Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams

Question

Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams at $30 per share. She borrows $5,000 from her broker to help pay for the purchase. The interest rate on the loan is 5%. a. What is the margin in Dée's account when she first purchases the stock? Margin b-1. If the share price falls to $19 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? 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 2 decimal places.) Rate of return

Explanation / Answer

A)total investment = no of share x price of a share

Total investment = 400*30 = 12000

Margin = 12000 - 5000 = $7000

B) Total investment @19 = 19*400 = 7600

Margin = 7600 - 5000 = 2600

Margin% = 2600/7600 = 34%

B2 No since margin currently is 34% which is more than 30%

c)

Interest charged = 5% of 5000 = $250

In the beginning of the year Total investment = 12000

Value in the year end = 7600

Gross loss = 12000 - 7600 = 4400

net loss = 4400+ 250 = 4650 (loss+ interest charged)

net loss % = 4650/12000 = 38.75%

Return on investment is -38.75%

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