# Margin Call Question

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. Oct 8, 2014 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. Oct 8, 2014 at 18:05
• @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! Oct 8, 2014 at 18:17
• 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? Oct 9, 2014 at 0:45
• 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. Oct 9, 2014 at 1:35