Question 1 The initial margin requirement is 60%. You have $50,000 to invest in a stock selling at $80.00 a share. Ignoring transaction costs, show in detail the impact on your rate of return if the stock price rises to $100 a share and if it declines to $40 a share assuming (i) you pay cash for your investment and (ii) you use margin. (i) Assume you pay $80 cash for the stock: (a) If the stock is later sold at $100 a share, the rate of return from the stock would be: (b) If stock is later sold at $40 a share, the rate of return from the stock would be: (ii) Assuming you use the maximum amount of leverage in buying the stock. (a) If the stock is later sold at $100 a share, the rate of return from the stock would be: (b) If stock is later sold at $40 a share, the rate of return from the stock would be:

Question 2: Suppose an investor initially pays $4,000 towards the purchase of $10,000 worth of stock (200 share at $50 per share), borrowing the remaining from a broker with an interest rate of 6% p.a.? i) What is the initial margin? ii) If the price declines to $40 by the end of the year, what is the percentage margin (equity position) and the return on investment (ROI)? iii) If the price increases to $60 by the end of the year, what is the percentage margin (equity position) and the return on investment (ROI)? iv) Suppose the maintenance margin is 20%. How far could the stock price fall before the investor would get a margin call? v) Suppose the maintenance margin is 30%. How far could the stock price fall before the investor would get a margin call?