Question

Dée Trader opens a brokerage account and purchases 200 shares of Internet Dreams at $44 per share. She borrows $4,150 from her broker to help pay for the purchase. The interest rate on the loan is 10%.

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

b. If the share price falls to $34 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?

• Yes

• No

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.)

rev: 02_04_2019_QC_CS-156785

Answer 1

a.) Calculation of Margin

Margin = Purchase price of Asset - Borrowing

= (200 * 44) - 4150

= 8800 - 4150

= 4650

(b.) Calculation of Margin if share price falls to 34

Margin = Value of share - Value of Borrowing including Interest

= (200 * 34) - (4150 * 1.10)

= 6800 - 4565

= 2235

(c.) Margin ratio after the price fall = Margin / Value of share

= 2235 / 6800

= 32.87%

32.87% is above the minimum margin requirement , therefore she will not receive the margin call.

(d.) Calculation of Return on Investment

Return on Investment = [ Marginafter share price falls (i.e calculated in part b.) - Initial Margin (calculated in part a )] / Initial Margin

= [2235 - 4650] / 4650

= [2235 - 4650] / 4650

= -2415 / 4650

= -51.93548387 or (-51.94%)