1.
award:
3.34 out of
10.00 points
Old Economy Traders opened an account to short sell 2,200 shares of Internet
Dreams at $64 per share. The initial margin requirement was 50%. (The margin
account pays no interest.) A year later, the price of Internet Dreams has risen from
$64 to $70, and the stock has paid a dividend of $2.00 per share.
a.
What is the remaining margin in the account?
(Omit the "$" sign in your
response.)
Remaining
margin
$
b.
If the maintenance margin requirement is 30%, will Old Economy receive a
margin call?
No
c.
What is the rate of return on the investment?
(Round your answer to 2 decimal
places. Negative answer should be indicated by a minus sign. Omit the "%"
sign in your response.)
Rate of
return
%
Explanation:
a.
The initial margin was: 0.50 × 2,200 × $64 = $70,400
As a result of the increase in the stock price Old Economy Traders loses:
$6 × 2,200 = $13,200
Therefore, margin decreases by $13,200. Moreover, Old Economy Traders must
pay the dividend of $2.00 per share to the lender of the shares, so that the margin in
the account decreases by an additional $4,400. Therefore, the remaining margin is:
$70,400 – $13,200 – $4,400 = $52,800
b.
The percentage margin is: $52,800 / $154,000 = .34 = 34% (rounded), which is
more than the required maintenance margin of 30%.
So, there will be no margin call.
c.
The equity in the account decreased from $70,400 to $52,800 in one year, for a rate
of return of:
(– $17,600 / $70,400) = -.2500 = -25.00%
2.
award:
10 out of
10.00 points