Question

You decide to open a margin account with your broker. You deposit $20,000 in your account. In addition, you borrow $20,000 from your broker and purchase 400 shares of XYZ corporation at $100 per share. As soon as you buy the stock, it drops to $90 per share.

A) What is your margin rate after the stock price drop to $90 per share?

B) If the stock drops further to $80 per share, how much money will you need to deposit in your account to bring the margin rate up to 40%?

Answer 1

A]

margin rate = (amount deposited - (number of shares * decrease in price per share)) / (number of shares * current price per share)

margin rate = ($20,000 - (400 * $10)) / (400 * $90)

margin rate = 44.44%

B]

To bring the margin rate up to 40%, balance required in account = number of shares * purchase price per share * 40%

balance required in account = 400 * $100 * 40% = $16,000

Current margin balance = amount deposited - (number of shares * decrease in price per share)

Current margin balance = $20,000 - (400 * $20) = $12,000

Amount to deposit =  $16,000 - $12,000 = $4,000