Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams

Question

Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. a. What is the margin in Dée’s account when she first purchases the stock? (Omit the "$" sign in your response.) Margin $ b-1. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? (Omit the "$" sign in your response.) Remaining margin $ b-2. If the maintenance margin requirement is 30%, will she receive a margin call? Yes No c. What is the rate of return on her investment? (Negative value should be indicated by a minus sign. Round your answer to 1 decimal place. Omit the "%" sign in your response.) Rate of return %

Explanation / Answer

Question a. No of Shares 300 Purchase price 40 Cost of Purchase 12000 Initial Deposit amount 4000 Initial percentage of Margin 33.33% Question b-1. Loss on shares (40-30) x 300 3000 Remaining Margin (4000-3000) 1000 Value of shares (30*300) 9000 %age of Margin (1000/9000) 11.11% Answer: $1,000 Question b-2. Answer: Yes Minimum Margin requirement @30% (9000 x 30%) 2700 Margin Balance 1000 Additional Margin required 1700 She will get a margin call for $ 1,700. Loss on reduced Market Value -2000 Purchase price of shares 12000 %age of return (-2000/12000) -16.67% Answer -16.67%

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