{"id":188975,"date":"2025-02-08T09:47:38","date_gmt":"2025-02-08T09:47:38","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=188975"},"modified":"2025-02-08T09:47:42","modified_gmt":"2025-02-08T09:47:42","slug":"you-are-bullish-on-telecom-stock","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/02\/08\/you-are-bullish-on-telecom-stock\/","title":{"rendered":"You are bullish on Telecom stock"},"content":{"rendered":"\n
    \n
  1. You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5.000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. (LO 3-4)
    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 dividend.)
    b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.<\/li>\n\n\n\n
  2. You are bearish on Telecom and decide to sell short 100 shares at the current market
    price of $50 per share. (LO 3-4)
    a. How much in cash or securities must you put into your brokerage account if the bro-ker’s initial margin requirement is 50% of the value of the short position?
    b. How high can the price of the stock go before you get a margin call if the mainte-nance margin is 30% of the value of the short position?<\/li>\n<\/ol>\n\n\n\n

    The Correct Answer and Explanation is :<\/strong><\/mark><\/p>\n\n\n\n

    18. Bullish on Telecom Stock<\/h3>\n\n\n\n

    a. Rate of return if Telecom stock price goes up by 10%<\/strong><\/p>\n\n\n\n

    You invest a total of $10,000 in Telecom stock. Of this, $5,000 is your own money and $5,000 is borrowed from the broker.<\/p>\n\n\n\n

      \n
    • Initial Investment: $10,000 (where $5,000 is your own money and $5,000 is borrowed).<\/li>\n\n\n\n
    • If the stock price increases by 10%, the new stock price per share would be:<\/li>\n<\/ul>\n\n\n\n

      [
      \\text{New Stock Price} = 50 \\times (1 + 0.10) = 55
      ]<\/p>\n\n\n\n

        \n
      • Number of shares you bought:<\/li>\n<\/ul>\n\n\n\n

        [
        \\text{Number of Shares} = \\frac{10,000}{50} = 200 \\, \\text{shares}
        ]<\/p>\n\n\n\n

          \n
        • The value of the stock after a 10% increase:<\/li>\n<\/ul>\n\n\n\n

          [
          \\text{Value of Shares} = 200 \\times 55 = 11,000
          ]<\/p>\n\n\n\n

            \n
          • You now sell the shares for $11,000, but you still owe your broker the $5,000 you borrowed, plus interest at 8%. For simplicity, assume the interest applies for one year:<\/li>\n<\/ul>\n\n\n\n

            [
            \\text{Interest} = 5,000 \\times 0.08 = 400
            ]<\/p>\n\n\n\n

              \n
            • Total repayment to the broker is $5,400 ($5,000 principal + $400 interest).<\/li>\n<\/ul>\n\n\n\n

              Your net profit:<\/strong><\/p>\n\n\n\n

              [
              \\text{Net Profit} = 11,000 – 5,400 – 5,000 = 600
              ]<\/p>\n\n\n\n

              Rate of Return (RoR) on your $5,000 investment:<\/strong><\/p>\n\n\n\n

              [
              \\text{Rate of Return} = \\frac{600}{5,000} = 0.12 \\, \\text{or} \\, 12\\%
              ]<\/p>\n\n\n\n

              So, your rate of return is 12% if the price of Telecom stock goes up by 10%.<\/p>\n\n\n\n

              \n\n\n\n

              b. Price fall for margin call with a maintenance margin of 30%<\/strong><\/p>\n\n\n\n

              A margin call happens when the equity in the account falls below the maintenance margin requirement. You borrowed $5,000 from the broker to purchase 200 shares, which means the value of your loan is $5,000.<\/p>\n\n\n\n

                \n
              • Maintenance margin = 30%, meaning your equity must remain at least 30% of the total value of the stock.<\/li>\n<\/ul>\n\n\n\n

                Let ( P ) be the price at which you get a margin call. Your equity is the difference between the total value of the shares and the amount you owe the broker, which is:<\/p>\n\n\n\n

                [
                \\text{Equity} = (\\text{Number of Shares} \\times P) – 5,400
                ]<\/p>\n\n\n\n

                The total value of the shares is ( 200 \\times P ), and your total equity should be at least 30% of that value:<\/p>\n\n\n\n

                [
                \\text{Equity} = 0.30 \\times (200 \\times P)
                ]<\/p>\n\n\n\n

                Set these two expressions for equity equal to each other:<\/p>\n\n\n\n

                [
                (200 \\times P) – 5,400 = 0.30 \\times (200 \\times P)
                ]<\/p>\n\n\n\n

                Solving for ( P ):<\/p>\n\n\n\n

                [
                200P – 5,400 = 60P
                ]<\/p>\n\n\n\n

                [
                140P = 5,400
                ]<\/p>\n\n\n\n

                [
                P = \\frac{5,400}{140} = 38.57
                ]<\/p>\n\n\n\n

                Therefore, the price must fall to $38.57<\/strong> per share for you to get a margin call.<\/p>\n\n\n\n

                \n\n\n\n

                19. Bearish on Telecom Stock<\/h3>\n\n\n\n

                a. Cash or securities required for the short sale<\/strong><\/p>\n\n\n\n

                When you sell short 100 shares at $50 per share, the total value of the short position is:<\/p>\n\n\n\n

                [
                \\text{Value of Short Position} = 100 \\times 50 = 5,000
                ]<\/p>\n\n\n\n

                The broker requires an initial margin of 50% of the value of the short position:<\/p>\n\n\n\n

                [
                \\text{Initial Margin Requirement} = 0.50 \\times 5,000 = 2,500
                ]<\/p>\n\n\n\n

                Thus, you must deposit $2,500<\/strong> in your brokerage account to meet the initial margin requirement.<\/p>\n\n\n\n

                \n\n\n\n

                b. Price rise for margin call with a maintenance margin of 30%<\/strong><\/p>\n\n\n\n

                For a short position, you need to maintain a margin that is 30% of the value of the position. If the price of the stock rises, the value of the short position increases, and you may get a margin call if the equity in the account falls below the maintenance margin.<\/p>\n\n\n\n

                Let ( P ) be the price at which you will receive a margin call. The total value of the short position is ( 100 \\times P ), and the maintenance margin requirement is 30% of that value:<\/p>\n\n\n\n

                [
                \\text{Equity} = \\text{Initial Margin} – (\\text{New Value of Short Position} – \\text{Proceeds from Short Sale})
                ]<\/p>\n\n\n\n

                [
                \\text{Equity} = 2,500 – (100 \\times P – 5,000)
                ]<\/p>\n\n\n\n

                You must maintain at least 30% of the total value of the short position as equity:<\/p>\n\n\n\n

                [
                \\text{Equity} = 0.30 \\times (100 \\times P)
                ]<\/p>\n\n\n\n

                Setting these equal:<\/p>\n\n\n\n

                [
                2,500 – (100P – 5,000) = 0.30 \\times (100 \\times P)
                ]<\/p>\n\n\n\n

                Simplifying:<\/p>\n\n\n\n

                [
                2,500 – 100P + 5,000 = 30P
                ]<\/p>\n\n\n\n

                [
                7,500 = 130P
                ]<\/p>\n\n\n\n

                [
                P = \\frac{7,500}{130} = 57.69
                ]<\/p>\n\n\n\n

                Thus, the price can rise to $57.69<\/strong> before you get a margin call.<\/p>\n\n\n\n

                \n\n\n\n

                Summary<\/h3>\n\n\n\n
                  \n
                • For the bullish position<\/strong>, your rate of return is 12%<\/strong> if the stock price increases by 10%.<\/li>\n\n\n\n
                • For the margin call on the bullish position<\/strong>, the stock price must fall to $38.57<\/strong> for you to get a margin call.<\/li>\n\n\n\n
                • For the bearish position<\/strong>, you must deposit $2,500<\/strong> in your brokerage account.<\/li>\n\n\n\n
                • For the margin call on the bearish position<\/strong>, the price can rise to $57.69<\/strong> before you get a margin call.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"

                  The Correct Answer and Explanation is : 18. Bullish on Telecom Stock a. Rate of return if Telecom stock price goes up by 10% You invest a total of $10,000 in Telecom stock. Of this, $5,000 is your own money and $5,000 is borrowed from the broker. [\\text{New Stock Price} = 50 \\times (1 + […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-188975","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/188975","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=188975"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/188975\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=188975"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=188975"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=188975"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}