Unit 6 Quizbank Review Flashcards
(36 cards)
A client buys stock on a Monday, August 14, in a cash account. Under regulation T, when is the client’s payment due?
A. Same Day
B. In four business days
C. In two businesses days
D. At or before the time of order placement
B. Regular way to firm to firm settlement is two business days after the trade date ( T + 2). Under regulation T, payment must be made two business days after the settlement date( S+2 or T +4)
A new customer opens a margin account and upon account approval, does an initial transaction purchasing 100 shares of MJS common stock at $25. How much will the customer need to deposit?
A. $2000
B. $5000
C. $1000
D. $2,500
A. For the first trade of a newly opened margin account, there must be at least $2000 in equity. The rule is as follows: transaction greater than $4000, deposit 50% between $2000 and $4000, deposit $2000; and if the transaction is less than $2000, deposit 200% of the purchase price. In this case the transaction is between $2000 and $4000 so a deposit of $2000 is required.
LO 6.g
Each of the following investments and practices are deemed ineligible for an IRA or any other retirement program except:
A. Variable annuities
B. Life Insurance
C. Collectible fine art
D. Margin account trading
A. Annuities are eligible for IRAs. However, FINRA deems them generally unsuitable . The tax- deferred nature of a variable annuities comes with some cost. Placing this tax deferred vehicle inside. Tax deferred account (like an IRA) would be hard to justify .
LO6.e
All of the following accounts would allow all parties with access to the account to authorize withdrawals except;
A. An individual account with full power of attorney (FPOA)
B. Individual account with limited pier of attorney (LPOS)
C. Tenants in common account ( TIC)
D. Joint tenants with rights of survivorship( JYWROS)
B. Individual accounts with limited POS allow a designated person to place trades but not make withdrawals. All the other answer choices do allow withdrawals as well as placing trades by all parties with access to the account.
LO 6.a
A new client of the member firm just opened a margin account . After account approval, the client’s initial trade is an order to purchase 100 shares of BMR common stock at $18. With Regulation T at 50%, to be in compliance with regulations, the client would need to deposit:
A. $1000
B. $1800
C. $2000
D. $900
B. No borrowing can take place in a margin account without at least $2000 in equity. It is only necessary to pay in full when the purchase is less than $2000. It is only necessary to deposit more than $2000 when the trade exceeds $4000.
LO 6.g
When customers open margin accounts, when must they be provided with a risk disclosure document?
A. Before initially opening the account
B. Quarterly
C. Semiannually
D. Annually
A. I and lV
B. III and IV
C. I and II
D. I only
A. The risk disclosure is required before opening the account and annually after opening the account.
LO 6.g
With a discretionary account;
A. The customer may still enter orders
B. The customer may refuse any trades done by the party giving the discretion
C. A full power of attorney is needed on file to grant discretion
D. Churning is permitted by the party given the discretion
A. With a discretionary account the customer can continue to enter orders themselves. A trading authorization or limited power of attorney, not full power of attorney is required. The customer is bond to accept all trades done by the party given the Fido and churning, trades only done for the purpose of generating commissions, is never permitted.
LO 6.h
A broker - dealer may extend credit under Regulation T for which of the following transactions:
A. A variable annuity purchase.
B. A mutual fund purchase
C. The purchase of an IPO that went public 25 days ago
D. A closed end investment company purchased on the NYSE
D. Regulation T government customer payment and the extension of credit to clients in margin accounts. A closed end fund is an existing lusted security and is eligible for purchase in credit. IPOs and other new issues, such as mutual fund purchases, may only receive loan value ( and credit) after 30 days from issuance. Variable annuity may not be purchased with margined funds. These products are hybrid insurance and investment contracts that must be fully funded at time of purchase.
LO 6.g
Under whose Social Security number is the custodial account established?
A. The parent, whether the parent is the custodian or not
B. The minor’s
C. The person who established the account for the minor, whether the parent or not
D. The Custodian’s
B.Assets in a custodial Aa count are the minor’s property, so the minors SSI is used.
LO 6.c
As long as it is not restricted in any documentation, margin trading is permissible in which of the following accounts:
I. Corporation
II. IRA
III. Partnership
IV. Fiduciary
A. I and IV
B. I and III
C. II and III
D. II and IV
B. Corporate accounts may utilize margin as long as it is not restricted in the corporation’s charter or bylaws. Partnership accounts may utilize margin as long as it is not restricted in the partnership resolution. Fiduciary accounts such as IRAs( and other retirement accounts) and custodial accounts would generally not be permitted to trade on margin unless permission to trade on margin is specifically stated.
LO 6.g
A broker dealer may extend credit under Regulation T for which of these transactions?
A. An exchange traded fund
B. A fixed an unity purchase
C. A mutual fund purchase
D. The purchase of an IPO at the POP
A. Regulation T governs customer payment and the extension of credit to clients in margin accounts. An exchange traded fund (ETF) is a security that is eligible for purchase on credit. IPOs and other new issues- such as mutual fund purchases- may only receive loan value ( and credit) after 30 data from issuance. Annuities may not be purchased with margin funds.
LO 6.g
A corporation would like to open a margin account. Which of the following is not needed?
A. A corporate charter that specifically allows margin borrowing
B. A credit agreement
C. A new account form
D. A corporate charter that does not prohibit margin borrowing
A. A corporate charter is required. There is however, no requirement that the charter specifically allow margin. The charter must only not prohibit margin. A new account form, a credit agreement, and a hypothecation agreement are required.
LO 6.b
Who can contribute to an IRA?
A. Anyone with earned income not covered By an employer- sponsored plan
B. Anyone with earned income under the age of 59 and 1/2
C. Anyone with earned income
C. Anyone with earned income can contribute, even if covered by an employer sponsored plan. The contribution, however, may or may not be deductible, depending on income level.
LO 6.e
Which of the following is true regarding accounts trading on margin?
A. A fiduciary account may only trade on margin if it is specifically permitted in the trust or custodial agreement
B. Joint accounts or those with more than one party titled on the account may never trade on margin
C. A partnership account may only trade in margin if it is specifically permitted in the partnership resolution
D. A corporate account may only trade on margin if it specifically permitted in the corporate charter.
A. Both individual and joint accounts may trade in margin. While corporate and partnership accounts may trade on margin as long as they are not specifically restricted from doing so, a fiduciary account may only trade on margin if permission is specifically granted in the trust or custodial agreement. In the answers for the business accounts, it is the wording “ only trade on margin if it is specifically permitted “ that makes these responses incorrect. Corporate and partnership accounts may trade on margin as long as it is not prohibited.
LO 6. g
Which of the following are true of non qualified plans but not true of qualified plans?
I. Contributions are not tax deductible
II. Contributions are tax deductible
III. Plan needs IRS approval
IV. Plan does not require IRS approval
A) II and III
B) II and IV
C) I and IV
D) I and III
C. Qualified plans require IRS approval and the contributions are tax deductible. Because non qualified plans’ contributions are not deductible they do not require IRS approval.
LO 6.f
A customer received Regulation T margin call for $3200. To meet the deposit requirements, which of the following can be deposited?
A. Cash in the amount of $1600
B. Fully paid margin-able securities totaling $6400 in market value
C. Fully paid margin able securities totaling $1600 in market value
D. Fully paid margin able securities totaling $3200 in market value
B. When meeting a T margin call with cash, 100% of the call must be deposited. In this case $3200. If using fully paid for margin able securities to meet the call, a deposit totaling twice the amount of the call must be made- In this case $6400. This is because securities are only margin able to 50% of their value.
LO 6.g
To open a new accounts that will have margin trading, all of the following documents will be required except:
A). Credit agreement
B). Consent to Loan agreement
C) hypothecation agreement
D) account agreement
B. The consent to loan agreement is not a regulatory requirement. Note this is a new account, so the regular agreement is required in addition to the margin documents.
LO 6.g
Which of the following are true of qualified plans but not true of non qualified plans?
A. The plan cannot discriminate
B. The plan may discriminate
C. All withdrawals are tax free
D. All withdrawals are taxable above cost basis
A. With qualified plans all withdrawals are taxable, and the plan cannot discriminate; it has to be offered to all qualified employees. A non qualified plan does not need to be offered to all qualified employees, and distributions above the cost basis are taxable.
LO 6.f
Which of the following are true of traditional IRAs but not Roth IRAs?
I. Contributions may be deductible
II. Contributions are always deductible
III. There is a 50% penalty for failing to take the required minimum distribution ( RMD)
IV. There are income limits for making contributions
A. I and II
B. I and III
C. III and IV
D. II and III
B. If the contribution had an employer- sponsored plan and makes over the limit, the contributor can still have an IRA but it won’t be deductible. After reaching age 72, the RMDs must be taken each year. Failure to do so results in a 50% penalty. Income limits on traditional IRA’s impact deductibility, not contributions.
LO 6.e
The defined contribution plan
I. The benefit amount is fixed
II. The benefit amount is variable
III. The contribution amount is fixed
IV. The contribution amount can vary
A) I and III
B) II and III
C) II and IV
D) I and IV
B. In a defined contribution plan, the amount that the employer is depositing is fixed by the employer, but the employee chooses the investments, so the benefit varies.
LO 6.f
Discretion given to a registered representative to make transactions applies to all of the following except
A. The security for the transaction
B. The number of shares or units for the transaction
C. Whether to buy or sell
D. Timing and price only
D. Discretion is defined as the authority to decide, what security, the number of shares or units, and whether to buy or sell. Discretion does not apply to decisions regarding only the timing of an investment or the price at which it is bought or sold.
LO 6.h
A registered representative is discussing fee based and commission based accounts with a customer. All of the following are true except:
A. A fee based account charges a single annual fee that can be a fixed dollar amount or a percentage of assets under management
B. Disclosure of what service fees cover in a fee based account must be made to the customer before the account is opened
C. Fee based accounts are most suitable for those who do very little trading during the course of the year.
D. A commission based account bills for each transaction separately.
C. Fee based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing at least a moderate amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fever transactions each year. For fee based accounts full disclosure of what is covered by the annual feee must be made before the account can be opened.
L0 6.g
The benefits of designating a brokerage account as transfer of death ( TOD) are that
I. The designation eliminates estate taxes
II. The designation avoids probate
III. The account holder no longer has to make investment decisions regarding the account
IV. The account holder may still make a beneficiary changes for the account
A. I and IV
B. II and III
C. II and IV
D. I and III
C. The transfer of Death (TOD) designation allows the account holder to name a specific beneficiary ( or beneficiaries) to receive the accounts assets upon death. Those named persons may be changed whenever the account holder wishes. Although this designation allows the account to by pass probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.
LO 6.a
Which of the following accounts can only be opened in a cash account?
I. Individual transfer of death ( TOD) account
II. Individual account
III. Individual retirement accounts (IRA)
IV, Individual custodial account?
A. I and II
B. I and IV
C. II and III
D. III and IV
D. IRAs and custodial accounts prohibit the use of margin, so they must be done in cash accounts. These other accounts can be cash or margin
LO 6.g
