Cash and Margin Accounts Flashcards
If a customer’s cash account is frozen due to the failure to make prompt payment:
[A] Additional purchases (except for exempt securities) are not permitted unless sufficient funds are already in the account before the order is processed.
[B] He may not make any additional purchases in the account.
[C] All transactions in the account must cease.
[D] It indicates that there is a deficit balance in the account.
[A] Additional purchases (except for exempt securities) are not permitted unless sufficient funds are already in the account before the order is processed.
If a customer’s cash account is frozen due to the failure to make prompt payment any additional purchases are not permitted unless sufficient funds are already in the account before the order is processed.(except for exempt securities)
Ch9 Sec2
207
A customer sells 100 shares of ABC short at 35. The initial minimum requirement, assuming Regulation T is 50%, is:
[A] $ 500
[B] $1,750
[C] $2,000
[D] $3,500
[C] $2,000
Sell Short 100 @ 35 =
$3,500 / 50 = $1,750
Since the question asks for initial, the minimum requirement is $2,000.
Ch9 Sec5
A customer’s Margin Account will be considered “restricted” if the equity is:
[A] Above the required Reg T% of the CMV
[B] Right at the required Reg T% of the CMV
[C] Below the required Reg T% of the CMV
[D] Equal to his current market value
[C] Below the required Reg T% of the CMV
A customer’s margin is “restricted” if his equity does not equal or exceed the Reg T requirement of the Current Market Value.
Ch9 Sec6C
What is the excess equity in this customer’s margin account?
$32,600 CMV
$12,750 DB
$19,850 EQ
[A] $3,550
[B] $7,100
[C] $16,300
[D] $19,850
[A] $3,550
Loan Value (LV)= 1/2 Current Market Value (CMV) Excess Equity = LV - Debit Balance (DB) 32600 / 2 = 16300 (Loan Value) 16300 - 12750 = 3550
Ch9 Sec6A
Hypothecation occurs when
[A] a customer gives a broker-dealer discretionary authority over their account.
[B] a broker-dealer makes a margin loan to a customer using securities purchased as collateral for the loan.
[C] a customer pays for purchases in full.
[D] a broker-dealer sends the customer a minimum maintenance call.
[B] a broker-dealer makes a margin loan to a customer using securities purchased as collateral for the loan.
Hypothecation occurs when the broker-dealer makes a margin loan to a customer using the securities purchased as collateral. Hypothecation by the customer, as well as the potential re-hypothecation of securities by the broker-dealer for margin loans will require the customer to sign a hypothecation agreement. Discretionary authority is provided to the broker-dealer when the customer signs a Discretionary Authorization. There is no hypothecation or pledge of collateral when a customer has a Cash account and pays for purchases in full. A minimum maintenance call would be identified as a minimum maintenance call, not hypothecation.
Ch9 Sec3
A customer purchased stock on a “when issued” basis in his cash account. He must deposit in cash:
[A] 100% of the issued cost within four business days from the trade date.
[B] 60% of the issued cost within four business days from trade date.
[C] 50% of the issued cost or $2,000, whichever is greater.
[D] 25% of the issued cost or $2,000, whichever is greater.
[D] 25% of the issued cost or $2,000, whichever is greater.
Ch9 Sec6G
The minimum deposit required for the purchase of $20,000 of a marginable stock in a margin account would be
[A] $12,000 in cash.
[B] $10,000 of marginable stock.
[C] $20,000 in cash.
[D] $20,000 of marginable stock.
[D] $20,000 of marginable stock.
To satisfy the MINIMUM deposit requirement, the investor can do either of the following:
Deposit Cash to meet a call = 100% of the amount called is required. The question states that $20,000 in stock was purchased. Reg T is 50% so the minimum cash required is $10,000 (not $12,000 which is more than the minimum).
Deposit Securities to meet a call = deposit securities that have a loan value equal to the amount of the call ( twice as much of a deposit is needed in securities because securities have a loan value of 50%). The Reg T. minimum deposit is $10,000, so depositing marginable stock of $20,000 would meet that requirement.
Ch9 Sec5
The buying power in this margin account, assuming the SMA is 0 and Reg T is 50%, is:
$ 50,000 MV
- $ 20,000 DB
$ 30,000 EQ
[A] $5,000
[B] $10,000
[C] $30,000
[D] Unlimited
[B] $10,000
Buying Power (BP) = 2 x Excess Equity (EE) 25,000 (LV) -20,000 (DB) =5,000 (EE) BP = 10,000 Ch9 Sec6A
Assume a customer has the following margin accounts:
Market Value Balance Long $40,000 $24,000 DR. Short $15,000 $12,000 CR. What is the customer's equity in the two accounts?
[A] $13,000
[B] $19,000
[C] $28,000
[D] $43,000
[A] $13,000
Market Value - Debit Balance = Equity Long
Credit Balance - Market Value = Equity Short
40-24= 16,000 (EqL)
12-15= -3,000 (EqS)
Total Equity (TEq) = 13,000
Ch9 SecF
A customer’s margin account has a market value of $10,000, a debit balance of $8,000 and SMA of $500. The NYSE maintenance call could be satisfied with:
[A] $500 SMA
[B] $250 SMA
[C] $1,000 cash
[D] $500 cash
[D] $500 cash
10,000 x 0.25 = 2,500 (NYSE Maintenance Requirement)
10,000 - 8,000 = 2,000 (Eq)
Since there is no money in SMA (it is only a line of credit) it could not be used to meet a maintenance call.
Ch9 Sec6D
A customer buys 100 shares of XYZ W.I. (when issued) at $46 per share. What is the deposit requirement assuming Regulation T is 50%?
[A] $1,150
[B] $2,000
[C] $2,300
[D] $4,600
[B] $2,000
The requirement on “When Issued” (W.I.) contracts is 25% or $2,000 whichever is greater.
Ch9 Sec6G
The initial action a broker-dealer must take if a customer fails to promptly pay for a purchase of securities and no extension of time is obtained, is to
[A] restrict the account for 90 days.
[B] close the account permanently.
[C] send an immediate notice to the NYSE of his failure to pay.
[D] cancel or liquidate the transaction.
[D] cancel or liquidate the transaction.
The key word in the question is “initial” - after the account is liquidated it would be frozen for 90 days - but initially the firm would cancel or liquidate the transaction.
Ch9 Sec2
Under FINRA regulations on minimum maintenance, customers are required to maintain a minimum equity of:
[A] 25% in both long and short margin accounts.
[B] 30% in both long and short margin accounts.
[C] 25% in long margin accounts and 30% in short margin accounts.
[D] 25% in long margin accounts and 50% in short margin accounts.
[C] 25% in long margin accounts and 30% in short margin accounts.
FINRA and NYSE Rules set minimum maintenance requirements related to equity at 25% for long margin accounts and 30% for short margin accounts. Regulation T deposit requirements specify 50% of all new purchases and short sales outside of exceptions for smaller accounts and the short sale of low-priced stock.
Ch9 Sec6D
A client’s margin account is as follows: Long Market Value $22,000 Debit Balance $ 9,000 Does this client have any excess equity in this account?
[A] The client has no excess equity in the account.
[B] The client has $2,000 of excess equity in the account.
[C] The client has $11,000 of excess equity in the account.
[D] The client has $13,000 of excess equity in the account.
[B] The client has $2,000 of excess equity in the account.
Start with the market value of the stock ($22,000), cut it in half ($11,000) and compare that to the debit balance (9,000), therefore the Excess Equity is $2,000 ($11,000 - $9,000 = $2,000).
Ch9 Sec6B
In an established margin account, a customer sells short 100 shares of ABC at $40 per share and writes 1 ABC July 40 put at 4. What is the customer’s cash deposit requirement?
[A] $1,600
[B] $2,000
[C] $2,400
[D] $4,400
[A] $1,600
With Reg T 50%, the customer would be required to deposit $2,000 to cover the short sale (50% of $4,000). The proceeds from the sale of the option can be used to reduce the $2,000 deposit, thus the $400 received for the sale of the option reduces the deposit to $1,600.
Ch9 Sec6E
A customer has the following margin account:
$20,000 Market Value Long
$ 5,500 Debit Balance
$ 5,400 SMA
If the market value in the account depreciated by $2,000, what is the effect on the purchasing power in the account?
[A] No effect.
[B] The purchasing power is reduced by $2,000.
[C] The purchasing power is reduced by $1,000.
[D] The purchasing power is reduced by $2,700.
[A] No effect.
Purchasing power refers to the amount of credit available to a margin investor to buy additional shares without depositing any additional funds. It’s available if there is credit in the Special Memorandum Account (SMA). The credit is created if there is “excess equity” resulting from a gain in the value of the stock in the account. The purchasing power amount is not reduced as a result of a later decline in the market value of the stock. The amount of the credit is established by the price on the “best day” in the market.
Ch9 Sec6B
A customer with a cash or margin account fails to make payment on a new purchase of securities within 4 business days of trade date. Under Reg T, the broker-dealer is not required to liquidate portions of the customer’s account if payment for the purchase in the account is for:
[A] $1,000 or less
[B] $2,000 or more
[C] $5,000
[D] Any unpaid amount
[A] $1,000 or less
Under Reg T, broker-dealers are required to liquidate portions of a customer’s account if the customer fails to make payment within Reg T settlement (T+4) for any amount exceeding $1,000. At $1,000 or less, the broker-dealer can choose whether or not to liquidate a portion of the account under Reg T.
Ch9 Sec2
In a Margin Account Long, the minimum maintenance requirement is:
[A] 30%
[B] 70%
[C] 25%
[D] Reg T%
[C] 25%
Minimum Maintenance: Long = 25%. Short = 30%
Ch9 Sec6D
