Suppose that Intel currently is selling at $40 per share. You buy 500 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%.
What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to (a) $44; (b) $40; (c) $36?
Answer:
Initial worth of brokerage account = 500 × $40 = $20,000
a). if the price changes to $44, then:
worth of brokerage account becomes = 500 × $44 = $22,000
∴ percentage increase = (22,000 - 20,000) / 20,000 = 10% increase.
b). if the price changes to $40, then:
worth of brokerage account becomes = 500 × $40 = $20,000
∴ percentage increase = (20,000 - 20,000) / 20,000 = 0 or no increase.
c). if the price changes to $36, then:
worth of brokerage account becomes = 500 × $36 = $18,000
∴ percentage increase = (18,000 - 20,000) / 20,000 = 10% decrease
