Chapter 8 Practice Question Answers
1. Answer: C. Initially, Regulation T allows a broker-dealer to loan a customer up to 50% of a security’s market value.
2. Answer: C. Freeriding occurs when an investor purchases securities in a cash account and then sells them on or before the settlement date in order to pay for the securities. Justine’s purchase is the only answer choice that fits this description. Because Martin sells his securities after he pays for them, his actions do not constitute freeriding.
3. Answer: A. Order tickets must be prepared before a trade executes. If a representative fails to comply with this requirement he may be fined or censured.
4. Answer: D. Broker-dealers may act as agents or principals on customer trades. When a broker-dealer acts as an agent, it is buying securities for a customer, or selling securities to a customer, from another broker-dealer or customer of its firm. In such “agency” transactions, the broker-dealer is compensated by charging a commission, which is reflected on the customer’s trade confirmation. When a broker-dealer acts as principal, it is selling the customer securities it owns or buying securities from a customer for its own account. In such principal transactions the firm is compensated by a markup or markdown, not a commission. A markup or markdown may be shown on the trade confirmation.
5. Answer: C. When an investor holds a security in street name, she is said to have a book-entry security. No physical certificate for the security is printed. Moreover, the security is not recorded in your name