Series 7 Exam Question 47: Answer and Explanation

Question: 47

As an initial transaction in a margin account, an investor purchased 1,000 shares of ABC at $40 with Regulation T at 50%. Two months later, ABC increased to $60. What is the investor's equity?

• A. 10,000
• B. 20,000
• C. 30,000
• D. 40,000

Correct Answer: B

Explanation:

B. With Regulation T at 50%, the investor would have to deposit 50% of the amount of the securities purchased, which sets up the following equation:

$\begin{array}{c}\text{ LMV }-\text{ DR }=\text{ EQ}\\ \text{\$40,000}-\$20,000=\$20,000\end{array}$

So initially, the purchased $40,000 ($40 × 1,000 shares) worth of securities, the LMV (Long Market Value) is $40,000. With Regulation T set at 50%, the investor had to come up with $20,000 ($40,000 × 50%), which is the investor's EQ (equity). This means that the investor borrowed the other $20,000 from the broker-dealer, which is the DR (debit balance). If the value of the securities increased to $60,000 ($60 × 1,000 shares) change the LMV to $60,000. So, with the DR remaining the same, the EQ had to increase to $40,000.

$\begin{array}{c}\text{ LMV }-\text{ DR }=\text{ EQ}\\ \sout{\text{\$40,000}-\$20,000=\$20,000}\\ \text{\$60,000}-\$20,000=\$40,000\end{array}$