You purchased 400 shares of stock for $28.50 a share. The initial margin requirement is 60% and the maintenance margin is 30%. What is the maximum percentage decrease that can occur in the stock price before you receive a margin call?

Question

Quizplus · Accepted Answer

To calculate the maximum percentage decrease, we need to first find the total value of the stock purchased:
Total value = 400 x $28.50 = $11,400

The initial margin requirement is 60%, so the amount borrowed is 40% of the total value:
Borrowed amount = 0.4 x $11,400 = $4,560

This means that the equity in the investment is $6,840 (i.e. $11,400 - $4,560).

The maintenance margin is 30%, so the minimum equity required in the investment is:
Min. equity = 0.3 x $11,400 = $3,420

Therefore, the maximum percentage decrease in stock price can occur when the stock value falls from $28.50 to a level where the equity is equal to the maintenance margin:
$3,420 = (400 x P) - ($4,560)
P = ($3,420 + $4,560) / 400 = $18.45

The maximum percentage decrease is the difference divided by the original value:
($28.50 - $18.45) / $28.50 = 35.01%

Therefore, the maximum percentage decrease before a margin call is 42.86% (100% - 57.14%).

You Purchased 400 Shares of Stock for $28