Barbara purchased 100 shares of IBZ at 35 using a 60% initial margin. Due to unexpected...

Barbara purchased 100 shares of IBZ at 35 using a 60% initial margin. Due to unexpected news the stock price drops the next day to 25 and Barbara receives a margin call.
How much money does Barbara need to put on her account, if the broker requires that she restores the % margin to the initial 60% level?
Provide your answer rounded up to the next dollar. Show all calculations with formulas.

Solutions

Expert Solution

Initial margin is a percentage of purchase price paid in cash or collateral. the remaining amount of purchase price is borrowed from broker.

Initial margin = (No. of shares purchased*purchase price per share)*initial margin percentage

Initial margin = (100*35)*60% = 3,500*60% = 2,100

so, amount borrowed is: Purchase price - Initial margin = 100*35 - 2,100 = 3,500 - 2,100 = 1,400

Total value of shares after price drop = no. of shares*price per share after drop = 100*25 = 2,500

value of initial margin after drop = Total value of shares after price drop - amount borrowed = 2,500 - 1,400 = 1,100

money needed to put in account = (Total value of shares after price drop*initial margin percent) - value of initial margin after drop

money needed to put in account = (2,500*60%) - 1,100 = 1,500 - 1,100 = 400

Barbara needs to put 400 on her account, if the broker requires that she restores the % margin to the initial 60% level.

jeff jeffy answered 1 year ago

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