CFA Level 1: Margin Transaction Return and Margin Call Stock Price Calculation

Margin Transaction Return

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Question

Using the following assumptions, calculate the rate of return on a margin transaction and the stock price at which the investor who purchases the stock will receive a margin call.

What of the following choices is closest to the correct answer? The margin transaction return is:

Answers

A. 83.33%, and the investor will receive a margin call at a stock price of $15.43.

B. 33.33%, and the investor will receive a margin call at a stock price of $15.43.

C. 111.11%, and the investor will receive a margin call at a stock price of $21.00.

D. 111.11%, and the investor will receive a margin call at a stock price of $15.43.

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Explanations

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A. B. C. D.

To obtain the result:

Part 1: Calculate Margin Return:

Margin Return % = [((Ending Value - Loan Payoff) / Beginning Equity Position) "" 1] * 100 =

= [(([$24 * 1,000] "" [$18 * 1,000 * 0.60]) / ($18 * 0.40 * 1,000)) "" 1] * 100 =

= 83.33%

Alternative (Check): Calculate the all cash return and multiply by the margin leverage factor.

= [(24,000 "" 18,000)/18,000] * [1 / 0.40] = 33.33% * 2.5 = 83.33%

Part 2: Calculate Margin Call Price:

Since the investor is long (purchased the stock), the formula for the margin call price is:

Margin Call = (original price) * (1 "" initial margin) / (1 "" maintenance margin)

= $18 * (1 "" 0.40) / (1 "" 0.30) = $15.43

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