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?
To calculate the interest Teresa must pay, we need to consider two factors: the interest on the borrowed funds (margin interest) and the interest on the purchase cost of the stock.
First, let's calculate the initial purchase cost. Teresa bought 100 shares of the XYZ stock at $20 per share, so the total initial cost is 100 shares * $20 per share = $2000.
The margin requirement is given as 45 percent. This means that Teresa only needs to provide 55 percent as a down payment while borrowing the remaining 45 percent. So, the borrowed amount is 45 percent * $2000 = $900.
Next, let's calculate the margin interest. Margin interest is charged on the borrowed amount. The interest rate is given as 10 percent. To find the margin interest, multiply the borrowed amount by the interest rate: $900 * 10 percent = $90.
Now, let's calculate the interest on the initial purchase cost. The interest rate is given as 10 percent, and Teresa holds the security for 1 year. Multiply the initial purchase cost ($2000) by the interest rate (10 percent) and the holding period (1 year): $2000 * 10 percent * 1 year = $200.
To find the total interest Teresa must pay, sum up the margin interest and the interest on the initial purchase cost: $90 + $200 = $290.
Therefore, Teresa must pay a total of $290 in interest.