Explanation:
Initial value of stock = $20,000.
With a 50% initial margin requirement, the initial equity is $10,000, and the borrowed amount (loan) is $10,000.
When the stock value falls to $11,100, the new equity = Current value - Loan amount = $11,100 - $10,000 = $1,100.
The maintenance margin requirement is 25% of the current stock value:
Maintenance margin required = 25% * $11,100 = $2,775.
To meet the maintenance margin requirement, the investor needs a minimum equity of $2,775.
Since the current equity is $1,100, the minimum amount to deposit is $2,775 - $1,100 = $1,675.
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Q.5 An investor purchases $20,000 worth of stock using a margin account with an initial margin requirement of 50% and a maintenance margin requirement of 25%. What is the minimum amount that the investor must deposit into the margin account to meet the maintenance margin requirement if the stock's value falls to $11,100?
A
$1,400
B
$1,675
C
$1,100
D
$7,500
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