 A guy buys ABC stock on 50% margin. His broker has an 8% lending rate, and 25% maintenance rate. He buys \$20,000 worth of ABC, at a price of \$40. One year later he gets a margin call. Which is closest to the price of the margin call? A \$27 B \$28 C \$29 D \$30 hint: the answer in NOT (40) x (1 - .5) / 1 - .25

C? Assuming the broker borrows 21.6

c? (500P-10000-800)/500P = .25 500P-10800=125P 375P = 10800 P = 10800/375 P=28.8 approx. 29

yea, the answer is C How did you arrive at C? I honestly have no idea how to figure out the 8% lending rate into the margin equation

this question was already discussed, read the previous post. 10000/(0.75*500) = 26.66 is what i get. A

lending rate is not supposed to be part of margin if it is then you say 10800 / .75 x 500

is there another way to figure this out…not using P? Pepp, when was it discussed today? I’ll look for it.

29 . If the price at margin call is P then owners equity/ share = (p - 20 - 0.08 *20)/P Maintenance margin is 0.25… 0.25= (p-1.08*20 )/p solving for p we get 28.8 or 29

pepp Wrote: ------------------------------------------------------- > lending rate is not supposed to be part of margin > if it is then you say 10800 / .75 x 500 -

20? I don’t see any 20 in this fact pattern. I’m totally confused man, where does the 20 come from?

will do, I’ll look in up on p. 27, 28

There is a 50% initial margin so the broker lends you \$20 of the \$40. So whatever the price is, you have to pay back \$20 that you borrowed plus the interest on same - 0.08*20. It is always easy to work this on the per share basis

Are you sure the answer is C? Because Pepp might be right…lending costs are not part of the margin requirement calculation, only the return calculation.

A

If he bought \$20 worth of ABC, does he pay the lending rate outside of that? Or was it deducted?

amberpower Wrote: ------------------------------------------------------- > If he bought \$20 worth of ABC, does he pay the > lending rate outside of that? Or was it deducted? The interest is charged outside of that… So when he buys \$20K worth of stock, he is buying 20,000/40 = 500 shares…

I also get A.

For exam purposes, you will probably not need to consider the margin cost. In reality, the margin call occurs sooner, because margin cost is deducted daily from your account. Once the *value* of your equity, not the price of the stock, hits the maintenance percentage (i.e., your equity equals 25% of the value of the account) you get a margin call. So, a margin call is not about the price of the stock, but the value of your equity. To find the price at which you will get the margin call, you need to know how long you have had the loan. In this example, it told you it was one year later. So, you really should deduct 1-year worth of interest from your equity, and solve for p. Do it either like delta9 did above, or like this: P-\$20+(0.08 * \$20)/p = 0.25 p = \$28.8

Yes we had this discussion about margin cost before. Thus this time I calculated i did include lending cost. I still am not entirely convinced.

Dreary Wrote: ------------------------------------------------------- > For exam purposes, you will probably not need to > consider the margin cost. > > In reality, the margin call occurs sooner, because > margin cost is deducted daily from your account. > Once the *value* of your equity, not the price of > the stock, hits the maintenance percentage (i.e., > your equity equals 25% of the value of the > account) you get a margin call. So, a margin call > is not about the price of the stock, but the value > of your equity. > > To find the price at which you will get the margin > call, you need to know how long you have had the > loan. In this example, it told you it was one > year later. So, you really should deduct 1-year > worth of interest from your equity, and solve for > p. > > Do it either like delta9 did above, or like this: > > P-\$20+(0.08 * \$20)/p = 0.25 > p = \$28.8 Whew! The one year is what put me on the right track in the first place…but I’ve been making soo many stupid mistakes the last few days, that I just thought this was one of them! Thanks Dreary!