Question

You’ve borrowed $15,000 on margin to buy shares in Ixnay, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 30%. Two days later, the stock price falls to $38 per share.

a. Will you receive a margin call?

	Yes
	No

b. How low can the price of Ixnay shares fall before you receive a margin call? (Round your answer to 2 decimal places.)
  

Margin call will be made at price

or lower

Answer 1

a. No margin call will be received.

Now, we borrowed $15,000. Since the initial margin requirement is 50%, this means you will have to add $15,000 of your own equity as well. And we purchased with this total $30000 investment 750 shares of Ixany at $40 per share.

At $38 per share, the market value of the stock is $28,500, so this loss would be reduced from equity portion, value of equity now is $13,500, and the percentage margin is: $13,500/$30,000 = 45%, which is higher than required maintenance margin (30%).

b. You will receive a margin call when:
(750P - $15,000)/750P = 0.30 -->

=> (750P - $15,000) = 225P

=> 525P = 15000

=> P = $28.57

answered by: anonymous