Customer Accounts - Long Margin Accounts

A customer has a short margin account that shows: Credit Balance:$90,000Short Market Value:$60,000Equity:$30,000 Interest on the account is charged on a balance of: A 0 B $30,000 C $60,000 D $90,000

A. Because there is no debit balance (loan amount) in a short margin account, there is no monthly interest charge. If the shares are difficult for the firm to borrow, there could be an interest charge on a stock loan, but there is no mention of this in the question. Review

Calls for minimum maintenance margin must be met: A promptly B no later than 5 business days after the call date C no later than 7 business days after the call date D no later than 10 business days after the call date

A. Calls for minimum maintenance margin must be met "promptly." If the call is not met by the date specified in the notice, then the firm must sell securities from the account in an amount necessary to bring the account back to the 25% minimum margin percentage.

Long Margin Account Market Value: $200,000Debit Balance: $80,000 If the customer buys $20,000 of listed stocks and sells $16,000 of listed stocks on the same day, the customer must deposit: A 0 B $1,000 C $2,000 D $4,000

A. Margin is computed on net purchases for the day. The customer purchased $20,000 of stock and sold $16,000 of stock, for a net purchase of $4,000. To buy $4,000 of stock, the customer must deposit $2,000 of cash. Since the customer has $20,000 of SMA available, no cash need be deposited in this account. The SMA is computed as follows: The customer can borrow 50% of the $200,000 securities position = $100,000 that can be borrowed. Since the customer has already borrowed $80,000, another $20,000 is available to be borrowed from SMA.

Short Positions: 100 ABC @ $60 200 XYZ @ $50 Credit = $40,000 SMA = $16,000 Reg. T = 50% What is the minimum maintenance margin requirement? A $4,000 B $4,800 C $7,200 D $12,000

B. Minimum maintenance margin for a short account is 30% of the market value. 30% of $16,000 = $4,800. This account currently has equity of $24,000 (Credit - Short Market Value), so it is well above the minimum requirement.

Short Positions: 100 ABC @ $60200 XYZ @ $50Credit = $40,000SMA = $16,000Reg. T = 50% What is the minimum maintenance margin requirement? A $4,000 B $4,800 C $7,200 D $12,000

B. Minimum maintenance margin for a short account is 30% of the market value. 30% of $16,000 = $4,800. This account currently has equity of $24,000 (Credit - Short Market Value), so it is well above the minimum requirement.

A customer margin account shows the following: 100 shares ABC Common @ $50200 shares PDQ Common @ $80100 shares XYZ Common @ $20Debit Balance: $14,000SMA: $2,200 The minimum maintenance margin requirement is: A $2,000 B $5,750 C $6,900 D $11,500

B. Minimum maintenance margin in a long account is 25% of market value. 25% of $23,000 = $5,750 minimum maintenance margin. Since the account has $9,000 of equity, it is well above the minimum.

A customer sells short 200 shares of ABC stock in a margin account. ABC declares a 5% stock dividend. How many shares must be purchased to close out the short position? A 190 B 200 C 210 D 250

C. Because the shares that were sold have been "borrowed," they must be replaced. The former owner (lender) of the shares has no idea that they are gone. The lender has received dividends on the stock because the short seller has paid them to him. The lender will also receive the stock dividend he deserves because the short seller pays this to him as well. The short seller must deliver a total of 200 x 1.05 = 210 shares to cover when he or she buys in the position.

A customer has a long margin account with $12,000 of stock and a $6,000 debit balance. Below which market value will the account receive a maintenance call? A $10,000 B $9,000 C $8,000 D $6,000

C. Long margin accounts have a minimum equity requirement of 25% of market value. Since the debit balance remains fixed for purposes of exam computations, at maintenance, the debit is equal to 75% of market value, with equity being equal to 25%. To find the market value at which the account is at maintenance, the formula is: Debit Balance/0.75 = Market Value at Maintenance $6,000.75= $8,000 Market Value If the market value declines to $8,000, the account is at maintenance. With $8,000 of market value, and a $6,000 debit, equity will be $2,000.

As compared to a cash account, margin accounts have: A greater volatility B less volatility C greater leverage D less leverage

C. Margin accounts have greater leverage than cash accounts because a portion of the purchase price is borrowed. For example: Deposit $10,000 to buy $10,000 of stock in a cash account. If the market value increases 20% to $12,000, the change in equity is $2,000. The percentage return on cash invested is $2,000 / $10,000 = 20%; or Deposit $10,000 to buy $20,000 of stock in a margin account. If the market value increases 20% to $24,000, the change in equity is $4,000. The percentage return on cash invested is $4,000 / $10,000 = 40%. Note that the price volatility of the security in this example was the same; the greater leverage in a margin account gave a greater percentage return on cash invested.

On the same day in a margin account, a customer sells short 100 shares of ABC at $40 and buys 1 ABC Jan 40 Call @ $2. The customer's transactions on this day will generate a margin call of: A $1,800 B $2,000 C $2,200 D $4,000

C. To short the stock requires 50% margin. 50% of $4,000 equals $2,000 to meet the Regulation T requirement. To buy the call requires the deposit of 100% of the premium or $200. Thus, the total Regulation T requirement is $2,200.

Which of the following does NOT affect SMA in a long margin account? A purchase of securities B sale of securities C increase in market value D decrease in market value

D

A customer has a long margin account that shows the following: Long Market Value: $15,000Debit Balance: $ 5,000 If the market value declines by $5,000, the debit balance will be what percentage of the equity in the account? A 25% B 50% C 75% D 100%

D. This account originally shows: Long Market Value Debit Balance Equity$15,000 $5,000 $10,000 If the market value declines by $5,000, the account now shows:Long Market Value Debit Balance Equity$10,000 $5,000 $5,000 The debit balance of $5,000 is exactly the same as the $5,000 of equity in the account.