Question

Barbara buys 140 shares of DEM at $31.00 a share and 250 shares of GOP at $43.00 a share. She buys on margin and the broker charges interest of 5 percent on the loan. If the margin requirement is 47 percent, what is the maximum amount she can borrow?

If she buys the stocks using the borrowed money and holds the securities for a year, how much interest must she pay?

If after a year she sells DEM for $26.00 a share and GOP for $32.00 a share, how much did she lose on her investment?

What is the percentage loss on the funds she invested if the interest payment is included in the calculation?

Answer 1

a. The maximum amount is computed as shown below:

= (140 shares x $ 31 + 250 shares x $ 43) x (1 - margin requirement)

= ($ 4,340 + $ 10,750) x (1 - 0.47)

= $ 15,090 x 0.53

= $ 7,997.7

b. Interest amount is computed as follows:

= Amount computed in part a above x interest rate

= $ 7,997.7 x 5%

= $ 399.885

c. Loss amount is computed as follows:

= (140 shares x $ 31 + 250 shares x $ 43) - (140 shares x $ 26 + 250 shares x $ 32) - Interest amount

= $ 15,090 - $ 11,640 - $ 399.885

= $ 3,050.115

d. % Loss is computed as follows:

= Loss amount computed in part c above / [ (140 shares x $ 31 + 250 shares x $ 43) x Margin requirement ]

= $ 3,050.115 / [ ($ 15,090 x 47%) ]

= $ 3,050.115 / $ 7,092.3

= 43.01% Approximately

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