Explanation:
A. Incorrect because this is the stock price minus the initial margin requirement; $108 - ($108 × 40%) = $64.80.
B. Correct because the price below which a margin call will take place is calculated with the following equation:
(Equity/share) / (Price/share) = ($43.20 + P - $108)/P= 20%, which can be solved for P = $81.00
C. Incorrect because this is the price 20% below the initial stock price ($108 × (1 - 20%) = $86.40) and not the level that triggers the margin call.
Market Organization and Structure
• calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call
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An investor buys a stock for $108 on margin by posting 40% of the initial stock price as equity. If the maintenance margin requirement for the position is 20%, a margin call first occurs when the price falls below:
A
$64.80.
B
$81.00.
C
$86.40.