Series 6 chapters 1 and 2
Which of the following statements is NOT true of Regulation S-P? A) Consumers must be given an initial privacy notice. B) Firms must establish procedures to protect customers' nonpublic personal information C) Customers may be provided privacy information on internet web pages. D) Customers must be given annual privacy disclosures on a separate piece of paper.
A customer with an ongoing relationship with a member must receive both an initial and an annual privacy notice. It may be included in other documents but must be clear and conspicuous.
Which of the following statements regarding money market mutual funds is TRUE?
A) Shares are purchased at net asset value.
Which of the following statements is true of Treasury STRIPS?
B) STRIPS are backed by the full faith and credit of the federal government. Treasury STRIPS are stripped treasuries (discounted principal and interest sold separately). STRIPS are direct issues of the U.S. government are backed by its full faith and credit.
The Securities Act of 1933 requires that all of the following be offered by a prospectus EXCEPT:
B) Treasury bonds.
Corporate bonds are considered safer than common stock issued by the same company because:
B) bonds place the issuer under an obligation but stock does not.
The cost basis of mutual fund shares includes
B) the total cost, including sales charges, plus dividends or capital gains reinvested in the fund
If a mutual fund's net asset value is $9.30 and its sales charge is 7%, its offering price is:
C) $10.00 To determine the selling price of the shares when given the NAV, divide the NAV by 100% minus the sales load: NAV / (100% − SL%) = public offering price. In this case, $9.30 divided by 93% (.93) = $10.
When a brokerage firm sells stock from its own inventory, it is acting in the capacity of
C) a principal and charges a mark-up
To open a new account, it is necessary to complete a new account form. That form must include the client's: A) membership in professional organizations. B) signature. C) date of birth. D) educational background. Explanation
C) date of birth.
The XYZ Growth Fund has an NAV of $19. Its sales charge, calculated by the usual industry method, is 5%. What is the public offering price of a single share?
D) $20.00 Public offering price is equal to NAV divided by (1 − sales charge). Thus, $19 / .95 = $20.00.
Which of the following does NOT issue commercial paper?
D) Sole proprietorship
If a corporation begins a nonqualified retirement plan, which of the following statements is TRUE?
Employee contributions grow tax deferred if they are invested in an annuity.
If a customer wishes to open a cash account, who must sign the new account form?
Only the principal. Neither the customer nor the registered representative are required to sign a new account form. A principal must review, and then accept, the new account by signing the form.
All of the following are advantages of investing in mutual fund shares EXCEPT:
Shareholders may exchange their holdings in one fund for another in the same family without tax implications. Although the exchange privilege is available at NAV (no sales charge), it is a taxable event.
All of the following are advantages of Section 529 plans EXCEPT:
gift tax rules do not apply, as long as the account is eventually used for higher education purposes.
Your customer is interested in a fund that follows a buy-and-hold style of investing. He also insists on the lowest fees and expenses possible. Which of these funds might you recommend?
A) Index. A manager of an index fund would use a buy-and-hold style. As the composition of the index changes through stock distributions or recapitalizations, the fund manager would buy or sell the issues to keep them in proportion to their position in the index before the distribution or recapitalization. Because this does not happen often, fees and expenses would also tend to be low.
A registered representative with a Series 6 registration can sell which of the following:
A) a mutual fund that redeems its own shares.
To be in compliance with the Investment Company Act of 1940, every registered investment company must report to shareholders no less frequently than every: A) 12 months. B) 6 months. C) 3 months. D) 16 months.
B) 6 months. Investment companies must report to customers on the state of the company at least twice a year with one audited annual report and one unaudited semiannual report.
An investor thinks ABC stock is going up and would like to use leverage to profit from his belief. You recommend the following A) Sell puts on ABC stock B) Buy calls on ABC stock C) Sell calls on ABC stock D) Buy puts on ABC stock
B) Buy calls on ABC stock The investor is bullish on ABC stock, believing it is going to rise in value. Buying calls (call up!) allows him or her to control a lot of ABC stock by paying a small premium, therefore leveraging the position.
Your customer has contributed $1,000 annually into her Roth IRA for seven years. Which of the following statements concerning her Roth IRA distributions is TRUE? A) The distributions are taxed as ordinary income. B) Your customer will not be taxed on the distributions if she is over the age of 59½ and the money has been held in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. C) Your customer will pay ordinary income taxes on the part of the distribution that represents earnings. D) The distributions are taxed as capital gains.
B) Your customer will not be taxed on the distributions if she is over the age of 59½ and the money has been held in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Distributions from Roth IRAs made after age 59½ are tax-free if the money was in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Contributions to Roth IRAs are made with after-tax dollars.
All of the following items require review by a principal of the member firm EXCEPT
B) a training presentation that is marked for internal use only The requirements for principal review do not apply to materials to be used internally. Note that form letters mailed to 25 or fewer prospective customers within a 30-day period (correspondence) is reviewed by a principal; pre-approval is not required.
The AIR (Assumed Interest Rate) for your customer's variable annuity contract is 5%. In February, the separate account earned 7%. In March, the separate account earns 5%. The April annuity payment will be:
B) equal to the March payment. When the separate account return is equal to the AIR, the next month's payment amount does not change.
An investor has been investing $100 per month for the past three months. The purchase prices were $20, $25, and $10. What is average cost per share purchased? A) $18.33 B) $100 C) $15.79 D) $5.45
C) $15.79 The first purchase (at $20) acquired 5 shares ($100/$20), subsequent purchases acquired 4, and 10 shares respectively. That is a total of 19 shares with an outlay of $300. The result is an average cost per share of $15.79 ($300/19).
If a member firm is notified by FINRA that it must begin tape-recording the phone calls of its assistant representatives and registered representatives to existing and potential customers, it must do so within how many days of notification?
C) 60
Which of the following securities may a Series 6 registered rep sell?
C) Closed-end funds, but only in the primary market Series 6 RRs have a limited registration and are limited to selling investment company securities with a prospectus (only in the primary market).
When pension plan proceeds (employer contributions only) are rolled into a Roth IRA, what portion is taxable? A) 20% of the total. B) Anything in excess of $5,000. C) Employer contributions. D) Employee contributions.
C) Employer contributions.
A shareholder has redeemed some mutual fund shares that were purchased over a period of ten years. If the shareholder has not indicated the specific dates of purchase and cost of the shares that were redeemed on his tax return, the IRS will follow which of the following methods in determining the cost basis of shares redeemed? A) Average cost of purchase. B) LIFO. C) FIFO. D) Step-up in basis.
C) FIFO. If another method is not chosen, the IRS will assume the FIFO (first in, first out) method of accounting in determining the cost basis of the shares redeemed. Investors may choose to identify shares redeemed only if the cost of the shares and the date of purchase is recorded on the tax return. The average cost method is an alternative that a taxpayer can use continuously for a given investment.
Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies? They may not be sold short. They are traded on registered stock exchanges. They are redeemable securities. Investors pay commissions to purchase and liquidate their positions.
C) II and IV. Explanation Both exchange-traded funds and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Both may be sold short (and purchased on margin). Neither is redeemable with the issuer as they are traded in the secondary market.
Assuming that expense ratios for the funds listed are identical, rank the funds below in order, from lowest to highest expected income yield. Municipal bond fund Government bond fund Corporate bond fund Growth stock fund
C) IV, I, II, III Corporate bonds have the greatest amount of credit risk and therefore the highest yield. Government bond funds yield more than municipal bond funds because interest paid on government bonds is federally taxable. Growth stock funds are not designed to provide income at all.
Which of the following types of annuity contracts could your customer NOT purchase?
C) Periodic payment immediate life annuity. Periodic payment annuities may be purchased only on a deferred basis. Annuitization and regular payments into an annuity may not occur simultaneously. Reference: 3.10.6 in the License Exam Manual
Each of the following are characteristic of a mutual fund voluntary accumulation plan EXCEPT:
C) obligatory purchase goal. A voluntary accumulation plan is just that-voluntary, not binding. The company may require that the initial investment meet a certain minimum dollar amount. It may also specify that any additions meet set minimums (e.g., $50). The plan may qualify for breakpoints based on the accumulated value.
A young, recently married couple, would like to purchase a home within five years. They have $2,000 in savings and $400 a month to invest. In addition, they owe $35,000 on student loans to be repaid over the next ten years. What type of mutual fund investment would likely be the BEST recommendation?
D) Build up cash reserves and then save for a down payment on the new home. Investing must wait.
If a 60-year-old male customer is interested in investing in a variable annuity, which of the following would be the least important in the investment decision?
D) Customer's sex.
An investor wishes to start a dollar cost averaging program by investing $100 per month. Which of the following would be the least appropriate investment vehicles for this plan? Closed-end investment company. Exchange-traded fund. Open-end investment company. Variable annuity.
D) I and II. Closed-end investment company shares and exchange-traded funds trade like any other stock. Smaller investment levels involve high commission costs relative to the amount being invested. Also, there are no provisions for rights of accumulation and reinvestment of distributions.
The Investment Company Act of 1940 requires that a mutual fund do which of the following? Provide a monthly balance sheet to investors. Have $100,000 minimum capitalization. Provide semiannual reports to shareholders. Redeem shares at the net asset value per share calculated as of the close of the next business day following the redemption request.
D) II and III.
Which of the following statements about a straight-life variable annuity is TRUE? A) The monthly payout is fixed to the Consumer Price Index. B) The number of accumulation units a client owns never changes. C) If a client dies during the annuity period, the remaining funds are distributed to the beneficiary. D) The number of annuity units a client owns never changes.
D) The number of annuity units a client owns never changes. Once annuitized, the number of annuity units remains fixed. For straight-life, the annuitant receives a check for the rest of their life (there is no beneficiary).
All of the following statements relating to a deferred compensation plan are correct EXCEPT:
D) the covered employee must receive reports on the status of the plan no less frequently than annually. Deferred compensation plans are not qualified plans. They may discriminate among employees, and no reporting is necessary. The benefits of the deferral will be best realized if the employee's tax rates are lower upon receipt of the money. Since the benefits are scheduled to be paid out of the corporation's cash flow at the time of the employee's retirement, corporate financial difficulties may preclude any payout.
Under the exchange provision, within the first 24 months, a variable life policy may be converted into a:
D) whole life policy. The variable life exchange provision allows a policyholder to convert the variable policy into a whole life policy within the first 24 months of variable policy ownership. The insurance company must use the initial contract date and cannot require proof of insurability.
When a customer receives payment during the annuity period of a variable annuity, which of the following is TRUE? A) Only the amount that represents investment income is subject to tax. B) The investment income is taxed at the capital gains rate. C) The entire amount is subject to tax. D) All withdrawals are tax free.
Only the amount that represents investment income is subject to tax. The payment is divided into investment income and the client's original investment. Tax is owed on the investment income only, which is taxed at an ordinary income rate.
An investor purchases $10,000 of the Class B shares of the KAPCO Growth Fund. Two years later, the client redeems the shares. The redemption charge is a percent of the:
lesser of the NAV or purchase price. When faced with a CDSC on Class B shares, the charge is levied against the lesser of the current NAV or the original purchase price.
Capital gains distributions may be combined with income distributions to calculate annual yield on mutual fund shares:
under no circumstances. Capital gains distributions may never be combined with income distributions when calculating yield
Which of the following will NOT be found in a final prospectus? A) Date and offering price. B) Agreement among underwriters. C) Business plan. D) Statement that the SEC neither approves nor disapproves of the issue.
B) Agreement among underwriters. The final prospectus will include information that is material to investors in order for them to make an informed decision. The agreement among underwriters is a separate document that is between the members of the underwriting syndicate. Investors do not require knowledge of what is contained in this agreement.
Mutual funds are like other types of corporations in which of the following ways? They may issue equity and debt. The board of directors makes policy decisions. Shareholders have ownership rights. Their shares trade in the secondary market.
B) II and III. Mutual funds may only issue redeemable common stock, no preferred stock or bonds. Like corporate stockholders, mutual fund shareholders have a number of rights, including the right to elect the board of directors, which sets policies for the fund. However, the shares can only be purchased in the primary market and then redeemed with the fund.
A customer has a variable life insurance policy and has made two annual premium payments. If the customer terminates the policy after the end of the second year, which of the following statements are TRUE? The customer receives the policy cash value only. B) The customer is refunded any cash value and a portion of the sales charges. C) The customer is refunded all premiums paid. D) The customer is not entitled to a policy refund but may exchange the policy for a traditional whole life policy.
The customer receives the policy cash value only.
If an elderly widower wants his investments to provide high current income, the representative should recommend: A) a mutual fund that matches the investor's stated objective. B) a zero-coupon bond. C) a growth fund. D) the ABC Widow Fund.
a mutual fund that matches the investor's stated objective. Investors should be careful not to be misled by a mutual fund's name. Although the name of a fund should bear a resemblance to its objective, the investor and the representative should read the fund's prospectus carefully to be sure that the fund's objective matches the investor's objective. Growth funds and zero-coupon bonds are not designed to meet the requirement of providing maximum current income.
If your customer holds ten KLP 6% bonds, how much money will he receive in total at the debenture's maturity? A) $10,300. B) $10,000. C) $10,600. D) $10,200.
A) $10,300. The holder of 10 bonds will receive $10,000 in principal at maturity. Each bond pays 6% annual interest, or $60. Thus, ten bonds pay a total of $600 per year in two semiannual payments of $300. At maturity, the bondholder will receive the $10,000 face amount plus the final semiannual payment ($10,000 + $300 = $10,300). Reference: 3.7.1 in the License Exam Manual
The maximum fee that can be charged for distribution and promotion under a 12b-1 plan is A) 0.75% of average net assets. B) an amount equal to the shares' net asset value. C) the difference between the shares' POP and NAV. D) 9% over the life of the plan.
A) 0.75% of average net assets. The maximum charged under a 12b-1 plan must be reasonable and bear a relationship to the distribution services offered. The fee on shares offered may not exceed .75% of average net assets.
If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that: dividend distributions will be reinvested at net asset value. dividend distributions will be reinvested at the public offering price. capital gains distributions will be reinvested at net asset value. capital gains distributions will be reinvested at the public offering price.
A) I and III.
ACE Fund experienced an unrealized loss last month. This will: result in a lower NAV per share. result in lower dividend payments to shareholders. reduce the proceeds payable to shareholders who liquidate their shares. force the fund to raise the POP to make up for the loss.
A) I and III. An unrealized loss is the same as a depreciation in asset value, which results in a lower NAV per share. A shareholder would receive less at redemption than he would have received if redemption took place before the asset's depreciation.
A FINRA member firm is found guilty of some but not all of the charges brought against it by the Department of Enforcement. An appeal: must be made within 25 days of the decision. must be made within 30 days of the decision. is filed with FINRA. stays the effective date of any sanction other than a bar or expulsion.
A) I and IV An appeal must be filled with the National Adjudicatory Council within 25 days of the decision or the decision is final.
Which of the following investors are eligible to establish an IRA? Independently wealthy individual whose sole source of income is $125,000 per year in dividends and interest. Law student who earned $1,200 in a part-time job. An individual who earned $3,500 last year selling encyclopedias but whose spouse is covered by a company profit-sharing plan. Property owner whose income is solely from rent charged on family dwellings he owns.
A) II and III. An individual may contribute 100% of earned income up to a maximum allowable dollar limit, whichever is less . Interest and dividend income is portfolio income and rent is passive income, not earned income.
In making a sales presentation to a prospective customer, a registered representative selling open-end investment company shares may compare the shares to a savings account at a bank if: it is pointed out that mutual funds have the advantage of federal backing. the risk of share price fluctuation is discussed. it is pointed out that mutual funds have the advantage of higher liquidity. a statement is made concerning variability of dividend returns.
A) II and IV. It would be misleading for a registered representative to compare mutual fund shares with bank savings accounts without indicating that savings accounts are insured by the federal government and mutual funds are not. Sales presentations of mutual fund shares should also include statements indicating that past performance is no guarantee of future results, that an investor's initial investment in mutual fund shares could be lost, and that dividends paid on mutual fund shares are not guaranteed.
A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.57. B) $8.42. C) $8.30. D) $7.80.
C) $8.30. The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge.
Which of the following permits the highest annual contributions? A) A traditional nondeductible IRA. B) A Coverdell Education Savings Account. C) A SEP IRA. D) A traditional spousal IRA for which the contribution has been deducted.
C) A SEP IRA. Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.
ACE Fund's offering price is $9.00, and its net asset value is $9.40. GEM Fund's offering price is $24.00, and its net asset value is $20.00. From these quotes you know that: ACE could be an open-end or closed-end fund. ACE is a closed-end fund. GEM could be an open-end or closed-end fund. GEM is a closed-end fund.
D) II and IV. ACE Fund is selling below its net asset value, so it must be a closed-end fund. GEM is selling above its NAV by more than the 8.5% sales load allowed for open-end funds, so it also must be a closed-end fund ($4/$24 = 16.7%).
Which of the following share classes typically have a higher expense ratio than Class A shares? No-load shares. Class B shares. Front-end load shares. Class C shares.
D) II and IV. The expense ratio of no-load shares is comparable to that of Class A shares-that is, very low. Front-end load shares are Class A shares under a different name. Class B shares and Class C shares have the highest expense ratios. Class B shares do convert to Class A shares after the CDSC expires.
If a registered representative of a FINRA member firm wants to open an account with another member firm, which of the following statements are TRUE? The account may not be opened under any circumstances because the registered representative has access to privileged information. The account may be opened, but the registered representative may not engage in securities transactions that he could do through his own firm. The member firm opening the account must send duplicate confirmations to the employing member firm if requested to do so. The member firm opening the account must give notice to the employing member firm.
D) III and IV. The member firm where the account is opened must notify the employing firm and provide copies of all requested trade confirmations.
Your customer is a 66-year-old retired widower. He is seeking an investment of $50,000 that will keep pace with inflation. He currently survives on Social security and a pension and is very risk averse. Which of the following do you recommend?
D) TIPS TIPS is the only choice that keeps pace with inflation and also has the lowest default risk of the choices given. The biggest risk associated with a fixed annuity is that over time it won't keep pace with inflation and both the high-yield bond fund and the gold fund are too volatile for this risk averse client.
Which of the following is an advantage of purchasing a lump-sum deferred annuity as opposed to a periodic payment deferred annuity? A) Most investors find it easier to make a single large payment rather than many small ones spread out over years. B) Sales charge discounts are lower for a lump-sum deferred annuity than for a periodic payment deferred annuity. C) Periodic payment annuities usually have a lower cost base. D) The entire amount of the purchase has the maximum amount of time to grow.
D) The entire amount of the purchase has the maximum amount of time to grow. A single purchase would have the possibility of growth from the first moment. Periodic payments do not begin to grow until invested and thus later payments have less time to generate returns.
If an investment company has a fixed portfolio of municipal bonds with high duration, how will substantial changes in general interest rates affect the company's portfolio?
D) The market value will fluctuate significantly, but the investment income will remain stable.
All of the following statements regarding government and agency securities are true EXCEPT:
D) they are always directly backed by the federal government. Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. Income from all three are taxable at federal, state, and local levels, and all were authorized by Congress.
A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to:
buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and .75 12b-1 fee. If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares.
During the accumulation phase of a variable annuity, the value of the contract owner's portion of the separate account is equal to:
the number of accumulation units times the value per unit. During the accumulation phase, a variable annuity contract holder owns accumulation units. The value of one accumulation unit multiplied by the number of accumulation units equals the total value of the contract holder's investment.
