You decide to purchase on margin 1000 shares of ABC stock currently trading at $25 each. Your initial margin is 40% and your broker allows you a buffer of 10% before making a margin call – i.e., the maintenance margin is 30%.
(a) How much must you invest initially to purchase the shares and what is the amount you borrow from your broker?
(b) How far can share price fall before a margin call is triggered?
(c) Now assume that share price drops to $20. You received a margin call and you decided to deposit T-bills in your account to increase the margin; the deposit will increase the total value of your margin account while NOT changing the value of the loan. That is, the total value of your account will be the sum of the value of 1000 shares and the value of T-bills. What is the total value of T-bills you need to put up, in order to get the margin back up to the maintenance margin of 30%?
(d) If you do not take an action in time your broker will partly liquidate your position and repay the loan in order to (just) meet the maintenance margin requirement. How many shares would the broker sell in order to get the margin back up to the maintenance margin of 30%?