4. Although we stated that real assets comprise the true productive capacity of an economy, it is hard to conceive of a modern economy without well-developed financial markets and security types. How would the productive capacity of the U.S. economy be affected if there were no markets in which one could trade financial assets? Financial assets are the claims on real assets. By involving in the financial market, companies find it more accessible to the external financial resources. With the help of financial market, companies can raise money simply by issuing stocks or securities. On the other hand, since the stock price is usually an indicator of the profitability of a certain company, investors do not need to spend a

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c. How would your answer to (b) change if you had financed the initial purchase with only $10,000 of your own money? d. What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Intel is selling after 1 year at: (i) $44; (ii) $40; (iii) $36? What is the relationship between your percentage return and the percentage change in the price of Intel? Assume that Intel pays no dividends. e. Continue to assume that a year has passed. How low can Intel’s price fall before you get a margin call?

A: (i) 4*500/15000=13.3% (ii) 0 (iii) -4*500/15000=-13.3%

The relationship between percentage return and percentage price change is

Percentage return= percentage price change*total investment/investor’s initial equity

B: (500P-5000)/500P=25% so when the price is $13.3or lower, investors will get a margin call.

C: (500P-10000)/500P=25% so when the price is $26.6 or lower, investors will receive a margin call.

D: (i) (4*500-5000*0.08)/15000=10.67% (ii) (0-5000*0.08)/15000=-2.67% (iii) (-4*500-5000*0.08)/15000=-16%

The relationship between percentage return and percentage price change is

Percentage return=percentage price change*total investment/initial investment of one’s own-8%*initial borrowing/investor’s initial equity

E:

(500P-5000*1.08)/500P=25% so when the price is $14.4 or