Explain why using leverage to purchase risky securities is so popular
One example, cited in the text, is this: Suppose Oscar buys a risky stock for $100, using $20 of his own money and $80 that he borrows from Fred Financier. Oscar agrees to pay $4 in interest for the loan, and both agree that Oscar will forfeit the stock he purchases with Fred's money if he fails to pay back the loan with interest ($84 total). If Oscar is lucky and the price of stock doubles to $40, Oscar would have made a 100% profit on his investment. But because he also invested the borrowed $80, his total gains are $200 - nearly a 500% profit on his original $20 investment, even after he pays Fred back his $80 loan plus $4 in interest.
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Which of the following will increase investment spending in the economy, holding everything else constant?
A) an increase in the federal government surplus B) an increase in transfer payments C) an increase in the budget deficit D) an increase in consumer dissavings
What is one of the traditional political uses of tariffs?
a. protection of borders b. protection of vested economic interests c. protection of military secrets d. protection of exchange rates
National income includes all of the following EXCEPT
A. corporate profits. B. net interest. C. proprietors' income. D. depreciation.
Which of the following describes the infant industry argument for protectionism?
A) An industry must be protected in its early stages of development so that firms can compete with government-subsidized foreign competition. B) Some strategic industries must be protected to ensure adequate supplies of resources needed for national defense in emergencies. C) Domestic producers in high-wage countries must be protected from foreign producers in low-wage countries to produce a level playing field. D) Domestic producers require time to gain experience and lower their unit costs; this will allow these producers to compete successfully in international markets.