Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
A client has a margin account with a current market value of $70,000. The debit balance in the account is $30,000. If the maintenance requirement is 25%, what is the excess equity in the account?
- A$22,500
- B$12,500
- C$10,000
- D$17,500
Show answer & explanationAnswer & explanation
Correct answer: D. $17,500
Excess equity is the amount of equity in a margin account above the maintenance margin. First, calculate the current equity. Then, determine the maintenance margin requirement. Finally, subtract the maintenance margin from the current equity to find the excess equity.
Why the other options are wrong
- A. This is the correct calculation: Equity = $70,000 (MV) - $30,000 (DB) = $40,000. Maintenance Requirement = 25% of $70,000 (MV) = $17,500. Excess Equity = $40,000 (Equity) - $17,500 (Maintenance) = $22,500.
- B. This is likely the result of calculating maintenance margin incorrectly or subtracting from the debit balance.
- C. This might be the result of incorrect calculation of maintenance margin or equity.
Excess Equity (Margin Account)
Excess equity in a margin account is the amount of equity above the minimum maintenance margin requirement. This surplus can be withdrawn by the client or used to purchase additional securities on margin.
- Calculated as (Current Equity) - (Maintenance Margin Requirement)
- Current Equity = Market Value - Debit Balance
- Maintenance Margin Requirement = Maintenance Percentage × Market Value
Memory trick: My Equity eXceeds Maintenance, so I have 'EX'tra cash!