Laura bought 200 shares of GE at $80 on a 70% margin and received a margin call ...

By Investopedia Staff AAA
Q:
Laura bought 200 shares of GE at $80 on a 70% margin and received a margin call. Laura's online broker requires a minimum of 30% coverage. If the request is no longer met, by what % did GE fall?
A:
  • 80 + .7 = $56 margin price
  • 80 - 56 = $24 in debt
  • New Low (NL) is [NL - $24 = .3NL] or, 7NL = $24 = $34 ¼ = Lowest price to maintain 30%
  • 34/80 = about 43%
  • GE has to decline by at least 57% to reduce Laura's equity low enough to trigger a call.

This is fairly simple, the only elegant piece is realizing the purpose of the proportional math in the algebra: to "tease out" the effect on the equity vs. debt portion of the investment. This logic appears ubiquitously throughout financial and investment models.

Have a Financial Question?

RELATED FAQS

  1. The Chairman of Bright Star Life and Casual had a meeting with his broker this afternoon ...

    The correct answer is b) Insider trading would include information that is material and non-public. Certainly, a poor earnings ...
  2. Which statements about common shareholder rights are FALSE? I. A shareholder may ...

    The correct answer is a. I should be the the other way around: convertible bond holders can exchange their bonds for shares. ...
  3. If ABC Company had the following Income Statement figures, what is the Operating ...

    The correct answer is c): The operating margin is a very useful test of the efficiency of corporate management. Operating ...
  4. A customer sells a 6% corporate bond on Tuesday October 4th for regular settlement ...

    Free info on financial certification exams including study guides, exam questions, and much more!
RELATED TERMS
  1. Series 79

    A examination to ensure a candidate is qualified to become a ...
  2. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  3. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  4. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  5. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
  6. Series 28

    An exam given by the Financial Industry Regulatory Authority ...

You May Also Like

Related Articles
  1. Insurance

    Municipal Bond Tips For The Series 7 ...

  2. Retirement

    6 Proven Tips For Series 6 Success

  3. Insurance

    Tips For Passing The Series 6 Exam

  4. Professionals

    Banker Or Broker: Which Career Is Right ...

  5. Professionals

    Breaking Down Financial Securities Licenses

Trading Center