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**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%)

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**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. |