Cash Account

B is correct. A cash account is most suitable for Patricia because it requires full payment for all purchases and completely prohibits borrowing or leverage. This aligns with her conservative risk profile, fear of debt, and desire to avoid owing more than she invests. Cash accounts eliminate margin interest and leverage risk entirely.

A is unsuitable because margin accounts allow borrowing and leverage, directly contradicting Patricia's stated fear of debt and risk aversion. Even with "flexibility," margin accounts expose clients to potential losses exceeding their initial investment. C describes account management authority (discretionary), not account type, and does not address her leverage concerns. D still involves margin borrowing capabilities, which conflicts with her "terrified of debt" statement and conservative profile.

B is correct. Cash accounts prohibit short selling because short sales require borrowing securities from the broker, which is not permitted in cash accounts. Margin accounts are required for short selling because the broker must lend securities to the customer, and the customer must post collateral.

A is incorrect because maintenance fees are not the defining characteristic. both account types may have fees depending on the broker. C is incorrect because both account types use the same settlement period (T+1 for stocks and bonds as of May 2024). the settlement timeline is determined by security type, not account type. D is incorrect because options can be traded in cash accounts (cash-secured puts, covered calls), though certain complex options strategies require margin accounts.

B is correct. David committed a free-riding violation by selling the security before paying for it. In a cash account, payment must be made by settlement (T+1 = Tuesday), but he sold on Tuesday before providing payment for the Monday purchase. The consequence is a 90-day cash account restriction, requiring David to have cash in hand before making any future purchases during the restriction period.

A is incorrect because even though David made a profit, the free-riding violation still occurred. profit or loss is irrelevant to settlement violations. C describes a different violation (good faith violation occurs when you use unsettled proceeds to buy, then sell before the original sale settles). D describes pattern day trading rules, which apply to margin accounts with four or more day trades in five business days, not cash account settlement violations.

C is correct (the EXCEPT answer). Individual taxable brokerage accounts for adults CAN be either cash or margin accounts, depending on the client's choice and suitability. They are NOT required to be cash accounts. Adults can choose margin accounts if they meet suitability requirements, sign margin agreements, and understand leverage risks.

A must be cash: IRAs cannot use margin because retirement accounts are prohibited from borrowing under ERISA and IRS rules. B must be cash: UTMA/UGMA custodial accounts cannot be margin accounts because minors cannot legally sign margin agreements (credit agreements). D must be cash: Coverdell ESAs are education savings accounts with restrictions similar to IRAs, prohibiting margin borrowing.

B is correct. Statements 1 and 3 are accurate.

Statement 1 is TRUE: Cash accounts require full payment by settlement date (T+1 for stocks and bonds). No borrowing or partial payment is allowed. this is the defining characteristic of cash accounts.

Statement 2 is FALSE: Cash accounts do NOT charge interest because they do not allow borrowing. Only margin accounts charge interest on borrowed funds (margin loans). Cash accounts are "cash only," meaning no credit extension.

Statement 3 is TRUE: Cash accounts are ideal for conservative investors who want to avoid leverage, margin interest, and the risk of owing more than they invest. They eliminate leverage-related risks entirely.

Statement 4 is FALSE: Cash accounts allow trading; the restriction is that you must have settled funds available or provide payment by settlement. You can trade before funds "clear" as long as you pay by T+1. The issue is free-riding (selling before paying), not prohibition of trading.