Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesHard
A client has a margin account with a market value of $20,000 and a debit balance of $8,000. The maintenance margin requirement is 25%. What is the client's excess equity in the account?
- A$12,000
- B$5,000
- C$8,000
- D$7,000
Show answer & explanationAnswer & explanation
Correct answer: D. $7,000
First, calculate the client's equity: Market Value - Debit Balance = $20,000 - $8,000 = $12,000. Next, calculate the maintenance margin requirement: Market Value * Maintenance Margin Rate = $20,000 * 0.25 = $5,000. Finally, calculate the excess equity: Equity - Maintenance Margin Requirement = $12,000 - $5,000 = $7,000.
Why the other options are wrong
- A. This is the total equity, not the excess equity.
- B. This is the maintenance margin requirement, not the excess equity.
- C. This is the debit balance, not excess equity.
Excess Equity (Margin Account)
The amount of equity in a margin account that exceeds the maintenance margin requirement. This excess equity is available for withdrawal or to support additional marginable securities purchases.
- Equity = Market Value - Debit Balance.
- Maintenance Requirement = Market Value x Maintenance Margin Rate.
- Excess Equity = Equity - Maintenance Requirement.
- Can be withdrawn or used for new purchases.
Memory trick: Margin: Know your equity, your loan, and how much cushion you have.