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Flashcards in A - Margin Deck (40):
1

In the account below, how much excess equity (SMA) is in the account?

Stock Price Value Debit Balance
200 EGG $30 $6,000 $10,000
200 Apple Computer $25 $5,000
200 Coors Beer $15 $3,000
200 U.S. Steel $35 $7,000
Total value $21,000 $10,000


A. $0
B. $500
C. $1,000
D. $2,000

Incorrect! The correct answer is: B. $500

$500. SMA, or excess equity, is the equity that is in excess of the required amount, as determined by using the present market value times the Reg T requirement. First, calculate the actual equity in the account by taking the total current market value of $21,000 - $10,000 debit balance = $11,000 in actual equity. Second, calculate the amount of required equity in the account by multiplying the current market value of $21,000 by Reg T 50% = $10,500 in required equity. Finally, simply take the actual equity in the account, $11,000, and subtract the required equity of $10,500 ($11,000 - $10,500), which equals $500 in excess equity or SMA. [Module 10, Margin, Section 4.3]

2

A broker/dealer monitors all margin accounts daily. The firms will mark-to-the-market the accounts for which two of the following reasons?

I. To calculate the market value at the end of the day to see if there is a margin call
II. To calculate when the account would have a margin call
III. To calculate new amounts of SMA in the accounts
IV. To calculate new debit and credit balances at the end of the day

A. I and II
B. I and III
C. II and IV
D. III and IV

Incorrect! The correct answer is: B. I and III

I and III. Marking accounts to the market is done to insure that there are no margin calls as well as to make sure the account has the appropriate amount of SMA. The debit and credit balances stay the same unless a purchase or sale is made, so marking to the market is not used for finding the debit and credit balance. Marking to the market is seeing what the account value is, not where the account value would have to be to have a margin call. Marking to the market determines the margin call, not when the account will receive a margin call. [Module 10, Margin, Section 7.0]

3

A customer has a margin account with a market value of $120,000 and a debit balance of $70,000. The FRB margin requirement is 50%. What is the minimum maintenance requirement for the account?

A. $25,000
B. $30,000
C. $60,000
D. $70,000

Correct Answer: B. $30,000

$30,000. To determine the minimum maintenance, calculate 25% of the market value at its present value. In this case, $120,000 market value x 25% = $30,000 in minimum maintenance. The minimum maintenance requirement for the account is $30,000. The FRB margin requirement of 50% is only applicable on an initial transaction, not for subsequent maintenance. [Module 10, Margin, Section 4.4]

4

A customer has an existing margin account with a long market value of $90,000 and a debit balance of $40,000. At what point in market value will the investor have a maintenance call?

A. $22,500
B. $27,000
C. $30,000
D. $53,300

Incorrect! The correct answer is: D. $53,300

$53,300. The question is asking at what point the investor would have a maintenance margin call. Since the debit balance is given, divide the debit balance by 75%, or in this case, $40,000 divided by 75% = $53,333, rounded-off to $53,300. Of course, the easy way is to pick the only answer that is between the market value and the debit balance. All of the other answers are below the debit balance, and the broker/dealer will never allow the market value of the stock get below the amount the customer owes. [Module 10, Margin, Section 4.5]

5

A customer has a margin account with a market value of $30,000 and a debit balance of $16,000. There is currently no SMA in the account. If the customer were to sell $4,000 worth of stock from the account, how much would the SMA increase?

A. $0
B. $500
C. $2,000
D. $4,000

Correct Answer: C. $2,000

$2,000. In a restricted margin account, if a customer sells some of the stock in the account, the broker/dealer will retain 50% of the proceeds and deposit the remaining 50% into the investor's SMA. A restricted account happens when the equity in an account is below the margin requirement of Reg T. In this case, the equity in the account is $1,000 below 50% of market value. With a $4,000 sale, 50% goes to the broker/dealer and 50% could go to the investor. For the test, assume the investor leaves all $4,000 with the broker/dealer to lower his debit balance (and pay fewer interest costs), so the 50% he could have withdrawn is credited to his SMA: 50% x $4,000 is $2,000. [Module 10, Margin, Section 4.3]

6

A customer's margin account appears as follows:

Market Value Balance
Long account $32,000 $16,000 Dr
Short account $10,000 $18,000 Cr

What is the amount of equity in the account?


A. $8,000
B. $16,000
C. $24,000
D. $42,000

Correct Answer: C. $24,000

$24,000. To determine the equity in this account, the long account has a market value of $32,000 and a debit balance of $16,000; therefore, the long account has $16,000 in equity. The short account has a market value of $10,000 and a credit balance of $18,000, leaving $8,000 in equity. $16,000 long account equity + $8,000 short account equity = $24,000 of total equity. [Module 10, Margin, Section 4.0]

7

Using the information below, how much excess equity (SMA) is in the account?

200 shares EGG -- Current market price $40
200 shares Exxon -- Current market price $50
200 shares Teledyne -- Current market price $80
Debit balance = $12,000

A. $4,000
B. $5,000
C. $17,000
D. $22,000

Incorrect! The correct answer is: B. $5,000

$5,000. SMA, or excess equity, is the equity that is in excess of the required amount, as determined by using the present market value times the Reg T requirement. First, calculate the actual equity in the account by adding up the market values to arrive at a current market value of $34,000 - $12,000 debit balance = $22,000 in actual equity. Second, calculate the amount of required equity in the account by multiplying the current market value of $34,000 by Reg T 50% = $17,000 in required equity. Finally, simply take the actual equity in the account, $22,000, and subtract the required equity of $17,000 ($22,000 - $17,000), which equals $5,000 in excess equity or SMA. [Module 10, Margin, Section 4.3]

8

Dr. Clarke, a client of the brokerage firm Yahoo Securities, buys $12,000 of stock and, on the same day, sells short $10,000 of another stock. The Reg T margin requirement is 50%. The member firm will issue a margin call for:

A. $1,000
B. $2,000
C. $6,000
D. $11,000

Correct Answer: D. $11,000

$11,000. These are both opening transactions and, therefore, have separate requirements. The customer must bring in money in accordance with the Reg T initial margin requirement. For the long purchase ($12,000 x 50%), Dr. Clarke must bring in $6,000. For the short sale ($10,000 x 50%), she must bring in $5,000. $6,000 required for the long purchase + $5,000 required for the short sale = $11,000. The member firm will issue a margin call for $11,000. [Module 10, Margin, Section 8.0]

9

Using the information below, at what point in market value will the investor have a maintenance margin call?

200 shares EGG -- Current market price $40
200 shares Exxon -- Current market price $50
200 shares Teledyne -- Current market price $80
Debit balance = $12,000

A. $8,500
B. $10,200
C. $12,000
D. $16,000

Incorrect! The correct answer is: D. $16,000

$16,000. A maintenance call is put out when the market value drops, causing the equity to be less than 25% of that market value. To calculate this, divide the debit balance by 75%, or $12,000 divided by 75% = $16,000. So the market value would have to drop all the way from its current level of $34,000 to $16,000 before the investor will receive a maintenance margin call. Also, it is the only answer that is between the market value and the debit balance. The broker/dealer will never allow the market value of the stock to go below the amount the customer owes. [Module 10, Margin, Section 4.4]

10

A customer receives a $100 cash dividend in a restricted margin account. The customer can withdraw the $100:

A. Immediately
B. After 35 days
C. After 65 days
D. After 95 days

Incorrect! The correct answer is: A. Immediately

Immediately. Customers can withdraw any dividend credited to their account any time it is put into the account. If the customer does not withdraw the amount of the dividend, the amount decreases the debit balance and the customer will have that much added to his or her SMA. [Module 10, Margin, Section 4.3]

11

Using the information below, what is the minimum maintenance in the account below?

200 shares EGG -- Current market price $40
200 shares Exxon -- Current market price $50
200 shares Teledyne -- Current market price $80
Debit balance = $12,000

A. $8,500
B. $10,200
C. $12,000
D. $16,000

Incorrect! The correct answer is: A. $8,500

$8,500. To determine the minimum maintenance, calculate 25% of the market value at its present value. In this case, $34,000 market value x 25% = $8,500 in minimum maintenance. [Module 10, Margin, Section 4.4]

12

A customer has a long margin account with the following securities in the account. Assume that there is a 50% Federal Reserve Board (FRB) initial margin requirement. The minimum maintenance requirement for the account below is:

Stock Price Value Debit Balance
200 EGG $30 $6,000 $10,000
200 Apple Computer $25 $5,000
200 Coors Beer $15 $3,000
200 U.S. Steel $35 $7,000
Total value $21,000 $10,000


A. $5,250
B. $6,300
C. $10,000
D. $13,330

Correct Answer: A. $5,250

$5,250. To find this, take 25% of the market value. The minimum maintenance of equity that must be kept in the account, according to the NYSE and FINRA, is 25%. Forget the initial margin requirement, since this is not relevant to the question being asked. 25% x $21,000 market value = $5,250 minimum maintenance required. [Module 10, Margin, Section 4.4]

13

What is the minimum maintenance of an account that has a market value of $100,000 and a debit balance of $30,000?

A. $23,000
B. $25,000
C. $30,000
D. $40,000

Incorrect! The correct answer is: B. $25,000

$25,000. To determine the minimum maintenance, calculate 25% of the market value at its present value. In this case, $100,000 market value x 25% = $25,000 in minimum maintenance. [Module 10, Margin, Section 4.4]

14

Which of the following will not cause an increase in the SMA for a long 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

Incorrect! The correct answer is: C. Stock dividends paid on securities held in the margin account

Correct answer (false statement): Stock dividends paid on securities held in the margin account. Stock dividends do not increase SMA. The person has received stock, and the existing stock in the account is reduced in price by the amount of the stock dividend. With the new stock, the total value remains the same. When cash is deposited into an account for purposes other than to meet a margin call, the SMA line of credit is raised and any appreciation in a long account always increases the SMA. [Module 10, Margin, Section 4.3]

15

Your customer has a margin account with the following values:

Market Value Balance SMA
Margin account $40,000 $15,000 Dr

The customer tells you to buy $11,000 of ABC call options. How much money must the customer deposit?


A. $0
B. $5,000
C. $6,000
D. $11,000

Correct Answer: C. $6,000

$6,000. When purchasing calls, the investor must pay the whole amount of the premium. However, the customer may use SMA in their margin account. This account has a 40,000 market value and a $15,000 debit balance, thus leaving $25,000 equity. To find the SMA, find 50% of the market value of $40,000 = $20,000 and deduct that from the equity to find the SMA: $25,000 - 20,000 = 5,000 SMA. This can be used to purchase the options: $11,000 - 5,000 SMA = $6,000 must be deposited. [Module 10, Margin, Sections 4.3 & 6.0]

16

A new customer makes a purchase of 1,000 shares of Apple at $9 per share. The customer will receive a margin call for:

A. $4,500
B. $5,000
C. $9,000
D. The purchase cannot be made.

Correct Answer: A. $4,500

$4,500. This is not a maintenance margin call, but rather a Reg T margin call. A Reg T call is the amount that is required for an initial transaction. In this case, the customer purchases 1,000 shares at $9, or $9,000. Therefore, the customer has to remit 50% of the purchase price, or $4,500. [Module 10, Margin, Section 4.1]

17

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

Incorrect! The correct answer is: B. $5,950

$5,950. Regardless of whether a margin account is restricted or not, the dividends are credited to the debit balance (and to the SMA). Therefore, $7,500 debit balance - $1,600 in dividends = $5,900 debit balance. But, don't forget -- you are told the account is debited $50 in interest charges -- add this $50 back to the debit balance ($5,900 + $50), which equals $5,950. [Module 10, Margin, Section 4.3]

18

A customer purchases 1,000 shares of EGG at $30 per share, depositing $15,000 in the account. If EGG increased in value to $40 per share, how much excess equity (SMA) would the customer have in the account (the Reg T requirement is 50%)?

A. $1,000
B. $2,500
C. $3,500
D. $5,000

Incorrect! The correct answer is: D. $5,000

$5,000. To determine this, set up the account as follows:

MV = Dr + E
$30,000 $15,000 $15,000
$40,000 $15,000 $25,000
The market value is now $40,000 because 1,000 shares x $40 is $40,000. The debit balance never changes unless money is brought in or taken out, so the equity must increase (to $25,000). Calculate Reg T of $40,000 (50% the amount required to be in equity), which is $20,000 ($40,000 x 50%) and subtract from the actual equity of $25,000 ($25,000 - $20,000). This gives $5,000, which is the excess equity in the account, or as it is more commonly called, the SMA.

[Module 10, Margin, Section 4.3]

19

Karen Miller, a client of the brokerage firm Yahoo Securities, has the following in her margin account:
Market Value Equity
Margin account $1,600 $1,600

She purchases 100 shares of APP, a marginable Pink Sheet stock at $10 per share. What is the amount she will have to deposit to the account?


A. $400
B. $800
C. $1,600
D. $2,000

Incorrect! The correct answer is: A. $400

$400. Since the account already has $1,600 in equity in the account, she only needs to bring the equity up to $2,000. Since the stock is marginable, she can borrow the rest. She will deposit $400 and borrow the remaining $600 of the purchase. [Module 10, Margin, Section 8.0]

20

A customer has a long margin account with a market value of $100,000 and a debit balance of $30,000. What is the SMA in the account?

A. $10,000
B. $20,000
C. $70,000
D. $100,000

Incorrect! The correct answer is: B. $20,000

$20,000. To find the SMA, first calculate the required equity, which is 50% of the present market value ($100,000), or $50,000. Second, determine the amount of equity currently in the account, which is $100,000 - $30,000 = $70,000. Now subtract the required equity of $50,000 from the current equity of $70,000 ($70,000 - $50,000) = $20,000 SMA. [Module 10, Margin, Section 4.3]

21

A customer has a short margin account with a market value of $80,000 and a credit balance of $130,000. In this account, what is the minimum maintenance with the market value at its present value?

A. $20,000
B. $24,000
C. $100,000
D. $174,000

Incorrect! The correct answer is: B. $24,000

$24,000. To determine the minimum maintenance for this short margin account, calculate 30% of the short market value at its present value. In this case, $80,000 short market value x 30% = $24,000 in minimum maintenance. [Module 10, Margin, Section 5.2]

22

A sale of securities in a long margin account affects all of the following, except:

A. The market value of the account will be reduced.
B. The equity of the account will be increased.
C. 50% of the proceeds of the sale can be added to the SMA.
D. The debit balance will be reduced.

Correct Answer: B. The equity of the account will be increased.

Correct answer (false statement): The equity of the account will be increased. The equity in a long margin account either decreases or stays the same when securities are sold from the account. There is no way that the equity can increase. The market value drops and the debit balance drops by the amount of the proceeds of the sale, so the equity cannot increase. The customer could withdraw up to 50% of the proceeds from the sale in cash. However, any amount withdrawn in cash from the proceeds from the sale would not be added to SMA. For the test, remember that the equity never changes, and SMA always increases with the sale of stock. [Module 10, Margin, Section 4.3]

23

A customer has the following accounts with a brokerage firm:

Market Value Balance SMA
Margin account $90,000 $40,000 Dr $5,000
Short account $40,000 $30,000 Cr

The FRB margin requirement is 50%. The total equity of all the accounts is:


A. $65,000
B. $60,000
C. $40,000
D. $45,000

Incorrect! The correct answer is: C. $40,000

$40,000. This is an unusual case, in that the credit balance in the short account is less than the market value. Technically, this cannot happen -- in a short account the stock is sold, thereby having money deposited to the account, and then the customer has to bring in 50% of the short sale. However, the customer can use the SMA in the long account to meet that margin call (using most of the SMA in the account). In this case, the customer did not bring in any cash. Now the stock has gone up and the equity has gone into a negative equity. The long account has $50,000 equity and the short account is in the red $10,000, which leaves $40,000 equity in the account. This covers the required amount for the combined account, $90,000 x 25% = $22,500 and $40,000 x 30% = $12,000. Total minimum maintenance is $34,500 ($22,500 + $12,000), which is amply covered by the $40,000 equity in the account. [Module 10, Margin, Section 5.2]

24

A customer has a short margin account with a market value of $80,000 and a credit balance of $130,000. How much excess equity (SMA) is in the account?

A. $5,000
B. $10,000
C. $20,000
D. $50,000

Incorrect! The correct answer is: B. $10,000

$10,000. Always calculate SMA the same way. First, determine the Reg T requirement of the present market value: $80,000 market value x 50% Reg T = $40,000 required equity. Now calculate the current equity in the account by subtracting the market value from the credit balance: $130,000 credit balance - $80,000 market value = $50,000 of actual equity in the account. Then, subtract the Reg T required amount of equity from the actual equity in the account: $50,000 actual equity - $40,000 required equity = $10,000 of excess equity or SMA. [Module 10, Margin, Section 5.1]

25

A customer has a short margin account with a $120,000 market value and a credit balance of $200,000. What is the SMA in the account?

A. $10,000
B. $20,000
C. $40,000
D. $60,000

Incorrect! The correct answer is: B. $20,000

$20,000. Always calculate SMA the same way. First, determine the Reg T requirement of the present market value: $120,000 market value x 50% Reg T = $60,000 required equity. Now calculate the current equity in the account by subtracting the market value from the credit balance: $200,000 credit balance - $120,000 market value = $80,000 of actual equity in the account. Then subtract the Reg T required amount of equity from the actual equity in the account: $80,000 actual equity - $60,000 required equity = $20,000 of excess equity or SMA. [Module 10, Margin, Section 5.1]

26

A customer has an existing margin account with a long market value of $67,000 and a debit balance of $40,000. How much equity is in the account at the present time?

A. $0
B. $40,000
C. $27,000
D. $67,000

Incorrect! The correct answer is: C. $27,000

$27,000. This is the equity in the account. In a long margin account, the basic formula is:

LMV = Dr + E.

In this case, market value is $67,000 and the Dr is $40,000. The difference is $27,000, which is the equity in the account.

[Module 10, Margin, Section 4.1]

27

A customer has a long margin account with a long market value of $180,000 and a debit balance of $70,000. At what point of market value would this account have a maintenance margin call?

A. $45,000
B. $54,000
C. $70,000
D. $94,000

Incorrect! The correct answer is: D. $94,000

$94,000. A maintenance call is put out when the market value drops and causes the equity to drop below 25% of that market value. To calculate this, divide the debit balance by 75%: $70,000 divided by 75% = $93,333. Therefore, the market value would have to drop all the way from its current level of $180,000 to $93,333 before the investor would receive a maintenance margin call. This is the only logical choice since the market value is declining and no broker would allow the market value to become less than the debit balance of $70,000. The closest available alternative to $93,333, rounded off, is $94,000. It is not unheard of to not have an answer selection that is correct to the dollar amount on an exam question. When this occurs, after verifying your calculations, always select the answer closest to the correct figure. [Module 10, Margin, Section 4.4]

28

A customer has a short margin account with a short market value of $110,000 and a credit balance of $190,000. At what point in market value will the broker/dealer issue a maintenance margin call to the customer?

A. $27,500
B. $33,000
C. $146,200
D. $253,300

Correct Answer: C. $146,200

$146,200. The question is asking at what point the investor would have a maintenance margin call. Since the credit balance is given, divide the credit balance by 130%, or in this case, $190,000 divided by 130% = $146,154, rounded-off to $146,200. Of course, the easy way is to pick the only answer that is between the market value and the credit balance. Remember, the broker/dealer will never let the market value equal or exceed the credit balance. [Module 10, Margin, Sections 5.3]

29

A customer has the following values in her margin account:

Market Value Equity
Long account $900 $900

She purchases 100 shares of NANS at $20 per share. What is her margin call? (Reg T is 50%.)


A. $1,000
B. $1,100
C. $2,000
D. $4,000

Correct Answer: B. $1,100

$1,100. Even though the question is asking for the margin call and gives the Reg T percentage, the customer cannot borrow any money until the equity is $2,000. Since the present equity is $900, she needs to bring in sufficient cash to bring her equity up to $2,000: $2,000 - $900 = $1,100, the minimum that she must deposit. [Module 10, Margin, Section 4.3]

30

A customer has a short margin account with a market value of $80,000 and a credit balance of $130,000. At what market value is there a maintenance margin call?

A. $20,000
B. $24,000
C. $100,000
D. $174,000

Correct Answer: C. $100,000

$100,000. To determine the point of the maintenance call for a short margin account, divide the credit balance by 130%: $130,000 divided by 130% = $100,000. Another way to look at this is to remember that a customer loses money in a short account when the market value rises. So, any answers indicating that the market value has declined would not result in a maintenance margin call. That eliminates $20,000 and $24,000 as answer choices. For the $174,000 answer choice, no broker/dealer would allow the value of the stock to be more than the amount of money available to pay for it. [Module 10, Margin, Section 5.3]

31

The debit balance in a restricted margin account is increased by all of the following, except:

A. The purchase of additional securities
B. Interest charges debited to the account
C. Withdrawal of securities after depositing cash equal to the retention requirement
D. The withdrawal of SMA

Correct Answer: C. Withdrawal of securities after depositing cash equal to the retention requirement

Correct answer (false statement): Withdrawal of securities after depositing cash equal to the retention requirement. When new purchases are made, more money is borrowed, so the debit balance increases. Interest charges are added to the debit balance, thus raising it. If a person deposits an amount of money equal to the retention requirement of stocks that are removed (sold), the debit balance will decrease, not increase. The retention requirement of 50% is the amount that must be kept by the broker in a sale of securities in a restricted account. The withdrawal of the SMA will also increase the debit balance because it is a loan to the customer by the broker/dealer with the securities in the account as collateral. Any loans by a broker/dealer will increase the debit balance in a customer's account. [Module 10, Margin, Section 4.1]

32

As far as the excess equity (SMA) in an account is concerned, a customer could do which of the following?

A. Withdraw the entire amount of the excess
B. Withdraw two times the excess
C. Withdraw three times the excess
D. Not allowed to withdraw the excess

Incorrect! The correct answer is: A. Withdraw the entire amount of the excess

Withdraw the entire amount of the excess. If the withdrawal would cause a margin call, the customer could not withdraw any money out of the account. Unless it is indicated that a withdrawal of SMA would result in a margin call, always assume that the investor could withdraw the entire amount. [Module 10, Margin, Sections 4.3 & 4.4]

33

A customer has a long margin account with a long market value of $180,000 and a debit balance of $70,000. What is the minimum maintenance of the account at its present market value?

A. $35,000
B. $45,000
C. $54,000
D. $90,000

Incorrect! The correct answer is: B. $45,000

$45,000. To determine the minimum maintenance in a long margin account, calculate 25% of the market value at its present value. In this case, $180,000 market value x 25% = $45,000 in minimum maintenance.

[Module 10, Margin, Section 4.4]

34

A customer has the following accounts with a brokerage firm:

Market Value Balance SMA
Margin account $60,000 $30,000 Dr $10,000
Short account $40,000 $60,000 Cr

The FRB margin requirement is 50%. The total equity of all the accounts is:


A. $50,000
B. $60,000
C. $70,000
D. $80,000

Incorrect! The correct answer is: A. $50,000

$50,000. To calculate the total equity, add the following:

Margin account: $60,000 - $30,000 = $30,000 equity
Short account: $60,000 - $40,000 = $20,000 equity
Total equity: = $50,000
To calculate the total, add $30,000 + $20,000, which equals $50,000.

In a long margin account, equity equals the market value minus the debit balance. In a short account, equity equals the credit balance minus the market value.

[Module 10, Margin, Sections 4.1 & 5.1]

35

An investor has the following account:

Market Value Balance SMA
Long account $90,000 $50,000 Dr $30,000
What is the buying power of this account at its present position?


A. $15,000
B. $30,000
C. $60,000
D. $100,000

Correct Answer: C. $60,000

$60,000. At its present position, the buying power of this account is $60,000. Remember that buying power is twice the amount of money or SMA, as long as the account does not go into a minimum maintenance call. Therefore, first double the SMA: $30,000 x 2 = $60,000. Then check to see if the amount of equity meets the minimum maintenance for the account after adding the $60,000 to the present$ 90,000 market value:

MV = $90,000 + $60,000 = $150,000 x 25% = $37,500 the new minimum maintenance requirement
Original: $90,000 = $50,000 + $40,000
With an additional $60,000 purchase and using all of the SMA, the account would now be:

$150,000 = $110,000 + $40,000
Since this $40,000 is greater than the minimum maintenance requirement of $37,500, the present buying power of this account is $60,000.

[Module 10, Margin, Section 4.1 ]

36

A customer has the following accounts with a brokerage firm:

Market Value Balance SMA
Cash account $20,000 $10,000 Cr
Margin account $60,000 $30,000 Dr $10,000
Short account $40,000 $60,000 Cr

Without selling any securities held, how much cash can be withdrawn from the above accounts?


A. $6,000
B. $15,000
C. $20,000
D. $40,000

Correct Answer: C. $20,000

$20,000. The total amount of cash that can be withdrawn is the cash in the cash account and the SMA -- as long as it does not put the account into a margin call. Remember -- cash is represented as a credit balance in a cash account. In this case, the withdrawal of the $10,000 in SMA does not result in a margin call. So $10,000 SMA + $10,000 cash = $20,000 that can be withdrawn. [Module 10, Margin, Sections 4.3 & 4.4]

37

A customer has an existing short margin account. She has three different stocks with a market value of $70,000 and a credit balance of $150,000. What is the minimum maintenance for the account?

A. $17,500
B. $115,000
C. $21,000
D. $200,000

Correct Answer: C. $21,000

$21,000. This is a short margin account. Don't be misled by the information indicating there are three different stocks. To find the minimum maintenance in a short account, multiply the market value times 30%; or, calculate it the easy way by multiplying the first number by 3. Either way, 7 x 3 = 21, and the only answer with 21 is $21,000. [Module 10, Margin, Section 5.2]

38

A customer has received a Reg T margin call. She can meet the call by depositing which of the following into her account?

I. Listed stock whose market value equals the amount of the call
II. Cash equal to the amount of the call
III. Unlisted marginable stock with a loan value equal to the call
IV. 50% of the cash amount of the call

A. I and II only
B. II and III only
C. I, II, and III only
D. I, II, III, and IV

Incorrect! The correct answer is: B. II and III only

II and III only. Cash and any marginable stock that have a loan value equal to the call are needed for the call. Regarding listed stock whose market value equals the amount of the call, the amount the broker/dealer can lend is considerably less (namely the loan value). This would not be enough to meet the margin call. Additionally, when a margin call is received, the entire dollar amount must be deposited, not 50% of the amount of the call. [Module 10, Margin, Section 8.0]

39

A customer has a margin account with the following:

Market Value Debit Balance
$100,000 $65,000

The stock decreases to $80,000. What is her maintenance margin call?


A. $2,500
B. $5,000
C. $10,000
D. $25,000

Correct Answer: B. $5,000

$5,000. The market value has dropped, requiring the customer to have a maintenance margin call. Do not mix this question up with finding "when" the customer will have a maintenance margin call. This is actually asking for the AMOUNT of the margin call, since the market has dropped so low that the equity is below the minimum maintenance. In this case, with the market value at $80,000, the account needs to have a minimum of $20,000 in equity: $80,000 x .25 = $20,000.

MV = Dr + E
$100,000 = $65,000 + $35,000
$80,000 = $65,000 + $15,000
The account has only $15,000, so the customer must bring in $5,000 or the B/D will start selling shares of stock to meet the margin call.

[Module 10, Margin, Sections 4.3 & 8.0]

40

When securities are sold in a restricted margin account:

I. The debit balance is decreased.
II. The SMA account is increased.
III. The equity is decreased.
IV. The market value of the account is decreased.

A. I only
B. I and IV only
C. II, III, and IV only
D. I, II, and IV only

Incorrect! The correct answer is: D. I, II, and IV only

I, II, and IV only. Test questions assume that customers will leave the proceeds in their account when securities are sold. Therefore, equity does not decrease when a customer sells some of the securities in a long margin account. When securities are sold in a margin account, whether it is restricted or not, the market value and the debit balance always decrease. The debit balance always decreases because part of the sale has to go to the broker/dealer. The SMA may or may not increase depending on whether the investor withdraws some of the proceeds of the sale or leaves the entire proceeds with the broker/dealer. The test always assumes that investors leave the money with the broker/dealer. Therefore, on the exam, when securities are sold in a margin account, whether it is restricted or not, the result is an increase in SMA while the equity stays the same. [Module 10, Margin, Section 4.3]