Assume you purchased 500 ordinary shares of GE corporation on margin at $80 per share from your broker. If the initial margin is 60%, how much did you borrow from the broker?

Question

BlackTom AI · Accepted Answer

Initial margin of 60% means you must supply 60% of the total purchase cost in cash; the broker lends the remaining 40%.

1) Relevant concepts
- Total purchase cost = number of shares × price per share.
- Initial margin = fraction of that cost paid by the investor (equity).
- Amount borrowed = total cost − investor equity.

2) Step-by-step reasoning
- Compute the total cost of the purchase.
- Compute investor equity using the initial margin percentage.
- Subtract equity from total cost to find the amount borrowed.

3) Calculations (all intermediate steps)
- Total cost = 500 shares × $80/share = $40,000.
- Investor equity (initial margin) = 60% × $40,000 = 0.60 × $40,000 = $24,000.
- Amount borrowed = Total cost − Equity = $40,000 − $24,000 = $16,000.

4) Why this is correct
Because initial margin defines how much of the purchase you must fund yourself. With a 60% initial margin you supply $24,000, so the broker must provide the remaining 40% ($16,000). That is the amount borrowed.

5) Why the other options are incorrect (brief)
- $6,000: Would correspond to borrowing only 15% of $40,000 (not relevant to 60% margin).
- $24,000: This is the investor’s equity (60% of $40,000), not the borrowed amount.
- $8,000: Would be 20% of $40,000 — not consistent with a 60% initial margin.
- $18,000: No direct relation to 40% or 60% of $40,000; it’s an incorrect arithmetic result.

6) Conclusion
Amount borrowed = $16,000. This matches the provided correct answer ($16,000).

Assume you purchased 500 ordinary shares of GE corporation on margin at $80 per share from your broker. If the initial margin is 60%, how much did you borrow from the broker?Single choice

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