Question

1. An investor purchases 200 shares of ABC stock on margin. The current price of ABC stock is $85 per share, the initial margin requirement is 60% and the maintenance margin requirement is 25%.

A)   What is the dollar amount of the loan the investor receives from her broker for this margin purchase?

B)   How far can the stock price fall before the investor gets a margin call

Answer 1

Sol:

Number of share purchased = 200

Current price of stock = $85

Total Purchase value = 200 * 85 = $17,000

Initial margin = 60%

Maintenance margin = 25%

Amount to be deposit by you = Total Purchase value x Initial Margin

Amount to be deposit by you = $17,000 * 60% = $10,200

Total margin requirement = Total Purchase value + Amount to be deposit by you

Total margin requirement = 17,000 + 10,200 = $27,200

A)   To determine dollar amount of the loan the investor receives from her broker for this margin purchase:

Loan received from broker = Total Purchase value - Amount to be deposit by you

Loan received from broker = $17,000 - 10,200 = $6,800

B) To determine how far can the stock price fall before the investor gets a margin call:

Maintenance margin = [(Number of shares x price) - Loan received from broker] / Number of shares x price

25% = [(200 * P) - 6,800] / 200 * P

25% * 200 * P = 200 * P - 6,800

200P - 50P = 6,800

P = 6,800 / 150 = $45.33

Therefore to get a margin call stock price has to fall to $45.33 or lower