Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

In the 1920s, the danger of buying stock on credit (buying on margin) was that if the stock price dropped, borrowers:

could owe more money than their initial investment and be required to repay the loan immediately

could keep the stock without any obligation to repay the borrowed funds

would only lose the interest paid on the loan, not the principal

would automatically receive additional shares to offset their losses

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Verified step by step guidance

Understand the concept of buying on margin: Buying on margin involves borrowing money from a broker to purchase stock. The investor pays a portion of the stock's price upfront (the margin) and borrows the rest.

Recognize the risk involved: If the stock price drops, the value of the stock may fall below the loan amount, creating a situation where the borrower owes more than the stock is worth.

Learn about margin calls: Brokers can issue a margin call, requiring the borrower to repay the loan or deposit additional funds immediately to cover the loss. This is a key risk of buying on margin.

Evaluate the options provided in the question: Analyze each answer choice to determine which one aligns with the financial risks of buying on margin, particularly the obligation to repay the loan if the stock price drops.

Select the correct answer: Based on the explanation, the correct answer is the one that highlights the borrower's obligation to repay the loan immediately and the potential to owe more than the initial investment.