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
%
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%
Get Answers For Free
Most questions answered within 1 hours.