Chapter 9: Margin Accounts Flashcards
If client removes SMA, what are the results…
- Equity is reduced for both long and short margin accounts 2. Debit balance (amount owed to brokerage) is increased for long margin accounts 3. Credit balance is decreased for short margin accounts
If a client has a debit balance, is it a long account or short account?
-Long account -Short accounts have a credit balance
If a client withdraws any excess equity, the debit balance ________ by the amount of the withdrawal
Increases
How does a margin account become restricted?
When the equity in the account is below the margin requirement
In a short margin account, the equity increases when the SMV of the security __________
Decreases
A margin loan consent form A. allows the broker-dealer to provide a loan to the customer B. allows the broker-dealer to loan a customer’s margined securities to other investors C. allows the broker-dealer to borrow money from a bank for margin accounts D. is required for both cash and margin accounts
B. allows the broker-dealer to loan a customer’s margined securities to other investors
In an initial transaction in a margin account, a customer purchases 100 shares of ABC at $18 per share. What is the margin call?
B. $1,800 Has to deposit the full amount if under $2,000
The deadline for meeting margin calls is A. on the trade date B. one business day after the trade date C. three business days after the trade date D. five business days after the trade date
D. five business days after the trade date
An investor opens a margin account by purchasing 1,000 shares of ABC at $15 per share and shorting 1,000 shares of DEF at $12 per share. What is the investor’s margin call as a result of these transactions?
- A. $1,500
- B. $3,000
- C. $13,500
- D. $27,000
C. $13,500
- 15k * 50% = $7,500
- 12k * 50% = $6,000
- $7,500 + $6,000 = $13,500
Client opens a margin account by purchasing 500 shares of ABC at $24 per share. The broker-dealer REG T requirement is 60% and the client deposits the full margin requirement. How much of this account can the broker dealer rehypothecate?
- A. $4,800
- B. $6,720
- C. $7,200
- D. $8,460
B. $6,720
The broker-dealer is allowed to rehypothecate (use as collateral) 140% of the debit balance.
- LVM - DR = EQ
- Reg T = 60%
- LMV = 500 * 24 = 12k
- Equity = LMV * 60% = $7,200
- $12,000 - $4,800 = $7,200
- $4,800 * 140% = $6,720
All of the following would reduce the debit balance in a long margin account EXCEPT
- A. cash deposits
- B. cash dividends
- C. stock dividends
- D. liquidation of stock held in the account
C. stock dividends
- Choices A, B, and C bring money into the margin account and thus would help bring down the debit balance.
- However, receiving a stock dividend doesn’t affect the overall value of the investment and doesn’t bring money into the account to help pay down the debit balance
Which of the following would increase the debit balance on a long margin account?
- I. interest charges
- II. withdrawing SMA
- III. an increase in the market value of the securities held
- IV. a decrease in the market value of the securities held
- A. I and II
- B. I, II, and III
- C. I, II, and IV
- D. I and III
A. I and II
- The debit balance is the amount of money borrowed from the broker dealer in long margin accounts.
- A change in the market value of the securities doesn’t change the amount borrowed, so statements III and IV are out. That leaves you with choice A.
- Brokers charge interest in the money borrowed so when that interest is charged its added to the debit balance.
- In addition, if an investor withdraws his SMA he’s borrowing more money from the account, and the debit balance would increase.
Client owns a short margin account with a short market value of $34,000, equity of $17,500, and a credit balance of $52,000. How high can the market value go before client receives a maintenance call?
- A. $36,000
- B. $38,000
- C. $40,000
- D. $42,000
C. $40,000
- When shorting securities, investors lose money when the price of the security increases.
- To determine how high the short market value of the securities can increase before the investor receives a maintenance call, use the following formula:
- Credit / 130%
- $52,000 / 1.3 = $40,000
An investor sells short 1,000 shares of ABC at $30. What is the credit balance?
- A. $15,000
- B. $30,000
- C. $45,000
- D. $60,000
C. $45,000
- SMV + EQ = CR
- $30,000 + $15,000 = $45,000
What is the minimum maintenance requirement for a short account with a current market value of $25,000?
- A. $6,250
- B. $7,500
- C. $10,000
- D. $12,500
B. $7,500
- Minimum maintenance on short accounts is 30% of the SMV:
- $25,000 * 30% = $7,500
One of your clients has a combined margin account with the following dollar figures:
- LMV = $30,000
- SMV = $25,000
- Debit = $18,000
- Credit = $40,000
- Long Account
- SMA = $1,500
- With Regulation T set at 50%, what is the combined equity in your client’s account?
- A. $25,500
- B. $27,000
- C. $28,500
- D. $30,000
B. $27,000
- LVM - DR = EQ
- $30,000 - $18,000 = X
- SMV + EQ = CR
- $25,000 + Y = $40,000
- X = $12,000
- Y = $15,000
- $12,000 + $15,000 = $27,000
An investor has a combined margin account with a long market value of $35,000 and a short market value of $28,000. The long market value increased to $38,000 and the short market value decreased to $26,000. What change occurs to the equity in the account?
- A. $1,000 increase in equity
- B. $1,000 decrease in equity
- C. $5,000 increase in equity
- D. $5,000 decrease in equity
C. $5,000 increase in equity
- When you purchase securities, you want the price to increase, and when you short securities you want the price to decrease.
- In this case, both things happened, which is great for the investor.
- A direct correlation exists between the market value of the stock and the equity (1 to 1).
- Therefore, because the long account went up by $3,000 and the short account went down by $2,000, the combined equity increased by $5,000
Which of the following regulations of the Federal Reserve Board regulates how much credit a bank can allow a customer for the purposes of purchasing securities on margin?
- A. Regulation T
- B. Regulation G
- C. Regulation U
- D. Regulation B
C. Regulation U
- The Federal Reserve Board regulation that covers bank loans to customers for the purchase of buying securities is Regulation U.
- Regulation T covers broker-dealer loans to customers.
Under Regulation T, what are the initial and maintenance requirements for long margin accounts?
- A. 50% initial and 25% maintenance
- B. 50% initial and 30% maintenance
- C. 75% initial and 25% maintenance
- D. 70% initial and 30% maintenance
A. 50% initial and 25% maintenance
Maintenance calls must be paid:
- A. on demand
- B. within 1 business day
- C. within 3 business days
- D. within 5 business days
A. on demand
- If a margin account falls below minimum maintenance (25% for a long account and 30% for short accounts), payment must be made right away.
- If the payment isn’t made the broker dealer has the right to sell securities in the account to bring it out of restricted status.
- The customer can deposit fully paid marginable securities or cash to meet the maintenance call.
A customer has a restricted long margin account. If the customer is purchasing new securities on margin and fails to pay for the new purchase, the broker dealer will sell stock worth
- A. the margin call
- B. twice the margin call
- C. three times the margin call
- D. securities cannot be purchased in restricted margin accounts
B. twice the margin call
- When an account is restricted, the equity in the account is below the Regulation T (50%) margin requirement.
- Investors can still purchase securities on margin when the account is restricted, but they must come up with 50% of the new purchase.
- If the investor fails to pay for the purchase, the broker dealer will sell stock out of the account worth 2 times the margin call.
The prohibited action of mixing a customer’s securities with the account of the broker dealer is called
- A. free riding
- B. hypothecation
- C. commingling
- D. conjoining
C. commingling
One of your clients opens a long margin account and fills out the required paperwork. Which of the following are TRUE regarding this account?
- I. the securities in the account will be held in street name
- II. your client will be required to pay interest on the debit balance
- III. a decrease in market value would lower the debit balance
- IV. a portion of the securities may be pledged as collateral for a loan
- A. II and III
- B. I and IV
- C. II, III, and IV
- D. I, II, and IV
D. I, II, and IV
- Margin accounts are always held in street name.
- Because the customer borrowed money from the broker dealer to purchase the securities, the customer would be required to pay interest on the money borrowed (the debit).
- In addition, a portion of the securities (140% of the debit) may be pledged as collateral for a bank loan by way of rehypothecation.
- However, a decrease in the market value of the securities doesn’t affect the debit balance.
You are opening a long margin account for a customer. You should inform him that he will have to sign
- I. a credit agreement
- II. a risk disclosure document
- III. a hypothecation agreement
- IV. a loan consent form
- A. I and II
- B. I, II, and IV
- C. I, III, and IV
- D. II, III, and IV
C. I, III, and IV
- Because of the additional risk taken in margin accounts, customers must sign a margin agreement before executing any trades.
- The margin agreement is broken down into the credit agreement, a hypothecation agreement, and a loan consent form.
- A risk disclosure document needs to be sent out prior to opening an options account