FINRA FINRA-SERIES-6 Online Practice Questions and Exam Preparation

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 191:

  Which of the following actions can be expected to result in a decrease in stock and bond prices, all else equal?

  I. The Federal Reserve announces a decrease in the discount rate.

  II. Congress votes to decrease payments to Social Security recipients.

  III. Congress votes to decrease taxes.

  IV.

  The Federal Reserve announces that it will sell some of the Treasury securities it owns on the open market.

  A. I and III only
  B. II and IV only
  C. I, II, and III only
  D. II and III only
  I. The Federal Reserve announces a decrease in the discount rate. II. Congress votes to decrease payments to Social Security recipients. III. Congress votes to decrease taxes. IV. The Federal Reserve announces that it will sell some of the Treasury securities it owns on the open market.
  B. II and IV only

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  Explanation/Reference:

  Only Selections II and IV will result in a decrease in stock and bond prices, all else equal. If Congress votes to decrease payments to Social Security recipients or if the Federal Reserve announces that it will sell some of the Treasury securities it owns on the open market, a decrease in stock and bond prices can be expected. A vote by Congress to decrease payments to Social Security recipients results in a decrease in money supply in our economy. Since interest rates can be thought of as the “price” of money, a decrease in the money supply will result in higher interest rates, which results in lower prices in the stock and bond markets. Similarly, if the Federal Reserve sells some of the Treasury securities it owns on the open market, a decrease in the money supply results, leading to an increase in interest rates and a decrease in securities’ prices. When the Federal Reserve decreases the discount rate and when Congress decreases taxes, the money supply is increased. The interest rate-the price of money-subsequently decreases (all else equal), and prices of stocks and bonds increase as a result.

• Question 192:

  After having been divorced for several years, Mrs. Blended has remarried a man with three children of his own. She has set up a revocable trust in which she deposited funds that she inherited when her mother died, so that the monies will go uncontested to her two biological children in the event of her own death. These two adult children are the only beneficiaries of the trust. Mrs. Blended has no plans to touch any of the money in the trust unless circumstances demand it in the future. The trust is invested in a mutual fund that paid $500 in dividend income and distributed $3,000 in long-term capital gain income to the trust this year.

  Which of the following statements is true regarding the tax treatment of these distributions?

  A. The distributions will not be taxed at this point; they will be taxed only when Mrs. Blended or her beneficiaries make withdrawals from the trust.
  B. Assuming her two adult children are equal beneficiaries, each one is responsible for paying tax on 50% of the income to the trust, or $1,750.
  C. Mrs. Blended must pay taxes on the $3,500 in distributions.
  D. The distributions will not be taxed at this point; they will be taxed as part of the estate upon Mrs. Blended's death.
  C. Mrs. Blended must pay taxes on the $3,500 in distributions.

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  Explanation/Reference:

  If Mrs. Blended established a revocable trust that invested in a mutual fund that distributed $3,500 total in dividend and capital gain income this year, Mrs. Blended is responsible for paying taxes on the distributions. Whether or not any monies or assets are withdrawn from a revocable trust, the grantor of the trust-in this case, Mrs. Blended-- is responsible for any taxes due.

• Question 193:

  After a registration statement has been filed with the SEC, no offers to sell the security to the public can be made for:

  A. a minimum of 30 days unless the SEC grants an exception.
  B. a maximum of 20 days.
  C. a maximum of 30 days.
  D. a minimum of 20 days unless the SEC grants an exception.
  D. a minimum of 20 days unless the SEC grants an exception.

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  Explanation/Reference:

  After a registration statement has been filed with the SEC, no offers to sell the security to the public can be made for minimum of 20 days unless the SEC grants an exception and declares the registration statement effective sooner. The security cannot be offered for sale until the SEC has declared the registration statement effective, and should the SEC find that it requires more information from the issuer, it may be take longer than 20 days for it to declare the statement effective.

• Question 194:

  The fees that member firms must pay to FINRA are based on:

  I. the total market value of its assets.

  II. the number of registered representatives it employs.

  III.

  the number of branch offices it has.

  A. I only
  B. I and III only
  C. II and III only
  D. I, II, and III
  I. the total market value of its assets. II. the number of registered representatives it employs. III. the number of branch offices it has.
  C. II and III only

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  Explanation/Reference:

  The fees that member firms must pay to FINRA are based on the number of registered representatives it employs and the number of branch offices it has.

• Question 195:

  The MaxCharge fund has a 5% front-end load and a 12b-1 fee that is 0.25% of its average net assets. Under these conditions, any rear-end load, it may have, is limited to:

  A. 2.00%.
  B. 4.25%.
  C. 4.75%.
  D. 3.25%.
  D. 3.25%.

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  Explanation/Reference:

  Since the MaxCharge fund has a 5% front-end load and a 12b -1 fee that is 0.25% of its average net assets, any rear-end load, it may have, is limited to 3.25%. The maximum sales charge that is allowed is 8.5%, and this includes the front-end load, rear-end load, and 12b-1 fee. Since MaxCharge has a front-end load and a 12b-1 fee that totals 5.25%, its rear-end load is limited to 8.5% - 5.25% = 3.25%.

• Question 196:

  A feature that gives a bondholder or the owner of preferred stock of a corporation the option to exchange his security for shares of the common stock of the firm is called a:

  A. call feature.
  B. warrant.
  C. convertible feature.
  D. right.
  C. convertible feature.

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  Explanation/Reference:

  A convertible feature on a bond or preferred stock gives the bondholder or the preferred stock owner the option to exchange the security he owns for shares of common stock of the firm.

• Question 197:

  Mr. Cross wanders into your office with a $35,000 check that he has received from his recently-deceased wife's insurance company and wants you to advise him how to invest it, since that is your job, as he puts it.

  You ask him to fill out a standard investor profile questionnaire, but he refuses to do so. You offer to fill it out for him, based on his answers to your verbal questions, but he still refuses and calls you a “nibby-nose.” Based on this, you can:

  A. allocate the $35,000 any way you choose since you have an uncooperative client.
  B. advise him to invest the money in a money market mutual fund instead of holding it as cash.
  C. advise him to invest the money in an SandP 500 Index fund.
  D. The advice provided in either Choice B or Choice C would be appropriate.
  B. advise him to invest the money in a money market mutual fund instead of holding it as cash.

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  Explanation/Reference:

  If you cannot get any personal information from a client, you cannot legitimately recommend (or execute) an asset allocation for him. You can advise him to invest the money in a money market mutual fund instead of holding it as

  cash since this will provide him with a small return on his money. You cannot advise him to invest the money in an SandP 500 Index fund, which would subject him to more risk.

  This would be considered an unsuitable recommendation and is in violation of securities’ laws.

• Question 198:

  Your nephew has asked you to help him formulate a financial plan for his family. Scott is 27 years old and has been employed as an associate with a law firm for two years. Sarah, his wife, is 26 years old and works in the human resources department of a large corporation. The couple is childless now, but they plan to begin a family in a few years. Together, they have accumulated $10,000 in a savings account and recently inherited $40,000 cash. They expect to be able to start saving at least $5,000 annually since their incomes more than meet their current needs. They each have employer-provided health insurance and retirement plans. Both have excellent upward mobility potential in their careers. They currently pay taxes at the marginal rate of 15%. Scott tells you that although they regularly read some of the more popular financial investment magazines, neither feels particularly knowledgeable about the world of investments.

  Based on this information, which of the following statements is true?

  A. A greater than average percentage of their money should be invested in money market mutual funds to meet their needs for liquidity.
  B. A greater than average percentage of their money should be invested in municipal bonds to minimize their currently high tax bill.
  C. Although some money should be allocated to bond funds for diversification purposes, bond funds should be underweighted in favor of stock funds.
  D. Purchasing power risk is not an issue in their situation.
  C. Although some money should be allocated to bond funds for diversification purposes, bond funds should be underweighted in favor of stock funds.

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  Explanation/Reference:

  Given that Scott and Sarah already have a nice nest egg started at their relatively young ages and are expecting to be able to contribute more to it, with no obvious need for current income, some of their money should be allocated to bond funds for diversification purposes, but bond funds should be underweighted in favor of stock funds. Purchasing power risk is an issue for them, and bond funds do not provide the inflation hedge that stock funds do. At the current time, municipal bond funds should not be selected since they pay taxes at a low marginal tax rate. This allocation may need to be changed down the road a bit as their tax rate (and other circumstances) change. Only a minimal amount of money should be allocated to a money market fund since the couple has no need for current income, and money market funds offer low returns.

• Question 199:

  The Federal Reserve announces that it plans to buy $3.89 billion in Treasury securities on the open market. All else equal, which of the following is a likely result of this Fed action?

  A. Interest rates will rise, causing security prices to fall.
  B. Money supply will increase, causing interest rates to fall.
  C. Stock and bond prices should increase.
  D. Both B and C are likely results of this Fed action.
  D. Both B and C are likely results of this Fed action.

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  Explanation/Reference:

  If the Federal Reserve buys Treasury bills on the open market, the money supply is increased, which causes interest rates to fall, and a decrease in interest rates results in an increase in stock and bond prices, all else equal.

• Question 200:

  The subaccounts into which Mr. Sumrisk directed his variable life premiums have earned a 6% return. If the assumed interest rate was 7%:

  I. the cash value of his policy increased.

  II. the death benefit associated with his policy decreased.

  III. the cash value of his policy decreased.

  IV.

  the death benefit associated with his policy increased.

  A. both I and II
  B. both I and IV
  C. both II and III
  D. both III and IV
  I. the cash value of his policy increased. II. the death benefit associated with his policy decreased. III. the cash value of his policy decreased. IV. the death benefit associated with his policy increased.
  A. both I and II

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  Explanation/Reference:

  If Mr. Sumrisk's subaccounts earned a 6% return and the assumed interest rate was 7%, then the cash value of his policy increased, but the death benefit associated with his policy decreased. The cash value of the policy increases when the separate account earns a positive return, regardless of the size of that return. The death benefit, however, depends on both the return earned on the separate account and the assumed interest rate. Since the separate account returned less, in this case, than the assumed interest rate, the death benefit decreased.