What is the maximum loan value based on?

What is the maximum loan value based on?

• A. Current market value of all assets
• B. Securities held within the margin account
• C. The client’s overall credit score
• D. The total cash available in the account

Answer: (B)

The maximum loan value is primarily based on the securities held within the margin account. This reflects the concept of margin lending, where the value of the securities can serve as collateral for a loan. Financial institutions assess the risk of extending credit by examining the total value of the securities an investor has, since these assets can be liquidated in the event of a default. The more liquid and stable the securities, the higher the loan value can potentially be.

By focusing on securities, lenders can ensure that the loan provided aligns with market conditions and the volatility of the client's portfolio. This methodology provides a calculated approach to risk management, allowing lenders to set loan limits that protect both the lender and the borrower.