teresa buys 100 shares of XYZ sock on margin at $20 per share. If the margin requirement is 45 percent, the interest rate is 10 percent, and she holds the security for 1 year, how much interest must she pay?
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To calculate the interest Teresa must pay, we need to follow these steps:
Step 1: Calculate the total cost of purchasing the shares.
Teresa buys 100 shares of XYZ stock at $20 per share, so the total cost is calculated as: 100 shares * $20 = $2,000.
Step 2: Calculate the initial margin.
The margin requirement is given as 45 percent. To calculate the initial margin, multiply the total cost by the margin requirement: $2,000 * 0.45 = $900.
The initial margin is the amount of money Teresa contributes herself, while the brokerage firm lends her the remaining amount.
Step 3: Calculate the amount borrowed.
The amount borrowed is simply the difference between the total cost and the initial margin: $2,000 - $900 = $1,100.
Step 4: Calculate the annual interest payable.
The interest rate is given as 10 percent. Since Teresa holds the security for 1 year, the annual interest payable is calculated as: $1,100 * 0.10 = $110.
Therefore, Teresa must pay $110 in interest.