Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent

Question

Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent over that. You buy 1,100 shares at $55 per share with an initial margin of 40 percent. One year later, the stock is selling for $61 per share, and you close out your position. What is your return assuming no dividends are paid?

Suppose the call money rate is 6.8 percent, and you pay a spread of 1.9 percent over that. You buy 1,100 shares at $55 per share with an initial margin of 40 percent. One year later, the stock is selling for $61 per share, and you close out your position. What is your return assuming no dividends are paid?

Explanation / Answer

Call Money Rate 6.80% Spread 1.90% Borrowing Rate 8.70% Shares 1100 Price per Share 55.00 Total Purchase Price 60500 Initial Margin % 40 Initial Cash Outlay (60500*40%) 24200 Borrwing Amout (60500*60%) 36300 Sale Price 1100*61 67100 Less: Payment of Borrowing PRINCIPAL 36300 INTEREST 36300*8.70% 3158 Remaining Position 27642 Return on the trade ($27642/$24200) - 1 14.22%

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