Session 2 Workshop Problems

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BUS 329
Oct 26, 2023
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Session 2 Chapter 3: How Securities Are Traded
6. 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 on the loan is 8% (a) What is the margin in Dée's account when she first purchases the stock? The stock is purchased for: 300 $40 = $12,000. The amount borrowed is $4,000. Therefore, the investor put up equity, or margin, of $8,000. (b) If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account? If the maintenance margin requirement is 30%, will she receive a margin call? If the share price falls to $30, then the value of the stock falls to 300×$30 = $9,000. By the end of the year, the amount of the loan owed to the broker grows to: $4,000 1.08 = $4,320 Therefore, the remaining margin in the investor's account is: $9,000 $4,320 = $4,680 The percentage margin is now: $4,680/$9,000 = 0.52, or 52% Therefore, the investor will not receive a margin call.
(c) What is the rate of return on her investment? The rate of return on the investment over the year is: (Ending equity in the account Initial equity)/Initial equity = ($4,680 $8,000)/$8,000 = 0.415, or 41.5%
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