Question

You purchased 500 shares of stock XYZ for $80 per share. You borrowed $15,000 from your broker to help pay for the purchase. A.) How much initial percent margin do you have in your account? B.) If your broker does not charge any interest payments on margin loans, how low can the price of the stock XYZ fall before you receive a margin call? Your broker has a maintenance margin requirement of 40% for stock XYZ.

Please show your work! Thank you!

Answer 1

Initial value of share = 80

No. of shares purchased = 500

Total value = no. of shares * initial value of shares = 80*500 = 40000

Margin Borrowed = 15000

Initial margin money in account = 40000 - 15000 = 25000

Margin Money (%) = Investor Margin Money / Total Value of Shares

initial margin money (%) = 25000 / 40000 = 5/8 = 62.5%

Let new price of share be y then

Total value of share = 500 * y

decrease in value of shares = (initial price - final price)*no. of shares = (80-y) * 500

Decrease in fund value = initial fund value - decrease in value of shares = 25000 - 500*(80-y)

Now maintenance margin = 40% = 0.4

then

Margin Money (%) = Investor Margin Money / Total Value of Share

= [25000-500*(80-y)] / 500*y = 0.4

25000 - 500*80 +500y = 0.4*500y

-15000 +500y = 200y

y = 50

Hence share value can fall upto 50 before margin call