An investor buys $8,000 worth of a stock priced at $40 per share using 50% initi

Question

An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker

charges 6% on the margin loan and requires a 30% maintenance margin. In one year the investor gets a

margin call.

1. Calculate the price the stock must have had at the time of the margin call.

2. Calculate the return the stock had at the time of the margin call.

3. Calculate the return the investor had at the time of the margin call. (Be careful, the interest charge on

the margin loan must be included in this calculation.)

Explanation / Answer

An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been

A margin call will occur if Equity/Market value = .30 or less
.3 = (200P - 4,000 - 240)/200P
60P = 200P - 4,240
-140P = -4,240

P = $30.29

2) -24.3% (The stock fell to $30.29 from $40)

3) -54.6% (Your $4000 fell to $1817)

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