Examkin

Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opens a new margin account with a broker-dealer and executes an initial long purchase of 8080 shares of a marginable equity security at $30\$30 per share. Assuming there is no prior cash or securities balance in the account, what is the minimum cash deposit, in dollars, that the investor must make to satisfy Regulation T and FINRA initial margin requirements?

Answer: 2000 dollars

Answer

The minimum cash deposit required from the investor is $2,000.
Under Federal Reserve Regulation T, an investor purchasing stock on margin must deposit 50% of the purchase value. Here, 80×$30=$2,40080 \times \$30 = \$2,400, so Regulation T requires $1,200\$1,200. However, FINRA Rule 4210 dictates that the minimum initial equity for opening a margin account is $2,000\$2,000 (or 100% of the purchase price if the purchase is under $2,000\$2,000). Because the total purchase price of $2,400\$2,400 falls between $2,000\$2,000 and $4,000\$4,000, the investor must deposit the higher FINRA minimum amount of $2,000\$2,000.

Step-by-Step Solution

1
Calculate total purchase value.
80×$30=$2,40080 \times \$30 = \$2,400
Determining the total transaction amount is necessary to evaluate margin rules.
2
Calculate Regulation T requirement.
50%×$2,400=$1,20050\% \times \$2,400 = \$1,200
Federal Reserve Board Regulation T standard initial margin requirement is 50% of the purchase price.
3
Apply FINRA minimum initial equity rule.
FINRA minimum deposit requirement = \$2,000
FINRA rules mandate a minimum initial equity deposit of 2,000fornewmarginaccountswhenthetotalpurchasepriceisbetween2,000 for new margin accounts when the total purchase price is between 2,000 and $4,000.

Key Concept

FINRA Initial Margin Minimum Equity Rule
Rate this question

Topics

Margin Accounts and Borrowing Requirements