Problem 2: Living on Margin : Matt decides to buy Google stock on margin. His broker informs him that the initial margin is 40%, the maintenance margin is 25%, and the interest rate 5% per annum. Eli decided to to buy stocks worth of $10,000, using the margin option to its full extend, when the price of the stock is $50.

1. Which price would initiate a margin call? At this price what would be his return?

2. After a year, the price of the stock increases by 20%. What is the return for Eli?

3. Using your answers both in (1) and (2), show how buying on margin increases leverage.