Series 7 Exam Question 194: Answer and Explanation

Question: 194

Mr. Mayvis has a margin account with a current market value of $20,250 and a debit balance of $3,000 with Regulation T at 50 percent. How much excess equity does the investor have in the account?

• A. $20,250
• B. $3,000
• C. $17,250
• D. $7,125

Correct Answer: D

Explanation:

D. Because this margin account has a debit balance, it's a long account; short accounts have a credit balance. The easiest way to deal with margin questions of this type is to set up a long margin account formula:

Because the LMV equals $20,250 and the DR equals $3,000, the EQ has to be $17,250. From there, you have to compare what the investor should have in equity to be at 50 percent (Regulation T) of the LMV with what is actually in equity. With Regulation T at 50 percent, which is standard, the investor should have $10,125 in EQ to be at 50 percent. However, the investor actually has $7,125 more than that, so that is the investor's excess equity.