Question

In a new margin account, a customer buys 1,000 shares of ABC stock at $40 per share. The stock rises to $50 during the next week and subsequently declines to $39. If there are no other transactions in the account, the current SMA balance would be:A. 0

B. $2,500
C. $5,000
D. $10,000

Answer 1

C) $5,000

Step-by-step explanation:

Since the price of the stocks first rose to $50, the account's equity was $50,000.

The SMA balance was = ($50,000 x 1/2) - $20,000 = $,5000

The SMA balance acts like a stabilizer and cannot be taken away even if the price of the stocks fall slightly. The price of stocks must fall 25% in order for the SMA to be withdrawn.

The investor's equity decreased = equity - margin requirement = $39,000 - $20,000 = $19,000, but the amount that the investor can borrow (SMA balance) will remain the same at $5,000.