Question

Barbara buys 150 shares of DEM at $33.00 a share and 230 shares of GOP at $45.00 a share. She buys on margin and the broker charges interest of 13 percent on the loan.

1. If the margin requirement is 59 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 $20.00 a share and GOP for $40.00 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

Answer (a):

Barbara buys 150 shares of DEM at $33.00 a share and 230 shares of GOP at $45.00 a share. She buys on margin and the broker charges interest of 13 percent on the loan.

Purchase cost of shares = 150 * $33 + 230 * $45 = $15,300

Margin requirement is 59 percent.

Hence maximum amount she can borrow = (100% - 59%) * 15300 = $6,273.00

Maximum amount she can borrow = $6,273.00

Answer (b):

She buys the stocks using the borrowed money and holds the securities for a year.

Interest she must pay = 6273 * 13% = $815.49

Interest she must pay = $815.49

Answer (c):

After a year she sells DEM for $20.00 a share and GOP for $40.00 a share.

Sale value = 150 * $20 + 230 * $40 = $12,200

Amount she lose on her investment = Sale value - Purchase value = 12200 - 15300 = -$3,100

Amount she lose on her investment = -$3,100

Answer (d):

Amount she invested = 15300 * 59% = $9027

Amount she lost including interest = - (3100 + 815.49) = -$3915.49

Percentage loss on the funds she invested = -3915.49 / 9027 = -43.38%

Percentage loss on the funds she invested = -43.38%