If a bank makes a loan that is in compliance with Regulation U, what will be the status of the loan at its consummation?
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A. B. C. D.D
Regulation U is a regulation implemented by the Federal Reserve Board under the Securities Exchange Act of 1934, which imposes certain requirements on lenders when they extend credit to borrowers to purchase or carry margin securities. Margin securities refer to securities that are bought with borrowed funds or securities that serve as collateral for a loan.
In order for a loan to be in compliance with Regulation U, the lender must comply with certain margin requirements. Specifically, the lender must make sure that the amount of credit extended does not exceed a certain percentage of the current market value of the margin securities (i.e., the collateral). This percentage is typically set at 50% but can be higher or lower depending on the type of securities involved.
Given this background, we can now evaluate the answer choices:
A. The loan will be in compliance until it is renewed, regardless of the reduction of the borrower's equity in the stock.
This answer choice is incorrect. Compliance with Regulation U depends on whether the lender is complying with the margin requirements at the time the loan is extended. If the borrower's equity in the stock decreases over time, it is possible that the loan could eventually fall out of compliance with Regulation U.
B. The loan will be in compliance only if the value of the stock remains within the margin requirements.
This answer choice is also incorrect. Compliance with Regulation U depends on whether the lender is complying with the margin requirements at the time the loan is extended. If the value of the stock decreases over time, it is possible that the loan could eventually fall out of compliance with Regulation U.
C. The loan will be in compliance unless the status of the stock changes (for example, margin or nonmargin).
This answer choice is partially correct. Compliance with Regulation U depends on whether the lender is complying with the margin requirements at the time the loan is extended. If the status of the stock changes (i.e., it becomes non-marginable), then the loan could fall out of compliance with Regulation U. However, it is important to note that changes in the value of the stock could also cause the loan to fall out of compliance, as discussed above.
D. The loan will always be in compliance until its maturity, regardless of the reduction of the borrower's equity in the stock, provided there are no substitutions or withdrawals that adversely affect the loan value.
This answer choice is also incorrect. Compliance with Regulation U depends on whether the lender is complying with the margin requirements at the time the loan is extended. Even if the borrower's equity in the stock does not decrease over time, it is still possible that changes in the value of the stock could cause the loan to fall out of compliance with Regulation U.