1
Q
If client removes SMA, what are the results…
A
- 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
2
Q
If a client has a debit balance, is it a long account or short account?
A
-Long account -Short accounts have a credit balance
3
Q
If a client withdraws any excess equity, the debit balance ________ by the amount of the withdrawal
A
Increases
4
Q
How does a margin account become restricted?
A
When the equity in the account is below the margin requirement
5
Q
In a short margin account, the equity increases when the SMV of the security __________
A
Decreases
6
Q
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
A
B. allows the broker-dealer to loan a customer’s margined securities to other investors
7
Q
In an initial transaction in a margin account, a customer purchases 100 shares of ABC at $18 per share. What is the margin call?
A
B. $1,800 Has to deposit the full amount if under $2,000
8
Q
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
A
D. five business days after the trade date
9
Q
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
A
C. $13,500
- 15k * 50% = $7,500
- 12k * 50% = $6,000
- $7,500 + $6,000 = $13,500
10
Q
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
A
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
11
Q
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
A
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
12
Q
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
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.
13
Q
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
A
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
14
Q
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
A
C. $45,000
- SMV + EQ = CR
- $30,000 + $15,000 = $45,000
15
Q
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
A
B. $7,500
- Minimum maintenance on short accounts is 30% of the SMV:
- $25,000 * 30% = $7,500
16
Q
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
A
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
17
Q
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
A
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
18
Q
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
A
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.
19
Q
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
A. 50% initial and 25% maintenance
20
Q
Maintenance calls must be paid:
- A. on demand
- B. within 1 business day
- C. within 3 business days
- D. within 5 business days
A
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.
21
Q
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
A
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.
22
Q
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
A
C. commingling
23
Q
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
A
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.
24
Q
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
A
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
25
Which of the following margin document discloses the interest rate to be charged on the debit balance?
* A. the credit agreement
* B. the hypothecation agreement
* C. the loan consent form
* D. the margin interest rate form
A. the credit agreement
* The credit agreement discloses the terms for borrowing, which includes the interest rate to be charged on the debit balance, the broker dealer's method of computation, and how and when interest rates may change.
* There is no such thing as a margin rate form.
26
Which of the following documents must be sent to a margin customer prior to the signing of the margin agreement?
* A. credit agreement
* B. hypothecation agreement
* C. loan consent form
* D. risk disclosure document
D. risk disclosure document
* The risk disclosure document covers some of the broker dealers rules and outlines the risks like "investors may lose more money than initially deposited."
27
Which of the following securities are exempt from the Reg T margin requirement?
* A. US Treasury bills
* B. municipal bonds
* C. US government agency securities
* D. all of the above
D. all of the above
* The margin requirement for these securities is much lower.
28
Which of the following securities can be purchased on margin by depositing the Reg T margin requirement?
* I. exchange listed stocks
* II. exchange listed bonds
* III. mutual funds
* IV. IPOs
* A. I and II
* B. III and IV
* C. I and III
* D. III only
A. I and II
* Securities that are marginable include stocks and bonds listed on an exchange, NASDAQ stocks, non-NASDAQ stocks approved by the Fed, and warrants.
* However, mutual funds and IPOs can't be purchased on margin because they are new issues.
* New issues can't be purchased on margin for at least 30 days.
* However, after you've held mutual fund shares for more than 30 days, they can be transferred to a margin account.
29
One of your clients wants to use the excess equity in his margin account and wants to know what will happen to his debit balance. You can inform him that his debit balance will
* A. increase
* B. decrease
* C. remain the same
* D. fluctuate
A. increase
* The excess equity (SMA) in a margin account is built into the equity.
* If your client removes equity from a margin account, he's borrowing more money from the account, and the debit balance (the amount owed to the broker dealer) will increase
30
The margin account of one of your customers is restricted. This means that
* I. the equity in her margin account has fallen below 50% of the long market value
* II. the equity in her margin account has fallen below 25% of the long market value
* III. she cannot borrow any additional money until the margin account is taken out of restricted status
* IV. she has 24 hours to deposit funds to bring it out of restricted status
* A. I only
* B. I, III, and IV
* C. II and III
* D. II, III, and IV
A. I only
* The only time she has to deposit immediately is if the account falls below the minimum maintenance (25% of LMV).
31
A client buys 1,000 shares of ABC common stock at $40 in a margin account. After the client meets the margin call, what is the debit balance?
* A. $16,000
* B. $20,000
* C. $24,000
* D. $30,000
B. $20,000
* LVM - DR = EQ
* $40,000 - Debit = $20,000 [$40,000 \* Reg T]
32
In a existing short margin account, a client sold short 1,000 shares of ABC common stock at $30. Prior to this transaction, the short market value of securities in the account was $52,000 and the equity was $25,000. What is the client's credit balance after the transaction?
* A. $15,000
* B. $45,000
* C. $77,000
* D. $122,000
D. $122,000
* This question is difficult because the transaction happened in an existing margin account.
* Prior to the transaction:
* Step 1:
* SMV + EQ = CR
* $52,000 + $25,000 = Credit
* Credit = $77,000
* Step 2:
* Then you need to determine what happened to it as a result of the new transaction.
* He shorted another $30,000 of stock so you need to enter that as SMV.
* You also have to enter how much he needs to pay or the equity, which is SMV \* 50%.
* SMV + EQ = CR
* $30,000 + $15,000 = Credit
* Credit = $45,000
* Step 3:
* Because the initial credit balance was $77,000 and it increased by $45,000, the credit balance after the transaction is $122,000.
33
A client purchased 1,000 shares of ABC on margin at $50 per share. If ABC is currently trading at $70 per share, what is the client's excess equity?
* A. $5,000
* B. $7,500
* C. $10,000
* D. $20,000
C. $10,000
* Step 1:
* LVM - DR = EQ
* $50,000 - Debit = $25,000
* Debit = $25,000
* Step 2:
* LVM - DR = EQ
* $70,000 - $25,000 = $45,000
* Step 3:
* Margin requirement = Reg T \* LMV
* Margin requirement = 50% \* $70,000 = $35,000
* Step 4:
* SMA = Equity - margin requirement
* SMA = $45,000 - $35,000
* Debit balance remains the same as the market price changes (D"R" = Remains)
34
A client sold short 1,000 shares of ABC on margin $60 per share. If ABC is currently trading at $50 per share, what is the client's excess equity?
* A. $5,000
* B. $7,500
* C. $10,000
* D. $15,000
D. $15,000
* Step 1:
* SMV + EQ = CR
* $60,000 + $30,000 = Credit
* Credit = $90,000
* Step 2:
* SMV + EQ = CR
* $50,000 + Equity = $90,000
* Equity = $40,000
* Step 3:
* Margin requirement = Reg T \* SMV
* Margin requirement = 50% \* $50,000 = $25,000
* Step 4:
* SMA = Equity - margin requirement
* SMA = $40,000 - $25,000 = $15,000
* The credit balance remains the same as the market price changes (C"R" = remains)
35
A client has a long margin account with a market value of $20,000, a debit balance of $5,000, an equity of $15,000, and an SMA of $3,000. If Reg T is set at 60%, what is the buying power?
* A. $3,000
* B. $5,000
* C. $6,000
* D. no buying power
* A. $5,000 The buying power of a margin account is how much in securities an investor can buy (or sell short) without depositing additional funds.
* Buying power = SMA / Reg T Buying power
* Buying power = $3,000 / 60%
* Buying power = $5,000
36
A client purchased 500 shares of ABC common stock on margin when ABC was trading at $30 per share. If ABC is currently trading at $25 per share, by how much is the client's margin account restricted?
* A. $1,250
* B. $2,500
* C. $5,000
* D. $6,250
A. $1,250
* Step 1:
* LVM - DR = EQ
* $15,000 - DR = $7,500
* DR = $7,500
* Step 2:
* LVM - DR = EQ
* $12,500 - $7,500 = EQ
* $5,000 = EQ
* Step 3:
* Margin requirement = Reg T \* LMV
* Margin requirement = 50% \* $12,500 = $6,250
* Step 4:
* Restriction = margin requirement - EQ
* Restriction = $6,250 - $5,000 = $1,250
37
A client sold short 400 shares of ABC stock on margin at $40 per share. If ABC is currently trading at $44 per share, how much is the account restricted?
* A. $2,400
* B. $6,400
* C. $8,800
* D. $16,000
A. $2,400
* Step 1:
* SMV + EQ = CR
* $16,000 + $8,000 = CR
* $24,000 = CR
* Step 2:
* SMV + EQ = CR
* $17,600 + EQ = $24,000
* EQ = $6,400
* Step 3:
* Margin requirement = Reg T \* SMV
* Margin requirement = 50% \* $17,600 = $8,800
* Step 4:
* Restriction = margin requirement - EQ
* Restriction = $8,800 - $6,400 = $2,400
38
A client purchased 1,000 shares of ABC common stock on margin account when ABC was trading at $55 per share. If ABC is currently trading at $35 per share, what is the maintenance call?
* A. $1,250
* B. $7,500
* C. $8.750
* D. $10,000
A. $1,250
* Step 1:
* LVM - DR = EQ
* $55,000 - DR = $27,500
* DR = $27,500
* Step 2:
* LVM - DR = EQ
* $35,000 - $27,500 = EQ
* EQ = $7,500
* Step 3:
* Maintenance equity = Minimum maintenance % \* LMV
* Maintenance equity = 25% \* $35,000 = $8,750
* Step 4:
* Maintenance call = $8,750 - $7,500 = $1,250
39
A client sold short 1,000 shares of ABC common stock on margin at $50 per share. If ABC is currently trading at $60 per share, what is the maintenance call?
* A. $0
* B. $2,000
* C. $3,000
* D. $8,000
C. $3,000
* Step 1:
* SMV + EQ = CR
* $50,000 + $25,000 = CR
* CR = $75,000
* Step 2:
* SMV + EQ = CR
* $60,000 - EQ = $75,000
* EQ = $15,000
* Step 3:
* Maintenance equity = Minimum maintenance % \* SMV
* Maintenance equity = 30% \* $60,000 = $18,000
* Step 4:
* Maintenance call = $8,750 - $7,500 = $1,250
* Maintenance call = $18,000 - $15,000 = $3,000
40
A client has an established margin account with a long market value of $20,300 and a debit balance of $7,500, with Reg T at 50%. What amount does the long market have to decrease below to trigger a maintenance call?
* A. $20,300
* B. $7,500
* C. $10,150
* D. $10,000
D. $10,000
* To calculate the long market value that would trigger a maintenance call, use the following formula:
* (4 \* DR) / 3
* (4 \* $7,500) / 3 = $10,000
41
According to the Investment Advisor's Act of 1940, which of the following are considered investment advisors?
* A. securities lawyers giving paid advice on investments?
* B. economics professors giving paid advice on investments
* C. registered reps giving paid advice on investments
* D. All of the above
C. registered reps giving paid advice on investments
* Lawyers, accountants, teachers, and engineers are not advisors unless they're offering advice outside of their job descriptions.
42
ABC declared a dividend of $0.40 payable to shareholders of record as of Thursday, September 14. What would happen to the opening price of ABC on Tuesday, September 12?
* A. it would be reduced by the amount of the dividend
* B. it would remain the same
* C. it would be increased by the amount of the dividend
* D. cannot be determined
A. it would be reduced by the amount of the dividend
* The ex dividend date (2 days before the record date) is the first day the stock trades without the dividend.
* The opening price on the ex dividend date is reduced by the amount of the dividend.
43
Which of the following orders are NOT held in a designated market maker's book?
* I. not held orders
* II. stop orders
* III. limit orders
* IV. market orders
* A, I and II
* B. II and III
* C. III and IV
* D. I and IV
D. I and IV
* The designated market maker's book keeps track of stop and limit orders.
* Market orders are for immediate execution at best price available and therefore are not placed in the book.
* Not held orders are held by the floor broker, who has discretion concerning the time and place at which the order will take place.
44
In an initial margin transaction, an investor purchases 100 shares of ABC at $24 per share. What is the margin call?
A. $1,200
B. $1,800
C. $2,000
D. $2,400
C. $2,000
* First time transaction requires Reg T 50% or $2,000, which ever is greater.
45
Which of the following orders are NOT held in a designated market maker's book?
* I. not held orders
* II. stop orders
* III. limit orders
* IV. market orders
* A, I and II
* B. II and III
* C. III and IV
* D. I and IV
D. I and IV
* The designated market maker's book keeps track of stop and limit orders.
* Market orders are for immediate execution at best price available and therefore are not placed in the book.
* Not held orders are held by the floor broker, who has discretion concerning the time and place at which the order will take place.
46
A client has a margin account with a market value of $30,000 and a debt balance of $12,000. If the client wants to purchase an additional $10,000 of stock in this account, what amount must he deposit?
* A. $2,000
* B. $3,000
* C. $5,000
* D. $10,000
* A. $2,000
* LMV - DR = EQ
* $30,000 - $12,000 = $18,000
* Reg T \* LMV = $15,000
* Excess equity (SMA) = $18,000 - $15,000 = $3,000
* $5,000 margin call - $3,000 excess equity = $2,000 to deposit
47
What is TRUE of a cross guarantee?
a. it allows the brokerage firm to lower the min maint requirement
b. it allows money to be transferred from another account if necessary
c. it is only available if he has a corporate account
d it would require the client to sign a recourse note
b. it allows money to be transferred from another account if necessary
margin cross guarantees allow excess margin to be transferred from one account to another if necessary; that is, if one falls below min maint
48
\_\_\_\_\_\_\_\_ is the amount of equity that a customer has in a margin account that is above the Reg T requirement.
Excess equity (SMA)
Dummies Series 7
flashcards
Decks in class (13)
# Cards
-
Manually Entered23
-
Chapter 5: Underwriting Securities26
-
Chapter 6: Stocks6
-
Chapter 7: Corporate and US Govt Bonds24
-
Chapter 8: Municipal Bonds21
-
Chapter 9: Margin Accounts48
-
Chapter 10: Packaged Securities13
-
Chapter 11: Direct Participation Programs27
-
Chapter 12: Options76
-
Chapter 13: Portfolio and Securities Analysis19
-
Chapter 14: Orders and Trades39
-
Chapter 15: Taxes10
-
Chapter 16: Rules and Regulations48
