UNIT 24 QBANK Flashcards
Which of the following transactions, if any, cannot be done in a cash account?
A) Sell 100 ABC to close
B) Any of these could be done in a cash account
C) Sell 100 ABC to open
D) Buy 100 ABC to open
C) Sell 100 ABC to open
Explanation
Selling to open (a short sell) can only be done in a margin account. It cannot be done in a cash account.
Which of the following must precede the first trade in an account?
A) Customer’s notarized signature on the new account form
B) Filing of the account information with the applicable self-regulatory organization (SRO)
C) Registered representative’s signature on the new account form
D) Approval of the new account by a principal
D) Approval of the new account by a principal
Explanation
All accounts must be approved by a principal before the first trade. Neither the customer nor the registered representative need sign the new account form, and no self-regulatory organization (SRO)—requires the filing of new account information with them.
All of the following may be purchased on margin except
A) call and put contracts.
B) exchange-listed securities.
C) municipal securities.
D) Nasdaq listed stocks.
A) call and put contracts.
Explanation
Option contracts—calls and puts—are among those securities products that cannot serve as collateral for a margin loan and, therefore, may not be purchased on margin. In the case of options, their unpredictable intrinsic value, diminishing time value, and limited life make them inappropriate for securing any kind of loan.
Hypothecation is
A) the closing of a securities initially position purchased on margin.
B) the pledging of customer securities as collateral for margin loans.
C) replacing shares that were borrowed to sell short in a margin account.
D) opening a position in a margin account.
B) the pledging of customer securities as collateral for margin loans.
Explanation
Hypothecation is agreed to in the margin account agreement. The customer agrees to pledge the securities to be purchased on margin to the broker-dealer so that the broker-dealer can then pledge them to a bank as collateral for the margin loan.
The Conduct Rules permit specific types of lending arrangements between registered representatives and their firms and customers. Which arrangement below would not be permitted?
A) The firm lends the customer’s securities without a consent agreement.
B) The firm’s customer is a lending institution.
C) The registered representative and the customer are immediate family.
D) The customer and the registered representative are both registered persons with the same firm.
A) The firm lends the customer’s securities without a consent agreement.
Explanation
The Conduct Rules permit several types of lending arrangements. Among them; an immediate family relationship exists between the representative and the customer, the customer is in the business of lending money, the customer and the representatives are both registered persons with the same firm, the customer and the representative have a personal relationship or a business relationship outside the broker-customer relationship. Lending securities for use in short sales can only be done with a signed consent agreement from the customer.
Regarding purchases on margin, which of the following is true?
A) Warrants can be purchased on margin, but rights cannot.
B) Rights can be purchased on margin, but warrants cannot.
C) Warrants and rights can both be purchased on margin.
D) Neither rights nor warrants can be purchased on margin.
A) Warrants can be purchased on margin, but rights cannot.
Explanation
Warrants are marginable securities, but rights are not.
Which type of account fee structure is typically better for the buy and hold investor?
A) A narrow-based account
B) A broad-based account
C) A fee-based account
D) A commission-based account
D) A commission-based account
Explanation
With a fee-based account, the customer is charged a fixed fee regardless of the number of trades. With a commission-based account, the customer is charged a fee for each trade. If the customer follows a buy and hold strategy, he typically won’t be doing enough trades for the fee-based account to save him money. The other two are just made up names.
In which of the following accounts would the use of margin always be prohibited?
A) Fiduciary accounts
B) Corporate accounts
C) Partnership accounts
D) Individual retirement accounts
D) Individual retirement accounts
Explanation
Of those listed, only qualified retirement accounts, such as IRAs, prohibit the use of margin. As long as the use of margin is not listed as being restricted, it is allowed in both corporate and partnership accounts, and as long as the use of margin is specifically listed as being allowed, a fiduciary account may do so.
A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for
A) $3,000.
B) $1,000.
C) $2,000.
D) $1,500.
C) $2,000.
Explanation
No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met.
Corporate accounts may trade on margin
A) only if it is specifically listed as being permitted to do so in the corporate charter.
B) only if it is not listed as being restricted from doing so in the corporate charter.
C) always.
D) never.
B) only if it is not listed as being restricted from doing so in the corporate charter.
Explanation
As long as there are no restrictions against trading on margin in the corporate charter, corporate accounts may trade on margin.
The minimum initial requirement when purchasing 100 shares at $30 in a new account would be
A) $1,500.
B) $750.
C) $2,000.
D) $375.
C) $2,000.
Explanation
The requirement is normally 50% but not less than $2,000 unless the purchase price is less than $2,000. Then only 100% of the purchase price would be required.
Borrowing money to buy securities is prohibited in all of the following accounts except
A) a margin account.
B) an individual IRA.
C) a Roth IRA.
D) a custodial account.
A) a margin account.
Explanation
Borrowing money to buy securities can only be done in a margin account. Retirement accounts and custodial accounts do not allow margin.
A customer wanting to open a margin account is told that the securities will be held in street name. This means that the securities will be registered in
A) the name of the broker-dealer.
B) the name of the bank supplying the loan.
C) the names of the customer and the broker-dealer jointly.
D) the name of the customer.
A) the name of the broker-dealer.
Explanation
Securities held in street name are registered in the name of the broker-dealer, who is the named or nominal owner. The customer remains as the beneficial owner.
When a client of a broker-dealer purchases stock on margin, in order to finance the loan, the broker-dealer
A) rehypothecates the stock to a bank.
B) lends a portion of the stock to a bank.
C) maintains possession of the stock.
D) must comply with the requirements of Regulation T.
A) rehypothecates the stock to a bank.
Explanation
Stock in a client’s margin account is hypothecated (pledged) to the broker-dealer. In order to obtain funds to carry the margin loan, the broker-dealer rehypothecates a portion of the stock to a bank. The shares pledged to the bank serve as collateral for the bank’s loan to the broker-dealer, which is made in accordance with Regulation U (not T).
The minimum initial requirement when buying 100 shares at $15 in a new account would be
A) $1,500.
B) $375.
C) $2,000.
D) $750.
A) $1,500.
Explanation
The FINRA minimum initial deposit for a long purchase in a margin account is $2,000 or 100%, whichever is less.
A customer is not required to sign which of the following when opening a margin account?
A) Margin agreement
B) Consent to loan form
C) Hypothecation agreement
D) Credit agreement
B) Consent to loan form
Explanation
Although most broker-dealers will not open the account without having the customer sign all of these, there is no rule that requires the customer to sign the consent to loan form.
Which if the following may not be purchased on margin but can be used as collateral for a margin loan after being held for 30 days?
A) Mutual funds
B) Options
C) Warrants
D) Equities
A) Mutual funds
Explanation
Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are.
When customers open margin accounts, when must they be provided with a risk disclosure document?
I. Before initially opening the account
II. Quarterly
III. Semiannually
IV. Annually
A) I and II
B) I and IV
C) III and IV
D) I only
B) I and IV
I. Before initially opening the account
IV. Annually
Explanation
The risk disclosure document is required before opening the account and annually after opening the account.
A customer wants to save some money for his grandson’s college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true?
A) The customer may take a deduction for the amount contributed.
B) The maximum contribution permitted is $3,000 annually.
C) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over.
D) The customer may make annual contributions until the grandson graduates from college.
C) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over.
Explanation
The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.
A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited?
A) Fully paid for marginable securities totaling $6,400 in market value
B) Fully paid for marginable securities totaling $3,200 in market value
C) Cash in the amount of $1,600
D) Fully paid for marginable securities totaling $1,600 in market value
A) Fully paid for marginable securities totaling $6,400 in market value
Explanation
When meeting a Regulation T margin call with cash, 100% of the call must be deposited—in this case, $3,200. If using fully paid for marginable securities to meet the call, a deposit totaling twice the amount of the call must be made—in this case, $6,400. This is because securities are only marginable to 50% of their value.
A broker-dealer firm has just rehypothecated a thousand shares of MMS stock. This means
A) a bank has pledged the stock to the firm, which now pledges it to the customer.
B) the customer withdraws the stock from the bank and pledges it directly to the firm.
C) the firm has withdrawn the stock from a bank and pledged it to the customer.
D) the customer pledged the stock to the firm, which has now pledged it to a bank.
D) the customer pledged the stock to the firm, which has now pledged it to a bank.
Explanation
In a long margin account, customers put up at least half the purchase price of securities, and the broker-dealer firm borrows the remainder on the customer’s behalf from a bank. The customer pledges the securities to the broker-dealer, which is known as hypothecating the securities. The broker-dealer then rehypothecates them to the bank as collateral for the margin loan.
Borrowing money to buy securities is prohibited in all of the following accounts except
A) an individual IRA.
B) a Roth IRA.
C) a custodial account.
D) a margin account.
D) a margin account.
Explanation
Borrowing money to buy securities can only be done in a margin account. Retirement accounts and custodial accounts do not allow margin.
If a margin deposit is late, an extension request made by the broker-dealer
A) is not permitted to be made in any circumstance.
B) is not required but can be made, and may or may not be granted.
C) is not required but, if made, will always be granted.
D) is required to be made but may not always be granted.
B) is not required but can be made, and may or may not be granted.
Explanation
Extension requests can be made by the broker-dealer but are not mandatorily required. When made to the firm’s designated examining authority (DEA), they may or may not be granted.
Which of the following must be signed by a customer wanting to open a margin account?
A) Credit and loan consent agreements
B) Risk disclosure document and credit agreement
C) Loan consent and hypothecation agreements
D) Credit and hypothecation agreements
D) Credit and hypothecation agreements
Explanation
Opening a margin account requires that the customer sign the credit agreement and the hypothecation agreement. The loan consent form (agreement) is optional. While the risk disclosure document must be received and attested to as read by signing the credit agreement, it need not be signed.
