Ch.18 S7

Question 1

How is the account affected if SMA is withdrawn?

Answer 1

Debit balance increases and equity decreases

Question 2

What may a BD lend to a customer in a margin account?

Answer 2

The complement of the Reg T margin call. In other words, 50%

Question 3

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. If SMA is withdrawn, what are the balances?

Answer 3

LMV $40,000 - Debit $20,000 = Equity $20,000 and SMA is $0

Question 4

T/F: Restricted accounts must be remedied immediately by depositing the appropriate dollar amount.

Answer 4

F; restricted accounts do not require immediate response

Question 5

T/F: Market declines will reduce SMA

Answer 5

F; the only way to lose SMA is to use SMA

Question 6

How is buying power calculated?

Answer 6

SMA divided by Reg T of 50% (just remember SMA x 2)

Question 7

A client buys stock on margin and makes no cash deposit because he uses SMA. How are the account balances affected?

Answer 7

LMV and Debut both increase by the full purchase price; no change is made to equity

Question 8

_____________ governs the extension of credit by BDs.

Answer 8

Reg T

Question 9

On margin, Henry sells short 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is the margin requirement?

Answer 9

$3,400 which is 50% of the short position. Since this is a covered position, there is no requirement on the short put.

Question 10

When a customer buys on margin, how much cash may a BD borrow from a bank?

Answer 10

100% of the debit balance

Question 11

To meet a $20,000 Reg T call, a customer could deposit cash of $_______ or fully paid securities of $__________.

Answer 11

$20,000 ; $40,000

Question 12

The formula for determining equity in a long margin account is: _________ - __________= Equity

Answer 12

LMV - Debit = Equity

Question 13

An account with equity below the Reg T requirement is called ______________.

Answer 13

Restricted

Question 14

The current Reg T margin requirement is _____%.

Answer 14

50%

Question 15

Mutual fund shares have loan value after they have been owned for _____ days.

Answer 15

30 days

Question 16

T/F: short against the box is considered being long and short the same position at the same time.

Answer 16

T

Question 17

On margin, an investor buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is the margin requirement?

Answer 17

$2,500 which is 50% of the stock position. Since this is a coveted position, there’s no requirement on the short call

Question 18

What is the maximum amount of securities that a BD may rehypothecate to a bank?

Answer 18

140% of the debit balance

Question 19

If a clients equity falls below 25%, the maintenance call must be met ___________.

Answer 19

Promptly

Question 20

The ____________ regulates margin requirements.

Answer 20

FRB

Question 21

What document allows a BD to lend customer securities to someone wishing to sell them short?

Answer 21

Loan Consent Agreement

Question 22

Define Reg T

Answer 22

The percentage a customer must deposit when purchasing securities or selling short

Question 23

Calculate the combined equity in the following account: LMV $24,000, Debit $10,000, Credit $18,000, SMV $9,000.

Answer 23

($24,000 + $18,000 - $10,000 - $9,000) = $23,000

Question 24

What is the margin requirement for a short against the box position?

Answer 24

5% of the long position

Question 25

May new issues (IPOs or mutual fund shares) be purchased on margin?

Answer 25

No

Question 26

What is the rate of interest that a bank charges a BD on margin loans?

Answer 26

Call rate

Question 27

Securities that are acceptable as collateral have a loan value that equals ____%

Answer 27

50%

Question 28

In a margin account, customers pay interest on the _______ balance.

Answer 28

Debit

Question 29

What is the margin requirement when buying options?

Answer 29

100% of the premium

Question 30

By how much is the following account restricted? LMV $40,000, Debit $25,000, Equity $15,000

Answer 30

Restricted by $5,000. The equity should be $20,000 (50% of $40,000) but there is only $15,000

Question 31

T/F: Firms may establish their own in house rules relating to payment dates and minimum requirements.

Answer 31

T; however, the requirements must be at least as stringent as those established by the regulators

Question 32

What stocks does the FRB deem to be marginable?

Answer 32

Those stocks listed on major exchanges and on Nasdaq

Question 33

The industry minimum maintenance for a long account is ____%

Answer 33

25% (Equity must be at least 25% of LMV)

Question 34

On margin, Ben buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is Bens required cash deposit?

Answer 34

$2,200 which is 50% of the stock position minus the $300 premium received on the sale of a call

Question 35

What amount of fully paid securities must be deposited to meet a margin requirement?

Answer 35

Securities with a loan value equal to the margin call (in other words, two times the margin call)

Question 36

T/F: Customers are required to sign the Loan Consent Agreement

Answer 36

F

Question 37

How long must new issues be held before they may be used as collateral?

Answer 37

30 days

Question 38

A client with $3,000 of SMA has buying power of $_______.

Answer 38

A client with $3,000 of SMA has buying power of $6,000 (the SMA balance x 2)

Question 39

Existing account: LMV $40,000, Debit $25,000. If $5,000 is sold from the account, how is SMA affected?

Answer 39

SMA would be credited with $2,500 (50% of the sales proceeds)

Question 40

How long can a short stock position be maintained?

Answer 40

Unlimited, provided the account maintains the minimum required equity

Question 41

Where will excess equity be recorded?

Answer 41

The Special Memorandum Account (SMA)

Question 42

Hypothecating is synonymous with what term?

Answer 42

Pledge

Question 43

The credit balance is made up of what two components?

Answer 43

Short sales proceeds plus the Reg T requirement

Question 44

The industry minimum maintenance requirement for a short account is _____%

Answer 44

30% (equity must be at least 30% of SMV)

Question 45

How would a $2,000 cash dividend or voluntary cash deposit affect a margin accounts balances?

Answer 45

LMV is unchanged, Debit is reduced by $2,000, Equity is increased by $2,000, and SMA is increased by $2,000

Question 46

The ___________ has the authority to regulate margin requirements

Answer 46

FRB

Question 47

What is a customer using when she borrows funds to increase the size of her position?

Answer 47

Leverage

Question 48

The formula for determining equity in a short margin account is: _________ - __________= Equity

Answer 48

Credit - SMV = Equity

Question 49

What is the Reg T margin requirement for short sales?

Answer 49

50%

Question 50

Calculate SMA using the following balances: LMV $40,000, Debut $10,000, and Equity $30,000

Answer 50

Equity - 50% of the LMV = Excess Equity ($30,000 - $20,000 = $10,000)

Question 51

Any amount of equity greater than 50% is called __________.

Answer 51

Excess equity

Question 52

The ____________ Agreement describes the customers pledging of securities as collateral to the BD.

Answer 52

Hypothecation

Question 53

The minimum equity requirement for the initial short sale in a margin account is $_____.

Answer 53

$2,000

Question 54

What does selling short mean?

Answer 54

Selling securities that are not owned but are borrowed from a BD

Question 55

On margin, Emma shorts 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is Emma’s required cash deposit?

Answer 55

$3,000, which is 50% of the short position minus the premium received on the sale of the put.

Question 56

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. SMA is used for a $20,000 purchase. Result?

Answer 56

LMV $60,000 - Debit $30,000 = Equity $30,000 and SMA is $0

Question 57

If an investor writes a covered call, is there a margin requirement in the option position?

Answer 57

No the long stick position covers the sale of the call

Question 58

An investors strategy is __________ when effected a short sale.

Answer 58

Bearish

Question 59

Existing account: LMV $40,000, Debit $25,000, Equity $15,000. How is SMA affected by receiving a $5,000 cash dividend?

Answer 59

SMA would be credited with $5,000 (100% of the deposit)

Question 60

How will the sale of securities from an account affect the account balances?

Answer 60

LMV and Debit decrease by the sales proceeds, Equity stays the same and SMA increases by 50% of the sales proceeds.

Question 61

A long margin accounts minimum initial equity requirement is ____% of the purchase of $_____, whichever is less.

Answer 61

100% ; $2,000

Question 62

What is the formula for finding equity in a combined margin account?

Answer 62

LMV + Credit Balance - Debit Balance - SMV