You deposited $50,000 in a margin account. The initial margin is 50%. Your broker charges 2% interest rate per year. You just purchased JNJ at $50 a share. What's your return if the stock price goes up to $60 in a year?
Solution:
Deposited amount = $50,000
Initial Margin = 50%
Hence borrowed money = $50,000
Interest rate =2%
Total amount that will be repaid = $50,000 * (1+2%) = $51,000
Total amount that can be used to purchase stocks = Equity + Margin money = 50,000 +50,000 = 100,000
Share price = 50
Total share purchased = 100,000/50 = 2,000
Share price after 1-year = $60
Value = 2,000 * 60 = 120,000
Value after repaying the borrowed oney = 120,000 - 51000 = 69,000
Profit = 69,000 - Invested money = 69,000 - 50,000 = $19,000
Return = $19,000 / $50,000 = 0.38 = 38%
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