Margin

Question 1

Long account equation

Answer 1

Current mkt value - debit balance = equity

CMV - DR = EQ

DR - amount loaned to customer

Question 2

Reg T

Answer 2

Determines the amount of EQ investor must deposit to pay for a security trade in a margin account

Usually 50%

Options are not marginable, must deposit full premium

Question 3

Difference between margin call and DR

Answer 3

Margin call is the equity or reserve requirement for margin whereas the DR represents the other side of reg t, the amount borrowed

Question 4

Impact of upward stock price movement on DR

Answer 4

None, you still borrowed the same amount

It’s the EQ that moves up

Question 5

SMA

Answer 5

Special memo acct

Represents the extra EQ you get when a stock price moves up

The difference btwn the new EQ positions - LESS THE NEW REG T REQUIREMENT OF THE NEW MKT VALUE

Can be withdrawn
Can be used to reduce margin when buying more stock

Can’t lose it till you use it
Cannot be used to lower the DR

Question 6

SMA buying power

Answer 6

SMA/reg t = buying power

, or the amount of securities the investor could buy w/o sending any more money

Question 7

Restricted acct

Answer 7

When stock price moves down on margin acct below the reg t requirement

Question 8

When must maintenance calls be met?

Answer 8

On demand (promptly not immediately) issued at the close of mkt, brokerage determines
No extensions are allowed

5 biz days after trade date

Question 9

Minimum maintenance

Answer 9

Minimum EQ = 25% of CMV

Question 10

Minimum CMV decline (long)

Answer 10

4 x DR/3

Question 11

Failure to meet maintenance call

Answer 11

The firm must sell out securities 4 times the amount of the call from the margin acct

Question 12

Impact of inflows or outflow on margin account

Answer 12

If money comes in DR decreases
If money goes out (or investor owes more money) DR increases

CMV-dr=EQ

Question 13

Minimum long margin deposit

Answer 13

2k

Or pay for the trade in full

Question 14

Day trading

When must disclosure stmt be sent?

Answer 14

Prior to the opening of non institutional accts

Requires principal approval

Question 15

Minimum equity requirement for day traders?

Answer 15

25k

Vs 2k for normal

Question 16

Nature of margin agreement

Answer 16

Document signed due to additional risk, must be done before any transactions

3 parts

1. Credit agreement - sets the terms of the loan
2. Hypothecation - b/d loans money to investor for purchase of securities on margin, held in street name
3. Loan consent - optional, allows firm to loan securities to a short seller

Question 17

Short accounts

Margin equation

Answer 17

CMV+EQ=CR

Now the customer is borrowing securities instead of cash

Reg t is still 50%

When CMV value changes CR stays the same, new SMA is the difference between the new EQ and the new reg t

Question 18

Maintenance requirement for short acct

Answer 18

30% of CMV

Vs 25% for long

Question 19

Reg U

Answer 19

Using securities as collateral to borrow money from the bank

Question 20

Reg G

Answer 20

Using securities to borrow money from another financial institution besides b/d or bank

Question 21

Reg X

Answer 21

Regulates foreign lenders of US investors who trade securities

Overseas lenders are still subject to Reg’s T U or G

Question 22

Margin required for options

Answer 22

100%

Options must be paid for in full

Question 23

Maximum CMV increase (short)

Answer 23

10xCR/13

Question 24

What can be used as collateral in a margin account

Answer 24

Bonds stocks mf

Not options