Question

An investor buys $8,000 worth of a stock priced at $40 per share using 55% initial margin three months ago. The broker charges 5.5% per annum on the margin loan and requires a 33% maintenance margin. The dividend yield of the stock is 0.5% per annum and is paid in every three year. The stock is sold at $42 per share. What was the investor's rate of return?

Answer 1

Current price of stock = $40

Current value = $8000

Number of stocks = 8000 / 40 = 200

Price of stock after 3 months = $42

So value of stock after 3 months = 42 *200 = $8400

Dividends yield = 0.5% but dividend is paid every 3 years.

So this will not be added in return

Intital margin = 55%

So amount of loan taken = 45% of 8000 =$3600

amount invested by self = = 8000 - 3600 = 4400

Interest = 5.5% per annum on $3600

Interest for 3 months = 5.5% / 4 * 3600 = $49.5

Loan payment = $3600

Return= value of stock after 3 months - interest - loan payment

Return = 8400 - 49.5 - 3600 = $4750.5

Return % =( return / amount invested by self) - 1

Return % = 4750.5 / 4400 - 1 = 7.965%