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Question 117

Which of the following credit arrangements would most likely be considered a purpose credit because it is indirectly secured by margin stock?

A loan made to purchase margin stock secured by nonmargin stock

A loan made to a company for various corporate purposes, including the purchase of margin stock, secured by the corporate assets, which from time to time include margin stock; on the date of the consummation of the transaction approximately 10 percent of the assets of the company are margin stock

A loan made to purchase margin stock, guaranteed by an individual who has pledged margin stock as security for the guarantee

Bank is the trustee for a qualified pension plan from which the participants may borrow and use their interest in the plan as security; a participant borrows money for the purpose of purchasing margin stock

Correct Answer: C

A loan made to purchase margin stock, guaranteed by an individual who has pledged margin stock as security for the guarantee, would most likely be considered a purpose credit because it is indirectly secured by margin stock. This is because the margin stock pledged as security for the guarantee effectively ties the ability to repay the loan to the value of the margin stock, making it align with the criteria for a purpose credit under margin stock regulations.

Discussion

Cam22Option: C

This scenario describes a credit arrangement that would most likely be considered a purpose credit indirectly secured by margin stock under the definitions and regulations concerning margin lending (such as Regulation U in the United States, which governs extensions of credit by lenders for the purpose of buying or carrying margin securities). In this case, even though the loan itself may not be directly secured by margin stock, the guarantee by an individual who has pledged margin stock as security effectively makes the loan indirectly secured by margin stock. This arrangement ties the ability to repay the loan to the value and presence of margin stock, aligning with the criteria for a purpose credit in the context of margin stock regulations.