Question

you purchase 300 shares of square enix at $40 per share. To pay the purchase, you borrow $4000 from broker

1. what is the % margin in your account when you first purchase the stock
2. if the share price falls to $30 per share. if the maintenance requirement is 30%, will u receive a margin call
3. if interest rate on loan over the borrowing period is 5%. what is the rate of return on your account when you sell the stock at $30

Answer 1

Total worth of shares bought = 300*40 =12000

As you borrowed 4000, your initial margin is 8000/12000 = 66.67%

When share peice falls, the worth of investments become 30*300 = 9000.

In 9000 you had borrowed 4000 so you have equity of 5000.

Had your equity fallen below 9000*0.3=2700 then you would have received a margin call. Here as your equity is more than 2700, you won't receive a margin call. (Assumption is no interest charged on loan).

The loan amount plus interest you would have to pay the broker = 4000*1.05 = 4200

When you sell at 30 you get 9000, from which you payback 4200. Hence, you are left with 4800. You had invested 8000. So, your return becomes

(4800/8000)-1 = 0.6-1 = -0.4

Hence you get a return of -40% during the period.