Unit 6 Quizbank Review

Question 1

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

Answer 1

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)

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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 .

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Question 4

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)

Answer 4

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

Question 5

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

Answer 5

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.

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Question 6

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

Answer 6

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.

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Question 7

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

Answer 7

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.

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Question 8

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

Answer 8

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.

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Question 9

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

Answer 9

B.Assets in a custodial Aa count are the minor’s property, so the minors SSI is used.

LO 6.c

Question 10

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

Answer 10

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.

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Question 11

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

Answer 11

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

Question 12

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

Answer 12

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

Question 13

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

Answer 13

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

Question 14

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.

Answer 14

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.

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Question 15

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

Answer 15

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.

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Question 16

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

Answer 16

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.

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Question 17

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

Answer 17

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.

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Question 18

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

Answer 18

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.

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Question 19

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

Answer 19

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.

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Question 20

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

Answer 20

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.

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Question 21

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

Answer 21

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.

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Question 22

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.

Answer 22

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.

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Question 23

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

Answer 23

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

Question 24

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

Answer 24

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

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Question 25

An account that charges a set feee on a monthly or quarterly basis, which covers all trading activity is called a
A. Set commission account
B. Wrap account
C. Fee- based account
D. Schedule account

Answer 25

C. A wrap account charges a few that includes all cost, including management and advice. An account that charged a set fee for trading costs in a fee- based account.

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Question 26

What is the penalty for not taking the required minimum distribution ( RMD) for the year?
A. 10% of the annual contribution limit
B. 50% of the annual contribution limits
C. 10% of the amount that should have been taken
D. 50% of the amount short of what should have been taken

Answer 26

D. There is a 10% penalty for early withdrawal. The penalty for missing a RMD is 50% of the amount missed

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Question 27

In which of the following accounts would margin always be prohibited?
A. A partnership account
B. Individual retirement accounts
C. Fiduciary account
D. Corporate accounts

Answer 27

B. 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, as long as the use of the margin is specifically listed as being allowed, a fiduciary account may do so.

Question 28

Which of the following securities is exempt from the Regulation T margin requirements but still subject to an initial margin requirement determined by the broker dealer?
A. T notes
B. Rights
C. Mutual funds
D. Options

Answer 28

A. While treasury securities, (bills, notes and bonds )are exempt from regulation, T margin requirements, purchases of them on margin are allowed and would be subject to the firm’s determination on what the initial margin deposit requirement should be.

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Question 29

What is a big advantage Roth IRAs have over traditional IRAs?
A. There are no penalties for early distributions
B. Contributions are tax free
C. There are no income limits
D. Distributions are normally tax free

Answer 29

D. If taken after age 59 1/2 and the account has been open for five years, there are no taxes or penalties on distributions from Roth IRAs. Contributions are made with after-tax dollars. There may be penalties on distributions if the account hasn’t been open for five years and the distributions are made before 59 1/2. Roth allowable contribution amounts, decrease and then end above certain income levels.

Question 30

Which of the following must be signed by a customer wanting to open a margin account?
A. Credit and hypothecation agreements
B. Loan consent and hypothecation agreements
C. Credit loan and consent agreements
D. Risk disclosure and credit agreement

Answer 30

A. Opening a margin account requires that the customer signed the credit agreement and the hypothecation agreement. The loan consent form (agreement )is optional. While the risk disclosure document must be received and attested it to as read by signing the credit agreement, it need not be signed.

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Question 31

An amended Form U5 must be filed be filed and a copy sent to the former employee within how many data of discovery of the inaccuracy?
A. 90
B. 25
C. 30
D. 10

Answer 31

C. If a broker - dealer discovers that a filed form U5 was inaccurate, an amended form must be filed and sent to the former employee within 30 days of the discovery of the inaccuracy

LO 12.a

Question 32

When a bond is purchased at a premium, the current yield will be
A. The same ad the nominal rate
B. Lower than the coupon rate
C. Higher than the stated rate
D. Higher than the fixed rate

Answer 32

B. The coupon rate, the stated rate, and the nominal rate all mean the same thing. It is the amount the bond pay each year. On a premium bond the coupon rate is always higher than the current yield

LO 8.a

Question 33

Your customer is long one DFG July 35 call at two. You explain to the customer that in order to break even. DFG stock must be trading at:
A. 35
B. 37
C. 33
D. 0

Answer 33

B. Break even (BE) for a call is calculated by adding the premium(two) to the strike price (35). In this case, a July call purchase at 2 will be at BE when the stock is at 37.

Question 34

Your customer has a large cash position and is interested in purchasing shares of Brink n Mortar stock ( ticket: BMS) if it drops to $20 a share. This stock is currently trading at $23 a share. They are curious to know if there is a way to use options to generate some extra income and buy the shares if the stock drops. You might suggest
A. Writing uncovered BMS calls that are currently out of the money
B. Writing covered puts on BMS stock that are currently out of the money
C. Buying out of the money BMS calls
D. Placing a buy stop order below the market for BMS

Answer 34

B. Writing the puts generate premium income. If the stock declines in value and the option is exercised, the crusty will buy the stock at a price lower than where the market at this moment. The short calls would force him to sell the shares if exercised. Buying out of the money calls cost money and the strike price will be higher than the market. The buy stop does not generate income

LO 5c

Question 35

In which of the following accounts would the use of margin always be prohibited?
A. Fiduciary accounts
B. Individual retirement accounts
C. Corporate accounts
D. Partnership accounts

Answer 35

B. 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 redo, 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.

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Question 36

When a broker- dealer pledges customer securities to a bank as collateral for a margin loan, the pledge is known as
A. Hypothecation
B. Rehypothecation
C. Credit agreement
D. Loan consent

Answer 36

B. By signing the margin agreement, a customer hypothecates ( pledges) the Secoya the broker - dealer who then rehypothecates (pledges) them to the bank as collateral for the margin loan.

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