Maximum Loan Value of Margin Stock

AC

Under the Federal Reserve's Regulation U (12 CFR 221), the maximum loan value that can be extended by a broker-dealer against margin stock is subject to certain collateral requirements. The maximum loan value of margin stock is currently set at 50 percent of the current market value.

Margin stock refers to any equity security that is registered on a national securities exchange, any over-the-counter security designated as a margin security by the Federal Reserve, or any other equity security that the Federal Reserve determines to be eligible for margin credit.

To prevent excessive borrowing against margin stock, the Federal Reserve sets minimum initial margin requirements, which are the amounts of equity that investors must put up when buying securities on margin. The Federal Reserve also sets maintenance margin requirements, which are the minimum levels of equity that investors must maintain in their margin accounts to avoid forced liquidation of their positions.

The maximum loan value of margin stock is the amount of credit that can be extended against the value of the margin stock after accounting for the required margin. For example, if an investor wants to buy $100,000 worth of margin stock, the broker-dealer can lend up to $50,000, assuming a 50 percent maximum loan value and 50 percent initial margin requirement.

It's important to note that the maximum loan value of margin stock is subject to change by the Federal Reserve, which can adjust the collateral requirements based on market conditions and other factors. The maximum loan value can also be affected by the equity reserve, which is the amount of equity that a broker-dealer is required to maintain in its margin accounts to cover potential losses.

In summary, the correct answer to the question is A. Currently, the maximum loan value of margin stock is 50 percent of the current market value, and this value is subject to change by the Federal Reserve.