An investor owns 1,000 shares of ABC Corp, trading at $20 per share, in a cash account. They wish to purchase an additional 500 shares of XYZ Inc. at $30 per share, but only have $10,000 in available cash. The brokerage firm's initial margin requirement is 50% and the maintenance margin is 30%. If they decide to convert their cash account to a margin account and use their ABC Corp shares as collateral to finance the purchase of XYZ Inc., what is the maximum amount of margin they could use against their ABC Corp shares for the new purchase, assuming regulatory requirements permit this asset as collateral?

Question: An investor owns 1,000 shares of ABC Corp, trading at $20 per share, in a cash account. They wish to purchase an additional 500 shares of XYZ Inc. at $30 per share, but only have $10,000 in available cash. The brokerage firm's initial margin requirement is 50% and the maintenance margin is 30%. If they decide to convert their cash account to a margin account and use their ABC Corp shares as collateral to finance the purchase of XYZ Inc., what is the maximum amount of margin they could use against their ABC Corp shares for the new purchase, assuming regulatory requirements permit this asset as collateral?

Answer options: ✅ $10,000

• $20,000
• $5,000
• $7,500

Correct answer: $10,000

Explanation: The value of ABC Corp shares is 1,000 shares * $20/share = $20,000. With an initial margin requirement of 50%, the maximum loan value is 50% of $20,000, which is $10,000. This is the maximum amount of margin they could use against their ABC Corp shares.