Question

Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent over that. You buy 900 shares at $80 per share with an initial margin of 65 percent. One year later, the stock is selling for $86 per share and you close out your position. What is your return assuming no dividends are paid

Answer 1

The rate of return assuming that  no dividends are paid is 6.85%.

What is rate of return?

A rate of return refers to the percentage of net gain/loss of an investment for a time period

Initial equity = (900 shares × $80)*(0.65)

Initial equity = $46,800

Amount borrowed = (900 × $80)*(1 – 0.65)

Amount borrowed = $25,200

Interest = $25,200 * (0.0680 + 0.0190)

Interest = $2,192.40

Proceeds from sale = 900 shares * $86

Proceeds from sale = $77,400

Dollar return = $77,400 - $25,200 - $2,192.4 - $46,800

Dollar return = $3,207.60

Rate of return = $3,207.6 / $46,800

Rate of return = 0.0685

Rate of return = 6.85%

Inn conclusion, the rate of return assuming that  no dividends are paid is 6.85%.

Read more about rate of return

brainly.com/question/24301559