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Dée Trader opens a brokerage account and purchases 400 shares of Internet Dreams at $28 per share.

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Business

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Homework

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Problem 3-15
Dée Trader opens a brokerage account and purchases 400 shares of Internet
Dreams at $28 per share. She borrows $3,000 from her broker to help pay for
the purchase. The interest rate on the loan is 12%.
a. What is the margin in Dée’s account when she first purchases the stock?
Margin
$
b-
1.
If the share price falls to $18 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
8,200
53.33

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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
%
rev: 08_16_2013_QC_32852
Explanation:
a.
The stock is purchased for $28 × 400 shares = $11,200.
Given that the amount borrowed from the broker is $3,000, Dee’s margin is
the initial purchase price net borrowing: $11,200 – $3,000 = $8,200.
b.
If the share price falls to $18, then the value of the stock falls to $7,200. By
the end of the year, the amount of the loan owed to the broker grows to:
Principal × (1 + Interest rate) = $3,000 × (1 + 0.12) = $3,360.
The value of the stock falls to: $18 × 400 shares = $7,200.
The remaining margin in the investors account is:
Margin on long position =
Equity in account
Value of stock
=
$7,200 – $3,360
= 0.5333 = 53.33%
$7,200
Therefore, the investor will not receive a margin call.
-53.17

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c.
Rate of return =
Ending equity in account – Initial equity in account
Initial equity in account
=
$3,840 – $8,200
= –0.5317 = –53.17%
$8,200

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