Which term refers to an account that allows you to borrow money using securities and cash held in the account as collateral?

• A. Yield
• B. Margin Account
• C. Dividends
• D. Prospectus

Answer: (B)

This question tests borrowing money using securities and cash held in the account as collateral, which is done through a margin account. In a margin arrangement, you can borrow funds from your broker to buy more securities, with the assets already in your account—both the securities and the cash balance—serving as collateral. Your total buying power increases, but you’ll pay interest on the borrowed amount, and you must maintain a minimum level of equity in the account. If market values fall and your equity drops below the required maintenance margin, you may receive a margin call asking you to deposit more funds or securities or have some assets liquidated to cover the loan. This concept is distinct from yield (the income generated by an investment), dividends (payments to shareholders), and a prospectus (a document describing a security or fund).