Today, you are purchasing 100 shares of stock on margin. The purchase price per share is $35. The initial margin requirement is 70% and the maintenance margin is 30%. The call money rate is 4.5% and you are charged 1.6% 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%
B)6.42%
C)7.18%
D)7.49%
E)8.03%

Question

Quizplus · Accepted Answer

The correct answer is A.The rate of return is calculated as follows:Rate of return = (Selling price - Purchase price + Margin interest) / Purchase priceSelling price = $37 per sharePurchase price = $35 per shareInitial margin requirement = 70%Maintenance margin = 30%Call money rate = 4.5%Margin interest rate = 4.5% + 1.6% = 6.1%Margin interest = (Purchase price * Initial margin requirement * Margin interest rate * Time) / 360Margin interest = ($35 * 0.7 * 0.061 * 1) / 360 = $0.0341 per shareRate of return = ($37 - $35 + $0.0341) / $35 = 5.55%

Today, You Are Purchasing 100 Shares of Stock on Margin