Wednesday, June 17, 2009

Margin Question

Let's enjoy a challenging practice question on margin accounts:

A customer in a new margin account purchases 100 XYZ @38 and makes the required Reg T deposit. If XYZ rises to $52 a share, the equity in this long margin account will be
A. $3,300
B. $3,400
C. $3,200
D. $1,400

EXPLANATION: this is a very tough question. First, if you simply take 1/2 of $3,800, you will get the question wrong. But, if you're lucky enough to remember that the minimum maintenance is $2,000, you could easily mess up by writing $2,000 as the Debit Balance. Remember that if the customer deposits $2,000 on a $3,800 position, the Debit Balance is only $1,800. So, when the stock rises to $5,200, the equity is the difference of $3,400.

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