Question

If an investor purchases a stock that appreciates from $40 per share to $60 per share over that six-month period, what is his/her return with 50% margin? Assume a 5% annual interest rate on the margin. What is the return assuming no margin? What is his/her return if the stock depreciates from $40 to $20 (assuming the same annual interest rate on margin)? What is the return assuming no margin? ​

Answer 1

Let us assume an investor purchases a stock at $40

Margin = 50% of Stock = $40*.5= $20

Annual interest rate = 5%

Interest for 6 months = $20*5%*6/12= $0.5

Return = Profit - Interest = ($60 - $40) - $0.5 = $19.5

Assume there is no margin then investor doesnt need to borrow the margin and invest .So there will be no interest payable.

So Return = $60 - $40 = $20

If Stock depreciates from $40 to $20

the

Return if margin exists = ($20-$40) -$0.5 = -$20.5

Retrun if there is no margin = ($20- $40) = -$20