Question

Barbara buys 100 shares of DEM at $35 a share and 200 shares of GOP at $40 a share. She buys on margin and the broker charges interest of 10% on the loan.
a. If the margin requirement i 55%, what is the maximum amount she can borrow?
b. If she buys the stocks using the borrowed money and holds the securities for a year, how much interest must she pay?
c. If after a year she sells DEM for $29 a share and GOP for $32 a share, how much did she lose on her investment?
d. What is the percentage loss on the funds she invested if the interest payment is included in the calculation?

Answer 1

Answer:

a. $5,175

b. $517.5

c. $2,200

d. 23.63%

Explanation:

a. If the margin requirement is 55% then the maximum Barbara can borrow is 45%

(100 * $35) + (200 * $40) * 45/100

$11,500 * 45/100

$5,175

b. If she buys stocks using the borrowed money she will have to pay interest on the amount borrowed that is $5,175. Interest rate is 10%

$5,175 * 10%

= $517.5

c. If she sell DEM for $29 and GOP for $32 she will lose

(100 * ($35 - $29) + (200 * ($40 - $32)

(100 * ($6) + (200 * ($8)

$600 + $1600

= $2,200

d. The total loss and interest is

$2,200 + $517.5

= $2,717.5

Total investment was $11,500

Loss percentage = total loss / Total investment

= $2,717.5 / $11,500 * 100

= 23.63%