Question

An investor buys $20,000 worth of a stock priced at $20 per

share using 60% initial margin. The broker requires a 35%
maintenance margin. What is the price of the stock when the
investor receives a ma

Answer 1

23.83%

Step-by-step explanation:

With a 60% initial margin, the out of pocket investment for the investor = 16,000 * 60% = 9,600. The number of stocks purchased = 16,000 / 20 = 800. The amount borrowed from the broker = 16,000 - 9,600 = 6,400.

With a 60% initial margin, the out of pocket investment for the investor = 16,000 * 60% = 9,600. The number of stocks purchased = 16,000 / 20 = 800. The amount borrowed from the broker = 16,000 - 9,600 = 6,400.In one year, the investor receives 800 * 0.5 = 400 dividend payments. Selling the stock at $23 per share will yield 23 * 800 = 18,400 in proceeds. To settle the margin account, the investor must repay the broker 6,400 * (1 + 8%) = 6,912. Thus the investor is left with 18,400 + 400 - 6,912 = 11,888.

With a 60% initial margin, the out of pocket investment for the investor = 16,000 * 60% = 9,600. The number of stocks purchased = 16,000 / 20 = 800. The amount borrowed from the broker = 16,000 - 9,600 = 6,400.In one year, the investor receives 800 * 0.5 = 400 dividend payments. Selling the stock at $23 per share will yield 23 * 800 = 18,400 in proceeds. To settle the margin account, the investor must repay the broker 6,400 * (1 + 8%) = 6,912. Thus the investor is left with 18,400 + 400 - 6,912 = 11,888.The rate of return for the investor = (11,888 - 9,600) / 9,600 = 23.83%