Question

You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin. A.0.33 B.0.55 C.0.43 D.0.23 E.0.253. Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow from the broker? A.$6,000 B.$4,000 C.$7,700 D.$7,000 E.$6,300

Answer 1

(1) Number of Shares Bought = 100, Price Per Share = $45, Initial Margin = 50 %

Total Value of Stocks Bought = 45 x 100 = $ 4500

Equity Investment = 0.5 x 4500 = $ 2250 and Borrowing = 2250

Let the maintenance margin proportion be Y and Margin call is received at a price of $ 30

Therefore, Y % of account value > = equity value (condition for margin call to be received)

Y x 30 x 100 = (30 x 100 - 2250)

Y x 3000 = 750

Y = (750 / 3000) = 0.25 or 25 %

Hence, the correct option is (E)

(2) Price Per Share = $ 70, Number of Shares Bought = 200, Total Value of Stocks Purchased = 200 x 70 = $ 14000

Initial Margin = 55 %

Borrowings = (Total Stock Value - Initial Margin = (1-0.55) x 14000 = $ 6300

Hence, the correct option is (E)