Question

23. Today, you are purchasing 100 shares of stock on margin. The purchase price per share is $35. The initial margin requirement is 70 percent and the maintenance margin is 30 percent. The call money rate is 4.5 percent and you are charged 1.6 percent over that rate. What will your rate of return be if you sell your shares one year from now for $37 a share? Ignore dividends.

A. 5.55 percent

B. 6.42 percent

C. 7.18 percent

D. 7.49 percent

E. 8.03 percent

Answer 1

A. 5.55 percent

Initial investment = (100 shares × $35 × 0.70) = $2,450

Loan repayment = [100 shares × $35 × (1 - 0.70)] × [1 + (0.045 + 0.016)]¹ = $1,114.05

Rate of return = [(100 × $37) - $1,114.05 - $2,450] / $2,450 = 5.55 percent