Question

Investor A buys 100 shares of SLM Inc. at $35 a share and holds the stock for a year. Investor B buys 100 shares on margin. The margin requirement is 60 percent, and the interest rate on borrowed funds is 8 percent.a)What is the interest cost for investor A

Answer 1

Answer:

A. $0

B. $112

C. Investor A 14.3% gain

Investor B 18.5%

Explanation:

a) Based on the information given interest cost for investor A will be Zero

b) Calculation for What is the interestcost for investor B

Cost of interest =(100 shares*$35)×(100*%-69%)×0.08

Cost of interest = 3,500 x 0.40 x 0.08

Cost of interest =$112

c) Calculation for what percentage returndoes each investor earn

Investor A: 4,000 - 3,500 = 500/3,500

= 0.1428 =14.3% gain

Investor B: $500 gain - $112 interest

= $388/2,100 = 0.1848 =18.5%