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?
Answer a. In a capitalist system, financial markets play a central role in the allocation of capital resources. The best resources always tend to come to the companies with the best prospect. The company’s management will find it easy to issue new shares or borrow funds to finance research and development, build new production facilities, and expand its…show more content… Initial Margin: $15000 Loan: 500×40-15000=$5000 Assume the margin call price is P (500P-5000)/(500P)=0.25 The solution is P=$13.33 c. Initial Margin: $ 10000 Loan: 500×40-10000=$10000 Assume the margin call price is P (500P-10000)/(500P)=0.25 The solution is P=$26.66 d. Assume the price of Intel is P one year later. Rate of return= (ending equity-beginning equity)/initial investment Beginning equity=$15000 Ending equity=500P-5000-5000×0.08=500P-5400 R=(500P-5400-15000)/15000 So, the rate of return on the margined position is 10.67% when P=$44. The rate of return on the margined position is -2.67% when P=$40. The rate of return on the margined position is -16% when P=$36. Assume the percentage return is R, the percentage change in the price is X% R=(ending equity-beginning equity)/initial investment R={[40×(1+X%)×500-5000-5000×0.08]-15000}/15000 R=X%×1.33-0.0267 e. Initial Margin: $15000 Loan: 500×40-15000=$5000 Assume the margin call price is P
