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Hoping for an explanation on one part of this problem:

Execute a margin call of 1000 shares of a stock at $40/share.
The initial margin requirement is 50% and the maintenance margin
requirement is 30%.

I hold for one year, at which time the stock is selling for $50/share
and the stock paid a dividend of $1. The interest rate on the loan was 6%
annually.

Calculate the percentage return on investment.

The formula I would use is:

R(t) = [P(t) - P(t-1) + D(t) - Interest(t)] / Initial Investment

And I know the answer is:

[50 - 40 + 1 - 1.2] / 20 = 49%

But I don't understand why the interest is 1.2 instead of .06. What is the reason behind this?

  • Is this homework because this looks like one. – DumbCoder Oct 8 '14 at 15:40
  • It is homework. Is that not allowed? I'm just looking for an explanation of how the interest rate is being caculated. – MISNole Oct 8 '14 at 18:05
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    @MISNole It's ok to ask homework questions but it's customary to explicitly state in the question that it's homework. People may provide different context for you! – Matthew Oct 8 '14 at 18:17
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    There is no margin call, you are simply asking about the math of a stock bought on margin. You didn't "Execute a margin call of 1000 shares" you just bought those shares with 50% margin. Would you like to edit or one of us can? – JTP - Apologise to Monica Oct 9 '14 at 0:45
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    FWIW, A "margin call" is what happens when your position cost (or expected position cost) exceeds the amount you have with the broker. They issue a margin call to you and may liquidate your holdings or lock your account demanding more funds or both. – Matthew Oct 9 '14 at 1:35
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The initial position is worth 40000. You post 50% margin, so you deposited 20000 and borrowed 20000. 6% of 20000 is 1200.

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