Investments, by Bodie, Kane, and Marcus, 9th Edition

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SOLUTIONS
Problem 9 - Buying on Margin Problem 11 - Buying on Margin

Problem 10 - Short Sales Problem 12 - Short Sales

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Buying on Margin

2 - Short Sales
 Buying on Margin

Initial Equity Investment 5,000.00 9. You are bullish on Telecom stock. The current market price
Amount Borrowed 5,000.00 is $50 per share, and you have $5,000 of your own to invest.
Initial Stock Price 50.00 You borrow an additional $5,000 from your broker at an
Shares Purchased 200 interest rate of 8% per year and invest $10,000 in the stock.
Ending Stock Price 55.00
Cash Dividends During Hold Per. 0.00 a. What will be your rate of return if the price of Telecom stock
goes up by 10% during the next year? (Ignore the expected
Initial Margin Percentage 50.00%
dividend.)
Maintenance Margin Percentage 30.00%
b. How far does the price of Telecom stock have to fall for you
Rate on Margin Loan 8.00% to get a margin call if the maintenance margin is 30%? Assume
Holding Period in Months 12 the price fall happens immediately.

Return on Investment
Capital Gain on Stock 1000.00
Dividends 0.00
Interest on Margin Loan 400.00
Net Income 600.00
Initial Investment 5000.00
Return on Investment 12.00%

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Margin Call:
Margin Based on Ending Price 54.55%
Price When Margin Call Occurs $35.71

Return on Stock without Margin 10.00%

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 Short Sales
10. You are bearish on Telecom and decide to sell
Initial Investment 2500.00 short 100 shares at the current market price of $50
Beginning Share Price 50.00 per share.
Number of Shares Sold Short 100.00
Ending Share Price a. How much in cash or securities must you put into
Dividends Per Share 0.00 your brokerage account if the broker’s initial margin
requirement is 50% of the value of the short
Initial Margin Percentage 50.00%
position?
Maintenance Margin Percentage 30.00%
b. How high can the price of the stock go before you
Return on Short Sale get a margin call if the maintenance margin is 30% of
Gain or Loss on Price 5000.00 the value of the short position?
Dividends Paid 0.00
Net Income 5000.00
Return on Investment 200.00%

Margin Positions
Margin Based on Ending Price #DIV/0!

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Price for Margin Call 57.69

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Buying on Margin Ending Return on
St Price Investment
Initial Equity Investment 15,000.00 -13.33%
Amount Borrowed 5,000.00 44 13.33%
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Initial Stock Price 40.00 40 0.00%
Shares Purchased 500 36 -13.33%
Ending Stock Price 36.00
Cash Dividends During Hold Per. 11. Suppose that Intel currently is selling at $40 per share. You buy 500 shares
Initial Margin Percentage 75.00% using $15,000 of your own money, borrowing the remainder of the purchase price
Maintenance Margin Percentage 25.00% from your broker. The rate on the margin loan is 8%.

Rate on Margin Loan
Holding Period in Months
Return on Investment
Capital Gain on Stock
Dividends
Interest on Margin Loan
Net Income
Initial Investment
Return on Investment
Margin Call:
Margin Based on Ending Price
Price When Margin Call Occurs
Return on Stock without Margin
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 between your percentage return and the percentage change in the
price of Intel?
-2000.00 b. If the maintenance margin is 25%, how low can Intel’s price fall before you get
0.00 a margin call?
0.00
-2000.00 c. How would your answer to (b) change if you had financed the initial purchase
15000.00 with only $10,000 of your own money?
-13.33%
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 1 year at: (i) $44; (ii)
$40; (iii) $36? What is the relationship between your percentage return and the
72.22% percentage change in the price of Intel? Assume that Intel pays no dividends.
$13.33
e. Continue to assume that a year has passed. How low can Intel’s price fall
before you get a margin call?
-10.00%

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 Short Sales
Ending Return on
Initial Investment 15000.00 St Price Investment
Beginning Share Price 40.00 -13.33%
Number of Shares Sold Short 500.00 44 -13.33%
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Ending Share Price 44.00 40 0.00%
Dividends Per Share 0.00 36 13.33%
Initial Margin Percentage 75.00%
Maintenance Margin Percentage 25.00% 12. Suppose that you sell short 500 shares of Intel, currently selling
for $40 per share, and give your broker $15,000 to establish your
Return on Short Sale margin account.
Gain or Loss on Price -2000.00
Dividends Paid 0.00 a. If you earn no interest on the funds in your margin account, what
Net Income -2000.00 will be your rate of return after 1 year if Intel stock is selling at: (i)
$44; (ii) $40; (iii) $36? Assume that Intel pays no dividends.
Return on Investment -13.33%
b. If the maintenance margin is 25%, how high can Intel’s price rise
before you get a margin call?
Margin Positions
Margin Based on Ending Price 59.09% c. Redo parts (a) and (b), but now assume that Intel also has paid a
year-end dividend of $1 per share. The prices in part (a) should be
Price for Margin Call 56.00 interpreted as ex-dividend, that is, prices after the dividend has been
paid.

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