel currently 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%.

a. What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to (i) $44; (ii) $40; (iii) $36? What is the relationship be- tween your percentage return and the percentage change in the price of Intel?

b. If the maintenance margin is 25%, how low can Intels 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 Intel is selling after one year at (i) $44; (ii) $40; (iii) $36? What is the relationship between your percentage return and the percent- age change in the price of Intel? Assume that Intel pays no dividends.

I. Introduction 3. How Securities Are Traded

The McGraw−Hill Companies, 2001 100 PART

I Introduction e. Continue to assume that a year has passed. How low can Intels price fall before you get a margin call?

14. 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 after one year if Intel stock is selling at (i) $44; (ii) $40; (iii) $36?