Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams
ID: 2769213 • Letter: D
Question
Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams at $22 per share. She borrows $3,600 from her broker to help pay for the purchase. The interest rate on the loan is 8%. a. What is the margin in Dée’s account when she first purchases the stock? Margin $ b-1. If the share price falls to $12 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 % b-2. 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.)
Explanation / Answer
(a) Margin = (22*400)-3600 = $5,200
(b) Decrease in share price = 12
Decrease in value = 12*400 = $4,800
Remaining margin = $5,200 - $4,800 = $400
(c) Yes she will receive a margin call as the margin is lower than maintenance margin after fall in share price
(d) Value of investment after one year = $4,800
Total investment made = $5,200 (margin money)
Interest on loan = 3,600*8% = $288
Total investment = 5,200 + 288 = 5488
Return on investment = (4800-5488)/5488 = -12.54%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.