Series 7 Trading and Settlement Practice Questions
Question 1
A customer's margin account holds stock originally purchased for $20,000 using Reg T 50% initial margin (a $10,000 debit balance). The stock has since risen in value to $24,000. Approximately how much additional fully marginable stock could the customer purchase using only the account's special memorandum account (SMA), without depositing new cash?
- A. $2,000
- B. $4,000
- C. $10,000
- D. $14,000
Show answer and explanation
Correct answer: B. $4,000
Current equity = market value − debit balance = $24,000 − $10,000 = $14,000. The Reg T requirement on the current $24,000 market value is 50% = $12,000. Excess equity credited to SMA = $14,000 − $12,000 = $2,000. Because a new purchase also requires 50% margin, that $2,000 of SMA supports twice its value in new fully marginable purchasing power: $2,000 × 2 = $4,000.
- A. This is the SMA balance itself ($2,000 of excess equity above the 50% requirement), not the additional buying power it generates. It understates the answer by ignoring Reg T leverage.
- B. Market appreciation to $24,000 leaves equity of $14,000 against a $12,000 Reg T requirement (50% of $24,000), creating $2,000 of SMA. Because SMA represents fully leveraged buying power, the customer can buy 2x that amount, or $4,000, of additional marginable stock without new cash.
- C. This matches the original debit balance, not the SMA-driven buying power created by the stock's appreciation — the two numbers are unrelated here.
- D. This is the account's total current equity ($24,000 value minus $10,000 debit), not the incremental buying power released into SMA by the price increase.
Question 2
Under current SEC rules, what is the standard settlement cycle for a regular-way trade of corporate stock?
- A. Trade date plus 1 business day (T+1)
- B. Trade date plus 2 business days (T+2)
- C. Trade date plus 3 business days (T+3)
- D. Same-day cash settlement
Show answer and explanation
Correct answer: A. Trade date plus 1 business day (T+1)
The SEC shortened the standard settlement cycle for most broker-dealer securities transactions, including regular-way corporate stock trades, from T+2 to T+1, effective May 2024. This reduces counterparty and market risk during the settlement period.
- A. Correct: regular-way settlement for corporate securities is currently T+1.
- B. T+2 was the standard prior to the May 2024 rule change; it is now outdated for regular-way trades.
- C. T+3 was the standard prior to 2017 and is no longer applicable.
- D. Cash settlement (same-day) is a special, less common settlement type, not the regular-way standard.
Question 3
A customer enters a market order for a thinly traded stock. Available quotes are wide and displayed size is small. Which explanation of expected execution is most accurate?
- A. The most recent quoted trade price is assured for the full order size, since a market order is filled at the last reported sale.
- B. The customer can cancel the order after it has been executed in the market, because a market order is not final until settlement.
- C. A market order removes liquidity risk, because the order is filled promptly and the wide quotes are irrelevant to the final price.
- D. The order emphasizes execution over price and can experience slippage from price impact, especially when depth is limited and quotes are wide.
Show answer and explanation
Correct answer: D. The order emphasizes execution over price and can experience slippage from price impact, especially when depth is limited and quotes are wide.
Market orders prioritize prompt execution at available prices, not a reference quote. Wide quotes and thin depth can cause price impact.
- A. Fills occur at available bids and offers, which can differ from the last trade, especially for larger sizes.
- B. An executed trade is binding; cancellation applies only to unexecuted orders.
- C. A market order still faces liquidity risk, which shows up as slippage in thin markets.
- D. Market orders favor execution over price, so thin depth and wide quotes can cause slippage.
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A long margin account holds $40,000 market value and has a $31,000 debit. If maintenance equity must equal 25% of market value, what is the current equity deficit?
- A. $9,000
- B. $1,000
- C. $2,250
- D. $10,000
Show answer and explanation
Correct answer: B. $1,000
Equity is $40,000 - $31,000 = $9,000. Required maintenance is 25% x $40,000 = $10,000, so the deficit is $1,000.
- A. This is the current equity, not the shortfall.
- B. Required equity of $10,000 less actual equity of $9,000 is a $1,000 deficit.
- C. This applies 25% to the equity rather than to market value.
- D. This is the required maintenance amount, not the shortfall.