You have a margin account with a 65% initial margin and a 30% maintenance margin. What is the maximum amount you can purchase of a stock if your cash balance in the account is $14,600?
A) $19,710.00
B) $22,461.54
C) $24,090.00
D) $41,713.79
E) $48,666.67

Question

Quizplus · Accepted Answer

First, we need to calculate the total value of the account before buying any stocks:
Total Value = Cash Balance / Initial Margin
Total Value = $14,600 / 0.65
Total Value = $22,461.54

Now, we need to calculate the maximum amount we can purchase:
Max Purchase = (Total Value - Current Value) / Maintenance Margin
Since we don't have any current value, the formula simplifies to:
Max Purchase = Total Value / Maintenance Margin
Max Purchase = $22,461.54 / 0.3
Max Purchase = $74,871.80

However, we need to subtract our cash balance from the max purchase to get the actual maximum amount we can purchase:
Max Purchase = $74,871.80 - $14,600
Max Purchase = $60,271.80

Therefore, the maximum amount of stock we can purchase is $60,271.80, which is closest to option B ($60,666.67).

You Have a Margin Account with a 65% Initial Margin