I kept getting 350% but it is not included in the answer choice. Are you guys getting the same thing? An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40 percent and the maintenance margin requirement is 25 percent. If the shares of stock later sold for $200 per share, what is the rate of return on the margin transaction? A) 100%. B) 200%. C) 250%. D) 400%.
A, you make 100 dollars on the 100 you put What is the ans
It looks like you paid $40 and got $200, so I think your return is 400%.
But it says he bought it on full margin. Doesnt it imply that he paid the whole thing
But you haven’t paid back the initial margin. It’s a $100 profit on $40 outlay, or 250% profit
This is what I think. When you say you buy on 40% margin , you put in 40 and 60 by the broker. In this case, if they say full margin do we assume we paid upfront for the whle thing
nm…i was solving for something else there
200 * 100=20000 40% Mine= 8000 and borrowed from broker 12000 (60%) 200*200 = 40000…paid broker 12000 back… rest 28000 Now you have invested 8000 initially 28-8/8 20/8 250%
Chrismaths, you are right – the answer is C.
[edit] corrected a post that has since been edited.
You paid 40% of 100 = $40. Borrowed from Broker - 100-40=60. You received $200. You paid $60 to broker. So you get 200-60=140. So your return = 140-40=100. Rate of return or HPR = 100/40=2.5 == 250%. OR HPR = F-P/P. F=140, P=40 ==> HPR=2.5. Also, I came across a question when investor has to pay interest on $60 (borrowed from Broker). In that case you have to deduct the interest also from 140. Suppose investor had to pay $5 as interest on $60. Then HPR = 140-40-5/40=95/40. HTH.
i get c as well. 200*100 = 20,000 * 40% = 8,000 investment 20,000 appreciation on the investment 20k gain / 8k investment = 2.5
oh, I see my mistake. I did not subtract the initial margin from the return. I divided 140 by 40 to get 3.5. Smeet, I see where you are coming from, but I believe that’s just a distractor…the answer is C. Thanks guys
wise folk - what would be the treatment to this problem if the investor got say a $2 per share dividend during the 1 year HP? i think it would be simply added to the ending price, just like margin interest is subtracted. please correct me if i am wrong.
niraj, i ‘think’ that would be correct as dividend belongs to investor.