Economics 12th Edition by William Baumol, Alan S Blinder

Exercise 2

Jenny purchases some stocks of Company X that initially cost $1,000 and pays for them in cash. Jim makes the same purchase but leverages his investment by borrowing $500 for the purpose at 10 percent interest, using the stocks as security for repayment. If the stock's price rises 20 percent, how much money do Jenny and Jim each make on their investments If the stock declines in value by 20 percent, how much money will Jenny and Jim each have (Remember that, in both instances, Jim must repay his $500 loan with interest.)