Question

Suppose that XTel currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.

b. If the maintenance margin is 25%, how low can XTel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)

Answer 1

Margin call will be triggered at the account value, which can be computed as follows

Account value = (Margin loan)/(1-Maintenance margin%)

The rate at which the margin call will be triggered is as follows - Account value/ No. of shares

-> Margin loan calculation

No.of shares bought (500 shares x $40) - 20,000

(-) Own money invested    - 15,000

Margin loan - 5,000

Account value = 5,000/(1-0.25) = 6,666.67

Value of the share for trigger = 6,666.67/ 500 = 13.33

-> Fall in the share price required

= (40-13.33)/40 = 66.67%

Answer : Price has to fall by 66.67% before getting the margin call