Chapter 6 - Margin Flashcards
What is margin and what does it allow?
Margin allows customers to increase trading capital by borrowing from the B/D.
With margin what are the advantages for the customer and what are advantages for the B/D?
Customer - can buy securities with a low cash outlay and leverage by borrowing.
B/D - loans generate interest and trading generates commission.
What are some of the components of the margin agreement?
Credit which gives terms and interest
Hypothecation that the B/D pledges securities as collateral
Loan Consent is the permission to loan
What is Regulation T?
Customers must deposit a minimum of 50% of the market value of the securities within 5 business days.
What are marginable securities?
Securities that may be used as collateral.
A customer purchases 100 shares of ABC stock at 62 and writes a ABC 65 call for 3. What is margin deposit?
(100 * 62) = 6200 * 50% = 3100
3100 - 300 = 2800
If a customer has a cash account and wants to purchase $1000 worth of securities. How much margin must he first put in the account?
$0, cash accounts must be paid for in full
A customer wants to purchase an option spread on margin. How much must he deposit into the account?
The max loss or the net debit into the account.
What are some securities that are exempt?
T-bills, notes and bonds
Agency issues
Municipal securities
If a margin deposit would be less than $2000, how much would the customer have to deposit?
$2000 is the margin minimum for deposit. If it is less than that then the requirement is 100% of the purchase price.
What is the equation for margin accounting when you are long?
long market value - debit register = equity
A customer purchases 1000 shares of XYZ at 60 on margin and borrows the minimum. What is the equity?
lmv = 60,000 dr = 30,000 equity = 60,000 - 30,000 = $30,000
What is the minimum account maintenance for a margin account?
minimum account maintenance is 25% of LMV
If an account is in between the initial regulation T deposit requirement and the minimum account maintenance requirement, what is the account?
The account is restricted
What is the market value at maintenance? How do you calculate it?
The value at which you will get a margin call if it falls below, DR/.75
What is excess equity and SMA?
Excess equity is when a customer has equity above and beyond the regulation T requirement. SMA creates buying power in the account. SMA is like a HELOC. SMA is equal to the greater of excess equity or the SMA already in the account. Dividends get added to SMA, and a sale of stock, 50%, would go towards SMA.
How can SMA be used?
Customer can withdraw SMA from their account which would increase the debit balance and lower the equity. In buying stock with SMA the customer gets a 2:1 ratio. If there is $20k SMA in the account then can buy $40k worth of securities.
What are some characteristics when an account becomes restricted?
Can purchase additional shares up to 50%
Withdrawal of securities must have a cash deposit of 50% of the securities value.
If securities are sold then 50% of the proceeds are used towards the debit balance.
If securities are sold in a restricted account which of the following are affected: LMV, DR, EQ, SMA?
All but the EQ. Equity is only affected if the customer elects to remove half of the proceeds.
If a customer shorts a stock that is on margin, what happens if the stock were paying dividends?
Dividends are taken from the customers account and paid to the lender.
What is the equation for margin accounts when you are short?
credit register - short market value = equity
What are the requirements for margin when shorting a stock?
Minimum deposit of $2000
Reg. T, initial deposit of 50%
minimum maintenance requirement of 30%
A customer shorts 1000 shares of XYZ at $70. What is the equity in the account and the credit?
SMV = sales proceeds of 1000 * 70 = $70,000 Equity = 50% of $70,000 = $35,000 CR = SMV + Equity = $70k + $35k = $105,000
What is excess equity for short market value accounts?
Equity above Regulation T requirements of the current SMV
What is restricted for short market value accounts?
Equity is less than regulation T requirements and greater than or equal to minimum maintenance requirements
