Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent

Question

Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent over that. You buy 700 shares at $89 per share with an initial margin of 40 percent. One year later, the stock is selling for $97 per share, and you close out your position. What is your return assuming no dividends are paid?

Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent over that. You buy 700 shares at $89 per share with an initial margin of 40 percent. One year later, the stock is selling for $97 per share, and you close out your position. What is your return assuming no dividends are paid?

Explanation / Answer

Answer:

Purchase price = 700 shares *$89 = $62300

Interest on amount borrowed = 62300 *40%*(6.8+1.9)% = $2168.04

Selling price of the shares = 700 Shares * $97 = $67900

Net profit on investment = 67900

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