CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

An investor opens a margin account with an initial deposit of $5,000. He then purchases 300 shares of a stock at $30. His margin account has a maintenance margin requirement of 30%. Ignoring commissions and interest, the price (in $) at which the investor receives a margin call is closest to ______.
A. 19.05
B. 21.38
C. 23.45
Explanation: Determine the stock price at which the investor receives a margin call by solving for the critical stock price, P, as: [(#of shares x P) - Margin Loan] / (# of shares x P) = % of Maintenance Margin
(300P - $4,000) / 300P = 0.30
P = $4,000 / 210 = $19.05

User Contributed Comments 3

User Comment
abeeman924 or (1 - Initial Margin)/(1 - Maintenance Margin) x Stock Price
= (1 - (5,000/9,000)/(1 - 0.30) x $30.00
= $19.0476

$9,000 is from the purchase (300 x 30)
bergje11 Isnt (#shares x P) - margin loan just equal to initial deposit?
9000 - 4000 = 5000 initial deposit so
initial deposit / (#shares x P) = % maintenance margin

Does this always apply?
111hal111 I thought margin call = loan per share/(1-MM)?
You need to log in first to add your comment.