Question

You buy 510 shares of stock that are priced at $48 a share using the full amount of margin available. The maintenance margin requirement or MMR is 35%. At what stock price do you get a margin call?

$36.92

$31.20

$32.71

$18.46

You buy 165 shares of stock that are priced at $38 a share using the full amount of margin available. The broker charges you a 3% interest rate on the margin loan. If you sell the stock in one year for $37 a share what was your rate of return?

-8.17%

-7.83%

-8.26%

-2.63%

Answer 1

Soln : Maintenance Margin requirement is when you bought the security using part of your money and partly from margin , and when it falls below the level of margin requirement overall in this case if margin required goes more than 35%, margin call will happen.In this case full margin value is used.

No. of shares here = 510 and priced at $48. So, Total amount of shares = 510*48 = 24480

Minimum Margin requirement = 35%* 24480 = $8568

Here if the securities values/share values goes below (24480-8568) = 15912, there will be margin call, since the min. margin call requirement will breach at this point.

Let x be the price, x = 15912/510 = 31.20

As the shares moves to $31.20 , margin call will happen.

2nd case

165 shares with $38 borrowed as margin.

Amount borrowed = 165*38 = $6270

IInterest charged = 3%*6270 *1 = 188.10

Amount received after selling = 37*165 = 6105

Rate of return = (6105-6270-188)/6270 = -5.63% +3% = -2.63% is the rate of return.