You’ve just opened a margin account with $14,000 at your local brokerage firm. Y
ID: 2382509 • Letter: Y
Question
You’ve just opened a margin account with $14,000 at your local brokerage firm. You instruct your broker to purchase 700 shares of Landon Golf stock, which currently sells for $61 per share. Suppose the call money rate is 5.5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for 6 months and sell at a price of $67 per share. The company paid a dividend of $0.52 per share the day before you sold your stock.
What is your total dollar return from this investment? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
What is your effective annual rate of return? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
You’ve just opened a margin account with $14,000 at your local brokerage firm. You instruct your broker to purchase 700 shares of Landon Golf stock, which currently sells for $61 per share. Suppose the call money rate is 5.5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for 6 months and sell at a price of $67 per share. The company paid a dividend of $0.52 per share the day before you sold your stock.
Explanation / Answer
1. Total interest rate = 5.5 + 1.25 = 6.75%
Total Dollar return = 700 x [(67 - 61) + 0.52] - (14,000 x 6.75%) = $3,619
2. Effective annual return = 3,619 x 100/14,000 x 12/6 = 51.7%
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