Question

Dée Trader opens a brokerage account and purchases 100 shares of Internet Dreams at $60 per share. She borrows $2,000 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 $50 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

Answer 1

a.

Purchase = 100 * 60 = $6000

Amount borrowed = $2000

Margin in Dee's account = 6000 - 2000 = $4000

b.

Value when price fell to 50 = 50 * 100 = $5000

Amount of loan = 2000 * (1+ 0.1) = $2200

Margin Remaining in Dee's account = 5000 - 2200 = $2800

c.

Margin = Amount Remaining in account / Value of stock

= 2800 / 5000 = 56%

Dee will not receive a margin call as margin in the account (i.e. 56%) is more than maintenance margin ( i.e. 30%) required.

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