Question

Dée Trader opens a brokerage account and purchases 100 shares of Internet Dreams at $56 per share. She borrows $3,500 from her broker to help pay for the purchase. The interest rate on the loan is 9%.
a. What is the margin in Dée’s account when she first purchases the stock? Margin __$ .

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 __ %.

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

Answer:

margin = $2100

remaining margin = 17.07 %

yes  remaining margin i.e 17.07% is less than the required margin i.e 30%

rate of return  = -62.62 %

Explanation:

given data

borrows = $3,500

interest rate = 9%

purchases  = 100 shares

Internet Dreams =  $56 per share

solution

we get here margin that is

margin = purchase Price of share - borrows amount   .............1

here purchase Price of share is = 100 Shares ×  $100 per share

purchase Price of share = $5,600

so here margin will be as

margin = $5600 - $3500

margin = $2100

and

when share price down = $46 per share

so that value of the stock = $46 ×  $100 per share  =   $4,600

and year end amount borrow outstanding

amount borrow = Loan Amount × (1 + Interest rate)    .........2

 amount borrow = $3,500 × ( 1 + 0.09  )

  amount borrow =  $3,815

so remaining margin will be as

remaining margin = ( value of the stock -    amount borrow ) ÷ value of the stock

remaining margin = $\frac{4600-3815}{4600}$    

remaining margin = 17.07 %

and when maintenance margin requirement is =  30%

so yes  remaining margin i.e 17.07% is less than the required margin i.e 30%

and

now we get Rate of return that is

rate of return  =  ( Ending equity in account – Initial equity in account) ÷ Initial equity in account  .............3

put here value

rate of return  = $\frac{785-2100}{2100}$    

rate of return  = -62.62 %