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

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 201:

  Which of the following statements regarding insider trading penalties is true?

  A. The SEC may seek both civil and criminal penalties against an individual who is found guilty of insider trading.
  B. Any contemporaneous trader who has lost money due to an illegal insider trade may sue the violator for both the amount of his losses and pain and suffering, as determined by the court.
  C. A broker-dealer who is found to have provided inadequate supervision over an agent who is found guilty of insider trading is also subject to insider trading penalties.
  D. Both A and C are true statements.
  D. Both A and C are true statements.

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  Explanation/Reference:

  Both A and C are true statements regarding insider trading penalties. The SEC may seek both civil and criminal penalties against an individual who is found guilty of insider trading, and a broker-dealer who is found to have provided inadequate supervision over an agent who is found guilty of insider trading is also subject to insider trading penalties. Any contemporaneous trader who has lost money due to an illegal insider trade may sue the violator, but only for his losses, and not for pain and suffering.

• Question 202:

  Which of the following is not a characteristic of all auction stock exchanges in the U.S.?

  A. There is a central marketplace.
  B. Stocks that are traded on the exchange must meet certain listing requirements, determined by the exchange.
  C. In order to conduct a trade on the exchange, a broker must be a member of the exchange or hold a license to trade on the exchange.
  D. If a stock is listed on one of these exchanges, it is not permitted to be listed on any other exchange.
  D. If a stock is listed on one of these exchanges, it is not permitted to be listed on any other exchange.

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  Explanation/Reference:

  The statement that does not describe a characteristic of all U.S. auction stock exchanges is D. Dual listing is permitted. Stocks listed on one exchange may also be listed on another. In fact, most of the trading on U.S. regional exchanges is in dual-listed stocks. All of the auction exchanges do have a central marketplace, listed stocks must meet listing requirements, and brokers wishing to conduct trades on the exchange must be members of the exchange or hold a license to trade on the exchange.

• Question 203:

  Which of the following retirement plans requires the employer to match employee contributions in accordance with specific guidelines?

  A. 401(k) plans
  B. SIMPLE IRAs
  C. Section 457 plans
  D. both A and B
  B. SIMPLE IRAs

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  Explanation/Reference:

  The retirement plan that requires the employer to match employee contributions in accordance with specific guidelines is the SIMPLE IRA. SIMPLE is an acronym for Savings Incentive Match Plans for Employees. Although some employers offer some sort of matching contribution to 401(k) participants, it is not required that they do so. A Section 457 plan is a deferred compensation plan.

• Question 204:

  Which of the following plans allows the contributor to withdraw both his earnings and contributions tax-free if certain conditions are met?

  A. Roth IRA
  B. traditional IRA
  C. money purchase plan
  D. 401(k) plan
  A. Roth IRA

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  Explanation/Reference:

  The Roth IRA allows the contributor to withdraw both his earnings and contributions tax-free if the Roth IRA has been in existence for at least 5 years and the contributor has reached the age of 59 ½. In all of the other choices, only non-tax-deductible contributions may be withdrawn tax-free.

• Question 205:

  Ms. Newbie is a registered representative with Savvy Investments and has recently gotten married. (Her new name is Mrs. Newbie-Oldman.)Her husband has been a client of hers, and the couple now wants to put her name on the account. In this case:

  A. Ms. Newbie is a registered representative with Savvy Investments and has recently gotten married. (Her new name is Mrs. Newbie-Oldman.)Her husband has been a client of hers, and the couple now wants to put her name on the account. In this case:
  B. Mrs. Newbie-Oldman must obtain written authorization from Savvy Investments to put her name on the account.
  C. Mrs. Newbie-Oldman's husband must provide written authorization to Savvy Investments for his new bride to be included on the account.
  D. Both B and C are true statements.
  D. Both B and C are true statements.

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  Explanation/Reference:

  If Mrs. Newbie-Oldman and her new husband want her name on what was previously his account, she must obtain written authorization from her employer, Savvy Investments, and her new husband must provide his written authorization to Savvy. She is exempted from the proportional investment requirement as Mr. Oldman's spouse, but not from the written authorization requirements under FINRA Rule 2150.

• Question 206:

  Tex Payor purchased his shares of Invest4U Mutual Fund 30 days prior to its ex-dividend date. In order for any dividends he receives from the fund to be qualified, Tex cannot sell his shares until:

  A. one day after the fund's ex-dividend date.
  B. thirty-one days after the fund's ex-dividend date.
  C. six months after the settlement date of his purchase.
  D. twelve months after the settlement date of his purchase.
  B. thirty-one days after the fund's ex-dividend date.

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  Explanation/Reference:

  In order for any of the dividends Tex receives from the fund he purchased 30 days prior to its ex-dividend date to be considered qualified, Tex cannot sell his shares until thirty-one days after the fund's ex-dividend date. To treat any fund dividends as qualified, a shareholder has to have held the shares for more than 60 days during a 121-day time frame that begins 60 days before the ex-dividend date stipulated by the fund. So, if Tex bought the shares 30 days prior to Invest4U's ex-dividend date, he needs to hold the shares for at least another 31 days after the fund's ex-dividend date for any distributed dividends to be considered qualified dividends.

• Question 207:

  A new issue of common stock can be classified in which of the following categories?

  I. primary market

  II. money market

  III. secondary market

  IV.

  capital market

  A. I only
  B. III only
  C. I and IV only
  D. II and III only
  I. primary market II. money market III. secondary market IV. capital market
  C. I and IV only

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  Explanation/Reference:

  Only Selections I and IV are correct. A new issue of common stock will be sold in the primary market. It is also a capital market security since it has no maturity, and capital market securities are securities with greater than one year to maturity.

• Question 208:

  Which of the following portfolios best represents a suitable asset allocation for a risk-averse investor?

  I. Cash/money market fund: 20%; government bonds: 10%; investment-grade bonds: 15%; foreign stocks: 10%; blue-chip stocks: 25%; high-yield bonds: 10%; small cap stocks: 10%

  II. Cash/money market fund: 30%; government bonds: 20%; investment-grade bonds: 15%; foreign stocks: 3%; blue-chip stocks: 25%; high-yield bonds: 0%; small cap stocks: 7%

  III.

  Cash/money market fund: 10%; government bonds: 5%; investment- grade bonds: 10%; foreign stocks: 15%; blue-chip stocks: 25%; high-yield bonds: 10%; small cap stocks: 25%

  A. I
  B. II
  C. III
  D. None of the above; a risk -averse investor should be entirely invested in government securities and/or money market funds.
  I. Cash/money market fund: 20%; government bonds: 10%; investment-grade bonds: 15%; foreign stocks: 10%; blue-chip stocks: 25%; high-yield bonds: 10%; small cap stocks: 10% II. Cash/money market fund: 30%; government bonds: 20%; investment-grade bonds: 15%; foreign stocks: 3%; blue-chip stocks: 25%; high-yield bonds: 0%; small cap stocks: 7% III. Cash/money market fund: 10%; government bonds: 5%; investment- grade bonds: 10%; foreign stocks: 15%; blue-chip stocks: 25%; high-yield bonds: 10%; small cap stocks: 25%
  B. II

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  Explanation/Reference:

  The asset allocation described in Selection II best represents a suitable asset allocation for a risk-averse investor. A risk-averse investor will have the greatest percentage of his funds invested in cash/money market fund. The bulk of his remaining funds will be invested in high-quality bonds, e.g., U.S. government bonds and investment-grade corporate bonds, and blue-chip stocks. He may choose to invest a little in foreign stocks and in small caps for additional diversification and a bit more growth potential. The portfolio presented in Selection II has 30% invested in the money market fund, 35% in high-quality bonds, 25% in blue-chip stocks and only 3% in foreign stocks and 7% in small caps. In contrast, Selection I has a riskier allocation with 20% invested in the money market fund and only 50% invested in high-quality bonds and blue chip stocks; the remaining 30% is invested in riskier assets-high-yield (junk) bonds, foreign stocks, and small cap stocks. Selection III is riskier still with only 10% in a money market fund, 40% in high -quality bonds and blue-chips, and 50% in the riskier three asset categories. Even a risk-averse investor should not be entirely invested in government securities and/or money-market funds; his purchasing power risk would be extremely high, and he would have no opportunity for capital appreciation.

• Question 209:

  MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 to yield 9.5%. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025.If interest rates in the economy increase, which of the following statements will be true, all else equal?

  I. the nominal yield of the bond will increase.

  II. the yield-to-maturity of the bond will increase.

  III.

  the current yield of the bond will increase.

  A. I only
  B. I and II only
  C. II and III only
  D. I, II, and III
  I. the nominal yield of the bond will increase. II. the yield-to-maturity of the bond will increase. III. the current yield of the bond will increase.
  C. II and III only

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  Explanation/Reference:

  Only statements II and III are true. If interest rates in the economy increase, both the bond's yield-to-maturity and its current yield will increase. The bond's yield-to-maturity will increase to reflect current market rates on similar risk investments, and this, in turn, causes the price of the bond to fall. The current yield of the bond is the interest payment divided by the bond price. Since the interest payment does not change with interest, the current yield will increase with the decrease in the bond price. The nominal yield of the bond is the same as its coupon rate, or what it yields when it sells at its par value, and does not change with changes in interest rates in the economy.

• Question 210:

  A fund's transfer agent is responsible for:

  I. calculating and distributing the capital gain and dividend income of the fund.

  II. mailing shareholder account statements.

  III.

  paying fund expenses.

  A. I only
  B. II only
  C. I and II only
  D. I, II, and III
  I. calculating and distributing the capital gain and dividend income of the fund. II. mailing shareholder account statements. III. paying fund expenses.
  C. I and II only

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  Explanation/Reference:

  A fund's transfer agent is responsible for calculating and distributing the capital gain and dividend income of the fund and mailing shareholder account statements. The fund's custodian is responsible for paying fund expenses.