Justin just made a margin purchase of 100 shares of DEF Corp. for $22.50 per share. The initial margin is 70%. The maintenance margin is 30%. How low can the price of each share of DEF be before Justin will have to add equity to his account?

Question

Quizplus · Accepted Answer

The price at which the maintenance margin call occurs can be found using the formula: Price at Margin Call = Initial Price * (1 - Initial Margin) / (1 - Maintenance Margin). Here, Initial Price = $22.50, Initial Margin = 70% or 0.7, and Maintenance Margin = 30% or 0.3. Plugging these values in gives: Price at Margin Call = $22.50 * (1 - 0.7) / (1 - 0.3) = $22.50 * 0.3 / 0.7 = $9.64.

Justin Just Made a Margin Purchase of 100 Shares of DEF