Question

Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams at $28 per share. She borrows $3,000 from her broker to help pay for the purchase. The interest rate on the loan is 12%. a. What is the margin in Dée’s account when she first purchases the stock? b. If the share price falls to $18 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.)

Answer 1

Answer and Explanation:

The computation is shown below:-

a. Margin

Equity account = Number of shares × Price per share

= 400 × $28

= $11,200

Margin = Purchase price - Money borrowed from the broker

= $11,200 - $3,000

= $8,200

b. Remaining margin

Equity account = Number of shares × Price per share

= 400 × $18

= $7,200

Total liability = Borrowed amount × 1.12

= $3,000 × 1.12

= $3,360

Remaining margin = Equity value - Liability to the broker

= $7,200 - $3,360

= $3,840

Remaining margin ratio = Remaining margin ÷ Equity value

= $3,840 ÷ $7,200

= 53.33%

c. As per the information maintenance margin requires 30%

No, maintenance margin requires 30% and the remaining martin is 53.33% then it will no margin calls

d. Rate of return

Rate of return = (Return - Initial inventment) ÷ Initial investment

= ($3,840 - $8,200) ÷ $8,200

= -53.17%