Q. An investor opens a margin account with an initial deposit of $5,000. He then purchases 300 shares of a stock at $30 each on margin, and his account requires a maintenance margin of 30%. Ignoring commissions and interest, the price at which the investor will receive a margin call is closest to:
Another approach doesn’t require memorizing the formula: check the middle price.
You borrowed $4,000 to purchase the stock. If the price falls to $23.08/share, then the total stock value is $6,924 (= $23.08 × 300) and the equity is $2,924 (= $6,924 − $4,000). The percent equity is 42.23% (= $2,924 ÷ $6,924). This is higher than the maintenance margin requirement, so the margin call price has to be lower than $23.08: it’s $19.05.
I tell my candidates not to memorize that formula: you don’t need it. Memorize the things you need to memorize, and work out the ones you don’t.