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Chapter 3: Buying on Margin
1. Suppose you buy 100 shares of stock initially selling for $50, borrowing 25%
of the necessary funds from your broker, i.e. 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
iii. $60
[Observe Cell: E13]
The rate of return is 25.33%.
2. Repeat question 1 assuming your initial margin was 50%. How does margin
affect the risk and return of your position?
Change the initial equity invested ($2,500) and the initial equity
percentage (50%):
[Change cells : 4 2500; 10 50%]B B= =
The new returns at the following price levels:
i. $40
[Observe Cell: E9]
