Suppose that OffStar 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 OffStar 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 OffStar?
b. If the maintenance margin is 25%, how low can OffStar’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?