A broker buys 500 shares of IBM stock at $80 a share on margin. The initial margin is 50% and the maintenance margin requirement is 30%. To what price may the IBM stock fall before the broker receives a margin call?

Question

Quizplus · Accepted Answer

The broker initially pays 50% of the total cost, which is 500 shares * $80/share * 50% = $20,000. The total value of the stocks is 500 shares * $80 = $40,000. For a margin call to occur, the equity in the account must fall to 30% of the total value of the stocks. Let P be the price at which a margin call occurs. Then, the equation is $20,000 + (500 * P - $40,000) = 0.30 * (500 * P). Solving for P gives $57.14.

A Broker Buys 500 Shares of IBM Stock at $80