Question

1. The price of Facebook stock is currently $43.18 and you decide to buy 170 shares on margin. The inital margin is 60%.

a.  How much money will you borrow from the broker if you borrow as much as possible?

b. If the price falls to $38.72, what is the new percentage margin in the account?

c. If the broker's maintenance margin is 40%, what is the minimum value the stock price can take before you are issued a margin call?

2. The stock price of Apple is $106. You have $10,000 to invest. The monthly interest rate is 0.5%.

a. You think the stock price will go up soon, and want to trade 120 shares. What should you do? Enter 120 for buying 120 shares (on margin if necessary), or -120 for selling or short-selling 120 shares.

b. What is your initial percentage margin (entered as a decimal number)?

c. Two months later, the stock price is $126. What is your percentage margin (entered as a decimal number)?

Answer 1

As per policy, only one question and its parts are allowed to answer at a time, so answering Q1 here:

1)
a: Money borrowed = Value of Facebook stock * (1 - Initial Margin)
Money borrowed = (170*43.18) * (1 - 0.60) = $2936.24
Margin deposited = (170*43.18) * 0.60 = $4404.36
b: Total value of stock on reduced price of $38.72 = 170*38.72 = $6582.40
Margin left on reduced price = Revised value - Borrowed money = 6582.40 - 2936.24 = $3646.16
New percentage margin in the account = Margin left/Revised value = 3646.16/6582.40 = 55.39%
c: Minimum stock price to call margin at maintenance margin 40% =
[borrowed money / (1-Minimum Maint. Margin)] / Number of shares =
[2936.24 / ( 1 - 0.40)]/ 170 = 4393.73 / 170 = $25.85 per share