1. Inside Traders open a brokerage account and purchases 300 shares of Energy Infusion at $40 per share. They borrow $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%.
A. What is the margin on IT’s account when they first purchase the stock?
B. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account?
C. If the maintenance margin required for the account is 30%, will she receive a margin call?
D. What is the rate of return on her investment?
2. Great Bear Lake Traders opened an account to short sell 1,000 shares of Energy Infusion from the previous problem. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of EI has risen from $40 to $50, and the stock has paid a dividend of $2 per share.
A. What is the remaining margin in the account?
B. If the maintenance margin requirement is 30%, will Great Bear Traders receive a margin call?
C. What is the rate of return on the investment?