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24 August, 02:57

Suppose you want to invest in ABC stock that does not pay any dividends. A share is trading at $100. You put $10,000 of your own money and borrow $10,000 from your broker at 9% per year to purchase a total of 200 shares. What is the rate of return on this position if the stock goes down by 30% in the following 12 months

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  1. 24 August, 03:21
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    A loss of 69%

    Explanation:

    Price per share $100

    Equity invested $10,000

    Funds taken from broker $10,000 at an Interest rate 9.00%

    Total investment $20,000

    Price change 30.00% less

    Margin required 30.00%

    Total shares purchased from investing = 200 shares

    The shares decrease in value by 30%: $20,000 * 0.30 = $6,000.

    You pay interest of = $10,000 * 0.09 = $900.

    The rate of return will be:

    "$6,000 - $900" / "$10,000" = - 0.69 = - 69%
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