CFA Level I · CFA Level I Exam · Equity Issuance and Trading
An investor buys 1,000 shares at $60 with 50% initial margin, borrowing $30,000. The maintenance margin is 30%. Ignoring interest and commissions, the price below which a margin call is triggered is closest to:
A margin call occurs below about $42.86. The loan is $30 per share, and equity must be at least 30% of market value, so price must satisfy (P − 30)/P = 0.30. Solving gives P = 30/0.70 = $42.86.
- A$36.00
- B$42.86Correct
- C$51.43
Explanation
Margin call price = Loan per share/(1 − maintenance margin) = 30/(1 − 0.30) = $42.86. Check: equity at 42.86 = 42,860 − 30,000 = 12,860, which is 30% of 42,860. The $36.00 option uses 30/(1+... ) incorrectly as 60×0.6, and $51.43 uses 30/0.583, a wrong base.
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