### 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 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.