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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