17 Margin Accounts

Question 1

In a new margin account Mildred Meyer purchases 100 ABC @90. When ABC subsequently rises to $120 per share, what is Mildred’s excess equity?

A. $3,000.00
B. $2,000.00
C. $1,500.00
D. None

Answer 1

C. $1,500.00

Rationale:
Notice how when the stock went up $3,000, the excess equity went up by half that?

Question 2

If the value of securities decreases in a long account, all of the following may be affected except:

A. Excess Equity
B. LMV
C. Equity
D. SMA

Answer 2

D. SMA

Rationale:
Excess equity is the water in the tub; SMA is the ring around the tub. If excess equity drains way, SMA is still here to stay

Question 3

If a customer sells $2,000 of securities in a restricted account, all of the following are affected except:

A. Dr
B. SMA
C. Equity
D. LMV

Answer 3

C. Equity

Rationale:
Believe it or not, equity is never affected when a customer sells. Lets prove it. If the customer has LMV of $30,000 and a Dr of $20,000. that’s equity of $10,000. If the customer sells 10K of stock, they now have only 20K left, but we paid down the Dr with the 10K. so the Dr is now only 10K. Therefore, what’s the equity? Still $10,000. What happened to SMA? We add half the proceeds ($5,000) to it. The customer can borrow the 5K or use it to buy more stock, at which point we add money to the Dr Like VISA or American Express, we like it when customers owe us a reasonable amount of money that they can reasonably be expected to repay with interest

Question 4

If a customer uses SMA to buy stock, all of the following are affected except:

A. LMV
B. Equity
C. SMA
D. Dr

Answer 4

B. Equity

Rationale:
If you use your $10,000 of buying power, you buy $10,000 of stock (LMV goes up by 10K), and they add the $10,000 to your Dr, leaving equity unchanged.

Question 5

If a customer borrows SMA, all of the following are affected except:

A. Dr
B. LMV
C. SMA
D. Equity

Answer 5

B. LMV

Rationale:
How would borrowing money affect the market value of the stock?

Question 6

In a new margin account, a customer buys 100 shares ABC @38 and makes the required Reg T deposit. Three months later ABC is @47. What is the equity?

A. $2700.00
B. $2900.00
C. None of the choices listed
D. $900.00

Answer 6

B. $2900.00

Rationale:
If the customer buys $3,800 worth of stock, shell have to put down $2,000, leaving her with a Dr of $1,800. $4700-$1800 = $2900 equity.

Question 7

A new margin customer purchases 200 ART @48 and meets the Fed call. Seven and one-half months later—with Reg T at 50%-ART rises to $64 per share. What is the customer’s buying power?

A. $3,200.00
B. $9,600.00
C. $2,000,00
D. $6,400.00

Answer 7

A. $3,200.00

Rationale:
The customer put down half initially, or $4,800, leaving a Debit balance of $4800. So, when the stock is now worth $12,800, the equity is $8,000. Reg T is $6,400 (half of LMV) so the $1,600 above that is excess equity. Multiply that by two to get the buying/purchasing power.

Question 8

A customer buys 300 ABC @50 and 3 ABC Apr 55 calls @2. What is the initial margin requirement on this position?

A. $8100.00
B. $7800.00
C. None of the choices listed
D. $2000.00

Answer 8

A. $8100.00

Rationale:
Put down half for the stock, but pay for the options in full. That’s $7,500 for the stock and the full $600 for the three options.

Question 9

A customer buys 100 XYT @70 and writes 1 XYT Mar 75 call @3. What is the amount of the margin deposit?

A. $3,200.00
B. $2,000.00
C. $3,800.00
D. $7,300.00

Answer 9

A. $3,200.00

Rationale:
The customer can reduce the deposit he makes with the proceeds from the covered call. So, he can put down the Reg T requirement of $3,500 less the $300 received for writing the call.

Question 10

At the end of each trading day, Marcy Masterson calculates margin requirements based on market values of securities. This process is known as:

A. Defeasance
B. Making a market
C. Lining up the market
D. Marking to the market

Answer 10

D. Marking to the market

Rationale:
That’s what it’s called “marking to the market.”

Question 11

For a short account, Reg-T and minimum maintenance are:

A. 50%/25%
B. 50%/50%
C. 50%/30%
D. None of the choices listed

Answer 11

C. 50%/30%

Rationale:
Memorize the minimum maintenance of 30% for a short account.

Question 12

For a long account, Reg-T and minimum maintenance are

A. 50%/30%
B. 50%/25%
C. 75%/30%
D. 75%/25%

Answer 12

B. 50%/25%

Rationale:
The minimum maintenance for long positions is 25%.

Question 13

Which regulation stipulates how much credit a bank may extend to a broker-dealer?

A. Reg U
B. Reg D
C. Maloney Act
D. Reg T

Answer 13

A. Reg U

Rationale:
Reg U tells banks how much credit to extend. Reg T tells a broker-dealer how much credit to extend.

Question 14

Which of the following may be purchased in a margin account?

I. Option
II. Mutual funds
lll. Closed-end funds
IV. Government bonds

A. II, III, IV
B. I, II
C. I, II, III, IV
D. Ill, IV

Answer 14

C. I, II, III, IV

Rationale:
You can purchase whatever you want in your margin account; you just might have to pay for some of the stuff in full.

Question 15

Which of the following may be purchased on margin?

I. Option
II. Mutual funds
lll. Closed-end funds
IV. Government bonds

A. I, II
B. Ill, IV
C. II, Ill, IV
D. I, II, III, IV

Answer 15

B. Ill, IV

Rationale:
Options, mutual funds, and IPO’s can be purchased within a margin account, but they have to be paid for in full.

Question 16

If the value of securities increases in a long account, which of the following are affected?

I. LMV
II. Equity
III. SMA
IV. Dr

A. I, II
B. II, IV
C. I, II, III
D. I, IV

Answer 16

C. I, II, III

Rationale:
“Dr” is simply the amount the broker-dealer lent to the customer. It does increase due to interest charges, but that’s too difficult to test, since interest rates vary from day to day and firm to firm. A change in market value, in any case, would never effect the “Dr.”

Question 17

What is the Fed call if a customer in a new margin account buys 200 XYZ @9?

A. $1,800.00
B. $5000.00
C. None of the choices listed
D. $2000.00

Answer 17

A. $1,800.00

Rationale:
This customer would pay the full amount, since the full amount is less than the $2,00 SRO minimum.

Question 18

What is the Fed call if a customer in a new margin account shorts 200 ABC @9?

A. $2,000.00
B. $1,900.00
C. $2,800,00
D. $5,000.00

Answer 18

A. $2,000.00

Rationale:
For a short account, you always put down at least $2,000.

Question 19

Which of the following Acts gave the FRB the power to regulate margin?

A. Maloney Act of 1938
B. Securities Exchange Act of 1934
C. Margin Act of 1917
D. Securities Act of 1933

Answer 19

B. Securities Exchange Act of 1934

Rationale:
The Act of 1934 has a very wide scope, including giving the Federal Reserve Board the authority to regulate margin.

Question 20

If a new margin customer shorts 300 XYZ ©50, what is the initial Credit?

A. $22,500.00
B. $2,250.00
C. $7,500.00
D. $2,000.00

Answer 20

A. $22,500.00

Rationale:
Half again as much. The customer takes in $15,000 in cash proceeds from the short sale and deposits half that amount in cash. $15,000 plus the $7,500 cash deposit gives him a total credit of $22,500.

Question 21

The credit balance in a margin account is $20,000. The short market value is $15,000. What is true of this account?

A. Minimum maintenance is $4,500
B. The customer is writing equity options
C. Minimum maintenance is S5.00
D. The customer is writing/purchasing futures contracts

Answer 21

A. Minimum maintenance is $4,500

Rationale:
Just take the SMV and multiply it by .30 or 30%. 30% is the minimum maintenance (equity) on a short stock position. So, this account has $5,000 equity and is above the minimum maintenance requirement of $4,500.

Question 22

Your customer’s debit balance is $5,000. He owns 100 shares ABC currently trading at $40 200 shares XYZ currently trading at $35, and 100 shares ZZZ currently trading at $32. If the positions all rose $3 per share, the customer’s equity would be:

A. $10,400
B. $1,000
C. $6,600
D. $7,100

Answer 22

A. $10,400

Rationale:
Add $3 to the share prices, multiply them by the 100, 200, and 100 shares, then subtract the $5,000 debit. So, it’s 100 shares @43, 200 shares @38, and 100 shares at $35. That equals $15,400. Minus the $5,000 debit balance = $10,400 equity.

Question 23

One of your customers has a short position in his margin account. The credit balance is $26,000. Therefore, the customer would receive a margin call if the short market value rose above:

A. $20,000
B. $33,800
C. $30,000
D. $34,666

Answer 23

A. $20,000

Rationale:
Take the Credit balance and divide by 1.3. This tells you the “account at maintenance” or how high the SMV can rise before the phone starts ringing.

Question 24

Lester has long positions worth $10,000 in his combined margin account and short positions worth $2,000. If both positions rise by $1,000 today, the equity in the account will:

A. Rise by $2,000
B. Rise by $1,000
C. Remain unchanged
D. Rise by $1,500

Answer 24

C. Remain unchanged

Rationale:
Remember that the short seller suffers when the short position rises. So, although it’s nice that the long position went up by $1,000, the $1,000 increase in SMV canceled that out Try running some numbers if you disagree. Say that the debit balance is $5,000 and the credit balance on the short position is $5,000. That’s total combined equity of $8,000. Now. add $1,000 to the long market value ($11.000) and add $1,000 to the short market value ($3,000) and what do you get? Still $8.000.

Question 25

Which of the following reduce the amount of a margin customer’s debit balance?

A. Sale of a long stock position in a restricted account
B. Dividends paid on preferred stock
C. All choices listed
D. Interest earned on US Treasury bonds

Answer 25

C. All choices listed

Rationale:
In a margin account, the customer owes the broker-dealer. So, if stock is sold, the proceeds pay down the debit balance. Also, interest and dividends coming into the account are used to reduce the debit balance. The interest charges on the debit balance, of course, raise the debit balance. Which is why broker-dealers love margin accounts.

Question 26

An investor purchases 1,00 ABC @ 55 and makes the required Reg T deposit in a new margin account. Three and a half weeks later ABC trades @ 70. Therefore, what is true of the investor’s buying power at this point?

A. It remains unchanged
B. There is no buying power in this restricted account
C. The buying power is now $15,000
D. The buying power is now $7,500

Answer 26

C. The buying power is now $15,000

Rationale:
You may notice that when the long position rises, SMA rises by half the amount. The stock goes up $15,000, SMA increase by $7,500. Buying power is twice SMA. The investor could borrow $7,500 cash-money, or buy $15,000 of stock on credit at this point.

Question 27

One of your customers sells 1,000 ABC short @55 and makes the required Reg T deposit in a new margin account. Two weeks later ABC trades @40. Therefore,

A. The customer’s account is under the minimum maintenance requirement
B. The equity in the account has dropped by $7,500
C. The equity in the account has dropped by $15,000
D. The equity in the account is $42,500

Answer 27

D. The equity in the account is $42,500

Rationale:
The initial credit is the $55,000 in short-sale proceeds plus $27,500 as the Reg T Deposit. The credit is $82,500. Subtract the SMV of $40,000 for equity of $42,500.

Question 28

Assume that Alan Atherton made the required Reg T deposit when purchasing 10,000 shares of XYZ common stock @45. Now that the stock trades at $50, what is true of the account?

A. The account is restricted
B. The account may not be used for uncovered option writing
C. There is no SMA based on this position
D. The equity is $275,000

Answer 28

D. The equity is $275,000

Rationale:
The long market value is $500,000; the debit is $225,000. The difference is the equity of $275,000. There actually is SMA based on the excess equity. $500,000 minus $225,000 = equity of $275,000. Subtract the Reg T requirement of $250,000, and you’re left with $25,000 of excess. A restricted account has less than 50% equity; this one has excess equity.

Question 29

When an investor sells 1,000 ABC short @40 in a new margin account, the credit will be:

A. Taxable as ordinary income
B. $20,000
C. $40,000
D. $60,000

Answer 29

D. $60,000

Rationale:
The initial credit is always one- and-a-half times the short market value. Why? The “investor” gets the short market value coming in as cash, then puts down half that amount with his own cash.

Question 30

One of your investing clients has a margin account with the following amounts Long Market Value $40,000 Debit Balance $25,000 SMA $2,000 If this customer sells $10,000 of stock, what is the equity in the account after the sale?

A. $50,000
B. $12,000
C. $15,000
D. $25,000

Answer 30

C. $15,000

Rationale:
Equity doesn’t change when stock is sold. If you take a $10,000 asset (stock) and turn it into $10,000 cash money, you have not actually achieved anything other than cashing in your chips. The long market value here drops to $30,000, and the $10,000 pays the debit balance down to $15,000. The equity is still the same $15,000

Question 31

Which of the following may be hypothecated by a broker- dealer?

A. Fully paid customer securities
B. All choices given
C. Customer margin securities
D. Customer excess margin securities

Answer 31

C. Customer margin securities

Rationale:
Broker-dealers get in big trouble for pledging securities that belong to customers as collateral for loans to the broker-dealer. They can pledge the “margin securities” only, and they have to get the customer’s signature on the hypothecation agreement to do that.

Question 32

Which of the following represent accurate statements concerning customer margin accounts?

I. Gains are double that of cash accounts on a percentage basis
II. Gains are half of that of cash accounts on a percentage basis
III. Losses are double that of cash accounts on a percentage basis
IV. Losses are half that of cash accounts on a percentage basis

A. I, Ill
B. II, IV
C. I, IV
D. II, Ill

Answer 32

A. I, Ill

Rationale:
By using half of the house’s money, you can double your gains and also double your losses.

Question 33

All of the following statements are accurate of SMA balances except:

A. SMA balances are created in both long and short margin accounts
B. SMA is a credit balance that must be made available to the customer on demand
C. SMA balances may not be applied to margin calls
D. SMA is not affected by a drop in market value

Answer 33

B. SMA is a credit balance that must be made available to the customer on demand

Rationale:
SMA is just a number; it is not actually money. It can be “withdrawn,” as long as that doesn’t put the account below maintenance. The word “withdrawn” is misleading- money coming out of SMA is a loan to the client, not a withdrawal of cash-money

Question 34

In a margin account a customer purchases 4 DJX Aug 950 calls @1.25. His required margin deposit is:

A. $5,000
B. $125
C. $1,250
D. $500

Answer 34

D. $500

Rationale:
Each call costs $125, and options must be paid in full. 4 X $125 = $500.

Question 35

A broker-dealer has just opened a margin account for a customer. The customer signed a hypothecation agreement, credit agreement, and consent to loan agreement. Therefore, all of the following statements are accurate EXCEPT:

A. The customer may not withdraw funds until all securities purchased on margin are sold
B. The customer will pay interest on any debit balances
C. The stock will be held in “street name
D. The customer may pledge a portion of the stock to secure a loan

Answer 35

A. The customer may not withdraw funds until all securities purchased on margin are sold

Rationale:
The customer can withdraw funds from SMA as long as doing so doesn’t put the account below the minimum maintenance level.

Question 36

In a restricted margin account, a customer sells $10,000 worth of ABC common stock. Therefore, SMA will be affected in which of the following manners?

A. SMA will be decreased by $2,500
B. SMA will be increased by $10,00
C. SMA will be increased by $5,000
D. SMA will not be affected

Answer 36

C. SMA will be increased by $5,000

Rationale:
In a restricted margin account- -where the Equity is under 50% of the current market value of the stock-half the proceeds of a sale are credited to SMA, meaning the customer can withdraw that amount.

Question 37

A margin customer buys 400 shares of XYZ @40. If XYZ drops to $30 per share, the customer’s account will:

A. Be required to have minimum equity of $12,000
B. Be requried to have minimum equity of $3,000
C. Receive a maintenance call
D. Be requried to have minimum equity of $6,000

Answer 37

B. Be requried to have minimum equity of $3,000

Rationale:
The minimum requirement on a long position of $12,000 is equity of $3,000. If the customer has a debit balance of $8,000 and a market value of $12,000, his $4,000 equity is above minimum maintenance.

Question 38

Shirley O’Leary purchases $20,000 of stock within her margin account. Today, her equity is $5,500. Reg T is 50%. The SRO minimum maintenance is 25%. The “house requirement” of the broker-dealer is 30%. Therefore:

A. Shirley must deposit $500
B. Shirley will not receive a margin call
C. Shirley must deposit cash in the amount of $4,500
D. Shirley may ignore the house requirement given that her equity exceeds the SRO minimum

Answer 38

A. Shirley must deposit $500

Rationale:
Broker-dealer’s “house requirements” may be higher than the minimum maintenance required by FINRA/NYSE. If so, that’s what the customer needs to meet on a $20,000 position, her equity must be at least $6,000.

Question 39

One of your customers, who invests exclusively through a margin account, has called to complain this morning after discovering that 1,000 shares of ABC, his favorite holding, were sold to meet a margin call. Further, he says that he never got a voicemail about the equity in the account. Therefore,

A. Your firm acted properly in this instance
B. Your firm acted improperly by not discussing which stock the customer wanted to liquidate to meet the call
C. Your firm acted improperly by not phoning or emailing the customer before selling the stock
D. The customer has valid grounds for an arbitration claim

Answer 39

A. Your firm acted properly in this instance

Rationale:
The stock is held in street name (name of the firm) so that the firm can sell whatever they need to sell when market values begin to plummet. There is no requirement that the firm contact the customer before liquidating securities to meet a margin call.

Question 40

Which of the following securities may be purchased on margin?

I. United States Treasury Bonds
II. Listed options
III. Non-convertible corporate bonds
IV. Preferred stock

A. I, II, III, IV
B. I, IV
C. I, III, IV
D. II

Answer 40

C. I, III, IV

Rationale:
Options, mutual funds, and IPO’s must be paid in full.

Question 41

In a new margin account Manny bought 1,000 ABC @45 last Friday. Today, Tuesday, ABC trades @50, and since Manny has not yet met the margin call, he will be required to deposit:

A. 10 call options with strike prices of $45 or better
B. $22,500
C. Full paid stock worth $22,500
D. All choices listed

Answer 41

B. $22,500

Rationale:
He bought $45,000 of stock on margin and must deposit either $22,500 in cash, or fully paid securities with a market value of $45,000 (loan value of $22,500).

Question 42

If a customer holds 1,000 XYZ in his account, with no SMA, what happens if XYZ declares a 10% stock dividend?

A. SMA rises by 10%
B. Equity remains the same
C. Debit balance drops by 10%
D. Current Market Value rises by 10%

Answer 42

B. Equity remains the same

Rationale:
The total value of the stock is unchanged. Debit balance stays the same, as does equity and SMA.

Question 43

Ingrid Investor is about to sell 500 shares of ABC short @40. The minimum maintenance on this position would, therefore, be:

A. $10,000
B. $2,000
C. $5,000
D. $6,000

Answer 43

D. $6,000

Rationale:
This is a $20,000 position. The minimum maintenance is 30% of that value, or $6,000.

Question 44

In a margin account SMA is not affected by which of the following?

A. Stock dividends paid on securities held in the account
B. Dividends received on securities held in the account
C. Increase in current market value of a long stock position
D. Deposits of cash into the account

Answer 44

A. Stock dividends paid on securities held in the account

Rationale:
Stock dividends don’t really change the value of anything- even if they do change the per- share price of a stock.

Question 45

In a combined margin account, one of your customers has a debit balance of $30,000 and a credit balance of $25,000. Therefore, interest will be charged on what amount?

A. $15,000
B. $5,000
C. $55,000
D. $30,000

Answer 45

D. $30,000

Rationale:
Customers pay interest on the debit balance. A credit is created by the money received on a short sale plus the customer’s cash deposit under Reg T.

Question 46

In a “restricted” margin account, all of the following are affected by a sale of a long stock position except:

A. Long market value
B. SMA
C. Debit balance
D. Equity

Answer 46

D. Equity

Rationale:
The debit balance is paid down by the amount of the sale, and half that amount is credited to SMA. Turning a security into cash does not change the equity in the account because whatever amount of stock is sold, that amount reduces the debit balance, too.

Question 47

A customer’s margin account has a market value of $25,000, a debit balance of $11,000, and SMA of $3,000. The equity in this account is:

A. $11,000
B. $25,000
C. $17,000
D. $14,000

Answer 47

D. $14,000

Rationale:
SMA is just a line of credit that can be tapped by the customer, or not. Equity is always just the difference between the market value of the asset minus the amount the customer still owes on that asset: 25 -11 = 14.

Question 48

A customer’s margin account has a market value of $22,000, a debit balance of $14,000, and SMA of $2,000. If the customer sells $1,000 of securities, he may withdraw what amount?

A. $2,500
B. $1,000
C. $2,000
D. $3,000

Answer 48

A. $2,500

Rationale:
The customer could have already withdrawn the existing $2,000 of SMA, which eliminates one answer choice. He can also withdraw half the amount of the sales proceeds ($500) for a total of $2,500. Why half the proceeds? The account has less than 50% equity, meaning it is “restricted.”

Question 49

Upon receipt of a cash dividend, a margin account is affected in which of the following ways?

A. Excess equity is reduced
B. Cost basis is adjusted
C. Debit balance is decreased
D. Market value is decreased

Answer 49

C. Debit balance is decreased

Rationale:
The dividend or interest payments coming in reduce the debit balance.

Question 50

What is true of the tax implications of margin interest that a customer pays on his debit balance within a margin account?

A. It is deductible against ordinary income, whether the customer has portfolio income or not
B. It is deductible within an IRA or 401k only
C. It is deductible against taxable portfolio income
D. It is deductible against interest charges associated with municipal bonds only

Answer 50

C. It is deductible against taxable portfolio income

Rationale:
If you receive taxable dividends or interest within your margin account, you can offset those amounts with the margin interest you paid to buy them. But, if it’s a tax-exempt municipal bond, since the interest is not taxable, you can not deduct the margin interest you paid to buy those tax-exempt bonds.

Question 51

In a customer’s margin account we see a long market value of $22,000 and a debit balance of $10,000. When a dividend check for $350 is paid to the account, the balances are affected how?

A. There is no effect, as the dividend must be paid out to the customer within three business days
B. The debit balance becomes $9,825
C. The debit balance becomes $10,175
D. The equity becomes $12,350

Answer 51

D. The equity becomes $12,350

Rationale:
The dividend pays down the debit to $9,650. $22,000 minus $9,650 = $12,350. Equity is just the difference between the market value and the amount still owed on that asset.

Question 52

A margin customer is about to execute his first transaction in the account, long 100 shares of XYZ @17. The required Reg T deposit is:

A. $1,700
B. Determined by the broker-dealer carrying the account
C. $850
D. $2,000

Answer 52

A. $1,700

Rationale:
Since the whole amount is under $2,000, the customer simply pays in-full . . , $1,700. Basically, the account is APPROVED for margin, but the customer hasn’t actually taken the plunge yet The Federal Reserve Board sets Reg T The broker-dealer could make it higher than that, but that is not quite what the answer choice is saying- it’s implying that the firm could go higher or lower than Reg T.

Question 53

A customer of your broker-dealer has an established margin account. Today he purchases $20,000 of ABC and sells short $30,000 of XYZ. The required Reg T requirement is, therefore, what amount?

A. $25,000
B. $10,000
C. $5,000
D. Zero

Answer 53

A. $25,000

Rationale:
He has to put down ½ of each amount: $10,000 plus $15,000.

Question 54

A customer of your broker-dealer has an established margin account. Today he purchases $20,000 of ABC and sells short $30,000 of XYZ. What is the minimum maintenance for this combined margin account?

A. $25,000
B. $14,000
C. $10,000
D. $12,500

Answer 54

B. $14,000

Rationale:
Take 25% of the long position ( = $5,000) and 30% of the short position (= $9,000).

Question 55

In a combined margin account, a customer has long stock positions worth $50,000 and a debit balance of $32,000. The credit balance is $30,000 with the short market values at $25,000. With Reg T at 50%, how much cash may be withdrawn from this account?

A. None at this time
B. $18,000
C. $7,000
D. $30,000

Answer 55

A. None at this time

Rationale:
There is no excess equity. The Reg T requirement on a 50K long position is $25,000, and the equity is only $18,000. The Reg T requirement on a $25,000 short position is $12,500, and the equity is only $5,000.