Exercise

Answer the following questions.

1.Tim’s margin account has a long market value of $60,000 and a debit balance of $20,000. What is Tim’s buying power?

A.$0

B.$20,000

C.$30,000

D.$60,000

2.Suppose you have a margin account with equity in the account equal to 50% of long market value. How would a special memorandum account be affected if you buy $18,000 of marginable stock in an existing margin account and pay for the transaction in full?

A.SMA increases by $9,000.

B.SMA is unchanged.

C.SMA increases by $18,000.

D.SMA increases by $4,500.

3.The value of the securities in your customer’s margin account plummets until his long market value is $32,000 and debit balance is $28,000. Your client is not returning phone calls, and your firm is forced to sell securities in the account to bring it up to minimum maintenance. After doing so, the account’s debit value is:

A.$20,000

B.$16,000

C.$0

D.$12,000

4.In a new margin account, a customer deposits $15,000 in cash and immediately purchases stock worth $30,000. Over the next two weeks, the stock falls dramatically in price to where it is worth $20,000. How much cash must the customer deposit in order to meet its minimum maintenance requirement?

A.$2,500

B.$5,000

C.$10,000

D.Nothing

5.Jack owns 200 shares of ABC Corp @ $60, which he bought on margin. His account has a long market value of $12,000 and equity of $6,000. If ABC Corp declines over time, at what price will Jack receive a margin call?

A.$35

B.$40

C.$42

D.$50

Answers

1. B. In a margin account, buying power is twice an account’s excess equity. Excess equity is equity in excess of 50% of the LMV in a long margin account. For Tim, excess equity would be any equity he has in excess of $30,000 (1/2 of $60,000). With a debit balance of $20,000 and an LMV of $60,000, his equity is the difference: $40,000. This leaves him with excess equity of $10,000. Buying power is equa