Margin Purchase

You are bullish on GE and expect a rise in its share price in one year. Since you have only $10,000 available, you want to get a margin loan. The annual interest rate on margin loan is 4% and your broker requires a maintenance margin of 35%.

A) If you borrow as much as you could within the legal limit (set by Fed), how many shares could you purchase at $20 per share?

B) If GE stock falls to $17 per share at the end of the first year, would you get a margin call? (For this part, ignore GE’s dividends.) What is your rate of return?