Chapter 2 Practice Question Answers
- 1. Answer: B. The Trade Reporting and Compliance Engine, or TRACE, is the automated system developed by FINRA that reports all trades involving United States dollar-denominated debt securities with maturities of one year or greater (except sovereign debt).
- 2. Answer: D. A market maker is required to honor quotes that it posts. If it does not list a size requirement, it must buy or sell at least 100 shares at the quoted price. In this case, the market maker has agreed to buy at least 100 shares of ABCD at 12.15 and, therefore, must buy a minimum of that amount.
- 3. Answer: B. According to SEC Rule 10b-10, a brokerage company must send a trade confirmation to its customers at or before the completion of the transaction. When a customer purchases a security through a broker-dealer, the completion of the transaction is the later of when the customer pays the broker-dealer and when the broker-dealer delivers the security to the customer. When a customer sells a security, the completion of the transaction is the later of when the customer delivers the security to the broker-dealer and when the broker-dealer pays the customer.
- 4. Answer: A. Securities received as a gift do not receive a stepped-up cost basis.
- 5. Answer: A. Stop orders become market orders to either buy or sell once a target price is reached. If the stop order is triggered, because the order becomes a market order, it is guaranteed to execute, but there is no guarantee on the execution price. Sell stop orders are typically used to limit loss on a long position. Buy stop orders are typically used to limit loss on a short position
- 6. Answer: A. According to IRS wash sale rules, an investor who sells a stock and incurs a loss cannot buy back the stock within 31 days of the sale if she wants to use the loss to offset capital gains. If an investor does buy back the stock within 31 days, she cannot use the loss, but she can add the loss to her cost ba