Question

You purchased 100 shares of ABC common stock on margin at $70 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call

Answer 1

A margin call would be issued if the stock price fell below $42.86.

Given initial margin 50% and maintenance margin 30%.

To find the stock price level to get a margin call.

When the value of assets in a brokerage account falls below a specific amount, known as the maintenance margin, the account holder is required to deposit extra cash or securities to fulfil the margin obligations. A margin call is a demand from a brokerage firm to boost the account's equity.

The formula to compute the margin call price is given below:

Margin call = $\frac{1-Initial Margin}{1-Manitenance margin} * Purchase price$

$= \frac{1-0.50}{1-0.30} *60$

$=\frac{0.50}{0.70} *60\\=42.86$

Therefore, the answer is $42.86.

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