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Question 115

First National Bank made the following loans to Mr. James Wilson during the previous calendar year:

"¢ Loan A, made on February 2, is a loan for purchasing margin stock and is secured by margin stock

"¢ Loan B, made on March 15, is also for purchasing margin stock and is secured by margin stock

"¢ Loan C, made on June 30, is an unsecured loan for purchasing margin stock

"¢ Loan D, made on September 10, is for purchasing a car, secured by the car

All the loans are still outstanding at the end of the year. Which of the loans must be combined for purposes of the margin requirements of Regulation U?

    Correct Answer: D

    Regulation U governs the amount of credit that banks can extend to borrowers for the purpose of buying or carrying margin securities if the loan is secured directly or indirectly by those securities. Any loans made for purchasing margin stock that are secured directly or indirectly by that stock need to be combined for the purpose of calculating compliance with margin requirements. In this case, Loans A, B, and C all are for purchasing margin stock. Loans A and B are secured by margin stock directly, while Loan C, although unsecured, still requires combining as it is for purchasing margin stock. Loan D, being for a car and secured by the car, is not relevant to the margin requirements. Therefore, Loans A, B, and C must be combined.

Discussion
Cam22Option: D

Regulation U governs the amount of credit that banks can extend to borrowers for the purpose of buying or carrying margin securities if the loan is secured directly or indirectly by those securities. The key elements for considering whether loans fall under the purview of Regulation U and need to be combined for the purpose of calculating compliance with margin requirements include: The purpose of the loan: It must be for purchasing or carrying margin stock. The security for the loan: The loan must be secured directly or indirectly by margin stock.