Question

Dée Trader opens a brokerage account and purchases 200 shares of Internet Dreams at $50 per share. She borrows $3,300 from her broker to help pay for the purchase. The interest rate on the loan is 6%.

a. What is the margin in Dée’s account when she first purchases the stock?

Margin=

b-1. If the share price falls to $40 per share by the end of the year, what is the remaining margin in her account? (Round your answer to 2 decimal places.)

Remaining margin=

b-2. If the maintenance margin requirement is 30%, will she receive a margin call? Yes or No ?

c. What is the rate of return on her investment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Rate of return=

Answer 1

Solution

a. Margin in Dee's Accoount when first purchased the stock

Margin in Account = Purchase Price of Shares - Borrowed Amount

= (200 shares * $50) - $3,300

= $10,000 - $ 3,300

= $6,700

b-1. Margin in Dee's Account after fall in share price at year end

Remaining Margin in Account at year end = Price of Shares after fall - (Borrowed Amount + Interest)

= (200 shares * $40) - [$3,300 + (3,300*6%)]

= $8,000 - $3,498

= $4,502

b-2. When maintenance margin required is 30%

Margin % at year end = (Margin at year end / Price of Shares after fall) * 100%

= ( $4,502 / $8,000) * 100%

= 56.275%

As Margin at year end (56.275%) is higher than the required margin (30%), Investor will not receive a margin call.

c. Rate of Return on Investment

Rate of Return on Investment = [(Margin at year end - Margin at beginning) / Margin at beginning] * 100

= [($4,502 - $6,700) / $6,700] * 100

= - 32.81%