Chapter 1: Q16I. (page 105)
Corporate Fund started the year with a net asset value of \(12.50. By year-end, its NAV equaled \)12.10. The fund paid year-end distributions of income and capital gains of $1.50. What was the rate of return to an investor in the fund?
8.80%
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Suppose that Intel currently is selling at \(40 per share. You buy 500 shares using \)15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
a. What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to (i) \(44; (ii) \)40; (iii) \(36? What is the relationship between your percentage return and the percentage change in the price of Intel?
b. If the maintenance margin is 25%, how low can Intel’s price fall before you get a margin call?
c. How would your answer to ( b ) change if you had financed the initial purchase with only \)10,000 of your own money?
d. What is the rate of return on your margined position (assuming again that you invest \(15,000 of your own money) if Intel is selling after one year at (i) \)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?
How do margin trades magnify both the upside potential and downside risk of an investment portfolio?
Explain the difference between a put option and a short position in a futures contract.
Why have average trade sizes declined in recent years?
What are the differences between real and financial assets?
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