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Exercise

# Exercise - 2 What is your effective annual rate of return...

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1 Finance 355: Investments Instructor: Shuming Liu In-Class Exercise 1 Chapter 2 Question 22 You’ve just opened a margin account with \$11,000 at your local brokerage firm. You instruct your broker to purchase 600 shares of Landon Golf stock, which currently sells for \$46 per share. Suppose the call money rate is 6% and your broker charges you a spread of 1.25% over this rate. You should hold the stock for 6 months and sell at a price of \$53 per share. The company paid a dividend of \$0.25 per share the day before you sold your stock. 1) What is your total dollar return from this investment?
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Unformatted text preview: 2) What is your effective annual rate of return? ANSWER: 1) Initial purchase = 600 \$46 = \$27,600 Amount borrowed = \$27,600 11,000 = \$16,600 6-month interest rate = (1 + .06 + .0125) 1/2 1 = 3.56% Interest on loan = \$16,600 3.56% = \$591.22 Dividends received = 600(\$.25) = \$150.00 Proceeds from stock sale = 600(\$53) = \$31,800 Dollar return = \$31,800 + 150 16,600 591.22 11,000 = \$3,758.78 2) Rate of return = \$3,758.78 / \$11,000 = 34.17% per six months Effective annual return = (1 + .3417) 12/6 1 = 80.02%...
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