Question

Please complete the following problems. Show all your work. Be sure to specify all equations used and your process.

You purchased 10,000 shares of stock JKL at price $30 on 60% margin. The call money rate is 3% and the spread is 1%. You sell the shares 3 months later when the price is $34. What is the total dollar return? Total percent return? Total annualized return?

Answer 1

Purchase amount=Number of shares*Purchase price=10000*30=300000.00

Own Deposit=Purchase amount*% Margin=300000.00*60%=180000.00

Loan amount=Purchase amount-Own Deposit=300000.00-180000.00=120000.00

Interest rate charged=3%+1%=4.0000%

Selling amount=Number of shares*Selling price=10000*34=340000.00

Dollar return=Selling amount-Loan amount*interest rate*t-Purchase amount=340000.00-120000.00*4.0000%*3/12-300000.00=38800.00

Total percentage return=Dollar return/Own Deposit=38800.00/180000.00=21.5556%

Total annualized return=Total percentage return*12/t=21.5556%*12/3=86.2224%