series 6 practice test 1
Which of the following statements regarding unrealized gain in a mutual fund portfolio are TRUE? It affects the mutual fund's shares' value. It is taxable as of the year it takes place. It is treated as part of the mutual fund's net investment income. It is realized by shareholders when they redeem their shares. A) I and III. B) II and IV. C) II and III. D) I and IV.
I and IV. Unrealized gains in portfolio securities result from the assets' appreciation in value and is reflected in an appreciation of the mutual fund shares themselves. A shareholder may cash in on this appreciation only by selling the shares and realizing the gain. Capital gains are never treated as net investment income.
If a company intends to issue one million shares of common stock, a tombstone advertisement for the company's stock: A) may be published during the cooling-off period. B) is considered by the SEC to be an offer to sell securities. C) is considered advertising and must be filed with FINRA. D) may be used instead of a prospectus to provide disclosure to potential investors.
may be published during the cooling-off period. A tombstone ad may be published by an issuer of common stock during the cooling-off period. A tombstone for an equity issue is not considered advertising by the SEC and is not subject to FINRA filing requirements. A tombstone offers information by telling investors where they can acquire a prospectus about the issue. It does not replace a prospectus and does not constitute an offer to sell securities.
Characteristics of money market mutual funds include all of the following EXCEPT: A) the net asset value falls within as narrow a range as possible. B) shares are offered on a no-load basis. C) their beta tends to mirror the overall market. D) dividends are earn
their beta tends to mirror the overall market. Money market funds are managed to have very low volatility. Therefore, they have a very low beta coefficient.
A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into five shares of common stock. The conversion price of the common stock is A) $20 B) $100 C) $25 D) $1,200
$20 Par value divided by conversion price equals the number of shares into which the security is convertible. Never use the current market value! If par is $100 and it can be converted into 5 shares, the conversion price must be $20 ($100÷5 = $20).
John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments? A) His annuity payments are all taxable as ordinary income. B) His annuity payments are tax free. C) His annuity payments are partly taxable and partly tax-free return of capital. D) His annuity payments are partly taxable as capital gain and partly taxable as ordinary income.
His annuity payments are partly taxable and partly tax-free return of capital. The key word here is nonqualifed! The investment John made was with after-tax dollars, the money grows tax-deferred, and only the earnings are taxed at distribution. A computation will be made at John's retirement called the exclusion ratio, to determine how much of each retirement payment will be treated as a return of cost basis and how much as taxable ordinary income. No annuity payment is treated as a distribution of capital gains.
Which of the following concerning Section 529 plans are TRUE? Qualified withdrawals are exempt from federal income tax. Contributions are made with pre-tax dollars. Contribution limits are set at the state level. Qualified withdrawals may be used for pre or post-secondary education. A) I and III. B) I and IV. C) II and IV. D) II and III.
I and III. Contribution amounts vary from state to state. Only "qualified" withdrawals are tax exempt when used for post-secondary education. Contributions are always made with after-tax dollars.
Asset-based distribution fees, also known as 12(b)-1 fees: are based on the fund's annual average daily net assets. are based on the fund's annual sales of shares. must be reviewed at least quarterly by the fund's board of directors. must be reviewed at least annually by the fund's board of directors. A) I and IV. B) II and IV. C) II and III. D) I and III.
I and III. Fees charged under Section 12(b)-1 are assessed against the fund's annual average daily net assets and must be reviewed at least quarterly by the investment company's board of directors.
The ABC Corporation would like to raise capital via a Regulation D private placement. In order to qualify for an exemption from registering with the SEC under Rule 506, which of the following is true? Advertising is allowed if only accredited investors may purchase the securities. Advertising is not allowed if selling to a minimum of 35 nonaccredited investors. If selling to a minimum of 35 accredited investors, general solicitation is allowed. If selling to nonaccredited investors, general solicitation is not allowed. A) I and IV B) II and III C) I and II D) III and IV
I and IV If the private placement sells to any nonaccredited investors (with the maximum number being 35) no advertising or general solicitation is allowed. If the sale is exclusively to accredited investors, the private placement may advertise.
In which of the following equity securities do stockholders have preemptive rights? A) Debentures. B) Common stock. C) Preferred stock. D) Convertible bonds.
Common stock. Preferred stockholders do not have preemptive rights, and neither convertible bonds nor debentures are equity securities. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.
Which of the following statements describe an open-end investment company? The company may sell new shares in any quantity at any time. The company may never suspend sales of shares to new investors. The company may redeem shares in any quantity at any time but may restrict the redemption of shares at the board of directors' discretion. The company must redeem shares in any quantity at any time except that it may suspend the redemption of shares with SEC approval. A) I and IV. B) I and III. C) II and IV. D) II and III.
I and IV. Under the Investment Company Act of 1940, an investment company selling mutual funds need not continuously offer new shares for sale. In fact, a fund often suspends sales to new investors when it grows too large to adequately meet its investment objective. The Act of 1940 does require a fund to continuously offer to redeem shares, and this redemption privilege may only be suspended during non-business days or with the SEC's approval.
ABC Securities Company, a FINRA member broker/dealer, offers a number of mutual funds for sale. ABC is also affiliated with ABC Funds, Inc. The CEO of the broker/dealer announces to all registered personnel that the month of May is going to be "who can sell the most funds" month with a substantial bonus going to the winner. Under FINRA rules: this would not be permitted. this would be permitted as long as no additional incentives were offered for selling certain funds. this would be permitted with the understanding that representatives selling the ABC Funds would earn extra points in the competition for selling the firm's proprietary product. sales of mutual funds must be based solely on customer suitability, not sales competitions. A) II and IV. B) III only. C) I and IV. D) IV only.
II and IV. A broker/dealer is permitted to sponsor an in house sales contest. However, no extra credit can be given for selling certain funds, particularly proprietary ones. As in all cases, customer suitability must be adhered to.
An American importer of English cheeses notices that the pound has weakened significantly since he paid for his last shipment of Wensleydale and Red Cheshire. Which of the following effects will this have on his business? He can expect his next shipment to be less profitable. It will have no effect on the profitability of his last shipment. He will have to charge lower prices in sales of his last shipment. He can expect his next shipment to be more profitable. A) I and II. B) I and III. C) III and IV. D) II and IV.
II and IV. Since he has already paid for his last shipment, changes in the value of the pound will not affect his cheeses' profitability in the American market. On the other hand, because the pound has weakened, goods priced in pounds will be cheaper in dollars; hence his next shipment should prove more profitable.
A 457 plan could cover which of the following: employees of a corporation. independent contractors providing services to the county. employees of a nonincorporated business. city employees. A) II and IV. B) I and III. C) II and III. D) I and IV.
II and IV. The 457 plan is a nonqualified deferred compensation plan for municipal employees as well as for independent contractors performing services for those entities.
The NAV of a mutual fund Class A share: must be calculated at least twice per business day. can never be higher than the POP. can never be equal to the POP. can never be so much lower than the POP that the difference exceeds 8.5% of the POP. A) I and IV. B) II and III. C) II and IV. D) I and III.
II and IV. The NAV of a mutual fund need be calculated only once per business day. For a Class A share, the investor pays NAV plus a front-end sales charge that may not exceed 8.5% of the POP. Thus, the offering-price range of a Class A mutual fund share is NAV at the lowest (some funds' highest breakpoint eliminates the front-end load entirely) and NAV + 8.5% of the POP at the highest.
Which of the following statements regarding sales charges on variable contracts of insurance companies are TRUE? The Conduct Rules call for a maximum sales charge on variable annuities of 8.5% of the purchase payment. The Conduct Rules do not impose a specific maximum on sales charges for variable annuities. Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract. Variable life insurance contracts are limited to a maximum sales charge of 9% over the life of the contract, but not to exceed 20 years. A) II and III. B) II and IV. C) I and IV. D) I and III.
II and IV. Variable annuities' sales charges are held only to a standard of reasonableness. The Investment Company Act of 1940 sets the limits for variable life insurance.
During the course of a routine FINRA examination of your member firm, the FINRA has requested copies of books and records regarding transactions of a particular client and has asked you to testify to provide additional information. You and your member firm: do not have to provide testimony because this is a routine examination and not an investigation of a complaint. must provide testimony. are not required to provide books and records regarding a particular client during routine examinations. must provide all copies of books and records requested. A) II and III. B) I and IV. C) II and IV. D) I and III.
II and IV. When FINRA asks for something, you comply.
Which of the following statements regarding the withdrawals from a qualified retirement plan are TRUE? The employee will be taxed at the ordinary income tax rate on his cost basis. Funds may be withdrawn after retirement (as defined) with no tax on the withdrawn amount. Funds may be withdrawn early by the beneficiary if the covered person dies. All qualified plan provisions must be in written form. A) III and IV. B) I and II. C) II and III. D) I and IV.
III and IV. A qualified planholder has no cost basis at retirement. Beneficiaries of planholders may withdraw funds without penalty if the planholder dies. Qualified plans must always be in written form and must be communicated to employees.
An individual opens an account with your firm. She tells you that, upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others. Which of the following accounts will allow for her wishes? A) Tenants in common. B) Joint tenants with rights of survivorship. C) Individual TOD account. D) A discretionary account.
Individual TOD account. A TOD (transfer on death) account will meet this client's needs. With a discretionary account, the registered representative's power of attorney would end with the client's death.
Your client owns a variable annuity contract with an AIR of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would his April payment compare to his March payment? A) It cannot be determined until the April return is calculated. B) It will be higher. C) It will be lower. D) It will stay the same.
It will be higher. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment.
A registered representative teaches a retirement course at a resort and receives the normal fee from the resort for doing so. Which of the following statements is TRUE? A) The registered representative must also be an investment adviser. B) Prior written notification of the activity to the firm is required. C) A copy of the text must be provided to the SEC. D) Approval of a principal of the firm is necessary.
Prior written notification of the activity to the firm is required. As an outside business activity, prior written notification of the firm is required but not approval (even though the firm may restrict or deny the activity). There is no requirement for a copy of the text to be provided to FINRA or the SEC. Also, it is not necessary for the registered representative to be registered as an investment adviser to engage in such an activity.
One of your clients wants to set aside some money for her ne'er-do-well nephew, who just turned 30. She does not wish his numerous creditors to have access to the money until after she dies, but she wants him to have easy access to the money at that time. You recommend that she open a: A) TOD registration on an account in her name. B) custodial account. C) TIC account. D) joint tenants with rights of survivorship account.
TOD registration on an account in her name. TOD stands for transfer on death. It is used to facilitate transfer of assets in an account upon the death of the account holder (your customer in this case) without the need for probate. While the owner is alive, the account remains her property. The nephew is chronologically too old for a custodial account. She should not have a joint account because of creditor and control issues.
A registered representative is preparing a profile on one of his customers. Which of the following should he list as a nonfinancial consideration? A) The customer's monthly discretionary income. B) The amount of money the customer is willing to risk. C) The customer's yearly salary. D) The amount of money in the customer's savings accounts.
The amount of money the customer is willing to risk. Financial considerations involve real assets or debts, whether part of total income, debt, or net worth. The amount of money the customer is willing to risk involves attitude, not something that can be placed on a balance sheet or income statement, and is thus nonfinancial.
All of the following are advantages of Section 529 plans EXCEPT: A) the account remains the property of the donor, even after the beneficiary reaches legal age. B) gift tax rules do not apply, as long as the account is eventually used for higher education purposes. C) there are few restrictions as to who may be designated first beneficiary. D) the assets in the account are not regarded as part of the owner's estate for tax purposes.
The correct answer was: gift tax rules do not apply, as long as the account is eventually used for higher education purposes. Gift tax rules do apply to contributions to a Section 529 plan. The limit beyond which the gift tax applies is an indexed annual limit.
A nurse has been participating in her employer's Keogh plan. Upon leaving the clinic, she may arrange for a transfer of the Keogh assets into an IRA and defer taxes on these assets if she completes the transaction within: A) Transfers are always tax and penalty-free. B) 90 days. C) 30 days. D) 60 days.
Transfers are always tax and penalty-free. Since the account holder does not have constructive possession of the assets, transfers are always tax and penalty-free, and do not have a frequency limitation.
Which of the following terms describe a third market transaction? Listed securities Unlisted securities Trading on exchanges Trading OTC A) II and IV B) I and III C) II and III D) I and IV
Your answer, I and IV, was correct!. A third market trade takes place when listed securities are traded over-the-counter.
The record date is the date: A) on which a transaction is made between two parties. B) by which an investor must be the owner of a stock in order to receive the next dividend. C) on and after which the buyer of a common stock is not entitled to a dividend previously declared. D) on which a dividend is paid.
by which an investor must be the owner of a stock in order to receive the next dividend. Stockholders of record, as of the record date, will receive the upcoming distribution.
If a customer works as a nurse in a public school, each of the following statements regarding his school's TSA plan are true EXCEPT: A) mutual funds and CDs are available investment vehicles. B) distributions before age 59½ are normally subject to penalty tax. C) his contributions are before tax. D) he is not eligible to participate.
he is not eligible to participate. Because he is employed by a public school system, your customer is eligible to participate in the tax-sheltered annuity plan.
A registered representative of a FINRA member firm wishes to open an account with another member firm. To do so, the executing member must take all the following actions EXCEPT: A) notify the representative of the executing member's intent to notify the employer. B) notify the employer in writing, before the execution of the transaction, of its intention to open or maintain the account for the representative. C) immediately transmit duplicate copies of confirmations or other statements to the employer with respect to the representative's account. D) transmit duplicate copies of confirmations or other statements to the employer with respect to the representative's account on request of the employer.
immediately transmit duplicate copies of confirmations or other statements to the employer with respect to the representative's account. When a registered representative opens an account with another FINRA member, the representative is notified that his employer will receive notification. Copies of confirmations and other reports must be available on request.
The Securities and Exchange Commission regulates all of the following EXCEPT: A) the secondary market. B) initial public stock offerings. C) investment adviser and client relationships. D) intrastate securities offerings.
intrastate securities offerings. The Securities and Exchange Commission was created by the Securities Exchange Act of 1934 as a federal commission with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. If a security is being offered in only a single state, however, it need not register with the SEC but only in the state where it is being offered.
One of the ways in which closed-end investment companies differ from open-end investment companies is in their ability to: A) operate as nondiversified management companies. B) operate as diversified management companies. C) issue common stock. D) issue debt securities.
issue debt securities. Closed-end investment companies may issue marketable common stock, preferred stock, and debt. Open-end companies may issue redeemable common stock only. Either may operate as a diversified or nondiversified management company.
An investment company must register with the SEC and, in doing so, must provide all of the following information EXCEPT: A) its intention to concentrate its investments in a single industry. B) its past performance. C) its plans for investing in real estate or commodities. D) its intention to borrow money.
its past performance. A registration statement or disclosure must describe any intent to borrow money. A company's concentration of investments is part of its required investment policy description. There is no requirement to describe past performance to the SEC.
As a result of a complaint brought by the Department of Enforcement, FINRA does not have the authority to: A) suspend or expel a member firm from membership in FINRA. B) censure a partner of a member firm. C) suspend or bar a person from further association with a member firm. D) prohibit a person from associating with a regional exchange.
prohibit a person from associating with a regional exchange. If a respondent is found guilty at a hearing (or is the subject of an AWC or offer of settlement), FINRA may censure, suspend, or expel a FINRA member firm or a person associated with a member firm. It has no jurisdiction over other SROs, such as the regional exchanges, and may not prohibit any person from associating with them.
Commercial paper is a: A) guaranteed note issued by a corporation. B) secured note issued by a corporation. C) promissory note issued by a broker/dealer. D) promissory note issued by a corporation.
promissory note issued by a corporation. A corporation issues commercial paper as a short-term, unsecured promissory note.
An investor has secured bonds maturing in two weeks. He plans to purchase some unsecured bonds he has identified on the secondary market that have a 6% coupon rate. If interest rates decline before the investor can purchase the new bonds, he can expect the income he will receive from the new bonds to: A) remain at $60 per year. B) pay no interest. C) decline to less than $60 per year. D) increase to more than $60 per year.
remain at $60 per year. Fluctuations in interest rates will affect a bond's price, but will not affect the bond's payable interest. The percentage interest payable for use of money is stated on the face of a bond and is part of the bond indenture, a legal obligation on the part of the issuing company.
All of the following are compensated from the expenses of a mutual fund EXCEPT: A) custodian. B) sponsor. C) investment adviser. D) transfer agent.
sponsor. The sponsor (also known as the underwriter or distributor of the fund) is compensated from the sales charges it collects from investors in the fund. Sales charges collected by a sponsor may never be an expense to the fund.
Characteristics of money market mutual funds include all of the following EXCEPT: A) dividends are earned on a daily basis. B) their beta tends to mirror the overall market. C) shares are offered on a no-load basis. D) the net asset value falls within as narrow a range as possible.
their beta tends to mirror the overall market. Money market funds are managed to have very low volatility. Therefore, they have a very low beta coefficient.
An announcement of a new issue of a security that gives the name of the issuer, the price and the name of the underwriter is called a(n): A) tombstone. B) red herring. C) prospectus. D) offering memorandum.
tombstone. A tombstone is an announcement of a new issue that includes the name of the issuer, the price of the security, and the name of the underwriter from whom it can be purchased.
Your client has asked about the automatic dividend reinvestment plan offered by the ABC Growth and Income Fund. In describing the differences between dividend reinvestment and receiving distributions in cash, which of the following statements are CORRECT? One benefit of dividend reinvestment is that distributions reinvested are tax deferred, whereas dividends received in cash are taxable in the year of receipt. The taxation of the dividend distribution is not affected by your choice to reinvest or receive the dividend in cash. Reinvestment of dividends tends to have a compounding effect, while taking the distributions in cash inhibits the opportunity for growth of capital. Taking the dividends in cash actually creates more wealth because the reinvested dividends are subject to sales charges. A) I and IV. B) II and IV. C) I and III. D) II and III.
II and III. Dividends, whether received in cash or reinvested, are subject to current taxation. A major benefit of reinvesting is the compounding effect on your account, if the shares increase in value. Dividends and capital gains distributions are always reinvested at net asset value.
Which of the following may a registered representative use to solicit an order for open-end investment company shares? An annual report. A prospectus. A summary prospectus. A preliminary prospectus. A) I and IV. B) I and III. C) II and IV. D) II and III.
II and III. The prospectus, sometimes referred to as the statutory or final prospectus, is the most complete one and may always be used. A summary prospectus, sometimes called a Rule 498 summary, may also be used as long as the client will be mailed a final prospectus within 3 business days or given access to a downloadable one online. A preliminary prospectus (red herring) may NEVER be used to solicit anything more than an indication of interest - not an order.
An investor has $250,000 to invest in mutual funds. Which of the following would be appropriate statements to make to him? Buying a no load fund will insure better performance in the long run. If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs. A purchase of Class A shares in this quantity will probably lead to a reduction in sales charge. A) I and III. B) I and II. C) II and III. D) I, II and III.
II and III., was correct!. Although Class B shares carry no front-end load, their higher expense ratios can negatively impact investor results. A purchase of this size invariably carries a greatly reduced sales charge.
Which of the following is the least suitable mutual fund transaction? A) Encouraging an investor in his early 30s to invest in an emerging markets mutual fund. B) Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund. C) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence. D) Encouraging an investor in a high-tax bracket with an income objective to invest in a municipal bond fund.
Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence. Switching funds, unless there is a pressing reason for it, is rarely in the client's best interest, when the client will be subject to the deferred sales charge. Reference: 6.1 in the License Exam Manual.
How often do Treasury notes pay interest? A) Once a month. B) With the same frequency as Treasury bills. C) Every six months. D) Once a year.
Every six months. Unlike Treasury bills, T-notes pay interest every six months.
The Department of Enforcement is an arm of: A) FINRA. B) the SEC. C) the Securities Industry Association. D) the federal government.
FINRA. The Department of Enforcement is an arm of FINRA; it is the first body to hear and judge complaints.
A customer in his 40s, with ample income to meet his needs, has unexpectedly received $250,000 and would like to invest it in mutual funds. He emphasizes that he is interested in long-term growth and is willing to accept moderate risk. He proposes to his registered representative that the investment be split among three funds: the XYZ Balanced Fund, whose portfolio includes stocks and bonds of many old and successful companies; the KPL Growth and Income Fund, which has shown excellent performance over the last several years; and the NYF International SmallCap Stock Fund, which he feels will provide diversification by investing in foreign companies. In discussing the customer's proposal, the registered representative might make which of the following points? A) The proposal is unsuitable. Since mutual funds are under the control of a fund manager, the customer cannot respond to market and economic changes in a timely fashion. B) The proposal does not address the customer's objective: long-term, moderate-risk growth. Also, by splitting the investment among different fund families, he will probably pay higher sales charges. C) The proposal appears to be suitable, since it combines safety (old and successful companies) and diversification (debt instruments, foreign stocks, and both small-cap and large-cap companies). D) The proposal is suitable, since it provides safety nets: if the U.S. economy does not do well, the foreign investments could take up the slack. If the growth objective is not met, there are also income investments to provide returns. If small companies do not do well, he is also investing in large companies.
The proposal does not address the customer's objective: long-term, moderate-risk growth. Also, by splitting the investment among different fund families, he will probably pay higher sales charges. The customer's proposal involves investing in comparatively high-risk, not moderate-risk, small-cap foreign stocks; in debt instruments, which do not provide growth; and in a balanced fund, whose objective is quite different from the customer's objective: long-term, moderate-risk growth.
Which of the following statements is CORRECT with regard to an index annuity? A) There is a minimum guaranteed rate of return. B) They are priced like a closed-end fund. C) Withdrawals are capital gains. D) They trade on secondary markets.
There is a minimum guaranteed rate of return. Index annuities are basically fixed annuities and they carry a minimum guaranteed return. Any withdrawals in excess of the cost basis are treated as ordinary income.
Your brother, a successful restaurant manager, approaches you about helping him raise funds to start his own restaurant. You suggest offering limited partnership units and agree to purchase one of the units yourself. Furthermore, you feel several of your clients will be interested in investing as well, and you are considering recommending it to them. You don't expect, however, to be paid anything for your services. Which of the following statements is CORRECT? A) Because the offering is of limited partnership units rather than stock, as a Series 6 limited representative you are prohibited from discussing these with your clients. B) This activity comes under the selling away rules and requires prior written approval from your firm. C) Because this is a passive investment on your part, no notification to your firm is necessary. D) This activity comes under the selling away rules and requires prior notification to your firm.
This activity comes under the selling away rules and requires prior notification to your firm. Regardless of the security type and your license, this is a private securities transaction, sometimes referred to as selling away. Because there is no compensation, all that is required is prior written notification to your employer member. Had there been compensation, approval would have been necessary. If you were simply investing as a passive investment and not bringing in other partners, no notification would have been necessary.