Series 7 Exam Question 357: Answer and Explanation

Question: 357

Barbara Billington has a margin account with a market value of $30,000 and a debit balance of $12,000. If Barbara wants to purchase an additional $10,000 of stock in this account, what amount must she deposit?

• A. $2,000
• B. $3,000
• C. $5,000
• D. $10,000

Correct Answer: A

Explanation:

A. Normally, if Barbara were purchasing $10,000 worth of stock on margin, she'd have to deposit $5,000 to meet the margin call (you can assume Regulation T is 50 percent of the purchase). First, you have to find out whether she has any excess equity in her margin account to help offset the $5,000 payment. Use the following equation:

LMV - DR = EQ

After setting up the equation, enter the market value of the securities ($30,000) under the long market value (LMV). Next, enter the $12,000 under the debit record (DR), also known as the debit balance. When you subtract the DR from the LMV, you come up with an equity (EQ) of $18,000. Multiply Regulation T (50 percent) by the LMV to get the amount of equity the customer needs to have in the account to be at 50 percent. This investor needs only $15,000 in equity to reach 50 percent, and this investor has $18,000, $3,000 more than necessary:

The $3,000 is excess equity (SMA, or special memorandum account), which she can use to help offset the margin call for the $10,000 worth of stock she wants to buy:

$5,000 margin call - $3,000 excess equity = $2,000 to deposit