A. An investor purchased 200 shares of stock at $100 per share on 55% margin. Suppose the...

Question:

A. An investor purchased 200 shares of stock at $100 per share on 55% margin. Suppose the maintenance margin is 30%, at what price does the investigator get a margin call?

a) $57.14

b) $64.29

c) $67.05

d) $57.05

B. Regarding the previous question, if the stock price declines to $70 per share, what?s the return to the investor?s equity? What if the stock rises to $150 per share?

a) 50% and -83%

b) -54.5% and -90.9%

c) -50% and 83%

d) -54.5% and 90.9%

Margin

Margin is the process of using a broker's money (in addition to your own) to buy shares of stock. Buying on margin allows you to leverage your position in the market -- making your portfolio more sensitive to market risk. If prices go up, your return will be higher than it would have been without the use of margin, but if prices go down your loss will also be higher than it would have been without the use of margin.

Answer and Explanation:

Question A:

The investor will get a margin when their equity as a percentage of the total investment falls below the maintenance margin of 30%.

Equit...

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What is an Investment? - Definition & Overview

from Corporate Finance: Help & Review

Chapter 2 / Lesson 6
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