Final answer:
The market value at which an account is at the minimum maintenance margin is calculated based on the maintenance margin percentage and the margin loan. For instance, with a 25% maintenance margin and a $10,000 loan, the market value must not fall below $13,333.33 to avoid a margin call.
Step-by-step explanation:
Understanding Minimum Maintenance Margin
The student's question pertains to the concept of a minimum maintenance margin, which is a regulatory requirement for investors trading on margin in the stock market. This minimum is set by self-regulatory organizations such as FINRA in the United States. To find the market value at which an account is at the minimum maintenance margin level, one must first know the percentage of the maintenance margin required, which is typically around 25%, and the initial amount of the margin loan.
For example, if an investor has a margin loan of $10,000 and the minimum maintenance margin is 25%, the minimum equity in the account should always be 25% of the market value of the securities purchased on margin. If the equity falls below this percentage, the account is subject to a margin call. To calculate the minimum market value before a margin call, you can use the formula:
Minimum Market Value = Margin Loan / (1 - Maintenance Margin Percentage)
So, in this example, it would be:
Minimum Market Value = $10,000 / (1 - 0.25) = $10,000 / 0.75 = $13,333.33
Thus, the account would receive a margin call if the market value of the securities drops below $13,333.33.