John bought 100 shares of ABC stock at $60 a share with a 50% initial margin requirement.If the maintenance margin requirement is 30%,John will get a margin call when the stock's price falls to $30 a share.

Question

Quizplus · Accepted Answer

To calculate the margin call price, we need to first calculate the amount of equity in the account at the time of purchase:

Equity = (Number of Shares x Share Price) - (Number of Shares x Share Price x Initial Margin Requirement)
Equity = (100 x $60) - (100 x $60 x 0.50)
Equity = $3,000

This means that John's account started with $3,000 in equity and $3,000 in borrowed funds (initial margin).

To calculate the price at which John will get a margin call, we can use the following formula:

Margin Call Price = ((100% - Maintenance Margin Requirement) x Purchase Price) / 100

Margin Call Price = ((100% - 30%) x $60) / 100
Margin Call Price = $42

This means that John will get a margin call when the stock's price falls to $42 a share, not $30 a share. Therefore, the answer is B - false.

John Bought 100 Shares of ABC Stock at $60 a Share