Eight months ago,Freda purchased 500 shares of stock on margin at a price per share of $35.The initial margin requirement on her account is 70 percent and the maintenance margin is 40 percent.The call money rate is 4.75 percent and she pays 2 percent above that rate.Today,she sold these shares for $37.50 each.What is her annualized rate of return?

Question

Quizplus · Accepted Answer

Initial investment = 500 × $35 × 0.70 = $12,250 Loan repayment = [500 × $35 × (1 - 0.70)] × [1 + (0.0475 + 0.02)]^8/12 = $5,483.67 HPR = [(500 × $37.50) - $5,483.67 - $12,250 / $12,250 = 0.0830 EAR = (1 + 0.0830)^{12 / 8} - 1 = 12.70 percent

Eight Months Ago,Freda Purchased 500 Shares of Stock on Margin