Question

Nancy purchased $80,000 worth of common stock by borrowing $32,000 from her broker. She paid the rest to satisfy the initial margin requirement. The initial stock price is $160 per share. The maintenance margin requirement is 45%. The broker charges 8% on the margin loan. If the stock price changes from $160 to $120 one year later, what is the rate of return on the investment?

	A.	-12.5%
	B.	-25.0%
	C.	-47.0%
	D.	42.4%

Answer 1

  

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No of shares bought = Investment / Price per share

= 80,000 / 160

= 500

Loss = (120 - 160) * 500   

= 20000

Interest on loan = 32000 * 0.08

= 2560

Initial Invesetment = 80,000 - 32000

= 48000

% Return = Loss + Interest ./ Invesment

= 20000 + 2560 / 48000

= 47%

Answer = -47%

Option C is correct.

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