Allan purchased 500 shares of stock on margin for $31.75 a share and sold the shares...
Allan purchased 500 shares of stock on margin for $31.75 a share and sold the shares five months later for $34.50 a share. The initial margin requirement was 65 percent and the maintenance margin was 30 percent. The interest rate on the margin loan was 8.5 percent. He received no dividend income. What was his holding period return?
Homework Answers
Profit = Ending Value - Beginning Value + Dividends - Transaction Costs - Interest
Beginning Value of Investment = $31.75 x 500 shares = $15,875
Your Investment = .65 x $15,875 = $10,318.75
Ending Value of Investment = $34.50 x 500 shares = $17,250
Interest = .085 x (.35 x $15,875) = $472.28
Therefore:
Profit = $17,250 - $15,875 + $0 - $0 - $472.28 = $902.72
The rate of return on your investment of $10,318.75 is:
$902.72/$10,318.75 = 8.75%
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