You've borrowed $20,000 on margin to buy shares in ixnay, which is now selling at $40 per share. your account starts at the initial margin requirement of 50%. the maintenance margin is 35%. two days later, the stock price falls to $35 per share.

a. will you receive a margin call?

b. how low can the price of ixnay shares fall before you receive a margin call?

Question

Business

Obie

21 September, 19:01

You've borrowed $20,000 on margin to buy shares in ixnay, which is now selling at $40 per share. your account starts at the initial margin requirement of 50%. the maintenance margin is 35%. two days later, the stock price falls to $35 per share.

a. will you receive a margin call?

b. how low can the price of ixnay shares fall before you receive a margin call?

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Answers (1)

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Morrison · Answer 1

a. will you receive a margin call?

No you wouldn't. You borrowed $20,000 on the margin which means that you invested $20,000 of your own money. You purchased 1,000 stocks ( = $40,000 / $40) of ixnay at $40, and now the stock price is $35. This means that you lost $5,000, and you percentage on the margin = $15,000 / $35,000 = 43%. Since the maintenance margin is 35%, you are still in.

b. how low can the price of ixnay shares fall before you receive a margin call?

we can use the following formula = (1,000price - $20,000) / 1,000price = 35%

350price = 1,000price - $20,000

$20,000 = 1,000price - 350price = 650price

price = $20,000/650 = $30.769 ≈ $30.77 or lower