UNIT 24 CHECKPOINT EXAM

Question 1

Fee-based accounts are appropriate for investors that

A) trade actively.
B) covered call writing.
C) asset allocators with quarterly rebalancing.
D) pursue a buy and hold strategy.

Answer 1

A) trade actively.

Explanation
Fee-based accounts are best for active traders, not individuals that hold position and trade infrequently.

Question 2

A customer of a broker-dealer sells 300 shares of stock at $50 per share and leaves the proceeds in the account. The proceeds are

I. A free credit balance
II. A debit balance
III. available to the customer on demand
IV. available for withdrawal after 30 days

A) I and IV
B) I and III
C) II and III
D) II and IV

Answer 2

B) I and III

I. A free credit balance
III. available to the customer on demand

Explanation
Proceeds from a sale that are not reinvested and held in the account at the broker-dealer are considered a free credit balance. The free means that the funds are available to the customer on demand (freely available).

Question 3

When opening a new account with margin, all of the following documents are required except

A)
credit agreement.
B) hypothecation agreement.
C) account agreement.
D) consent to loan agreement.

Answer 3

D) consent to loan agreement.

Explanation
The consent to a loan agreement is not a regulatory requirement. Note this is a new account, so the regular account agreement is required in addition to the margin documents.

Question 4

Minimum maintenance requirements in a long margin account is

A) 30%.
B) 75%.
C) 25%.
D) 50%.

Answer 4

C) 25%.

Explanation
Minimum maintenance for long margin is 25%. In a short account the minimum maintenance requirement is 30%. Initial requirement under Regulation T is 50%.

Question 5

A broker-dealer may extend credit under Regulation T for which of these transactions?

A) The purchase of an IPO that went public 25 days ago
B) A mutual fund purchase
C) A closed-end investment company purchased on the NYSE
D) A variable annuity purchase

Answer 5

C) A closed-end investment company purchased on the NYSE

Explanation
Regulation T governs customer payment and the extension of credit to clients in margin accounts. A closed-end fund is an existing listed security and 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 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.

Question 6

A new client of the member firm has just opened a margin account. After account approval, the client’s initial trade is an order to purchase 100 shares of LMN common stock at $25. With Regulation T at 50%, in order to be in compliance with all regulations, the client would need to deposit

A) $2,000.
B) $1,000.
C) $1,250.
D) $2,500.

Answer 6

A) $2,000.

Explanation
No borrowing can take place in a margin account without at least $2,000 in equity. It is only necessary to pay in full when the purchase is less than $2,000. It is only necessary to deposit more than $2,000 when the trade exceeds $4,000.

Question 7

Margin Maintenance requirements are set by

A) the SEC.
B) the FBI.
C) FINRA.
D) the FRB.

Answer 7

C) FINRA.

Explanation
Maintenance requirements are set by the governing SRO. FINRA is the best answer of this set. FRB sets the initial margin requirement along with the SRO minimum. The FRB does not set maintenance requirements.

Question 8

A margin account allows a customer to borrow a portion of the funds needed to complete a trade. Currently, the required minimum is 50%. Which regulator sets the requirement?

A) The FRB
B) The SEC
C) The OCC
D) FINRA

Answer 8

A) The FRB

Explanation
The Federal Reserve Board sets the Regulation T requirement.

Question 9

An account that charges a set fee on a monthly or quarterly basis, which covers all trading activity, is called a

A) schedule account.
B) wrap account.
C) fee-based account.
D) set commission account.

Answer 9

C) fee-based account.

Explanation
A wrap account charges a fee that includes all costs, including management and advice. An account that charged a set fee for trading costs is a fee-based account. The other choices are not actual account types.

Question 10

Your customer purchases 200 shares of Seabird Airlines (the ticker is SBRD) at $30 a share in a cash account. Under Regulation T, the Federal Reserve has set the initial margin requirement at 50%. How much does your customer need to deposit for this trade?

A) $3,000
B) $2,000
C) $6,000
D) $1,500

Answer 10

C) $6,000

Explanation
This is a cash account. There is no margin borrowing, so 100% of the trade’s value must be deposited. 200 shares at $30 = $6,000.