Question

Three months ago, you purchased 100 shares of stock on margin. The initial margin requirement on...

Three months ago, you purchased 100 shares of stock on margin. The initial margin requirement on your account is 70 percent and the maintenance margin is 40 percent. The call money rate is 4.2%/year and you pay 2.0% above that rate. The purchase price was \$22 per share. Today, you sold these shares for \$25.00 each. What is your annualized rate of return?

Solution :

Here, First we need to calculate the Initial investment as follows :

Initial investment = 100 * \$22 * 0.70 = \$1,540

Next, we will calculate the Loan payment as follows,

Loan payment = [ 100 * \$22 * ( 1 - 0.70 ) ] * [ 1 + ( 0.042 + 0.02 ) ]^3/12

= \$670.00

Now, we can calculate the Holding period return ( HPR ) as,

HPR = [ ( 100 * \$25 ) - \$1,540 - \$670.00 ] / \$1,540

HPR = 0.1883

Finally, we can calculate the effective annual rate ( EAR ) as,

EAR = ( 1 + 0.1883 )^12/3 - 1

EAR = 99.39%

The annualized return is 99.39%

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