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 answer 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%)