Solution-Buying equity on margin, Suppose that it is the

Buying equity on margin

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Reference no: EM132680272

Part 1: Buying Equity on Margin

1. Suppose that it is the end of the day on Monday Feb 3. You have $10,000 to invest and decide to buy Tesla stock. At the end of the day on Tuesday Feb 4, you decide to sell your position in Tesla stock. What is your return?

2. Now suppose that on Monday Feb 3, you feel inspired by Elon Musk and hence extremely bullish on Tesla. Not only do you want to buy Tesla stock, but you want to buy on margin. Suppose that your broker requires a margin of 50%. Also, your broker charges you interest at a rate of 0.03% per day. You decide to invest so that your initial margin is 60%. That is, 60% of the purchase is paid for in cash and the rest is borrowed. What is the value of stock that you buy? How many shares did you buy?

3. Continuing on the above margin question, suppose that you sell at the end of the day on Tuesday Feb 4. What is your return? Compare this to the case where you did not buy on margin.

4. Suppose that you instead held Tesla until Wednesday Feb 5 [2 days]. What is your return? Compare this to the case where you did not buy on margin. What lessons do you learn about buying on margin?

Reference no: EM132680272

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Buying equity on margin

Reference no: EM132680272

Reference no: EM132680272

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