Question

You purchased 100 shares of common stock on margin at $40 per share. Assume the initial margin is 50% and the stock pays no dividend. What would the maintenance margin be of a margin call is made at a stock price of $25? Ignore interest on margin. Make sure that you interpret your numerical answer (i.e. explain why would you get the call at this rate).

Answer 1

Number of Shares Bought = 100 and Price per Share = $ 40, Total Value of Purchase = 40 x 100 = $ 4000

Intial Margin = 50 %, Initial Deposit = 0.5 x 4000 = $ 2000, Borrowing = 4000 - 2000 = $ 2000

A margin call is received when the stock price touches $ 25 per share. Value of Purchase at Margin Call = 25 x 100 = $ 2500

Let the maintenance margin be Y

Now, a margin call is received only when the initial deposit value goes down below Y% of the total account value.

Therefore, 2500 x Y = (2500 - 2000)

Y = 500 / 2500 = 1/5 = 0.2 or 20 %