Wednesday, June 17, 2009

Margin Question

Not much to report on my adventures with margin loans. Hospira (HSP) is still about where it was, and unless it rises sharply, I'm going to have to dip into savings to pay back the loan I took from "SMA." Oh well. I'll keep you posted on that.

For now, let's do a question on margin accounts:

An investor purchased 1,000 shares of XYZ @50 in a new margin account, making the required Reg T deposit. If XYZ rises to $75 per share, the investor's buying power will be equal to:
A. $12,500
B. $25,000
C. $50,000
D. $75,000

EXPLANATION: the investor has a Debit Balance of $25,000 after putting down $25,000 cash money. When the stock value rises to $75,000, the equity rises to $50,000. Now--carefully--what is the Reg T requirement on $75,000? Only $37,500. So, there is $12,500 of excess equity or SMA. The customer can borrow $12,500; his buying power is twice that amount, or $25,000.


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