What was effective rate of interest on his investment

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Reference no: EM131972484

Meng short sells a stock for $10,000. The proceeds of the sale are retained by the lender (ignore interest on the proceeds). Meng must deposit $5,000 with the lender as collateral. He earns 6% effective on this haircut. At the end of one year, he closes his position by buying the stock for $8,000 and returning it to the lender. A dividend of $500 was payable one day before he covered the short. What was Meng’s effective rate of interest on his investment? Hint: The effective rate of interest is the same as the IRR which you learned about in interest rate theory.

Reference no: EM131972484

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