Chapter 15 Practice Question Answers
1. Answer: B. A margin agreement generally contains three parts. A hypothecation agreement says that if a customer borrows money from the broker-dealer, then the broker-dealer may use securities in the customer’s account as collateral for the loan. In the event that the customer doesn’t pay off the loan, the hypothecated securities in the customer’s account may be sold by the broker-dealer to pay off the debt. A credit agreement sets terms and conditions, including the interest rate, to be charged for the borrowed funds. A loan consent agreement permits the broker-dealer to lend securities a customer may have bought on margin to other customers or broker-dealers, primarily for short-selling. Because such shares are already hypothecated (that is, used as collateral), this practice is known as rehypothecation.
2. Answer: A. The minimum maintenance margin for a long margin account is 25% of the long market value. This is the minimum amount of equity that the account holder must hold. Since equity declines as LMV shrinks, this is not a simple matter of multiplying LMV by 25%. However, the debit balance is constant throughout. The threshold LMV is found by dividing the debit balance by 75%. The debit balance is 50% of the original market value of the securities, or $90,000. Dividing $90,000 by 75% results in $120,000.
3. Answer: B. Debit register is another name for debit balance. This is the money a customer borrows from his broker for margin trading. These amounts are not affected by a change in the market price of the borrowed securities. Fluctuating prices do impact how the percentage of equity the deposited amount represents.
4. Answer: A. Whenever the funds in a margin account fall below the initial margin requirement, it becomes a restricted account. Customers may continue to buy additional stock with a restricted account if they deposit the required initial margin on each new purchase. Should funds drop b