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Series 7 > chapter 21 > Flashcards

chapter 21 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

What does Regulation SHO regulate?

A

short sales

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2
Q

The _________________________ regulates margin requirements.

A

Federal Reserve Board

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3
Q

In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?

A

easy to borrow

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4
Q

Secondary market trades involving U.S. Government securities settle _____________________.

A

next business day (T+1)

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5
Q

The _____________________ has the authority to regulate margin requirements.

A

Federal Reserve Board

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6
Q

____________ governs the extension of credit by BDs.

A

Regulation T

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7
Q

The current Reg T margin requirement is ____%.

A

50%

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8
Q

Define Regulation T.

A

The percentage a customer must deposit when purchasing securities or selling short

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9
Q

Does the payment date requirement of Regulation T apply to cash or margin accounts?

A

Payment is required within 5 business days for both (100% in a cash account, 50% in a margin account).

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10
Q

What stocks does the FRB deem to be marginable?

A

Those stocks listed on major exchanges and on Nasdaq

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11
Q

What document allows a BD to lend customer securities to someone wishing to sell them short?

A

Loan Consent Agreement

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12
Q

True or False: Customers are required to sign the Loan Consent Agreement.

A

False, signature is optional

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13
Q

Hypothecation is synonymous with what term?

A

pledge

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14
Q

The ________________ Agreement describes the customer’s pledging of securities as collateral to the BD.

A

Hypothecation

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15
Q

When a customer buys on margin, how much cash may a BD borrow from a bank?

A

100% of the debit balance

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16
Q

What is the maximum amount of securities that a BD may rehypothecate to a bank?

A

140% of the debit balance

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17
Q

What is the rate of interest that a bank charges a BD on margin loans?

A

call rate

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18
Q

What is a customer using when she borrows funds to increase the size of her position?

A

leverage

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19
Q

Customers are given ____ business days after settlement date to pay for their portion of the trade.

A

Customers are given two business days after settlement date to pay for their portion of the trade. (S + 2 or T + 5)

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20
Q

True or False: Firms may establish their own in-house rules relating to payment dates and minimum requirements.

A

True. However, the requirements must be at least as stringent as those established by the regulators.

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21
Q

The formula for determining equity in a long margin account is: ____________ - __________ = Equity

A

Long Market Value (LMV) - Debit Balance = Equity

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22
Q

In a margin account, customers pay interest on the ________ balance.

A

debit balance

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23
Q

Any amount of equity greater than 50% is called _______________.

A

excess equity

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24
Q

Where will excess equity be recorded?

A

The Special Memorandum Account (SMA)

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25
Q

Calculate SMA using the following balances: LMV $40,000, Debit $10,000 and Equity $30,000

A

Equity - 50% of the LMV = Excess Equity ($30,000 - $20,000 = $10,000)

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26
Q

How is the account affected if SMA is withdrawn?

A

Debit balance increases and equity decreases.

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27
Q

True or False: Market declines will reduce SMA.

A

False. The only way to lose SMA is to use SMA.

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28
Q

A client with $3,000 of SMA has buying power of $________.

A

$6,000

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29
Q

How is buying power calculated?

A

SMA divided by Reg T of 50% (just remember SMA x 2)

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30
Q

A client buys stock on margin and makes no cash deposit because he uses SMA. How are the account balances affected?

A

LMV and Debit both increase by the full purchase price; no change is made to equity.

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31
Q

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. SMA is used for a $20,000 purchase. Result?

A

LMV $60,000 - Debit $30,000 = Equity $30,000 and SMA is $0

32
Q

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. If SMA is withdrawn, what are the balances?

A

LMV $40,000 - Debit $20,000 = Equity $20,000 and SMA is $0

33
Q

An account with equity below the Reg T requirement is called ____________.

A

restricted

34
Q

By how much is the following account restricted? LMV $40,000, Debit $25,000, Equity $15,000

A

Restricted by $5,000. The equity should be $20,000 (50% of $40,000), but there is only $15,000.

35
Q

True or False: Restricted accounts must be remedied immediately by depositing the appropriate dollar amount.

A

False

36
Q

How will the sale of securities from an account affect the account balances?

A

LMV and Debit decrease by the sales proceeds, Equity stays the same, and SMA increases by 50% of the sales proceeds.

37
Q

Existing account: LMV $40,000, Debit $25,000, Equity $15,000. If $5,000 is sold from the account, how is SMA affected?

A

SMA would be credited with $2,500 (50% of the sales proceeds).

38
Q

How would a $2,000 cash dividend or voluntary cash deposit affect a margin account’s balances?

A

LMV is unchanged, Debit is reduced by $2,000, Equity is increased by $2,000, and SMA is increased by $2,000.

39
Q

Existing account: LMV $40,000, Debit $25,000, Equity $15,000. How is SMA affected by receiving a $5,000 cash dividend?

A

SMA would be credited with $5,000 (100% of the deposit).

40
Q

The industry minimum maintenance requirement for a long account is ____%.

A

25%. (Equity must be at least 25% of LMV.)

41
Q

If a client’s equity falls below 25%, the maintenance call must be met __________.

A

promptly

42
Q

May new issues (e.g., IPOs or mutual fund shares) be purchased on margin?

A

No, have to wait 30 days

43
Q

How long must new issues be held before they may be used as collateral?

A

30 days

44
Q

Securities that are acceptable as collateral have a loan value that equals ____%.

A

50%

45
Q

What amount of fully paid securities must be deposited to meet a margin requirement?

A

two times the margin call

46
Q

To meet a $20,000 Reg. T call, a customer could deposit cash of $________ or fully paid securities of $________.

A

cash of $20,000 or securities of $40,000

47
Q

The maximum potential loss when selling short is ____________.

A

unlimited

48
Q

How long can a short stock position be maintained?

A

unlimited

49
Q

True or False: If a stock is shorted and a dividend is declared, the short seller must pay the lender the dividend.

A

True

50
Q

What is the Reg T margin requirement for short sales?

A

50%

51
Q

The formula for determining equity in a short margin account is: ____________ - ____________ = Equity

A

Credit Balance - Short Market Value (SMV) = Equity

52
Q

The credit balance is made up of what two components?

A

Short sales proceeds plus the Reg. T requirement

53
Q

The industry minimum maintenance requirement for a short account is ____%.

A

30%. Equity must be at least 30%

54
Q

A long margin account’s minimum initial equity requirement is _____% of the purchase or $______ , whichever is less.

A

100% or $2,000

55
Q

The minimum equity requirement for the initial short sale in a margin account is $_______ .

A

$2,000

56
Q

What is the formula for finding equity in a combined margin account?

A

(LMV + Credit Balance - Debit Balance - SMV)

57
Q

Calculate the combined equity in the following account: LMV $24,000, Debit $10,000, Credit $18,000, SMV $9,000

A

(24,000 + 18,000 - 10,000 - 9,000) = $23,000

58
Q

Upon the purchase of an option, Regulation T requires payment to be made within ____ business days.

A

5

59
Q

What is the margin requirement when buying options?

A

100% of premium

60
Q

If an investor writes a covered call, is there a margin requirement on the option position?

A

no

61
Q

On margin, an investor buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is the margin requirement?

A

$2,500, which is 50% of the stock position. Since this is a covered position, there’s no requirement on the short call

62
Q

On margin, Ben buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is Ben’s required cash deposit?

A

$2,200, which is 50% of the stock position minus the $300 premium received on the sale of the call

63
Q

On margin, Henry sells short 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is the margin requirement?

A

$3,400, which is 50% of the short position. Since this is a covered position, there is no requirement on the short put.

64
Q

On margin, Emma shorts 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is Emma’s required cash deposit?

A

$3,000

65
Q

Mutual fund shares have loan value after they have been owned for ____ days.

A

30 days

66
Q

What may a BD lend to a customer in a margin account?

A

The complement of the Reg T margin call. In other words, 50%.

67
Q

What formula can be used to determine how far the LMV can fall to be at the minimum maintenance requirement?

A

Debit Balance x 4/3 or Debit Balance ÷ 75%

68
Q

What formula can be used to determine how high the SMV can rise to be at the minimum maintenance requirement?

A

Credit Balance x 10/13

69
Q

What is the special minimum margin and maintenance requirement when selling short stock priced below $5 per share.

A

$2.50 per share or 100% of the market value - whichever is greater

70
Q

True or False: Short against the box is considered being long and short the same position at the same time.

A

True

71
Q

What is the margin requirement for a short against the box position?

A

5% of the long position

72
Q

True or False: Uncovered option positions have a margin requirement, while covered positions do not.

A

True

73
Q

Identify this: Long a security convertible into an equal number of shares of a short position being carried.

A

Arbitrage in a margin account

74
Q

Is there a margin requirement when engaging in arbitrage in a margin account?

A

Yes, 10% of the current market value of the long position.

75
Q

True or False: An investor is able to protect a profit on a long position by being short against the box.

A

True. “Short against the box” refers to investors who have sold stock short that they currently hold in their portfolio.

Series 7 (25 decks)

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