Buying on margin. Assume that you purchase 1,000 shares of the stock in the comp

Question

Buying on margin. Assume that you purchase 1,000 shares of the stock in the company, borrowing one half of the funds from your broker; and assume that the maintenance margin is 25%. Assume that you buy the stock on the first day of Week 1 and sell the stock on the last day of Week 4. Follow the stock's price,(11.30 for Bank of America) noting the position in the account at the end of each week. If there is a margin call, make a cash infusion sufficient to prevent your broker from selling the stock, hence increasing your equity in your account. Calculate the return on your investment, assuming: An annual rate of interest on the borrowings of 6% Commission of 0.5% of the stocks value for buying and selling Be sure to factor in any dividends that are paid on the stock.

Explanation / Answer

Rate of Return = (Stock Sale Price + Dividends Received - Stock Purchase Price - Margin Interest)/ Stock Purchase Price stock purchase price=11300 stock sale price=11300*0.06+11300=678+11300=11978 stock dividend=11300*.065=734.5 rate of return=(11978+734.5-11300-678)/11300=0.065=6.5 %

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