1,200 shares of a stock are purchased at a price of $54 on a 70 percent initial margin. If the maintenance margin is 35 percent, at what stock price will a margin call be issued?
A) $25.47
B) $24.92
C) $28.32
D) $18.65
E) $22.23

Question

Quizplus · Accepted Answer

The initial investment is 70% of the total value, so the investor initially pays 0.70 * $54 * 1,200 = $45,360. The maintenance margin requirement means the investor's equity must not fall below 35% of the current market value of the stock. A margin call occurs when the equity equals the maintenance margin requirement. Let P be the price at which a margin call is issued. The equation is: Equity = 0.35 * (P * 1,200). The equity is also equal to the current value of the stock minus the loan amount. The loan amount is the initial value of the stock minus the initial investment, which is (1,200 * $54) - $45,360 = $19,440. So, 0.35 * (P * 1,200) = P * 1,200 - $19,440. Solving for P gives P = $24.92.

1,200 Shares of a Stock Are Purchased at a Price