Question

Dée Trader opens a brokerage account and purchases 100 shares of Internet Dreams at $56 per share. She borrows $3,500 from her broker to help pay for the purchase. The interest rate on the loan is 9%.

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

Margin            $

b-1. If the share price falls to $46 per share by the end of the year, what is the remaining margin in her account? (Round your answer to 2 decimal places.)

Remaining margin             %

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

No
Yes

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.)

Rate of return             %

Answer 1

a. The margin in Dée’s account when she first purchases the stock

The Purchase Price of share = 100 Shares x $100 per share = $5,600

Amount borrowed from broker = $3,500

Therefore, Margin in Dée’s account when she first purchases the stock

= $5,600 – 3,500

= $2,100

“ Margin in Dée’s account when she first purchases the stock = $2,100 “

b-1. If the share price falls to $46 per share by the end of the year, the remaining margin in her account

If the share price down to $46 per share, then the value of the stock will be $4,600

At the end of the year, the amount of the borrowing outstanding

= Loan Amount × (1 + Interest rate)

= $3,500 × 1.09

= $3,815

Remaining margin in her account = [ ($4,600 – 3,815) / 4,600 ] x 100 = 17.07%

“ Remaining margin in her account = 17.07% “

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

YES , Since the remaining margin (17.07%) is less than required margin (30%)

(c) Rate of return on her investment

Rate of return = [ (Ending equity in account – Initial equity in account) / Initial equity in account ] x 100

= [ ($785 – 2,100) / 2,100 ] x 100

= - 62.62%

“Rate of return on her investment = - 62.62% (Negative) “