You’ve just opened a margin account with $13,000 at your local brokerage firm. Y
ID: 2728237 • Letter: Y
Question
You’ve just opened a margin account with $13,000 at your local brokerage firm. You instruct your broker to purchase 600 shares of Landon Golf stock, which currently sells for $82 per share. Suppose the call money rate is 7 percent and your broker charges you a spread of 1 percent over this rate. You hold the stock for 4 months and sell at a price of $90 per share. The company paid a dividend of $.44 per share the day before you sold your stock.
What is your total dollar return from this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
What is your effective annual rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
1.What is your total dollar return from this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
Total loan:
= $82×600-$13,000
= $36,200
Interest rate = 7%+1% =8%
Amount payable after 4 months:
= $36,200×(1+8%÷3)
= $37,165.33
Net proceeds at the end of 4 months:
= ($90+$0.44)×600-$13,000-$37,165.33
= $4,098.67
Total dollar return = $4,098.67
EAR = (1+APR÷n)^n-1
n is number of compounding per year
= (1+$4,098.67÷$13,000)^3-1
Effective annual return = 127.54%
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