An investor buys $16 000 worth of a share priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The share pays a $0.50 per share dividend in one year and then the share is sold at $23 per share. What was the investor's rate of return?

Question

Quizplus · Accepted Answer

The investor initially invests $9,600 of their own money ($16,000 * 60%) and borrows $6,400. The interest on the loan is $512 ($6,400 * 8%). The dividend income is $400 ($0.50 * 800 shares). The sale proceeds are $18,400 (800 shares * $23). The total return is calculated as: [(Sale proceeds + Dividends - Loan repayment - Initial investment) / Initial investment] = [($18,400 + $400 - $6,912 - $9,600) / $9,600] = 23.83%.

An Investor Buys $16 000 Worth of a Share Priced