Question

You purchased 3000 shares of Microsoft common stock on margin at $80 per share. Assume the initial margin is 70%, and the maintenance margin is 30%. What will be your initial position? If the share price falls below to $50 per share, what will be your new position and percentage of margin?

Answer #1

Invsetment costs = no. of shares purchased*purchase price per share = 3000*$80 = $240,000

the initial margin is 70% which means equity of the investor is 70% and 30% loan taken from broker.

loan amount = $240,000*30% = $72,000

equity value = $240,000 - $72,000 = $168,000

percentage of margin = (current value of investment - loan amount)/current value of investment = ($50*3000 - $72,000)/($50*3000) = ($150,000 - $72,000)/$150,000 = $78,000/$150,000 = 0.52 or 52%

current percentage of margin is 52% which is higher than maintenance margin of 30%. so, investor will not receive any margin call.

new position of equity of investor in the investment = current value of investment - loan amount = $150,000 - $72,000 = $78,000.

so, equity has reduced in the investment from $168,000 to $78,000 or by $168,000 - $78,000 = $90,000.

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