CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

Assume that six months ago you bought 2,500 shares of a stock at $70 per share using a margin. The margin rate was 40% and the interest rate on the margin loan was 8%. Assume no commissions. What is your gain or loss if the current stock price is $71 per share?
A. -$1,700
B. $2,500
C. $6,700
Explanation: Original equity = 40% of (2,500 x $70) = (.40)($175,000) = $70,000
Original Loan = 60% of (2,500 x $70) = (.60)($175,000) = $105,000
Interest on loan = 1/2 of 8% of $105,000 = (1/2)($8,400) = $4,200
Current loan = $105,000 + $4,200 = $109,200
Current Equity = (QP-L) = (2,500 x $71 - $109,200) = $177,500 - $109,200 = $68,300
$ return = $68,300 - $70,000 = - $1,700 (Rate of return = -1,700/70,000= -2.43%)

User Contributed Comments 9

User Comment
shasha margin rate = investor's equity loan = 1 - margin rate
blumonster with the $1 appreciation, gain=$2,500 subtract interest charged on amt borrowed ie. $4,200 we have -$1,700.
wldu 1/2 X 8% HAVE TO REMEMBER!
iceluke read carefully! 40% margin = equity, the remaining 60% = loan; also remember the six months!
danlan Capital gain < interest expense, so there is a loss, and A is the only possible choice.
Becker N=0.5
PV=105,000
I=8%
FV= ? = 109,200
maria15 Becker - your suggestion is not working on my BA II.
Mikehuynh Margin rate = proportion of equity
=> 40% equity + 60% loan
Shaan23 6 months -- such a dumbass.
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