Margin purchase
a. Assume an investor purchases a 10-year, $1,000 bond with a coupon rate of 12 percent. The market rate almost immediately falls to 9 percent. What would be the percentage return on the investment if the buyer borrowed part of the funds with a 25 percent margin requirement? Assume the interest payments on the bond cover the interest expense on the borrowed funds. (You can use Table 12–3 in this problem to determine the new value of the bond.)
b. Assume the same bond in part a is purchased with 25 percent margin, but market rates go up to 14 percent from 12 percent instead of going down to 9 percent. You can once again use Table 12–3 on page 317 to determine the price of the bond. What is the percentage loss on the cash investment?