Question

An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. If the stock is sold at $23 per share in one year, what was the investor’s rate of return?

Input your answer as a percentage with 2 decimal places, without the %. For example, 20.27.

Answer 1

Please find the below explanation and “ Don’t forget to give a like! Thank you”

stock buying price = $20

Number of stocks purchased = $16000 / $20 = 800

stock sale price = $23

Value of stock in one year = Number of stocks purchased * stock sale price

= 800 * $23

= $18400

Broker charge = 8%

Balance after initial margin = 40%

Interest due = Investor stock buying value * Balance after initial margin * brokers charge

= 16000 * 40% * 8%

= 512

Loan payoff = Investor stock buying value * Balance after initial margin

= 16000 * 40%

= 6400

Ending account balance = Value of stock after one year – Interest due – Loan payoff

= 18400 – 512 – 6400

= 11488

Initial margin = 16000 * 60%

= 9600

Investors rate of return = Ending account balance / Initial margin – 1

= 11488 / 9600 – 1

= 0.1966 or 19.66

The investors rate of return is 19.66