Thursday, February 4, 2010

Margin Question

Margin questions are always fun, so let's enjoy one right now, shall we?

A customer of a broker-dealer purchases $30,000 of XYZ in a new margin account. The margin requirement is 60%; therefore, the required equity initially is
A. $18,000
B. $15,000
C. $12,000
D. $2,000

EXPLANATION: if the question says the intial margin requirement is above 50%, you have to accept that fact and work with it. If margin is what the customer has to deposit, he has to deposit $18,000. Which makes the initial equity $18,000.


Also, for anyone who remembers back when I was willing to discuss the stupid loan I took from "SMA" in my own margin account, the debit balance is now $4,700 with the little interest charges adding up each month. The 90 shares of Hospira that I plan to sell to pay off the debit is worth about $4,500, after advancing 17%. Back when I started blogging about my adventures in margin, Hospira was in negative territory. Unfortunately, as it slowly rises in value, it never seems to quite catch up to the interest charged on the loan. Even if/when it rises above what I owe, it will still be an idiotic maneuver. I'll end up selling a stock that would otherwise pay me dividends for decades and probably end up worth three times what I bought it for when/if I reach retirement age. Oh well. I needed the cash at that point, and I was willing to sacrifice good judgment for the sake of my Series 7 customers, who deserve to see at least a few testable points played out in the real world.

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