You purchase 500 shares of stock on margin at a cost per share of $22. The initial margin requirement is 60%. The effective interest rate on the margin loan is 6.4%. How much interest will you pay if you repay the loan in four months?
A)$68.77
B)$91.93
C)$102.16
D)$112.38
E)$117.04

Question

Quizplus · Accepted Answer

To calculate the interest paid on the margin loan, first determine the amount borrowed. With a 60% initial margin requirement, you're covering 60% of the purchase with your own funds, and borrowing the remaining 40%. The total cost of the 500 shares at $22 each is $11,000 (500 shares * $22/share). The amount borrowed is 40% of this, or $4,400 (0.40 * $11,000). The annual interest rate is 6.4%, but since the loan is repaid in four months, you'll pay interest for 1/3 of a year (4/12 months). The interest paid is thus $4,400 * 0.064 * (4/12) = $91.93.

You Purchase 500 Shares of Stock on Margin at a Cost