Question

You purchased 400 shares of XYZ common stock on margin at $20 per share. Assume the initial margin is 60% and the maintenance margin is 30%. You would get a margin call if the stock price is below _______________. Assume the stock pays no dividend and ignore interest on margin.

Answer 1

$11.43

Step-by-step explanation:

Starting position

Stock: 400 x 2 = 800

Stock= 800

Borrowed: 3200

Equity: 4800

Let P be the price that you would get a call

Position

Stock: 400P

Borrowed: 3200

Equity: 400P-3200

For we to get a margin call

(400P-3200) / 400P = 0.3

P= 11.43

When it is assumed that the stock pays no dividends.

Therefore when P is lesser than $11.43, you will get a margin call

Anytime the value of P is below $11.43 it means we are going to get a marginal call .

Answer 2

$11.42

Step-by-step explanation:

Firstly, we calculate the the buying cost of the shares. We were told that 40” shares were bought at a rate of $20 per one

The total amount spent buying is mathematically equal to = 400 * $20 = $8,000

Now since initial margin is 60%, the amount of personal money to used would be: 60% of $8,000 = 60/100 * 8,000 = $4,800. The amount borrowed will be 8.000 - 4800. = 5,200

Now we want to calculate the price at which there would be a margin call.

Mathematically;

Margin Call Price = Purchase Price x (1 - Initial margin) / (1 - Maintenance Margin) = 20 x (1 - 60%) / (1 - 30%) = $11.42