Question

You open a brokerage account and purchase 300 shares of paperboy Inc at $45 per share. you borrow $5,400 from your broker to help pay for the purchase. The interest rate on the

loan is 8%.

a. What is the margin in your account when you first purchase the stock?

b. If the share price falls to $35 per share by the end of the year, what is the remaining margin in your account? If the maintenance margin requirement is 30%, will you receive a margin call?

c. What is the rate of return on your investment?

Answer 1

Solution:-

Stock Purchase Value = 300 shares * $45 = $13,500

Borrowed Amount = $5,400

A. To Calculate margin in your account when you first purchase the stock-

Margin (In $) = Purchase Value - Borrowed Amount

Margin (In $) = $13,500 - $5,400

Margin (In $) = $8,100

Margin (In %) =

Margin (In %) =

Margin (In %) = 60%

B. To Calculate the remaining margin in your account If the share price falls to $35 per share by the end of the year-

Value at year End = 300 shares * $35 = $10,500

Margin (In $) = Value at year end - Borrowed Amount

Margin (In $) = $10,500 - $5,400

Margin (In $) = $5,100

Margin (In %) =

Margin (In %) =

Margin (In %) = 48.57%

Hence, Margin is over Maintainence Margin i.e. 30% and will not recieve any margin call.

C. To Calculate the rate of return on your investment-

Value at Year end = $10,500.

Borrowed Amount paid with Interest = 5,400 + 5,400 * 0.08 = $5,832

Rate of Return =

Rate of Return =

Rate of Return = -42.37%

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