CFA Level I · CFA Level I Exam · Equity Issuance and Trading
An investor buys shares at $40 with an initial margin of 50% and the maintenance margin is 30%. Ignoring interest, the share price at which the investor first receives a margin call is closest to:
The margin call occurs at about $28.57. The loan per share is $20, and equity ratio (P − 20)/P must fall to 30%, giving P = 20/0.70. The $32.00 choice wrongly assumes a 20% price decline, ignoring that the loan stays fixed.
- A$22.86
- B$28.57Correct
- C$32.00
Explanation
Per share, loan = $20. Margin call when (P − 20)/P = 0.30, so 0.70P = 20 and P = $28.57. The $22.86 option uses 12% equity... incorrectly dividing by 0.875; the $32.00 option wrongly applies a 20% drop to the price.
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