Question

Dée Trader opens a brokerage account and purchases 200 shares of Internet Dreams at $46 per share. She borrows $2,400 from her broker to help pay for the purchase. The interest rate on the loan is 8%.

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

(Round your answer to the whole dollar amount and put it in the following format X,XXX. Do NOT record starting 0's.)

Margin            $

b-1. If the share price falls to $36 per share by the end of the year, what is the remaining margin in her account?

(Round your answer to 2 decimal places and put it in the following format XX.XX. Do NOT record starting 0's.)

Remaining margin              %

b-2. If the maintenance margin requirement is 30%, will she receive a margin call?

• Yes

• No

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 and put it in the following format XX.XX. Do NOT record starting 0's.)

Rate of return              %

Answer 1

a]

margin in account = (number of shares purchased * purchase price per share) - amount borrowed

margin in account = (200 * $46) - $2,400

margin in account = $6,800

b-1]

Remaining margin = beginning margin - (number of shares purchased * (purchase price - ending price)) - (amount borrowed * interest rate)

Remaining margin = $6,800 - (200 * ($46 - $36)) - ($2,400 * 8%)

Remaining margin = $4,608

b-2]

Maintenance margin amount = maintenance margin % * number of shares purchased * purchase price per share

Maintenance margin amount = 30% * 200 * $46

Maintenance margin amount = $2,760

No, she will not receive a margin call as the remaining margin in the account is higher than the maintenance margin amount

c]

rate of return = (Remaining margin - initial margin) / initial margin

rate of return = ($4,608 - $6,800) / $6,800

rate of return = -32.24%