Question

Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $32 per...

Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $32 per share. She borrows $4,600 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 $21 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?

No
Yes

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             %

Homework Answers

Answer #1

Question - a

Initial Margin = Value of stock - value of borrowing = 300 * 32 - 4600 = 5000

Question - b

Remaining Margin = Value of stock (end of the year ) - Value of the borrowing ( end of the year )

= 300 shares * 21 - 5000 * ( 1.06) = 6300 - 5300 = 1000

Question b - 2

Current margin ratio = Remaining margin / Value of stock (ending) * 100

= 1000 / 6300 * 100 = 15.87 % .......... this is lower than the required 30% maintenance margin. Hence a call will be received.

Yes

Question - c

Rate of return = ( Remaining margin - Initial Margin) / Initial margin * 100

= ( 1000 - 5000 ) / 5000 = - 80%

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