Question 1

The initial Federal Reserve Bank margin requirement is set at 60% and Bubba purchases 100 shares of XYZ at $100 per share. He deposits $6,000 of the $10,000 purchase price in his account. If XYZ increases in value to $150 per share, how much excess equity would Bubba have in his account?

Accepted Answer

$2,000. Bubba started with $6,000 of equity and a debit balance of $4,000. The market value of his XYZ stock increased by $5,000 ($15,000 - $10,000). Therefore, his equity increased to $11,000. Since Bubba only needs 60% equity, his Reg T requirement is $9,000 ($15,000 x 60%). His equity exceeds the requirement by $2,000.

Question 2

Under an initial federal requirement of 70% equity, Bubba purchases 100 shares of XYZ at $40 per share and wishes to satisfy the margin call by delivering another listed security into his account. He may do so by depositing stocks with a market value of:

Accepted Answer

$9,333. If Bubba were depositing cash, he would need $2,800 (70% x $4,000). Since he is depositing stock, he would have to deposit enough with loan value of $2,800. To arrive at this, divide $2,800 by the 30% loan value to obtain $9,333.

Question 3

Bubba is opening a margin account with a member organization. He wishes to purchase 100 shares of XYZ at $15 per share. What is Bubba's initial cash deposit?

Accepted Answer

$1,500. The NYSE minimum requirement is the lower of $2,000 or 100% of the account.

Question 4

Call loans made by banks to broker/dealers are generally for the purpose of which of the following?

Accepted Answer

carrying margin accounts. A call loan is made to brokers who use securities as collateral. They are usually made to finance the debit balances in margin accounts.

Question 5

Bubba has a cash account and fails to make full and prompt payment for a purchase. The broker liquidated the transaction. Two weeks later, Bubba places another buy order for 100 shares of XYZ. What does the broker do?

Accepted Answer

refuses the order. Reg T requires that under these circumstances the account must be frozen for 90 days. Any trade prior to that, requires cash in advance.

Question 6

Bubba sells short 100 XYZ at $60 and makes the required Regulation T deposit of 50%. XYZ then rises I price to $65. At this point what is the credit balance?

Accepted Answer

$9,000. Credit balances in short accounts do not change because of fluctuation in market prices. The initial deposit of $3,000 ($6,000 x 50%) plus the $6,000 from the short sale leave a credit balance of $9,000.

Question 7

Bubba has a short margin account with equity of $15,000 and a credit balance of $28,000. What is the current NYSE minimum equity maintenance requirement on Bubba's account?

Accepted Answer

$3,900. The requirement for short accounts is 30% of the current market value. The market value is $13,000 ($28,000 - $15,000). Multiplying by 30% equals $3,900.

Question 8

Bubba has a short margin account with a short market value of $22,000, a credit balance of $42,000, and SMA of $500. What is the NYSE minimum equity maintenance for this account?

Accepted Answer

$6,600. The NYSE maintenance requirement on short margin accounts is 30%. Multiplying the short market value of $22,000 by 30% equals $6,600.

Question 9

Under Regulation T of the Federal Reserve, when may a broker overlook an amount due in a customer's account?

Accepted Answer

if it does not exceed $1,000. If the net amount due is less than $1,000 no action is required under Reg T.

Question 10

Initial margin deposit minimum requirements are set by the:

Accepted Answer

FRB. The Federal Reserve Board sets the initial margin deposit requirements. The NYSE set the ongoing minimum equity requirements.

Question 11

Which of the following is true about a customer with a frozen account?

Accepted Answer

must deposit the full purchase cost before an order is executed. A "frozen" account is restricted to full cash payment in advance for any purchase.

Question 12

What Federal Reserve Board regulation governs the extension of securities-related credit by banks?

Accepted Answer

Regulation U. Regulation T is the extension of credit by broker/dealers. Reg U relates to the extension of credit by banks on securities.

Question 13

Which of the following clients could not open a margin account?

Accepted Answer

a custodian under UGMA. The Uniform Gifts to Minors Act requires securities registration in the name of the custodian for the benefit of the minor. A margin account does not qualify because such an account has all securities registered in street name.

Question 14

Which of the following is an acceptable deposit to answer an NYSE maintenance call?

Accepted Answer

US treasury notes. A maintenance call requires cash or negotiable securities. Only the treasury notes meet this standard.

Question 15

Bubba buys municipal bonds with a $100,000 principal amount at 89 on margin. His account has no cash or securities. What is his minimum required deposit?

Accepted Answer

$13,350. Munis are not subject to Reg T. The NYSE maintenance requirement on munis is the greater of 15% of the market value or 7% of the principal amount.

Question 16

Bubba opens a margin account and sells short 100 shares of XYZ at $50. Assuming a Reg T requirement of 50%, what is the opening balance in Bubba's account?

Accepted Answer

$7,500. The short sale transaction is $5,000.The Reg T required deposit is $2,500 ($5,000 x 50%). Adding both results in $7,500.

Question 17

When the market value in a long margin account decreases, the SMA will:

Accepted Answer

stay the same. The SMA does not decline as the market value declines.

Question 18

Bubba buys $100,000 of US Treasury 10½s of 31 on margin. If the current market price is 92.16, what is Bubba's minimum deposit requirement?

Accepted Answer

$5,500. The NYSE maintenance requirements on obligations of the US treasury vary depending upon the term of the instrument. For 20-year bonds, the requirement is 6% of the market value. Multiplying the market value of $92,500 by 6% equals $5,500.

Question 19

Bubba's margin account has $1,000 of SMA. If he buys $20,000 of listed securities, how much fully paid margin stock must he deposit to respond to a Reg T requirement of 50%?

Accepted Answer

$18,000. Fully paid marginable stock equal to the value of the purchase satisfies the requirement. Since Bubba's account already has $1,000 of SMA, this comprises buying power of $2,000. Therefore he only needs to deposit the remaining $18,000.

Question 20

Bubba's margin account has $2,000 of SMA. If he buys $10,000 of new securities, how much additional cash must he deposit assuming a Reg T requirement of 50%?

Accepted Answer

$3,000. The purchase requires $5,000 ($10,000 x 50%). Since the existing SMA is $2,000 Bubba only needs to deposit the remaining $3,000.

Quiz 2: Investment and Securities