Series 7 Exam Question 48: Answer and Explanation

Question: 48

An investor has a margin account with $45,000 in securities, a debit balance of $20,000, and equity of $25,000. With Regulation T at 50%, how much does this investor have in excess equity?

• A. $0
• B. $2,250
• C. $2,500
• D. $5,000

Correct Answer: C

Explanation:

C. Remember, for this investor to be properly margined, they must have at least 50% of the current market value (CMV) in equity (EQ). That equation looks like this:

$\begin{array}{c}\text{Margin requirement}=\text{Regulation T}\times \text{CMV}\\ \text{Margin requirement}=\text{50\%}\times \text{\$45,000}=\text{\$22,500 }\end{array}$

Next, to determine the excess equity (SMA – Special Memorandum Account), use the following equation:

$\begin{array}{c}\text{SMA}=\text{EQ}-\text{Margin requirement}\\ \text{SMA}=\$25,000-\$22,500=\$2,500\end{array}$

Remember, the SMA is excess equity that can be withdrawn or used to purchase additional securities.