I am posting this bcos i think it is tricky and can trip anyone who’s a little careless like i was. See if you can crack it and explain the trick - or what to watch out for; An investor bought a stock on margin. The margin requirement was 60 percent; the current price of the stock is $75 and the investor paid $50 for it 1 year ago. The rate on the margin loan was 10 percent. Ignoring transactions costs, what is the investor’s return on this transaction? A) 115.00%. B) 143.33%. C) 83.33%. D) 76.67%.
THis is what I see. It was 50 dollars lasy yr… so u paid 30 dollars and were charged 20*0.1=2 dollars interest REturn = 25-2/30=76.67%
D Initial margin - (.6)($50) = $30 Borrowed $20, so interest is (.1)($20) = 2 HPR = (75-2-50)/30 = 23/30 = .76667 = 76.67%
You are spot on Smeet. D is the right ans. What would it have been if it were interest free. i know it sounds dumb but pls…
25/30 = 83.33
if they don’t give you the interest costs, it is a straight HPR. 75-50/30 = 83.33%
smeet is faster than me. quick draw, smeet!!
true true, this is what i did - 1/.7 = 1.4285 ((75/50) - 1 ) * 1.4285 = 71.42% and chose D as it was the closest. EDIT - Additionally i thought that the return had to be lower than 83.33% as that return does not include the interest cost so that reinforced my calculation a bit. now i know how to do these more accurately based on your methods. thanks!