Assume you buy 400 shares of stock ay 64 per shareon a 60 ma

Assume you buy 400 shares of stock ay $64 per shareon a 60% margin and call money rate of 6% and a spread of 1.5%. The stock pays no dividends. if after one year the price goes up to $68/share, calculate the Rate of Return.

Solution

Initial Equity = (no. of shares x share price)(initial margin)

= (400 x $64)(0.60) = $15,360

Amount Borrowed = (no. of shares x share price)(1 - initial margin)

= (400 x $64)(1 - 0.60) = $10,240

Interest = loan amount x (call money rate + spread)

= $10,240 x (0.06 + 0.015)

= $10,240 x 0.075 = $768

Proceeds from sale = no. of shares x new share price

= 400 x $68 = $27,200

Rate of return = (Sales Proceeds - initial equity - amount borrowed - interest) / initial equity

= ($27,200 - $15,360 - $10,240 - $768)/$15,360 = $832/$15,360 = 0.0542, or 5.42%