Margin Account: Trivia Questions! Quiz

The current initial margin requirement under Regulation T is 50%. This means that investors are required to deposit at least 50% of the total value of the securities they wish to purchase on margin. The remaining 50% can be borrowed from the broker. This requirement is set by the Federal Reserve to ensure that investors have enough equity in their accounts to cover potential losses and to prevent excessive borrowing and speculation.

The short market value is not used for computation in a long margin account. A long margin account involves borrowing funds from a broker to purchase securities. The factors used for computation in a long margin account include the long market value (the value of securities held in the account), the debit balance (the amount borrowed), and the equity (the difference between the long market value and the debit balance). The short market value, on the other hand, is relevant in a short margin account, where an investor borrows securities to sell them with the expectation of buying them back at a lower price.

The customer would need to meet the Reg. T requirement of $2,500 since this is greater than the $2,000 required by industry rules.

The minimum maintenance requirement for a long-term margin position is 25%. This means that the investor must maintain at least 25% of the total value of the position in their account to avoid a margin call. A margin call occurs when the account falls below the minimum requirement, and the investor is required to deposit additional funds to bring it back up to the required level. A 25% maintenance requirement is common in margin trading and provides a buffer to protect against potential losses.

When the value of Mr. Green's securities declines from $20,000 to $16,000, it results in a decrease in his overall equity. Equity represents the net worth of an individual or company and is calculated by subtracting liabilities (in this case, the debit balance of $10,000) from assets (the value of securities). Therefore, when the value of the securities decreases, it directly affects the equity by reducing it.

The formula for combined equity is:

(LMV - DR) + (CR - SMV)

Both a and b. When the value of a stock in a long position decreases, it can cause the account to become restricted because the broker may impose certain restrictions on trading activities. Additionally, if the decrease in value causes the account's equity to fall below the Reg. T margin requirement, it will be considered undermargined and may face a margin call or liquidation. Therefore, both situations can occur as a result of a decrease in the stock's value.

Excess equity in a short account is created when the stock decreases in value. In a short sale, an investor borrows shares and sells them, anticipating that the stock price will decline. If the stock indeed decreases in value, the investor can repurchase the shares at a lower price, return them to the lender, and keep the difference as profit. This results in excess equity in the short account. If the stock increases in value or remains the same, the investor would incur losses and there would be no excess equity.

To calculate equity in a combined margin account, the formula is:

(LMV - DR) + (CR - SMV)

The FRB would require a deposit of $1,500 ($3,000 x 50%). However, this doesn't meet the overriding industry requirement of a minimum deposit of the lesser of $2,000 or the total purchase price.

The extension of credit by a broker-dealer to a customer is regulated by the Federal Reserve Board. The Federal Reserve Board is responsible for overseeing the regulation and supervision of banks and financial institutions, including broker-dealers. They establish rules and regulations to ensure the safety and soundness of the financial system, including the extension of credit by broker-dealers.

Excess equity refers to the surplus amount of equity in an account that exceeds the initial margin requirement. This means that the account has more equity than what is initially required to open or maintain a position. Having excess equity provides a buffer or cushion for the trader, allowing them to withstand potential losses or fluctuations in the market. It also gives them the flexibility to potentially take on additional positions or increase their trading activity.

Ms. Black sells short 1,000 shares of ABC at $20, generating proceeds of $20,000. A Reg. T call refers to the requirement by the Federal Reserve Board for an investor to deposit a certain amount of cash or marginable securities to cover the margin requirement. In this case, Ms. Black has two options to meet the Reg. T call. Option a suggests depositing $10,000 in cash, which would cover half of the proceeds generated. Option d suggests depositing $20,000 worth of marginable securities, which would cover the entire proceeds generated. Therefore, the correct answer is a and d.

Municipal bonds are subject to a margin requirement of 7% of the market value.

Regulation T applies to securities listed on a registered stock exchange and securities listed on Nasdaq. This means that individuals and institutions must comply with Regulation T when trading these types of securities. Municipal securities and U.S. Treasury securities are not covered by Regulation T. Therefore, the correct answer is b & c.

$24,000 x 50% = $12,000

Since the required equity is $12,500 ($50,000 x 25%), the customer would get a maintenance call for $2,500.

Industry rules would require a deposit of $1,800 since $2,000 would be great than the total purchase price, and the Reg. T requirement of $900 ($1,800 x 50%) would be insufficient.

The correct answer is "Both a and b." This means that both options a (1% for government securities with less than 1 year to maturity) and b (6% for government securities with 20 or more years to maturity) are correct. This implies that the initial and maintenance requirements for U.S. government obligations vary depending on the maturity of the securities. For securities with less than 1 year to maturity, the requirement is 1%, while for securities with 20 or more years to maturity, the requirement is 6%.

The credit balance would be the proceeds of the sale plus the required Regulation T deposit ($5,000 + $2,500 = $7,500)