Question

Nancy purchased $80,000 worth of common stock by borrowing $32,000 from her broker. She paid the rest to satisfy the initial margin requirement. The initial stock price is $160 per share. The maintenance margin requirement is 45%. The broker charges 8% on the margin loan. If the stock price changes from $160 to $120 one year later, will Nancy receive a margin call at this price?

	A.	Yes, Nancy will receive a margin call at this price.
	B.	No, Nancy will not receive a margin call at this price.

Answer 1

Initial Margin = (80,000 - 32,000)/80,000 = 60.0%

Margin Call Price = 160(1 - 0.60)/(1 - 0.45)

Margin Call Price = $116.36

As price is above $116.36 Nancy won't receive