Question

Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams at $20 per share. She borrows $2,500 from her broker to help pay for the purchase. The interest rate on the loan is 7%. a. What is the margin in Dée's account when she first purchases the stock? Margin b. If the share price falls to $10 per share by the end of the year, what is the remaining margin in her account? (Round your answer to 2 decimal places.) Remaining marginſ %

Answer 1

i) ii) Purchase of stock = $20*400 shares Amount borrowed from the broker Dee's margin = Purchase price - borrowing = $8,000 - $2,500 = $8.000 = $2.500 = $5,500 iii) (6) i) ii) iii) Value of the stock if price falls to $10 = $10*400 Amount due on loan along with interest =$2.500*(1 + 0.07) The remaining margin in her account = $4,000 - $2,675 = $4,000 = $2.675 =$1.325 Margin on long position=Equity in account/Value of stock Margin on long position =$1.325/$4.000 = 0.3313 = 33.13% Therefore, she will not receive a margin call as margin in her account (33.13%) is more than maintenance margin (30%) required (d) Rate of retum =Ending equity in account - Initial equity in account/Initial equity in account = {$1,325 – $2,500} /$2,500 = – $1,175 / $2,500 Rate of return on her investment = -0.47 or - 47.00%