Question

Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent over that. You buy 600 shares at $44 per share with an initial margin of 55 percent. One year later, the stock is selling for $52 per share and you close out your position. What is your return assuming no dividends are paid

Answer 1

Based on the information given, it can be noted that the rate of return will be 25.94%.

How to calculate the rate of return.

The initial equity will be:

= (600 × $44) × 0.55

= $14520

The amount borrowed will be:

= (600 × $44)(1 - 0.55) = $11880

The interest will be:

= $11880 × (0.680 + 0.0190)

= $1033.56

Proceed from sales will be:

= 600 × $52 = $31200.

The dollar return will be:

= $31200 - $11880 - $1033.56 - $14520

= $3766.44

Therefore, the rate of return will be:

= 3766.44 / 14520

= 25.94%

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