Dée Trader opens a brokerage account and purchases 100 shares of
Internet Dreams at $52 per share. She borrows $2,800 from her
broker to help pay for the purchase. The interest rate on the loan
is 7%.
a. What is the margin in Dée’s account when she
first purchases the stock?
b. If the share price falls to $30 per share by
the end of the year, what is the remaining margin in her account?
(Round your answer to 2 decimal places.)
c. If the maintenance margin requirement is 30%,
will she receive a margin call?
No
Yes
d. 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.)
a) | ||
Margin in Dée’s account = Purchase Price - Money Borrowed from the broker | ||
Margin in Dée’s account = 100*$52-$2800 | ||
Margin in Dée’s account = $2400 | ||
b) | Remaining Margin = Equity Value- Liability to the broker | |
Remaining Margin = 100*$30 - ($2800*1.07) | ||
Remaining Margin = $4 | ||
Remaining Margin Ratio = $4/$3000 | ||
Remaining Margin Ratio = 0.13% | ||
Yes | ||
c) | Rate of Return = Return - Initial Investment / Initial Investment | |
Rate of Return = ($4-$5200)/$5200 | ||
Rate of Return = -99.92% |
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