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61 Cards in this Set

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The initial FRB margin requirement is 50%. A customer has a margin account with a market value of $20,000, a debit balance of $12,000 and equity of $8,000. If the customer was to sell $1,000 worth of stock, the amount of the adjusted increase in the SMA would be:
A $300
B $400
C $500
D $1,000
C
This account is restricted since the equity ($8,000) is less than the Reg T requirement of the account's market value ($20,000 x 50% = $10,000). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds times the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's SMA. The customer is then at liberty to borrow the credited amount. (13-13)
A customer is short 1,000 shares of ABC. If the current market price of ABC is $30 per share, what is the minimum maintenance requirement for equity in the account?
A $2,500
B $5,000
C $7,500
D $9,000
D
The minimum maintenance requirement for a short margin account is 30% of the short market value or $5.00 per share, whichever is greater. In this example, 30% of the short market value is equal to $9,000 ($30,000 x 30%). This is greater than $5.00 per share which would be $5,000 ($5 x 1,000 shares). (13-16)
A customer owns 20 ABC Corporation October 30 calls in a cash account. The customer exercises the calls and the same day sells the stock at $32. The customer will have to deposit into the account:
A $20,000
B $30,000
C $60,000
D No cash deposit is required
C
Since the option is exercised in a cash account, a deposit of cash is required even though the stock is sold on the same day. The client must deposit $60,000 (100 shares per contract x 20 contracts = 2,000 shares; 2,000 shares x 30 strike price). (13-13)
Which of the following will not affect the SMA in a long margin account?
A Cash dividends paid on securities in a margin account
B Cash deposited in the account to reduce the debit balance
C Stock dividends paid on securities held in the margin account
D Appreciation in market value of the securities in a margin account
C
Stock dividends paid on securities held in a margin account will not increase the SMA. The market value of the stock already in the account will be reduced by the amount of the stock dividend as the number of shares of the stock increases. The total dollar value will remain the same. All of the other choices will have an effect on the SMA. (13-8, 4-8)
A customer has a long margin account with the following securities in the account:
Stock Market Price Market Value Debit Balance
100 A Co. $30 $ 3,000 $8,400
100 B Co. $25 $ 2,500
200 C Co. $15 $ 3,000
100 D Co. $35 $ 3,500
$12,000
The minimum maintenance requirement for this account is:

A $2,000
B $2,200
C $3,000
D $5,000
C
The minimum maintenance requirement states that the equity must equal 25% of the market value of the securities in the account. This would equal $3,000 (25% of $12,000 = $3,000). (13-7)
A customer's margin account is as follows:
Long Market Value $45,000
Debit Balance $20,000
SMA $5,000
Credit Balance $15,000
Short Market Value $9,000

What is the total equity in this account?

A. $6,000
B. $25,000
C. $31,000
D. $36,000
C
The equity in the long margin account is $25,000 ($45,000 LMV - $20,000 DR). The equity in the short margin account is $6,000 ($15,000 CR - $9,000 SMV). The total equity is $31,000. SMA is not considered to be part of the equity. (13-19)
A customer has the following accounts with a brokerage firm:
Cash Account $20,000 securities (market value)
$10,000 cash
Long Margin Account $60,000 securities (market value)
$30,000 debit balance
$10,000 SMA
Short Margin Account $40,000 securities (market value)
$60,000 credit balance
The total amount of cash that can be withdrawn from all the accounts is:

A. $6,000
B. $15,000
C. $20,000
D. $40,000
C
The $10,000 in cash can be withdrawn from the cash account. The $10,000 SMA in the long margin position may also be withdrawn for a total of $20,000. The short margin position does not have any SMA. Therefore, in this example, nothing can be withdrawn from that position. (13-8)
A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest?
a. 0
b. $5,000
c. $15,000
d. $20,000
C
Customers are charged interest on the average daily amount of the debit balance in their account. (13-2, 13-6)
When securities are sold in a restricted margin account:
I. The debit balance is decreased
II. The SMA is increased
III. The equity is increased
IV. The market value of the account is decreased
a. I and II only
b. I and III only
c. II and III only
d. I, II, and IV only
D
When securities are sold in a restricted account, 100% of the sale proceeds will be used by the broker-dealer to reduce the customer's debit balance and the broker-dealer will, in turn, credit the customer's SMA for an amount equal to the Reg T requirement (50%) multiplied by the sale proceeds. The market value of the account will be reduced since securities have been sold. (13-13)
Which TWO of the following statements are TRUE regarding the maintenance requirements for selling short stock that is trading at less than $5 per share?
I. The maintenance requirement for shorting a stock at $2.00 per share is 100% of the market value.
II. The maintenance requirement for shorting a stock at $2.00 per share is $2.50 per share.
III. The maintenance requirement for shorting a stock at $4.00 per share is 100% of the market value.
IV. The maintenance requirement for shorting a stock at $4.00 per share is $2.50 per share.
a. I and III
b. I and IV
c. II and III
d. II and IV
C
The industry maintenance requirement when shorting stock that is trading at less than $5.00 per share, is the greater of $2.50 per share or 100% of the market value. When shorting stocks less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value. (13-16)
A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000.
The equity in the account is:
a. $6,000
b. $7,000
c. $8,000
d. $14,000
B
The equity in a long margin account equals market value minus debit balance. The equity equals $7,000 ($15,000 - $8,000). SMA does not enter into the calculation of equity. (13-6)
A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000.
If the customer sold $1,000 of securities in the account, what amount could the customer withdraw after the sale?
a. None
b. $1,000
c. $1,500
d. $2,000
C
This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds times the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500. (13-13)
How much may be withdrawn from a Special Memorandum Account?
a. 2 times the SMA
b. 3 times the SMA
c. 25% of the SMA
d. 100% of the SMA
D
The full amount of cash or 100% of the SMA may be withdrawn. (13-8).
When may a new issue become marginable?
a. 3 days from the effective date
b. 5 days from the effective date
c. 30 days from the effective date
d. 40 days from the effective date
C
When approved for margin trading by the FRB, a new issue would become marginable 30 days from the effective date of the offering. (13-1)
If a cash dividend is paid, how does it affect a margin account?
a. SMA is decreased.
b. Debit balance is reduced.
c. Market value is increased.
d. Equity is reduced.
B
When a cash dividend is paid, the debit balance is reduced by the amount of the dividend. The SMA is also increased by the amount of the dividend. The market value changes due to fluctuations in the price of the security. (13-8)
An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense can the investor use as a deduction for federal income tax purposes?
a. None
b. $5,000
c. $10,000
d. $12,000
A
The investor cannot use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities cannot be used as an interest expense deduction for federal income tax purposes. The investor is already getting the benefit of tax-free interest income from the municipal bond and the IRS will therefore not allow the interest expense to be deducted as well. (13-2).
Which TWO of the following are TRUE regarding the hypothecation agreement in a margin account?
I. The broker-dealer pledges 100% of the debit balance in stock to the bank.
II. The broker-dealer pledges 140% of the debit balance in stock to the bank.
III. The bank loans 100% of the debit balance to the broker-dealer.
IV. The bank loans 140% of the debit balance to the broker-dealer.
a. I and III
b. I and IV
c. II and III
d. II and IV
C
In the hypothecation agreement, the customer pledges the stock to the broker- dealer as collateral for a loan. The broker-dealer then pledges (rehypothecates) an amount of the customer's stock equal to 140% of the debit balance to collateralize the loan from the bank. The bank will loan the entire debit balance (100%) to the broker-dealer, who will loan the same dollar amount to the customer. (13-2)
The market value of a margin account is $12,000. The debit balance is $6,000. A cash dividend of $100 is credited to the account. What is the new debit balance?
a. $5,900
b. $5,950
c. $6,000
d. $6,100
A
When a cash dividend is paid, it reduces the debit balance. The entire cash dividend of $100 will be allocated to reduce the debit balance of $6,000. The new debit balance equals $5,900. (13-8)
Which of the following formulae would be used to determine the total equity in a combined margin account?
a. LMV + DR - CR - SMV
b. LMV - DR + SMV - CR
c. LMV + CR - DR - SMV
d. LMV - CR - DR + SMV
C

To find the equity in a combined margin account, take the long market value (LMV) plus the credit balance (CR), then subtract the debit balance (DR) and the short market value (SMV). (13-19)
An investor establishes a short margin account and sells 1,000 shares of ABC short at 30. The value of the securities declines and SMA is created. All of the following would affect SMA EXCEPT:
a. The value of the securities continues to decrease
b. The value of the securities increases
c. Cash is withdrawn from the account
d. Using the selling power of the account
B
An increase in the market value of securities would not affect the SMA in a short account since, once created, SMA is reduced only if used. The decrease in the market value of the securities would increase SMA since equity would increase, creating additional excess equity. The withdrawal of cash and the selling short of additional securities in the account would reduce the SMA since the SMA would be used. (13-15, 13-18)
Regulation T applies to:
I. Cash accounts
II. Margin accounts
III. Commodity accounts
IV. Municipal bond margin accounts
a. I and II only
b. II and III only
c. II and IV only
d. I, II, III, and IV
A
Regulation T of the Federal Reserve Board applies to cash accounts and margin accounts. Regulation T does not apply to commodity accounts or municipal bond margin accounts. For municipal bond accounts, industry rules require a margin deposit of 7% of the market value of the bond. Margin requirements for commodity accounts are set by the individual commodity exchanges. (13-1)
A customer has a restricted margin account with a debit balance of $7,500. The account is credited with $1,600 in dividends and debited with interest charges of $50. The debit balance after the adjustments is:
a. $5,900
b. $5,950
c. $6,000
d. $6,050
B
The debit balance is reduced from $7,500 to $5,900 when the dividends of $1,600 are credited to the account ($7,500 - $1,600 = $5,900). Adding interest charges of $50 to the debit balance results in a final debit balance after adjustments of $5,950 ($5,900 + $50 interest charges = $5,950). (13-8)
Which of the following transactions would require a customer to be considered a pattern day trader?
a. 3 day trades executed in one week
b. 3 day trades executed in one day
c. 4 day trades executed in one week
d. 10 day trades executed in one month
C
A customer is considered a pattern day trader if 4 or more day trades are executed over any 5-business-day period. The minimum equity required for a pattern day trader is $25,000. (13-3)
A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is:
a. $5,000
b. $10,000
c. $15,000
d. $20,000
C
The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is equal to $15,000. (13-14)
The FRB initial margin requirement is 50%. A customer opening a new margin account with the purchase of 100 shares of XYZ at $15 per share would have to deposit:
a. $375
b. $750
c. $1,500
d. $2,000
C
Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase. (13-6)
When a sale takes place in a long margin account, which of the following occurs?
I. The market value of the account will be reduced.
II. The equity of the account will be increased.
III. The loan value of the account will be reduced.
IV. The debit balance will be reduced.
a. I and II only
b. II and IV only
c. I, III, and IV only
d. II, III, and IV only
C
The sale of securities in a long margin account would not cause the equity in the account to increase. The market value and the loan value of the securities will be reduced. The debit balance (indebtedness) of the account is reduced by the same amount as the market value and the equity will remain the same. (13-13)
A customer purchases $10,000 of stock on margin. Before depositing the required amount, the stock rises to a market value of $12,000. How much will the customer be required to deposit?
a. $4,000
b. $5,000
c. $6,000
d. $7,000
B
Regulation T requires 50% of the purchase price to be deposited by the customer within two business days after the settlement date of the transaction. Any market price change during this time period would not affect the amount of the deposit. It would be $5,000 (50% of the purchase price of $10,000). (13-1)
How many days would have to pass before a member of a syndicate can extend credit for a customer on a security that was part of a new issue?
a. 30 days
b. 60 days
c. 90 days
d. 120 days
A
According to the Securities Exchange Act of 1934, 30 days must pass before a member of a syndicate can extend credit for a customer on a new issue. (13-1)
A customer sold short 1,000 shares of XYZ Corporation that is presently selling at $2 per share. Industry rules require a minimum maintenance margin of:
a. $0.33 per share
b. $2.00 per share
c. $2.50 per share
d. $2,000
C
When a stock that has been sold short has a market value of less than $5, industry rules require a minimum maintenance margin of $2.50 per share or 100% of the value of the securities, whichever is greater. In this example, $2.50 per share is greater and the customer would have to deposit $2,500 into the account to meet the requirement. (13-16)
A customer makes an initial purchase of 100 shares of XYZ on the NYSE at $30 per share. The Federal Reserve margin requirement according to Regulation T is 50%. The customer will have to deposit:
a. $1,500
b. $2,000
c. $2,500
d. $3,000
B
Industry rules require minimum equity in a margin account of $2,000, unless the securities are paid in full. If the customer already had an account with enough equity in it, the call would be for $1,500 (50% of $3,000). However, the question states that it is an initial purchase and we must assume that this is a new margin account. Therefore, $2,000 must be deposited. (13-6)
A customer's combined long and short margin account appears as shown below:
Long Market Value = $30,000
Short Market Value = $18,000
Debit Balance = $ 8,000
Credit Balance = $15,000
What is the customer's combined equity?
a. $15,000
b. $19,000
c. $22,000
d. $35,000
B
The equity in a combined long and short margin account equals the long market value ($30,000) plus the credit balance ($15,000) minus the debit balance ($8,000) minus the short market value ($18,000). (13-19)
Margin requirements established by the FRB can be:
a. Increased by broker-dealers in the form of in-house rules
b. Decreased by broker-dealers in the form of in-house rules
c. Disregarded by institutional investors
d. Replaced by SRO rules
A
Margin requirements established by the FRB can be increased by broker-dealers in the form of in-house rules. FRB rules apply to both retail and institutional investors and may not be replaced by SRO rules. (13-6)
The Federal Reserve Board was given the authority to set margin requirements according to the provisions of the:
a. Securities Act of 1933
b. Securities Exchange Act of 1934
c. Securities Investors Protection Act of 1970
d. Investment Company Act of 1940
B
The Securities Exchange Act of 1934 gave the Federal Reserve Board the power to set margin requirements. This is done through Regulation T (for broker-dealers) and Regulation U (for banks and lenders other than broker-dealers). (13-1)
Mr. Jones, a client of XYZ brokerage firm, buys $12,000 of stock and on the same day sells short $10,000 of another stock. The Regulation T margin requirement is 50%.
The Regulation T margin call will be:
a. $2,000
b. $6,000
c. $7,200
d. $11,000
D
The client made two separate transactions that would each require a margin deposit. At a 50% margin requirement, the long purchase of $12,000 would require a cash deposit of $6,000 (50% of $12,000 = $6,000). The short sale of $10,000 would require a cash deposit of $5,000 (50% of $10,000 = $5,000). A total margin call of $11,000 must be met ($6,000 + $5,000 = $11,000). It is important to note that in this example there are two separate transactions. A margin call for each is necessary. This differs from other margin questions where there is a same-day substitution in a restricted margin account and offsetting transactions are made. (13-13)
Mr. Jones, a client of XYZ brokerage firm, buys $12,000 of stock and on the same day sells short $10,000 of another stock. The Regulation T margin requirement is 50%.
What would be the minimum maintenance requirement for this account?
a. $500
b. $5,500
c. $6,000
d. $6,600
C
The minimum maintenance requirement is $6,000. For a long account, the equity must equal 25% of the market value to satisfy the minimum maintenance requirement. This equals $3,000 (25% of $12,000 = $3,000). For the short account, the equity must equal 30% of the market value to satisfy the minimum maintenance requirement. This equals $3,000 (30% of $10,000 = $3,000). A total of $6,000 ($3,000 for the long account + $3,000 for the short account = $6,000) is required. (13-7, 13-16)
A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%.
How much cash can the customer withdraw from the account?
a. 0
b. $10,000
c. $17,000
d. $23,000
A
The long account is restricted because the equity of $10,000 is less than the initial FRB requirement ($30,000 market value times 50% FRB requirement equals $15,000 required equity). There is no excess equity in the short account since the equity of $3,000 ($10,000 credit balance minus $7,000 market value) is less than the FRB requirement of $3,500 (50% of $7,000 market value). (13-8, 13-13)
A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%.
What is the minimum equity requirement for the short position?
a. 0
b. $2,100
c. $9,000
d. $11,000
B
The SRO minimum maintenance requirement for a short position is 30% of the market value. The market value is $7,000 and 30% of $7,000 would equal $2,100. (13-16)
Mr. Green, a new client, decides to short 100 shares of TANDY at $18 per share. What is the initial margin requirement for this trade?
a. $2.50 per share
b. 30% of current market value
c. $1,800
d. $2,000
D
Industry rules require a minimum deposit of $2,000 on a short sale when it is the initial transaction in the account. For a purchase, the initial requirement is $2,000 or 100% of the purchase price, whichever is less. (13-15)
A client sells short 100 shares at 15 in his existing margin account. The FRB requirement is 50%. How much will he need to deposit?
a. $450
b. $750
c. $1,500
d. $2,000
B
The FRB requirement is 50%, which is the same for purchases as it is for short sales. Therefore, the required deposit would be $750 (50% x $1,500). Since this trade is executed in an existing account, the only requirement is the FRB's. If this had been the initial trade in the account, the required deposit under industry rules would be $2,000. (13-14)
If a customer is short 1,000 shares of RST stock, the customer:
a. Must cover the position within six months
b. Can use a buy stop order to limit losses if the stock advanced
c. May use the entire credit balance in the account to buy more stock
d. Is entitled to receive dividends and vote at the annual meeting
B
A short position will be profitable if the market price of the security decreases. If the stock increases, the investor will have a loss. A buy stop order is placed above the market. If executed, stock will be purchased which will prevent further loss. There is no limit to the length of time that a short position may remain open. A portion of the short credit balance must always remain in the account to be eventually used to cover the short position. An investor who is short the stock does not receive dividends or have the right to vote. (13-14, 11-24)
A customer purchases $15,000 in convertible bonds (15 bonds at $1,000 par). The Federal Reserve Board margin requirement is 50% and the customer deposits $7,500.
If the bonds increase in value to 108 ($16,200), how much excess equity would the customer have in the account?
a. $300
b. $600
c. $1,200
d. $8,700
B
If the bonds increase in value to $16,200, the equity in the account would be $8,700 (market value of $16,200 - $7,500 debit balance). The initial FRB requirement on $16,200 market value is $8,100 (50% x $16,200). Since there is $8,700 of equity, there would be $600 of excess ($8,700 equity - $8,100 requirement). (13-7)
A customer has a restricted margin account. The customer sells $7,000 worth of securities and on the same day buys $5,000 worth of other securities. The Regulation T margin requirement is 50%. The customer:
a. Can withdraw cash equal to the margin requirement on the net amount
b. Cannot withdraw anything because the account is restricted
c. Can withdraw the entire $2,000 net amount
d. Can withdraw 50% of $7,000
A
When a customer buys and sells securities in a restricted margin account on the same day, it is called a same-day substitution and the transactions are netted against each other. In this question, the sale of $7,000 and the purchase of $5,000 result in a net sale of $2,000. The entire amount will be used to reduce the customer's debit balance and the customer's SMA will be credited with an amount equal to the net sale proceeds times the Reg T requirement ($2,000 x 50% = $1,000). If desired, the customer can then borrow this amount. (13-13)
A customer's margin account is as follows:
Long Market Value $25,000 MNO
$11,000 XYZ
Debit Balance $20,000
SMA $ 800
The customer sells $3,000 of stock in the account. What will the value of the SMA be after the sale?
a. $800
b. $1,500
c. $2,300
d. $3,800
C
This account is restricted since the equity ($16,000) is less than the Reg T requirement of the account's market value ($36,000 x 50% = $18,000). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds times the Reg T requirement of 50%. In this question, the sale of $3,000 worth of stock will be used to reduce the customer's debit balance to $17,000 and the SMA will be credited by $1,500 ($3,000 sale x 50% Reg T). This will bring the SMA up to $2,300 ($800 + $1,500). (13-13)
Compared to selling a stock short, buying a put option:
a. Requires a smaller capital commitment
b. Has a lower loss potential
c. Is not subject to Regulation SHO
d. All of the above
D
Short selling requires the deposit of margin, while the premium of a put is usually substantially less than the Regulation T margin requirement. On a short sale, the seller's maximum loss or risk is unlimited, while in a put purchase, the risk is limited to the premium. A short sale is subject to Regulation SHO (locate requirements), a put option is not. (13-14, 14-15)
A customer has a margin account with a market value of $20,000 and a debit balance of $12,000. The FRB margin requirement is 50%. On Monday, March 2nd, the customer buys $10,000 worth of new stock and sells $8,000 worth of stock.
How much money will the customer have to deposit as a result of the two trades?
a. $1,000
b. $1,500
c. $2,400
d. $3,200
A
The customer made a same-day substitution in a restricted account. The purchase of $10,000 was $2,000 more than the sale of $8,000. $2,000 would be considered a new purchase. This would require a cash deposit of 50% of the $2,000 new purchase or $1,000 (50% of $2,000 = $1,000). (13-13)
An investor sells short 1,000 shares of JonCo stock at 3.50. The customer must deposit:
a. $1,750
b. $2,000
c. $2,500
d. $3,500
D
The required equity for a short sale where the stock is less than $5 per share is the greater of $2.50 per share or 100% of the market value. An investor selling 1,000 shares of JonCo stock short must deposit $3,500 because the market value (1,000 shares x $3.50) is greater than $2.50 per share (1,000 shares x $2.50). (13-16)
To compute equity in both a short and long margin account, the formula would be:
a. The long market value plus the credit balance minus the short market value minus the debit balance
b. The long market value minus the credit balance minus the short market value minus the debit balance
c. The long market value plus the debit balance minus the short market value minus the credit balance
d. The long market value plus the credit balance plus the debit balance minus the short market value
A
The long market value plus the credit balance minus the short market value minus the debit balance equals the equity in both a long and short margin account. (13-19)
An investor has sold a stock short. If the present market value is $2.00 per share, the minimum maintenance requirement would be:
a. 50%
b. $2.50 per share
c. $2.00 per share
d. 30%
B
When selling short securities that have a market value less than $5 per share, a minimum maintenance requirement of $2.50 per share or 100% of the market value, whichever is greater, applies. Since $2.50 a share is greater than $2.00 per share, this is the correct answer. (13-16)
Calculate the SMA for the following margin account:
Long Account Short Account
$150,000 Market Value $45,000 Market Value
$50,000 Debit Balance $75,000 Credit Balance
a. $7,500
b. $25,000
c. $32,500
d. $130,000
C
The formula for calculating SMA is:
Actual equity - Reg T Requirement = SMA
• The equity in the long account is $100,000 ($150,000 LMV
- $50,000 DR).
• The Reg T requirement for the long account is $75,000 ($150,000 LMV x 50%).
• The SMA for the long account is $25,000 ($100,000 Actual equity - $75,000 Reg T requirement).
• The equity in the short account is $30,000 ($75,000 CR
- $45,000 SMV).
• The Reg T requirement for the short account is $22,500 ($45,000 SMV x 50%).
• The SMA for the short account is $7,500 ($30,000 Actual equity - $22,500 Reg T requirement).
The combined SMA is, therefore, $32,500 ($25,000 Long SMA + $7,500 Short SMA). (13-8, 13-19)
Mr. Blue's margin account has a market value of $20,000 and a debit balance of $9,000.
If Mr. Blue purchases $2,000 of options, he would have to deposit:
a. 0
b. $1,000
c. $2,000
d. $3,000
B
The margin requirement when purchasing options is 100% of the purchase price (premium). Since the purchase price of the options is $2,000, Mr. Blue may use the $1,000 SMA and would be required to deposit an additional $1,000. The SMA is found by subtracting the required equity, $10,000 ($20,000 x 50%) from the current equity in the account ($11,000). (13-20, 16-5)
A customer opens a margin account and signs the basic customer agreement which consists of a credit agreement, loan consent agreement, and hypothecation agreement. If the customer's first order is to buy 100 shares of XYZ stock at a price of 36, the customer:
a. May take delivery of all of the shares that are purchased
b. Will pledge stock in order to receive a loan to buy the stock
c. Will be obligated to pay interest on a debit balance of $1,800
d. Will only allow the brokerage firm to lend some of the stock to other customers on a case-by-case basis
B
Securities in a margin account would always be held at the brokerage firm in street name to allow the firm to liquidate shares if necessary. Under the hypothecation agreement, the customer pledges securities as collateral for the loan. The loan consent agreement permits the firm to lend the securities to other customers or other broker-dealers. The credit agreement establishes the customer's responsibility to pay interest on the debit balance. Since the initial trade was for $3,600, industry rules require that the customer must deposit at least $2,000 and may borrow up to $1,600. (13-2, 13-6)
A customer's margin account has a long market value of $30,000 and a debit balance of $12,000. FRB initial margin requirement is 50%.
What is the purchasing power in the account?
a. 0
b. $3,000
c. $6,000
d. $18,000
C
The account has $18,000 equity which is $3,000 more than the FRB initial requirement of $15,000 ($30,000 market value x 50% requirement). This excess equity is journaled to SMA and creates buying (purchasing) power of $6,000 (2 x SMA). (13-9)
A customer's margin account has a current market value of $10,000, debit balance of $8,000, and SMA of $1,000. The customer could meet a maintenance call with:
a. $100 cash
b. $500 SMA
c. $500 cash
d. $1,000 SMA
C
A long margin account must maintain an equity equal to 25% of the market value. The account is $500 below the minimum ($2,500 required minus $2,000 equity). Using SMA will increase the debit balance and therefore reduce equity. (13-7)
The initial transaction in a margin account is a short sale of 100 shares of stock at $17.50 a share. The customer would be requested to deposit:
a. 0
b. $875
c. $1,750
d. $2,000
D
If the initial transaction in a margin account is a short sale, industry rules require a minimum equity (deposit) of $2,000. For a purchase, the minimum equity requirement is the lesser of $2,000 or 100% of the purchase price. (13-14)
All of the following would be needed to open a new discretionary margin account EXCEPT a:
a. New account form
b. Basic customer agreement
c. Trust Agreement
d. Power of attorney
C
A new account form, basic customer agreement, and power of attorneywould be needed to open a new discretionary account. The basic customer agreement includes the hypothecation, loan consent, and credit agreements. A trust agreement is needed to open a trust account. (13-2, 2-10)
An investor shorts a stock at $6 per share. What is the minimum maintenance requirement for this position?
a. $1.80 per share
b. $2.50 per share
c. $3.00 per share
d. $5.00 per share
D
The minimum maintenance requirement for a stock sold short at $5 per share or above is $5 per share or 30% of the market value, whichever is greater. (13-16)
A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. The client's maintenance requirement is:
a. $4,400
b. $4,600
c. $11,500
d. $13,200
B
If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. This is an industry rule, not a Regulation T requirement. Each bond is convertible into 50 shares (the par value of $1,000 divided by the conversion price of $20). The client may convert the 40 bonds into a total of 2,000 shares (50 shares x 40 bonds), which is equal to the number of shares the client is short. The maintenance requirement is equal to 10% of the long position, which is equal to $4,600 ($1,150 x 40 bonds x 10%). (13-20)
An investor shorts a stock at $6 per share. What is the minimum maintenance requirement for this position?
a. $1.80 per share
b. $2.50 per share
c. $3.00 per share
d. $5.00 per share
D
The minimum maintenance requirement for a stock sold short at $5 per share or above is $5 per share or 30% of the market value, whichever is greater. (13-16)
A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. The client's maintenance requirement is:
a. $4,400
b. $4,600
c. $11,500
d. $13,200
B
If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. This is an industry rule, not a Regulation T requirement. Each bond is convertible into 50 shares (the par value of $1,000 divided by the conversion price of $20). The client may convert the 40 bonds into a total of 2,000 shares (50 shares x 40 bonds), which is equal to the number of shares the client is short. The maintenance requirement is equal to 10% of the long position, which is equal to $4,600 ($1,150 x 40 bonds x 10%). (13-20)
A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 2,000 shares of EXA at $24 . The client's maintenance requirement is:
a. $2,200
b. $2,400
c. $11,500
d. $13,200
B
If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. 5% of $48,000 (2,000 shares x $24) equals $2,400. (13-20)
A client is long and short 1,000 shares of the same security. If the current market value is $80,000, the client is permitted to borrow up to:
a. $4,000
b. $20,000
c. $40,000
d. $76,000
D
If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000); therefore, the client is permitted to borrow 95% of $80,000 or $76,000. (13-20)