# Margin Call Question

Hoping for an explanation on one part of this problem:

``````Execute a margin call of 1000 shares of a stock at \$40/share.
The initial margin requirement is 50% and the maintenance margin
requirement is 30%.

I hold for one year, at which time the stock is selling for \$50/share
and the stock paid a dividend of \$1. The interest rate on the loan was 6%
annually.

Calculate the percentage return on investment.
``````

The formula I would use is:

``````R(t) = [P(t) - P(t-1) + D(t) - Interest(t)] / Initial Investment
``````

And I know the answer is:

``````[50 - 40 + 1 - 1.2] / 20 = 49%
``````

But I don't understand why the interest is 1.2 instead of .06. What is the reason behind this?

• Is this homework because this looks like one. Oct 8 '14 at 15:40
• It is homework. Is that not allowed? I'm just looking for an explanation of how the interest rate is being caculated. Oct 8 '14 at 18:05
• @MISNole It's ok to ask homework questions but it's customary to explicitly state in the question that it's homework. People may provide different context for you! Oct 8 '14 at 18:17
• There is no margin call, you are simply asking about the math of a stock bought on margin. You didn't "Execute a margin call of 1000 shares" you just bought those shares with 50% margin. Would you like to edit or one of us can? Oct 9 '14 at 0:45
• FWIW, A "margin call" is what happens when your position cost (or expected position cost) exceeds the amount you have with the broker. They issue a margin call to you and may liquidate your holdings or lock your account demanding more funds or both. Oct 9 '14 at 1:35