You decide to buy 1,300 shares of stock at a price of $36 and an initial margin of 65 percent.

What is the maximum percentage decline in the stock before you will receive a margin call if the maintenance margin is 40 percent?

(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Do not include a minus sign. Omit the "%" sign in your response.)

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aristeus aristeus · Answer 1 · 2020-02-06T09:52:03+01:00

Answer:

Maximum percentage decline in the stock will be 12.5%

Explanation:

It is given that number of shares which is bought is 1300 at a stock price of $36 an an initial margin of 65 %

Maintenance margin is given as 40%

Margin call price is equal to [tex]=stock\ price\times \frac{1-initial\ margin}{1-maintinance\ margin}[/tex]

So margin call price [tex]=36\times \frac{1-0.65}{1-0.40}=31.5[/tex]

So percentage decline [tex]=\frac{31.5}{36}\times 100=87.5[/tex] %

So maximum percentage decline in stock before you will receive a margin call is 100 -87.5 = 12.5%

So answer will be 12.5 %