Exercise
Choose the best answer.
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. 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 balance is:
A. $20,000
B. $16,000
C. $0
D. $12,000
3. 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 the minimum maintenance requirement?
A. $2,500
B. $5,000
C. $10,000
D. Nothing
4. 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
5. Which of the following allows the broker-dealer to use the customer’s securities as collateral for its own borrowing?
A. loan consent agreement
B. credit agreement
C. hypothecation agreement
D. new customer account form
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 equal to twice that amount, or $20,000.
2. D. Before your firm takes action, the equity in the