Question

Eight months ago, Freda purchased 500 shares of stock on margin at a price per share of $35. The initial margin requirement on her account is 70 percent and the maintenance margin is 40 percent. The call money rate is 4.75 percent and she pays 2 percent above that rate. Today, she sold these shares for $37.50 each. What is her annualized rate of return?

Answer 1

Answer:

the effective annual rate for Freda is 12.70%

Explanation:

Freda investment

500 shares x $ 35 each x 70% margin = 12,250

Financing taken:

500 shares x $ 35 each x 30% = 5,250

Payment of the loan:

principal x (1 + rate x time)

5,520 x ( 1 + (0.0475 + 0.02) x 8/12) = 5,483.67

Holding return:

$\frac{return}{cost} -1$

(500 shares x 37.5 - 5,483.67)/12,250   - 1   = 0.0830

Then we calcualte the annual equivalent rate to the holding return:

$(1+ r_e)^{8/12} = 1.0830$

$r_e = 1.0830^{12/8} -1$

effective rate = 12.70 percent