CFA Level IEquity InvestmentsMedium
An investor buys 200 shares of a stock at $50 per share using a margin account with an initial margin requirement of 60% and a maintenance margin requirement of 30%. To what price must the stock fall before the investor receives a margin call?
- A$40.00
- B$28.57
- C$35.00
- D$21.43
Show answer & explanationAnswer & explanation
Correct answer: B. $28.57
The margin call price formula is P0 × (1 − initial margin)/(1 − maintenance margin) = 50 × (1 − 0.60)/(1 − 0.30) = 50 × 0.40/0.70 = $28.57. Below this price, the investor's equity as a percentage of the position value falls below the 30% maintenance requirement.
Why the other options are wrong
- A. This equals 80% of the purchase price, an incorrect shortcut.
- C. This equals 70% of the purchase price, not the correctly derived margin call price.
- D. This results from dividing by 1.4 instead of 0.70.
Margin call price
The stock price at which an investor's equity percentage falls to the maintenance margin, triggering a margin call.
- Formula: P0 × (1 − initial margin)/(1 − maintenance margin)
- Loan amount is fixed in dollar terms as price falls
- Lower maintenance margin means price can fall further before a call
Memory trick: As price falls, equity shrinks faster than debt — find the tipping point.