Suppose you buy 100 shares of stock initially selling for $50, borrowing 25% of the necessary funds from your broker; that is, the initial margin on your purchase is 25%. You pay an interest rate of 8% on margin loans.
a. How much of your own money do you invest? How much do you borrow from your broker?
b. What will be your rate of return for the following stock prices at the end of a one-year holding period? (i) $40; (ii) $50; (iii) $60.

2. Suppose you buy 100 shares of stock initially selling for $50, borrowing 50% of the necessary funds from your broker; that is, the initial margin on your purchase is 50%. You pay an interest rate of 8% on margin loans. How does margin affect the risk and return of your position?

Answer rating: 100% (QA)

a To buy 100 shares of stock initially selling for 50 you need a total investment of 5000 Since the ... View the full answer