uestion $3$

a$.$ What are the differences among a limit buy order, a limit sell order, and a market order?

$[3$ marks$]$

b$.$ How does buying on margin magnify both the upside potential and the downside potential risk of an investment position?

$[3$ marks$]$

c$.$ Suppose an investor initially pays $6000$ toward the purchase of a stock worth $\frac{O}{10},000(100$ shares at $100$ per share$),$ and borrows the remaining $\frac{O}{4},000$ from a broker.

i$.$ Construct the initial balance sheet

$[2$ marks$]$

ii$.$ What is the initial percentage margin

$[2$ marks$]$

iii. Assuming the price declines to &$70,$ construct the new balance sheet and find the new percentage margin

$[3$ marks$]$

iv$.$ Assuming the maintenance margin is $30\%,$ what price should the stock drop to before the investor receives a margin call?

$[3$ marks$]$

v$.$ Now assume the investor buys $20,000$ worth of stock, borrowing $10,000$ of the purchase price at an interest rate of $9\%$ per year. The price per share is $100.$ Compare the returns of the investor with and without buying on margin if;

The stock price rises by $30\%$

There is no change in stock price

The stock price falls by $30\%$

What do you notice about buying on margin?