Margin Limits, Stock Returns
Hi, I have the following problem that I don't know how to proceed with:
You are bullish on Steel stock. The current market price is $50 per share, and you have $5,000 to invest. If the margin limit is 50% and you borrow the maximum from your broker at 7% interest, and invest everything in Steel.
1. What will your return be if you hold the stock for a year and the price increases to $60? Show your calculation.
2.How far does the price have to fall for you to have a margin call if the maintenance margin is 30%? Show your calculation.
For number 1: 5,000 / 50 = 100 Shares. If we multiply 60*100, we get 6,000, therefore we have made 1,000 Am I correct? I also don't know what to do for the 7% interest the broker charges.
For number 2: P represents price of stock to have margin call:
(100P - 2,500) / 100P = .30 Which would be, 35.71
Thanks for your help.