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Questions and Answers
What is the new margin requirement after the price of the security rises to $29?
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?
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?
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?
Why is the dealer now willing to lend $14,500 instead of $12,500?
What must the client consider when withdrawing the excess margin amount?
What must the client consider when withdrawing the excess margin amount?
How is the initial margin deposit calculated in this scenario?
How is the initial margin deposit calculated in this scenario?
What is the significance of an increase in the market price of a security in margin lending?
What is the significance of an increase in the market price of a security in margin lending?
What does the term 'excess margin' refer to in this context?
What does the term 'excess margin' refer to in this context?
Which of the following reflects the total margin requirement calculation used in this scenario?
Which of the following reflects the total margin requirement calculation used in this scenario?
What is the key difference between a cash account and a margin account?
What is the key difference between a cash account and a margin account?
When must a client pay for a security in a cash account transaction?
When must a client pay for a security in a cash account transaction?
What does a long position represent?
What does a long position represent?
In a margin account, what is primarily understood between the client and the investment dealer?
In a margin account, what is primarily understood between the client and the investment dealer?
What is the implication of initiating a short position?
What is the implication of initiating a short position?
What is required for a client to close a long position in a stock?
What is required for a client to close a long position in a stock?
What happens when a settlement date falls on a weekend for a security transaction?
What happens when a settlement date falls on a weekend for a security transaction?
How does an investment dealer charge for loans in a margin account?
How does an investment dealer charge for loans in a margin account?
Which statement is true regarding treasury bill transactions?
Which statement is true regarding treasury bill transactions?
Under what condition are the current yield, approximate YTM, and YTM equal?
Under what condition are the current yield, approximate YTM, and YTM equal?
What primarily characterizes reinvestment risk associated with bonds?
What primarily characterizes reinvestment risk associated with bonds?
How does reinvestment of coupon payments affect YTM perception over time?
How does reinvestment of coupon payments affect YTM perception over time?
Which scenario ensures a bond has no reinvestment risk?
Which scenario ensures a bond has no reinvestment risk?
What does YTM generally represent in terms of bond investment?
What does YTM generally represent in terms of bond investment?
What happens when coupon payments are reinvested at a rate lower than the bond's original YTM?
What happens when coupon payments are reinvested at a rate lower than the bond's original YTM?
What is the primary characteristic of a margin account compared to a cash account?
What is the primary characteristic of a margin account compared to a cash account?
What does the term 'margin' specifically refer to in equity trading?
What does the term 'margin' specifically refer to in equity trading?
What is the condition for an investor to profit from a long margin position?
What is the condition for an investor to profit from a long margin position?
In what scenario would a short seller earn a profit from their transaction?
In what scenario would a short seller earn a profit from their transaction?
What must occur before an employee’s order can be filled if there are outstanding sell orders at a dealer?
What must occur before an employee’s order can be filled if there are outstanding sell orders at a dealer?
Which of the following statements is true regarding clients with margin accounts?
Which of the following statements is true regarding clients with margin accounts?
What is the formula to calculate the minimum margin required for a transaction?
What is the formula to calculate the minimum margin required for a transaction?
What is the primary purpose of calculating the present value of a bond?
What is the primary purpose of calculating the present value of a bond?
What happens to outstanding orders when a new employee order is placed?
What happens to outstanding orders when a new employee order is placed?
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?
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?
How do clients with cash accounts differ from those with margin accounts regarding positions?
How do clients with cash accounts differ from those with margin accounts regarding positions?
Why is it significant to know the present value of a bond's coupons?
Why is it significant to know the present value of a bond's coupons?
What type of order should be marked for employee transactions in the equities market?
What type of order should be marked for employee transactions in the equities market?
What does the fair value of a bond represent?
What does the fair value of a bond represent?
What is the present value of the bond when calculated with a discount rate of 10%?
What is the present value of the bond when calculated with a discount rate of 10%?
How can investors adjust their bond valuation based on economic conditions?
How can investors adjust their bond valuation based on economic conditions?
What is the calculated present value of the coupons in the example provided?
What is the calculated present value of the coupons in the example provided?
In manual calculations, what role does understanding the present value play?
In manual calculations, what role does understanding the present value play?
What is indicated by a present value of approximately $67.68?
What is indicated by a present value of approximately $67.68?
What does pressing COMP then PV on a financial calculator achieve?
What does pressing COMP then PV on a financial calculator achieve?
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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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