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?

**b.** 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.)**

**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 an****swer to 2 decimal places.)
(in%)**

Answer #1

Answer :

**(a.) Calculation of Margin**

**Margin = Purchase price of Asset -
Borrowing**

= (200 * 46) - 2400

= 9200 - 2400

**= 6800**

**(b.) Calculation of Margin if share price falls to
36**

Margin = Value of share - Value of Borrowing including Interest

= (200 * 36) - (2400 * 1.08)

= 7200 - 2592

**= 4608**

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

= 4608 / 7200

= 64%

**64% 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**

**= [4608 - 6800] / 6800**

**= [4608 - 6800] / 6800**

**= -2192 / 6800**

**= -32.235294117 or (-32.24%)**

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