Question

1. An investor buys 300 shares of stock selling at $110 per share using a 60% initial margin and a 30% maintenance margin. The stock does not pay a dividend. A margin loan can be obtained at an annual interest rate of 5%. What is the annualized return on invested capital if the stock price gradually increases to $124 at the end of one year? (include the interest on the margin loan.)

Annualized rate of return = _________________________%

Answer 1

Annualized return= Net return/Total investment

Total value ofinvestment=Price per share*no.of share

=$110*300= $33000

Margin required = Total value * 60%

= $33000*60% =$19800

Interest on margin= $19800*5% =$990

Gain on investment= (Price at year end-purchase price)*no. Of share

Gain = ($124-$110)*300

=$14*300 =$4200

Net reuturn = gain on investment- interest on margin

NET RETURN =$4200-$990= $3210

Annualized return =$3210/$19800

Annualized return=0.1621 or 16.21%

Note-Maintenance margin is part of initial margin and is already inculded in initial margin.

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