Final answer:
Borrowing $7,950 to finance the purchase of fund units is known as leveraging, which can amplify both potential gains and losses. It also introduces additional costs in the form of interest, reducing the effective return on the investment.
Step-by-step explanation:
When Raoul borrows $7,950 to finance the purchase of 1,500 units of a growth fund with a Net Asset Value Per Unit (NAVPU) of $11.30, he is engaging in a practice known as leveraging or using leverage. The effect of borrowing to purchase the units increases his potential for higher gains if the value of the growth fund increases, because he can control a larger amount of assets with a smaller amount of his own capital. However, it also increases his risk because if the value of the units decreases, he will still be responsible for repaying the loan plus any interest accrued.
For example, if the growth fund's NAVPU increases, Raoul's profit will be amplified because he owns more units than he could have bought with just his inherited money. Conversely, if the NAVPU decreases, he could end up losing more money than he initially invested. It's also important to consider the cost of borrowing, such as the interest rate on the loan, as this will reduce the effective return on Raoul's investment and needs to be factored into any profit calculation.