Question

You’ve borrowed $42,000 on margin to buy shares in Ixnay, which is now selling at $42.2 per share. You invest 1,220 shares. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price changes to $46 per share. a. Will you receive a margin call? Yes No b. At what price will you receive a margin call? (Round your answer to 2 decimal places.) rev: 02_06_2019_QC_CS-156769, 08_10_2019_QC_CS-174777

Answer 1

a]

You have bought shares. A margin call will be received if the margin account balance falls below the maintenance margin. This would happen if the price of the share falls. The price of the share has increased from $42.20 to $46. Hence, you will not receive a margin call

b]

Initial margin - maintenance margin = number of shares bought * decrease in share price

Initial margin = number of shares bought * purchase price per share * Initial margin%

Initial margin = 1,220 * $42.20 * 50% = $25,742

maintenance = number of shares bought * purchase price per share * maintenance margin%

maintenance margin = 1,220 * $42.20 * 35% = $18,019.40

Initial margin - maintenance margin = number of shares bought * decrease in share price

$25,742 - $18,019.40 = 1,220 * decrease in share price

decrease in share price = $6.33

Price at which margin call is made = purchase price per share - decrease in share price

Price at which margin call is made = $42.20 - $6.33 = $35.87