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Difficulty: Very hardMargin Accounts and Borrowing Requirements

An investor holds a long margin account with a long market value of 18,00018,000 and a debit balance of 7,0007,000. The market value of the securities in the account subsequently increases to 24,00024,000. Assuming no other transactions occur and market prices remain unchanged thereafter, what is the maximum dollar amount of additional marginable securities the investor can purchase on margin without depositing additional funds?

Answer: 10000 USD

Answer

The maximum dollar amount of additional marginable securities the investor can purchase without depositing additional funds is $10,000.
When the long market value increases from 18,00018,000 to 24,00024,000, current account equity increases to 17,00017,000 (24,00024,000 long market value minus 7,0007,000 debit balance). Under Federal Reserve Regulation T, the required equity is 50% of the current market value, or 12,00012,000 (50%×24,00050\% \times 24,000). The difference between current equity (17,00017,000) and required equity (12,00012,000) creates 5,0005,000 of excess equity, which is credited to the account's Special Memorandum Account (SMA). Because additional marginable stock can be purchased by depositing 50% of the transaction value, buying power is equal to twice the available SMA balance (2×5,000=10,0002 \times 5,000 = 10,000).

Step-by-Step Solution

1
Calculate the current equity in the account following market appreciation
Equity = 17,00017,000
Equity equals current Long Market Value (24,00024,000) minus Debit Balance (7,0007,000).
2
Calculate the Regulation T required equity for the current market value
Required Equity = 12,00012,000
Federal Reserve Regulation T requires 50% equity of the current long market value (50%×24,000=12,00050\% \times 24,000 = 12,000).
3
Determine the excess equity / Special Memorandum Account (SMA) balance
SMA = 5,0005,000
Excess equity is current equity (17,00017,000) minus required equity (12,00012,000).
4
Calculate margin buying power from available SMA
Buying Power = 10,00010,000
Buying power allows purchasing securities at a 50% margin requirement, which is equal to SMA divided by 0.50 (or 2×2 \times SMA).

Key Concept

Excess Equity, Special Memorandum Account (SMA), and Margin Buying Power
Estimated Time:2m 0s
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Topics

Margin Accounts and Borrowing Requirements