John Doe buys 125 shares of Microgen Inc. at $35 a share and holds the stock for a year. Patricia Smith buys 200 shares of Microgen Inc. for $32 on margin. The margin requirement is 65% and the interest rate on the borrowed funds is 8%. If they both sell the stock for $47 after a year, what percentage return does each investor earn?
John Doe buys 125 shares of Microgen Inc. at $35 a share and holds the stock for a year. Patricia Smith buys 200 shares of Microgen Inc. for $32 on margin. The margin requirement is 65% and the interest rate on the borrowed funds is 8%. If they both sell the stock for $47 after a year, what percentage return does each investor earn?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:John Doe buys 125 shares of Microgen Inc. at $35 a share and holds the stock for a year. Patricia Smith buys 200 shares of
Microgen Inc. for $32 on margin. The margin requirement is 65% and the interest rate on the borrowed funds is 8%. If they both
sell the stock for $47 after a year, what percentage return does each investor earn?
Expert Solution
Step 1
The margin purchase of stocks refers to the practice of borrowing from a broker and then using the loan to purchase stocks on the market at a fixed rate of the market price. It is usually done by institutional investors who purchase stocks in bulk.
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