Question

Emma had a trading account and bought 250 shares of Amazon at the price of $35 per share. The amount she borrowed is $3800, and the interest charged on the loan is 6%.

A) Calculate Emma’s initial margin in her trading account.

B) By Dec 31 of the year, the share price has fallen from $35 to $25 per share. Calculate the remaining margin in Emma’s trading account. Will she receive a margin call if the maintenance margin is 35%?

C) What is the rate of return over Emma’s investment period?

Answer 1

A)

And in percentage terms, the inital margin is as follows:

B)

The margin call price is calculated as follows:

  

So as the price of 25 is greater than margin call price, so she will not receive the margin call.

C) Rate of return:

• Total cost of purchasing the shares = 250 x 35 = 8750
• Equity in the shares = 4900
• Receipts on sale= Sale price per share x number of shares
  • Receipts on sale= 25 x 250
  • Receipts on sale= 6250
• Interest on borrowed money = Call money rate x borrowed amount
  • Interest on borrowed money = 0.06 x 3850
  • Interest on borrowed money = $231.00
• Residual Receipts on sale = Receipts on sale – Borrowed money – Interest
  • Residual Receipts on sale = 6250 - 3850 - 231
• Residual Receipts on sale = $2,169.00
  ​​​​​​
• So the equity of shares was 4900 and the Residual receipts are only 2169 so the return on the stock is
• 
• Therefore it is a loss