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Equity Transactions and Margin Accounts
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Equity Transactions and Margin Accounts

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Questions and Answers

What is the new margin requirement after the price of the security rises to $29?

  • $10,500 (correct)
  • $14,500
  • $2,000
  • $12,500

    • How much is the client's excess margin after the price adjustment?

  • $12,500
  • $14,500
  • $1,500
  • $2,000 (correct)

    • If the client withdraws the $2,000 excess margin, what will the total amount borrowed from the dealer remain as?

  • $12,500 (correct)
  • $10,500
  • $14,500
  • $2,000

    • Why is the dealer now willing to lend $14,500 instead of $12,500?

    <p>The market price of the shares increased.</p> Signup and view all the answers

    What must the client consider when withdrawing the excess margin amount?

    <p>They will still incur interest on the remaining borrowed amount.</p> Signup and view all the answers

    How is the initial margin deposit calculated in this scenario?

    <p>By subtracting the loan amount from the original cost.</p> Signup and view all the answers

    What is the significance of an increase in the market price of a security in margin lending?

    <p>It can enhance the client's ability to make additional investments.</p> Signup and view all the answers

    What does the term 'excess margin' refer to in this context?

    <p>The amount by which the client's margin deposit exceeds the margin requirement.</p> Signup and view all the answers

    Which of the following reflects the total margin requirement calculation used in this scenario?

    <p>$25,000 - $14,500</p> Signup and view all the answers

    What is the key difference between a cash account and a margin account?

    <p>A cash account requires full payment, while a margin account allows partial payment.</p> Signup and view all the answers

    When must a client pay for a security in a cash account transaction?

    <p>On or before the settlement date.</p> Signup and view all the answers

    What does a long position represent?

    <p>Owning a security outright.</p> Signup and view all the answers

    In a margin account, what is primarily understood between the client and the investment dealer?

    <p>The dealer grants credit based on the market value of securities.</p> Signup and view all the answers

    What is the implication of initiating a short position?

    <p>An investor must borrow securities to sell them.</p> Signup and view all the answers

    What is required for a client to close a long position in a stock?

    <p>The client must sell the stock in the market.</p> Signup and view all the answers

    What happens when a settlement date falls on a weekend for a security transaction?

    <p>Payment is not needed until the next business day.</p> Signup and view all the answers

    How does an investment dealer charge for loans in a margin account?

    <p>According to the market value of securities held in the account.</p> Signup and view all the answers

    Which statement is true regarding treasury bill transactions?

    <p>Payment must be completed on the same day of the transaction.</p> Signup and view all the answers

    Under what condition are the current yield, approximate YTM, and YTM equal?

    <p>When the bond trades at par</p> Signup and view all the answers

    What primarily characterizes reinvestment risk associated with bonds?

    <p>The interest rates at which coupon payments are reinvested</p> Signup and view all the answers

    How does reinvestment of coupon payments affect YTM perception over time?

    <p>Higher reinvestment rates than YTM can overstate returns</p> Signup and view all the answers

    Which scenario ensures a bond has no reinvestment risk?

    <p>When the bond is a zero-coupon bond</p> Signup and view all the answers

    What does YTM generally represent in terms of bond investment?

    <p>An estimate of the return on a bond if held until maturity</p> Signup and view all the answers

    What happens when coupon payments are reinvested at a rate lower than the bond's original YTM?

    <p>The bond's overall return is lower than the YTM</p> Signup and view all the answers

    What is the primary characteristic of a margin account compared to a cash account?

    <p>Margin accounts allow the purchase of securities on credit.</p> Signup and view all the answers

    What does the term 'margin' specifically refer to in equity trading?

    <p>The amount put up by the client to secure a loan.</p> Signup and view all the answers

    What is the condition for an investor to profit from a long margin position?

    <p>The stock price must rise above the purchase price.</p> Signup and view all the answers

    In what scenario would a short seller earn a profit from their transaction?

    <p>When the initial sale price exceeds the repurchase cost.</p> Signup and view all the answers

    What must occur before an employee’s order can be filled if there are outstanding sell orders at a dealer?

    <p>The outstanding sell orders must be filled first.</p> Signup and view all the answers

    Which of the following statements is true regarding clients with margin accounts?

    <p>They can hold both long and short positions.</p> Signup and view all the answers

    What is the formula to calculate the minimum margin required for a transaction?

    <p>Initial cost of the transaction minus the loan amount.</p> Signup and view all the answers

    What is the primary purpose of calculating the present value of a bond?

    <p>To assess the bond’s worth based on current market conditions</p> Signup and view all the answers

    What happens to outstanding orders when a new employee order is placed?

    <p>Outstanding orders must be filled before processing the employee's order.</p> Signup and view all the answers

    What would the correct input sequence be for calculating the present value of a bond with a principal of $100 and an interest rate of 5% using a financial calculator?

    <p>Type 8, then press N, type 5, then press I/Y</p> Signup and view all the answers

    How do clients with cash accounts differ from those with margin accounts regarding positions?

    <p>Cash accounts can only hold long positions.</p> Signup and view all the answers

    Why is it significant to know the present value of a bond's coupons?

    <p>It contributes to the overall valuation of the bond</p> Signup and view all the answers

    What type of order should be marked for employee transactions in the equities market?

    <p>PRO or EMP/N-C.</p> Signup and view all the answers

    What does the fair value of a bond represent?

    <p>The market value which reflects current conditions</p> Signup and view all the answers

    What is the present value of the bond when calculated with a discount rate of 10%?

    <p>$96.77</p> Signup and view all the answers

    How can investors adjust their bond valuation based on economic conditions?

    <p>By utilizing different discount rates reflective of risk</p> Signup and view all the answers

    What is the calculated present value of the coupons in the example provided?

    <p>$29.08</p> Signup and view all the answers

    In manual calculations, what role does understanding the present value play?

    <p>It enables valuation on cash flows occurring at different times</p> Signup and view all the answers

    What is indicated by a present value of approximately $67.68?

    <p>It represents the initial investment necessary to receive $100 in four years</p> Signup and view all the answers

    What does pressing COMP then PV on a financial calculator achieve?

    <p>Determines the present value based on future cash flows</p> Signup and view all the answers

    Study Notes

    Cash Accounts and Margin Accounts

    • Transactions must occur in either cash or margin accounts; cash accounts require full payment on or before the settlement date.
    • Settlement rules: Government of Canada Treasury bills settle on the transaction day, while other securities settle one business day later.
    • Margin accounts allow partial payment, with the dealer lending the remaining balance, accruing interest on this loan.
    • Cash accounts do not provide credit; clients must pay in full, unlike margin accounts where credit is granted based on market value.

    Long Positions and Short Positions

    • Long positions indicate ownership of a security; short positions involve selling securities not owned.
    • In a long position, an investor pays for the stock and can later sell it for profit when prices rise.
    • Short selling profits when the sale price exceeds the repurchase cost after closing the short position.

    Example of Margin Calculation

    • Original cost of ABC shares: $25,000; market price rises to $29.
    • Member's revised maximum loan: $14,500 (50% of $29).
    • New margin requirement decreases to $10,500.
    • Client's original margin deposit: $12,500 results in an excess margin of $2,000.
    • Excess margin can be used for further investments or withdrawn, but interest still accrues on the borrowed amount.

    Buy and Sell Orders

    • The choice of buy/sell order greatly affects share price; understanding different order types is crucial for effective trading.

    Key Terms and Summary of Equity Transactions

    • Clients with cash accounts cannot trade on credit; margin accounts allow both long and short positions.
    • Long margin positions mean partial financing for securities by borrowing from the dealer; initial margin is the key amount required.
    • Profits arise when stock values increase for long positions and when selling prices are higher than repurchase costs in short positions.

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    Description

    This quiz covers key concepts related to equity transactions, focusing on cash accounts, margin accounts, and the intricacies of margin and short selling. Test your understanding of how these accounts operate and the different types of orders used in stock trading.

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