Question

Barbara buys 80 shares of DEM at $25.00 a share and 160 shares of GOP at $40.00 a share. She buys on margin and the broker charges interest of 8 percent on the loan.

1. If the margin requirement is 56 percent, what is the maximum amount she can borrow? Round your answer to the nearest cent.

   $   

2. If she buys the stocks using the borrowed money and holds the securities for a year, how much interest must she pay? Round your answer to the nearest cent.

   $   

3. If after a year she sells DEM for $11.00 a share and GOP for $27.00 a share, how much did she lose on her investment? Use a minus sign to enter the amount as a negative value. Round your answer to the nearest cent.

   $   

4. What is the percentage loss on the funds she invested if the interest payment is included in the calculation? Use a minus sign to enter the amount as a negative value. Round your answer to two decimal places.

Answer 1

A)

DEM at $25.00 - 80 Shares = $2000

GOP at $40.0 - 160 Shares = $ 6400

Total Investment Value = $8400

The margin requirement is 56%

Therefore the amount of margin required = $8400 * 56% = $4704

Therefore the rest of the amount i.e (8400 - 4704) = $3696

B)

Amount borrowed = $3696

Rate of Interest = 8%

Term of loan = 1 year

Therefore amount of interest = 3696 * 8% = $ 295.68

C)

Amount of Loss:

DEM = (25 - 11) * 80 = -$1120

GOP = (40-27) * 160 = -$2080

Loss on investment = -$3200

Loss on account of interest = -$ 295.68

Total amount of Loss (incl. Interest) = -$3495.68

D)

Percentage Loss = Amount of Loss/ Initial Investment *100

= $3495.68/$8400 * 100

= - 41.62%