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Series 27 Questions > Unit 3- Extension of Credit > Flashcards

Unit 3- Extension of Credit Flashcards

1
Q

Margin Accounts
Question ID: 48482
A customer opens an account with XYZ Discount Securities and signs a loan consent agreement. The firm is now permitted to:

A) commingle the customer’s securities with securities owned by the firm.
B) loan the customer money and charge interest.
C) loan out the customer’s margin securities.
D) hypothecate securities in the customer’s account.

A

Answer: C

The loan consent agreement allows the firm to loan out customer margin securities. The other components of a margin agreement (the hypothecation agreement and the credit agreement) are necessary to allow the firm to pledge customer securities and to extend credit to a customer. Securities owned by a customer may not be commingled with firm securities.

Reference: 3.1.2 in the License Exam Manual.

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2
Q

Margin Accounts
Question ID: 48486
Under SEC Rule 15c3-3, customer excess margin securities carried by a broker/dealer one equal to the:

A) market value of the margin securities exceeding 140% of customer debit balances.
B) difference between the required amount of initial margin and the market value of the margin securities.
C) difference between customer debit balances and the market value of the margin securities.
D) value of securities exceeding Regulation T.

A

Answer: A

Under the rule, excess margin securities are those exceeding 140% of customer debit balances.

Reference: 3.1.3.4.2 in the License Exam Manual.

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3
Q

Margin Accounts
Question ID: 48487
A customer buys 1,000 shares of ABC at $50 a share when Regulation T is 50%. The customer’s debit balance is $25,000. Assuming that the broker/dealer has hypothecated the maximum amount of stock permissible for the customer, how many shares should the firm be holding in segregation?

A) 0 shares.
B) 500 shares.
C) 1,000 shares.
D) 300 shares.

A

Answer: D

Broker/dealers are allowed to hypothecate customer securities in amounts of up to 140% of an account’s debit balance. In this case, the debit balance is $25,000, which means that $35,000 worth of stock ($25,000 × 140%) can be hypothecated. With the stock at 50, a total of 700 shares ($35,000 ÷ $50) can be hypothecated as margin stock, and the balance of 300 shares must be segregated as excess margin stock.

Reference: 3.1.3.4.1 in the License Exam Manual.

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4
Q

Margin Accounts
Question ID: 48488
All of the following statements regarding the handling of a customer’s securities by a broker/dealer are true EXCEPT:

A) the securities may be commingled with those of other customers if all of the customers involved grant consent in writing.
B) the broker/dealer may use the customer’s securities as collateral to borrow only to the extent of the customer’s indebtedness to the broker/dealer.
C) the securities may be loaned to another customer if the lending customer grants consent in writing.
D) the securities may be commingled with those of the broker/dealer if the customer grants consent in writing.

A

Answer: D

Under SEC Rule 15c-2-1, a customer’s securities may be commingled with those of other customers if all customers express their consent in writing. The broker/dealer can pledge these customer securities to a bank to obtain a loan, provided the loan does not exceed the amount the broker/dealer reloans to the customers. Customer securities may never be commingled with firm positions. The firm may loan out customer margin securities if the customer has signed a loan consent agreement.

Reference: 3.1.3.4.1 in the License Exam Manual.

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5
Q

Margin Accounts
Question ID: 48499
A customer’s margin account has available SMA of $10,000. How much would he have to deposit to purchase listed options with premiums totaling $18,000?

A) $16,000.
B) $8,000.
C) $4,000.
D) $6,500.

A

Answer: B

The options purchases must be fully paid. The customer has available SMA of $10,000, which means $10,000 may be borrowed from the account. The remaining $8,000 must be deposited by the customer. SMA may be used 1 for 1 when purchasing options; 2 for 1 when purchasing stock.

Reference: 3.1.3.2.1 in the License Exam Manual.

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6
Q

Margin Accounts
Question ID: 48500
Which of the following will cause a change in SMA in a long account?

I. Purchase of stock.
II. Sale of stock.
III. Increase in market value.
IV. Decrease in market value.
A) I and II.
B) III only.
C) I, II, III and IV.
D) I, II and III.
A

Answer: D

Once SMA is created in a long account, it is not reduced by a decline in market value; the SMA may still be taken out provided it will not bring the account below the maintenance level. An increase in market value (as well as a sale of stock) increases SMA. The purchase of stock decreases available SMA.

Reference: 3.1.3.2 in the License Exam Manual.

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7
Q

Margin Accounts
Question ID: 48535
SEC rules prohibit broker/dealers from overborrowing on customer margin securities. Which of the following statements is TRUE?

A) Broker/dealers may use margin securities equal to 140% of a customer’s debit balance as collateral for bank loans.
B) Broker/dealers may borrow from banks in amounts equal to 140% of their aggregate margin account debit balances.
C) Broker/dealers may use all margin securities in amounts greater than 140% of the customer’s debit balance as collateral for cash loans from banks.
D) Broker/dealers may use customer margin securities equal to 100% of the current debit balance as collateral for cash loans from banks. If the margin account is restricted, broker/dealers can use securities equal to 140% of the debit balance.

A

Answer: A

SEC rules limit the amount of margin stock a broker/dealer can use as bank loan collateral to 140% of a customer’s debit balance. The SEC’s rule ensures that a broker/dealer is never allowed to borrow more money against customer securities than the firm itself is lending to a customer.

Reference: 3.1.3.4.1 in the License Exam Manual.

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8
Q

Margin Accounts
Question ID: 48540
With Regulation T at 65%, what is the margin maintenance requirement for an account that is long 200 shares of AMF stock worth $40 per share?

A) $2,400.
B) $4,000.
C) $5,200.
D) $2,000.

A

Answer: D

The maintenance requirement for a long margin account is set by the SRO and is 25% of the market value. In this case, 25% of $8,000 equals $2,000. The Regulation T requirement determines the initial deposit amount; it does not affect the maintenance requirement.

Reference: 3.1.3.4 in the License Exam Manual.

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9
Q

Margin Accounts
Question ID: 48544
A customer has $1,000 of SMA in his account, which becomes restricted. The customer:

A) may withdraw 100% of the SMA even though the account is restricted, provided the equity does not fall below maintenance level.
B) loses his SMA.
C) retains his SMA, but cannot make any withdrawals as long as the account remains restricted.
D) may withdraw only 30% of the SMA because the account is restricted.

A

Answer: A

SMA may be withdrawn when an account is restricted, provided the account is not brought below the maintenance level (25% in a long account). As SMA is withdrawn, equity decreases and debit increases.

Reference: 3.1.3.2.2 in the License Exam Manual.

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10
Q

Margin Accounts
Question ID: 48545
Which of the following statements regarding SMA in a customer’s account are TRUE?

I. SMA may not be withdrawn from a restricted account.
II. SMA may be withdrawn if it does not cause the account to fall below the maintenance level.
III. SMA may be used as buying power if it does not cause the account to fall below the maintenance level.
IV. SMA remains in the account even if the value of the account subsequently declines.
A) I and IV.
B) II and III.
C) III and IV.
D) II, III and IV.

A

Answer: D

SMA represents an available credit line. It may be taken out of an account whether or not the account is restricted, provided the account is not brought below the maintenance level.

Reference: 3.1.3.2.1 in the License Exam Manual.

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11
Q

Margin Accounts
Question ID: 48548
A member firm opening a margin account for a customer must furnish the customer with:

A) its most recent balance sheet.
B) its most recent income statement.
C) all of these.
D) a statement disclosing the terms and conditions under which it extends credit and the method of computing interest on the debit balance.

A

Answer: D

In addition to disclosing the terms under which credit will be extended to a margin account customer, a registered representative must also complete a new account form and the customer must sign a margin agreement. The customer must also be given a risk disclosure statement.

Reference: 3.1.2 in the License Exam Manual.

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12
Q

Margin Accounts
Question ID: 48550
A customer has a mixed margin account consisting of both long and short positions. If the long market value decreases and, at the same time, the short market value decreases an equal amount, the customer’s net equity:

A) decreases.
B) doubles.
C) remains the same.
D) increases.

A

Answer: C

The equity stays the same because the loss on the long position is offset by the gain on the short position.

Reference: 3.1.6 in the License Exam Manual.

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13
Q

Margin Accounts
Question ID: 48554
A customer account has a long market value of $60,000 and a debit of $28,000. The broker/dealer must segregate securities with a market value of:

A) $50,000.
B) $20,800.
C) $28,000.
D) $39,200.

A

Answer: B

A firm is permitted to rehypothecate customer margin securities in an amount up to 140% of the customer’s debit balance. Securities not rehypothecated are excess margin securities; these must be kept in segregation and reduced to possession or control. Here, 140% of the customer’s $28,000 debit balance equals $39,200, which represents the amount that may be rehypothecated. Securities with a market value of $20,800 ($60,000 − $39,200) represent excess margin securities which must be segregated.

Reference: 3.1.3.4.1 in the License Exam Manual.

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14
Q

Margin Accounts
Question ID: 48560
As an initial transaction in a margin account, a customer sells short 1,000 shares of a capital market stock at $2 per share. If Regulation T is 50%, how much money will the customer be required to deposit?

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

A

Answer: D

The industry requirement to short stocks below $5 per share is 100% of market value or $2.50 per share (whichever is greater).

Reference: 3.1.5.2 in the License Exam Manual

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15
Q

Margin Accounts
Question ID: 48565
A customer enters the following orders in a margin account:

Buy 200 XYZ shares at 25.
Buy 10 XYZ Nov 30 calls at 1.
The customer may satisfy the Regulation T requirements for these purchases by depositing listed stock with a current market value of:
A) $1,500.
B) $3,500.
C) $6,000.
D) $7,000.
A

Answer: D

The customer purchases 200 shares of stock at 25, for a total market value of $5,000. The Reg T requirement for this purchase is $2,500. The customer also purchases 10 calls for a premium of 1, at a price of $1,000. The calls must be paid for in full. The customer’s total initial margin requirement is $2,500 plus $1,000, which equals $3,500. The customer may deposit securities with a loan value up to the amount of the margin requirement. The loan value of marginable stock is 50% of its market value. If the customer deposits $7,000 worth of stock, its loan value is $3,500-enough to meet the margin requirement.

Reference: 3.1.3.10 in the License Exam Manual.

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16
Q

Margin Accounts
Question ID: 48578
The agreement which allows the member firm to use customer securities as collateral for a loan is the:

A) restriction agreement.
B) hypothecation agreement.
C) credit agreement.
D) loan consent agreement.

A

Answer: B

The hypothecation agreement, signed when opening a margin account, allows the member firm to use customer securities to collateralize a loan to the member. The member in turn reloans the money to the customer to finance the debit balance.

Reference: 3.1.2 in the License Exam Manual.

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17
Q

Margin Accounts
Question ID: 48579
A customer’s margin account is long 400 shares of XYZ currently trading at $18 per share. Under FINRA rules, the minimum maintenance margin requirement for this account is:

A) $1,800.
B) $2,000.
C) $2,160.
D) $3,600.

A

Answer: A

This account has a current market value of $7,200 (400 × $18). Minimum maintenance is 25% of market value (25% × 7,200 = $1,800).

Reference: 3.1.3.4 in the License Exam Manual

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18
Q

Margin Accounts
Question ID: 48580
In a combined margin account, the market value of the long position increases. At the same time, the market value of the short position decreases by the same dollar amount. As a result, the equity in the combined account:

A) cannot be determined from the information as given.
B) has increased.
C) has decreased.
D) remains the same.

A

Answer: B

If the long position is increasing, equity is increasing. If the short position is decreasing, equity is increasing. As a result, equity in the combined account has risen significantly.

Reference: 3.1.6 in the License Exam Manual.

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19
Q

Margin Accounts
Question ID: 48581
The deposit of fully paid securities into a long margin account increases all of the following EXCEPT:

A) debit balance.
B) market value.
C) equity.
D) SMA.

A

Answer: A

The debit balance will not change because the customer is not borrowing more money. The market value in the account will increase by the value of the securities deposited, and equity will rise dollar for dollar with the deposit. SMA will increase by 50% of the value of the securities deposited.

Reference: 3.1.3.3 in the License Exam Manual.

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20
Q

Margin Accounts
Question ID: 48582
A customer has a margin account with a market value of $42,000 and a debit balance of $20,000. How much did the member borrow using customer securities as collateral?

A) $28,000.
B) $20,000.
C) $21,000.
D) $22,000.

A

Answer: B

A member can never borrow more than it reloans to the customer using customer securities as collateral.

Reference: 3.1.3.4.1 in the License Exam Manual.

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21
Q

Margin Accounts
Question ID: 48605
A long margin account has a debit balance of $16,800. The long market value at maintenance is:

A) $16,800.
B) $28,000.
C) $33,600.
D) $22,400.

A

Answer: D

Long market value at maintenance is the market value to which the securities could fall that would put the account at minimum maintenance (25% of market value). The quickest way to make the computation is to divide the debit balance by 0.75. In this example, dividing $16,800 by 0.75 results in a maintenance market value of $22,400. At this point, the equity in the account is $5,600 ($22,400 − $16,800), which is exactly 25% of the market value.

Reference: 3.1.3.5 in the License Exam Manual.

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22
Q

Margin Accounts
Question ID: 48608
A customer has a margin account with a market value of $18,000 and a debit balance of $10,000. How much did the broker/dealer borrow using customer securities as collateral?

A) $8,000.
B) $14,000.
C) $18,000.
D) $10,000.

A

Answer: D

A broker/dealer, using customer securities as collateral, can never borrow more than the firm relends to the customer ($10,000).

Reference: 3.1.3.4.1 in the License Exam Manual.

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23
Q

Margin Accounts
Question ID: 48641
Customer credit agreements signed when opening margin accounts must contain all of the following information EXCEPT:

A) the method for determining the debit balance.
B) the basis upon which interest will be computed.
C) the terms under which the interest rate can change.
D) the stated rate of interest.

A

Answer: D

The stated rate of interest is not part of the credit agreement. Interest charged on customer debit balances will vary daily with the call loan rate.

Reference: 3.1.2 in the License Exam Manual.

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24
Q

Margin Accounts
Question ID: 48650
In a new margin account, a customer sells short 2,000 shares of XPTT at $26 per share. The short market value at maintenance is:

A) $15,600.
B) $26,000.
C) $78,000.
D) $60,000.

A

Answer: D

Short market value at maintenance refers to the market value where the short account would be at minimum maintenance. The easy way to compute this value is to divide the credit balance in the account by 1.3. The formula is: CR − SMV = EQ; $78,000 − $52,000 = $26,000. $78,000 / 1.3 = $60,000. If the market value of the short position were to rise to $60,000 from $52,000, the account would be at minimum: CR − SMV = EQ; $78,000 − $60,000 = $18,000 (30%).

Reference: 3.1.5.1 in the License Exam Manual.

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25
Q

Margin Accounts
Question ID: 48661
The Federal Reserve will determine the marginability of a new issue once the security has traded in the secondary market for:

A) 45 days.
B) 60 days.
C) 90 days.
D) 30 days.

A

Answer: D

A new issue becomes marginable (if determined by the Fed) only after it has traded in the secondary market for 30 days.

Reference: 3.1.7 in the License Exam Manual.

26
Q

Margin Accounts
Question ID: 48676
The loan consent agreement signed when opening a margin account allows the member carrying the account to loan out:

A) margin securities.
B) excess margin securities.
C) fully paid-for securities.
D) all of these.

A

Answer: A

The typical loan consent agreement allows the member firm to loan out customer margin securities. Excess margin securities and fully paid securities must be placed in segregation under possession and control rules.

Reference: 3.1.2 in the License Exam Manual.

27
Q 
Margin Accounts
Question ID: 48684 
"The customer control accounts below appear on the trial balance of ABC Securities, Inc.: 
#	Debit	Credit
1	500	100(A)
2	200	50
3	125	25
4	75	75(B)

(A) credit from short sale; (B) credit from short against the box

The amount of customer securities that can be rehypothecated to a bank is based on a balance of:”

A) $900,000.
B) $825,000.
C) $300,000.
D) $625,000.

A

Answer: B

The maximum amount of securities that can be rehypothecated is 140% of the customer’s net debit balance. Net debit equals margin account debits less cash account balances, and excludes credits from short sales of securities. Shorting against the box is considered a short sale of securities. To calculate net debit in this example, add all debits ($900,000) and subtract the credits that did not arise from short sales ($75,000). The amount on which rehypothecation can be based is $825,000.

Reference: 3.1.3.4.2 in the License Exam Manual.

28
Q

Margin Accounts
Question ID: 48687
Which of the following will affect SMA in a long margin account?

I. Sale of securities in a restricted account.
II. Decline in portfolio value.
III. Cash dividend received.
IV. Interest charged on debit balance.
A) I, II and IV.
B) I and IV.
C) I, II, III and IV.
D) I and III.
A

Answer: D

SMA in a long account will be increased by 50% of the sales proceeds when a sale occurs in a restricted account. It will be increased on a dollar-for-dollar basis when a dividend is received. A decline in market value and interest charged on a debit balance will reduce the equity in the margin account but will have no effect on SMA.

Reference: 3.1.3.2 in the License Exam Manual.

29
Q

Margin Accounts
Question ID: 48704
Which of the following will affect SMA in a short margin account?

I. Purchase of securities.
II. Sale of securities.
III. Increase in market value.
IV. Decrease in market value.
A) I and III.
B) I and IV.
C) I, II and IV.
D) I, II and III.
A

Answer: C

SMA in a short account is decreased when securities are purchased. SMA is increased by 50% of the sales proceeds when securities are sold and when the market value of securities in the account falls.

Reference: 3.1.3.2 in the License Exam Manual.

30
Q

Margin Accounts
Question ID: 48731
In a new margin account, a customer sells short 500 XYZ at $40. The stock immediately declines to $30. Payment is received from the customer 10 business days after trade date. Which of the following statements may be TRUE?

I. The Regulation T requirement is $10,000.
II. The customer may reduce the Regulation T requirement by 50% of the subsequent profit.
III. The account has $7,500 of SMA.
IV. If an extension was not requested and received, the account will be frozen.
A) I and II.
B) III and IV.
C) I, II, III and IV.
D) I, III and IV.

A

Answer: D

Regulation T is 50% in a short or long account. The credit balance of this account is $30,000 (SMV of $20,000 + Regulation T of $10,000). If the SMV falls to $15,000, the equity in the account is $15,000 (CR − SMV = EQ). The SMA is the excess of the equity over the new Regulation T, which on SMV of $15,000 is $7,500 (EQ of $15,000 − Regulation T of $7,500 = SMA of $7,500). This account is frozen because the customer did not meet the Regulation T settlement requirement of 5 business days. The Regulation T requirement cannot be reduced by profits in the account.

Reference: 3.1.1 in the License Exam Manual.

31
Q

Margin Accounts
Question ID: 48737
FRB Regulation U would govern which of the following transactions?

A) Bank lending to a broker/dealer where securities are used as collateral.
B) Corporation borrowing from a bank to finance its stock option program.
C) Commercial lender loaning money to a corporation where securities are used as collateral.
D) Broker/dealer lending to a customer where securities are used as collateral.

A

Answer: A

Regulation U regulates commercial banks loaning money to broker/dealers based on securities as collateral.

Reference: 3.1.1 in the License Exam Manual.

32
Q

Margin Accounts
Question ID: 48755
A customer buys 100 shares of XYZ at 30 in an initial transaction in a margin account. What must the customer deposit?

A) $1,500.
B) $3,000.
C) $2,000.
D) $750.

A

Answer: C

If the first trade in a margin account is between $2,000 and $4,000, the customer must deposit $2,000.

Reference: 3.1.3.6 in the License Exam Manual.

33
Q

Margin Accounts
Question ID: 48756
In a margin account, a customer is long 2,000 shares of ABC at $25. The account has a debit balance of $12,000. If the customer wishes to buy shares of XYZ currently trading at $40, how many shares can she buy without putting up additional funds?

A) 975 shares.
B) 1,300 shares.
C) 650 shares.
D) 325 shares.

A

Answer: C

The customer can purchase additional securities with the buying power available through SMA. To find the SMA amount, the equity must first be calculated (LMV-DR = EQ). In this example the equity is $38,000. The SMA in the account is the amount by which the equity exceeds the Regulation T amount. Regulation T on the $50,000 of LMV is $25,000; $38,000 of equity minus Regulation T of $25,000 creates SMA of $13,000. $1 of SMA buys $2 of stock, so the buying power of this account is $26,000. At $40 per share, $26,000 will buy 650 shares of ABC.

Reference: 3.1.3.2.1 in the License Exam Manual.

34
Q

Margin Accounts
Question ID: 48758
In a new margin account, a customer buys 2,000 shares of ABC at $45. What is the long market value at maintenance?

A) $30,000.
B) $45,000.
C) $60,000.
D) $22,500.

A

Answer: C

The maintenance market value is the point which the market value of securities in a margin account can fall before triggering a maintenance call. It is calculated by dividing the debit balance of the account by 0.75 (the complement of the NYSE 25% minimum maintenance for long accounts). In this purchase of $90,000 of ABC, the debit balance would be $45,000 ($45,000 divided by 0.75 results in the maintenance market value of $60,000).

Reference: 3.1.3.5 in the License Exam Manual.

35
Q

Margin Accounts
Question ID: 48773
Which of the following statements are TRUE under 15c2-1?

I. Securities of one customer can be commingled with those of another with written consent.
II. Securities of one customer can be commingled with those of the broker/dealer with written consent of the customer.
III. The broker/dealer may borrow, using customer securities as collateral, only to the extent of the customer’s debit balance.
IV. Securities of one customer may be loaned to another customer with written consent.

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

A

Answer: B

Customer securities may be commingled with securities of other customers if prior written consent is given. They are not allowed to be commingled with securities of the firm. The firm may borrow no more than the customer’s debit balance, although it may pledge as collateral a maximum of 140% of the debit balance. The signed loan consent form allows a customer’s margin securities to be loaned to other customers of the broker/dealer for short sales.

Reference: 3.1.3.4.2 in the License Exam Manual.

36
Q

Margin Accounts
Question ID: 48781
Which of the following statements regarding Regulation T are TRUE?

I. Margin calls for $1,000 or less do not have to be sent.
II. Regulation T sets initial requirements for exempt securities.
III. Regulation T sets minimum maintenance requirements.
IV. All Nasdaq securities are eligible for purchase on margin.

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

A

Answer: C

Regulation T sets initial requirements for nonexempt securities. The SROs set minimum maintenance requirements.

Reference: 3.1.1 in the License Exam Manual.

37
Q

Margin Accounts
Question ID: 48789
A customer account has a LMV of $60,000 and a DR of $28,000. The broker/dealer must segregate securities with a market value of:

A) $28,000.
B) $39,200.
C) $50,800.
D) $20,800.

A

Answer: D

A broker/dealer is required to segregate excess margin securities, which are defined as the amount by which the market value exceeds 140% of the customer’s debit balance. The margin securities in this example are $39,200 ($28,000 × 1.4); $60,000 − $39,200 = $20,800.

Reference: 3.1.3.4.1 in the License Exam Manual.

38
Q

Margin Accounts
Question ID: 48800
Under SEC Rule 15c3-3, excess margin securities are defined as the:

A) difference between the market value of the margin securities and the debit balance.
B) market value of the securities in excess of 140% of gross customer debit balances.
C) market value of the securities in excess of 140% of net customer debit balances.
D) difference between the market value of the margin securities and the initial margin requirement.

A

Answer: C

Excess margin securities are the market value of securities in excess of 140% of the customer’s net debit balance.

Reference: 3.1.3.4.2 in the License Exam Manual.

39
Q

Margin Accounts
Question ID: 48803
With Regulation T at 60%, a customer enters the following orders in an existing account:

Debit (Long)
200 ABC @ $35/share
100 DEF @ $20/share
1 DEF put @ $500

Credit (Short)
100 XYZ @ $30/share

The margin call will be for:

A) $3,275.
B) $5,500.
C) $7,500.
D) $7,700.

A

Answer: D

With Regulation T at 60%, the purchase of 200 ABC at $35 per share requires equity of $4,200. The purchase of 100 ABC at $20 per share requires equity of $1,200. The short sale of 100 XYZ at $30 requires equity of $1,800. Options may not be purchased on the margin, so the entire premium of $500 must be paid in full. The total equity required on all transactions is $7,700.

Reference: 3.1.3 in the License Exam Manual.

40
Q

Margin Accounts
Question ID: 48814
Which of the following statements best describes a restricted margin account?

A) An account for which no new securities may be purchased.
B) An account in which SMA cannot be used.
C) An account with a debit balance.
D) An account in which equity is below the initial margin requirement.

A

Answer: D

A restricted margin account is an account where the equity is below the initial 50% requirement and at or above the minimum maintenance. SMA can be used in a restricted account provided its use does not cause a maintenance call. New securities can be purchased in a restricted account if the Regulation T requirement is met.

Reference: 3.1.3.1 in the License Exam Manual.

41
Q

Margin Accounts
Question ID: 48944
An arbitrage account where the account is long and short the same amount of the same security requires a FINRA maintenance margin of:

A) 5%.
B) 10%.
C) 25%.
D) 50%.

A

Answer: A

The margin requirement in an account where the same security is carried both long and short is 5% of the long position. The margin is low because the customer is taking opposite positions and is not at risk.

Reference: 3.1.6.1 in the License Exam Manual.

42
Q

Margin Accounts
Question ID: 48996
A broker/dealer that wishes to hypothecate a customer’s securities to a bank must:

A) notify the bank promptly if the customer’s securities will be used as collateral to secure a loan to finance the broker/dealer’s operations.
B) notify the bank of the dollar amount representing customer securities and the dollar amount representing firm securities.
C) all of these.
D) give written notice to the bank that the securities are carried for the account of a customer and that such hypothecation does not contravene SEC Rule 15c2-1.

A

Answer: D

For a broker/dealer to hypothecate customer securities to a bank, it must inform the bank in writing that they are customer securities and that they are hypothecated in accordance with SEC Rule 15c2-1.

Reference: 3.1.3.4.2 in the License Exam Manual

43
Q

Margin Accounts
Question ID: 49003
A customer buys $10,000 worth of stock in a cash account and sells the shares for $12,000 without first paying for the buy side in full. The customer then asks that a check for the $2,000 profit be sent to him. Which of the following statements may be TRUE?

I. The $2,000 profit cannot be sent to the customer until he pays for the buy side in full.
II. The $2,000 can be sent to the customer but his account will be frozen for 90 days.
III. If the customer pays for the buy side in full on or before the 5th business day, status as a frozen account is lifted.
IV. Both trades must be switched to the customer’s margin account where buying and selling in this manner are acceptable practices.

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

A

Answer: D

Any time a customer buys and sells stock without paying for the buy side in full, the account is automatically frozen for 90 days, meaning that no orders will be accepted without cash and/or securities on deposit in advance. If the customer pays for the buy side in full within the 5-business-day limit imposed by Regulation T and the customer’s check clears the banking system, the sale proceeds can be remitted in full and the frozen account status lifted.

Reference: 3.1.8 in the License Exam Manual.

44
Q

Margin Accounts
Question ID: 49050
A customer’s margin account contains the following registered nonexempt securities:
100 shares of AMF, CMV $40 per share.
100 shares of FLB, CMV $50 per share.
100 shares of TPL, CMV $80 per share.
The account has a debit balance of $10,800, and the initial margin requirement is 50%. How much equity is in the account?

A) $4,030.
B) $11,050.
C) $17,000.
D) $6,200.

A

Answer: D

The current market value of the shares held in the account is $17,000. Subtract the debit balance of $10,800 from the CMV of $17,000 to calculate the equity balance ($6,200).

Reference: 3.1.3 in the License Exam Manual.

45
Q

Margin Accounts
Question ID: 49051
A customer’s margin account contains the following registered nonexempt securities:
100 shares of AMF, CMV $40 per share.
100 shares of FLB, CMV $50 per share.
100 shares of TPL, CMV $80 per share.
The account has a debit balance of $10,800, and the initial margin requirement is 50%. The excess equity is:

A) $8,500.
B) $0.
C) $2,300.
D) $6,200.

A

Answer: B

The current market value of the shares held in the account is $17,000. At 50%, the Regulation T requirement is $8,500. Because the customer has an equity balance of only $6,200, there is no excess equity.

Reference: 3.1.3 in the License Exam Manual.

46
Q

Margin Accounts
Question ID: 49052
When stock held in a margin account appreciates, which of the following increase(s)?

I. Current market value.
II. Debit balance.
III. Equity.

A) I, II and II.
B) I and III.
C) I only.
D) II only.

A

Answer: B

The debit balance changes when securities are purchased or sold, not change a stock’s price appreciates or declines.

Reference: 3.1.3 in the License Exam Manual.

47
Q

Margin Accounts
Question ID: 49053
A customer chooses to leave a dividend payment in a margin account. As a result:

I. equity increases.
II. equity decreases.
III. debit balance increases.
IV. debit balance decreases.
A) II and IV.
B) I and IV.
C) I and III.
D) II and III.
A

Answer: B

A dividend received into an account results in an increased equity balance and a decreased debit balance. If the dividend is subsequently paid out, equity will decrease and debits will increase.

Reference: 3.1.3.3 in the License Exam Manual.

48
Q

Margin Accounts
Question ID: 49054
Selling a security held long in a margin account:

I. decreases the debit balance.
II. decreases the current market value.
III. decreases the equity.
IV. increases the equity.

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

A

Answer: D

When a security that is held long in an account is sold, the proceeds from the sale decrease the debit balance and the total market value of the account.

Reference: 3.1.3.7 in the License Exam Manual.

49
Q

Margin Accounts
Question ID: 49055
A customer has a margin account with $23,000 in securities and a debit of $12,000. Which of the following statements are TRUE?

I. The account is restricted.
II. The customer will receive a margin call for $500.
III. The customer may withdraw securities if he deposits 50% of the securities’ value in cash.
IV. The account has excess equity of $5,250.

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

A

Answer: D

When an account is restricted, the customer must deposit the Regulation T initial margin requirement (currently 50%) to make new purchases or withdraw stock.

Reference: 3.1.3.1 in the License Exam Manual.

50
Q

Margin Accounts
Question ID: 49056
A customer has a margin account with market value of $300,000 and equity of $100,000. The stock drops $20,000 in value. Assuming maintenance is 25%, the customer will receive a maintenance call for:

A) $20,000.
B) $75,000.
C) $100,000.
D) $0.

A

Answer: D

The customer has equity of $80,000, a CMV of $280,000 and a debit balance of $200,000. The maintenance requirement for the stock at a CMV of $280,000 is $70,000 ($280,000 × 25%), so the customer is still $10,000 above the point at which he would be issued a maintenance call.

Reference: 3.1.3.4 in the License Exam Manual.

51
Q

Margin Accounts
Question ID: 49057
A client has a margin account with market value of $300,000 and equity of $100,000. The market value drops $35,000. Assuming maintenance is 25%, the client will receive a maintenance call for:

A) $1,250.
B) $0.
C) $1,600.
D) $35,000.

A

Answer: A

The customer has equity of $65,000, a CMV of $265,000 and a debit balance of $200,000. The maintenance requirement for the stock at a CMV of $265,000 is $66,250 ($265,000 × 25%), so the customer will be issued a maintenance call for $1,250.

Reference: 3.1.3.4 in the License Exam Manual.

52
Q

Margin Accounts
Question ID: 49100
If a customer wishes to remove a cash dividend credited to his long margin account, which of the following statements is TRUE?

A) Cash dividends may be removed without restriction.
B) Cash dividends must be removed within 90 days of receipt.
C) Cash dividends may only be removed after the underlying stock is sold.
D) Cash dividends must be removed within 30 days of receipt.

A

Answer: D

When a cash dividend comes into a margin account, the debit balance is reduced, the equity is increased, and a credit to SMA is established. To remove the dividend, the customer utilizes SMA and after doing so, the debit and equity in the account are restored to their original amounts. Under Federal Reserve rules, cash dividends must be removed within 30 days of receipt. Otherwise, they become a permanent reduction of debit balance.

Reference: 3.1.3.3 in the License Exam Manual.

53
Q

Margin Accounts
Question ID: 49101
Regulation X of the Federal Reserve states that:

A) margin credit obtained outside the U.S. must be in compliance with Regulation T.
B) margin credit obtained outside the U.S. is exempt from Regulation T.
C) banks cannot lend to consumers directly with securities as collateral.
D) banks cannot lend to corporations directly with securities as collateral.

A

Answer: A

Regulation X requires that margin credit obtained outside the U.S. be in compliance with Regulation T if the credit is obtained form a foreign branch of a broker/dealer, or with Reg U if the credit is obtained from a foreign bank.

Reference: 3.1.9.2 in the License Exam Manual.

54
Q

Margin Accounts
Question ID: 49102
Under NYSE rules, on any day that day trading occurs, pattern day traders must have on deposit in the account equity of at least:

A) $25,000.
B) $2,000.
C) $5,000.
D) $10,000.

A

Answer: A

The minimum equity requirement for pattern day traders is $25,000.

Reference: 3.1.9 in the License Exam Manual.

55
Q

Margin Accounts
Question ID: 49103
The buying power in a margin account of a pattern day trader is:

A) 2 × SMA.
B) 4 × SMA.
C) 2 × maintenance margin excess.
D) 4 × maintenance margin excess.

A

Answer: D

The buying power for conventional margin accounts is 2 × SMA, while for pattern day traders it is 4 × maintenance margin excess. Maintenance margin excess is the equity in the account above the 25% minimum margin requirement.

Reference: 3.1.9 in the License Exam Manual.

56
Q

Margin Accounts
Question ID: 49104
Because of sharp decline in market averages, a customer’s margin account has a market value of $22,000 and a debit balance of $34,000. The customer will receive a maintenance call for:

A) $11,000.
B) $17,000.
C) $17,500.
D) $5,500.

A

Answer: C

The customer’s account has negative equity of $12,000. A maintenance call will be for an amount to bring the account back to minimum, which is 25% of $22,000 ($5,500). To go from a negative $12,000 to a positive $5,500 requires a cash deposit of $17,500. Once the call is met, the account will look as follows: LMV $22,000; DB $16,500; EQ $5,500.

Reference: 3.1.3.10 in the License Exam Manual.

57
Q

Margin Accounts
Question ID: 49119
Due to a sharp decline in the price of ABCD stock, a customer’s margin account shows a long market value of $26,000 and a debit balance of $32,000. The customer will receive a maintenance call for:

A) $12,500.
B) $6,500.
C) $8,000.
D) $13,000.

A

Answer: A

The maintenance call will be for an amount necessary to bring the account back to minimum, 25% of the market value; 25% × $26,000 = $6,500. The account has negative equity of $6,000, so it will take $12,500 to bring it back to 25%. Once the customer deposits $12,500, the account will look like this: LMV $26,000; DB $19,500; EQ $6,500.

Reference: 3.1.3.4 in the License Exam Manual.

58
Q

Margin Accounts
Question ID: 49135
Which of the following meets the definition of a pattern day trader?

A) 3 day trades in 1 business day.
B) 1 day trade in 3 business days.
C) 3 day trades in 4 business days.
D) 7 day trades in 5 business days

A

Answer: D

A pattern day trader is one who executes four or more day trades in a 5-business-day period.

Reference: 3.1.9 in the License Exam Manual.

59
Q

Margin Accounts
Question ID: 49159
A customer’s margin account shows two positions: $6,000 of ABC and $4,000 of XYZ. The debit balance in the account is $7,500. The customer wishes to remove the ABC stock from the account and replace it with $6,000 of fully paid for shares of DEF, a listed company. Under Federal Reserve rules, this action is:

A) permitted.
B) permitted as long as the customer deposits $500 in cash.
C) permitted as long as the customer deposits $1,500 in cash.
D) permitted as long as the customer deposits $2,500 in cash.

A

Answer: A

This account is right at minimum maintenance (25%). By replacing $6,000 worth of ABC with $6,000 worth of fully paid-for shares of DEF, the account will remain at 25%. There is no need to put additional cash into the account. If the customer had wanted to remove the ABC stock without replacing it with stock of the same or higher value, the customer would have been required to put up enough cash to keep the account from falling below minimum.

Reference: 3.1.8 in the License Exam Manual.

60
Q

Margin Accounts
Question ID: 49161
In a new margin account, a customer buys 500 XYZ at $37 and writes 5 XYZ Oct 40 calls against the long position. XYZ subsequently rises to $43 per share. At this point, the minimum maintenance margin requirement for the account is:

A) $6,000.
B) $5,000.
C) $4,625.
D) $5,375.

A

Answer: B

In a long account, the minimum maintenance margin requirement is 25% of the market value of the stock. There is no margin requirement for writing covered calls; therefore, there is no minimum maintenance requirement for the option. However, once the stock rises above the strike price of the call, making exercise likely, the value of the stock for margin maintenance purposes is limited to the strike price which is $40. Thus, the value of the long position is $20,000. 25% × $20,000 = $5,000.

Reference: 3.1.7.2 in the License Exam Manual

61
Q

Margin Accounts
Question ID: 49177
When viewing customer margin accounts, you note that the total of all debit balances is $910,000 and that these accounts have free credit balances totaling $400,000. Under SEC Rule 15c2-1, your firm is permitted to rehypothecate securities with a total market value of:

A) $510,000.
B) $560,000.
C) $1,274,000.
D) $714,000.

A

Answer: D

Free credits (cash) must be netted against the debit before applying the 140% rule.

Reference: 3.1.3.4.1 in the License Exam Manual

62
Q

Margin Accounts
Question ID: 49188
A customer has a short margin account containing 1,000 shares of XYZ currently trading at $10 per share. Under NYSE rules, the minimum maintenance margin requirement for this account is:

A) $5,000.
B) $2,000.
C) $2,500.
D) $3,000.

A

Answer: A

With regard to short accounts, for stocks trading at $5 and above, the minimum is $5 per share or 30%, whichever is greater. In this case, $5 per share or $5,000 is greater than 30% of $10,000.

Reference: 3.1.5.1 in the License Exam Manual.

Series 27 Questions (7 decks)

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