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

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 251:

  A bond has a face value of $1,000, matures in 12 years, and pays an 4% coupon, with interest paid semiannually. If the bond is priced to yield 3.5%, it is selling:

  A. at par.
  B. at a discount.
  C. at a premium.
  D. at its maturity value.
  C. at a premium.

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  Explanation/Reference:

  If the bond is priced to yield 3.5%, it will be selling at a premium. The coupon rate of 4% is also the bond's nominal rate, which is what the bond would be yielding if it were selling at its par value. If it is yielding less than this, it means that the bond is selling for more than its par value, which is the same as its maturity value. A bond that sells for more than its par value is said to be selling at a premium.

• Question 252:

  Chandler is a registered representative with GetErDone Broker-Dealers, a FINRA member-firm. His friend, Phoebe, is employed by FlyByNight Investments, which is not a member of FINRA, or any other securities association for that matter. Given these facts:

  A. If Chandler executes any transactions for Phoebe, he is required to charge her the same commission that he charges any member of the general public.
  B. Chandler is prohibited from engaging in any financial transactions with Phoebe.
  C. Chandler is prohibited from splitting any commissions with Phoebe.
  D. Both A and C are true.
  D. Both A and C are true.

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  Explanation/Reference:

  Given that Chandler is a representative with a member firm while Phoebe's employer is not a member of any known securities association, he is required to charge Phoebe the same commission that he charges any member of the general public when executing a transaction for her and is prohibited from splitting commissions with her. He is not prohibited from engaging in any financial transactions with her; he simply must do so “for the same commissions or fees, and on the same terms and conditions as are. . .accorded to the general public,” according to FINRA.

• Question 253:

  The Bank Secrecy Act (BSA) requires any financial institution to:

  I. file a suspicious activity report (SAR) when a possible violation of a law is suspected.

  II. inform its customer that it is filing the SAR.

  III. provide any customer that is suspected of engaging in an illegal transaction the opportunity to explain himself prior to filing an SAR.

  IV.

  obtain specified information on any party sending or receiving a wire transfer of $3,000 or more.

  A. I and II only
  B. I, II, and IV only
  C. I and IV only
  D. I, II, III and IV
  I. file a suspicious activity report (SAR) when a possible violation of a law is suspected. II. inform its customer that it is filing the SAR. III. provide any customer that is suspected of engaging in an illegal transaction the opportunity to explain himself prior to filing an SAR. IV. obtain specified information on any party sending or receiving a wire transfer of $3,000 or more.
  C. I and IV only

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  Explanation/Reference:

  Only Selections I and IV are accurate statements. The BSA requires any financial institution to file a suspicious activity report when a possible violation of the law is suspected, and it also requires that specified information on any party sending or receiving a wire transfer of $3,000 or more be obtained and kept. The customer remains uninformed.

• Question 254:

  Callie has a new client who wants to begin investing in mutual funds with the $5,000 she has pulled out of her savings account. The client has indicated she wants to set this money aside in a separate account so that her baby girl, now 2 years old, can have the “wedding of her dreams” when she grows up. Based on the information the client has provided, Callie believes the client would benefit most by purchasing shares of a certain fund that offers Class A, Class B, and Class C shares.

  Given these facts, Callie's client is probably best off purchasing the shares of which class?

  A. Class A
  B. Class B
  C. Class C
  D. None of that above. Based on the facts, Callie's client would be better off buying a Treasury STRIP that matures in 20 to 30 years.
  B. Class B

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  Explanation/Reference:

  If Callie's client wants to have enough money for her 2-year-old daughter to have the wedding of her dreams and a suitable fund has been selected, Callie would probably be best off purchasing Class B shares of that fund. Class B shares have a deferred sales charge, but this sales charge goes away after so many years, and since Callie's investment horizon is long -term, she should never have to pay this fee. If she buys the Class A shares, she will have to pay a front -end load when she buys the shares, thus reducing the total amount that she has invested. Class C shares tend to charge higher 12b-1 fees than Class A or Class B shares, which will reduce the annual return on Callie's client's investment. With Class B shares and a long-term investment, Callie can effectively avoid the “loads.” A Treasury STRIP investment will not return enough to provide Callie's little girl with “the wedding of her dreams.”

• Question 255:

  Rank the following funds in order of their relative risk, from highest to lowest:

  I. growth fund

  II. high-yield bond fund

  III. high-grade bond fund

  IV.

  international fund

  A. IV, I, II, III
  B. I, IV, III, II
  C. II, IV, I, III
  D. IV, II, I, III
  I. growth fund II. high-yield bond fund III. high-grade bond fund IV. international fund
  A. IV, I, II, III

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  Explanation/Reference:

  The funds ordered by their relative risk from highest to lowest are IV, I, II, III. The highest risk is an international fund that invests in foreign securities, which exposes the investor to more currency exchange risk and some social and political risk as well. Next is the growth fund that invests most of its funds in domestic stocks, which are riskier than bonds. The high-yield bond fund is a junk bond fund and, as such, is next in the list. The high-grade bond fund invests mostly in investment-grade bonds, which offer investors a moderate risk exposure and is the least risky of the choices listed.

• Question 256:

  Which of the following statements about mutual funds is false?

  A. Mutual funds may be organized as corporations, statutory trusts, or partnerships.
  B. Mutual funds are organized under state law.
  C. Mutual funds issue redeemable shares.
  D. Mutual funds may be either actively or passively managed.
  A. Mutual funds may be organized as corporations, statutory trusts, or partnerships.

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  Explanation/Reference:

  The false statement is that mutual funds may be organized as corporations, statutory trusts, or partnerships. Mutual funds may be organized only as corporations or statutory (business) trusts.

• Question 257:

  Which of the following is an example of a primary market transaction?

  A. Exco Resources (XCO) sells a new issue of 7.5%, 8-year notes.
  B. Ms. Talker calls her broker and places a market order to sell shares of ATandT (T) on the NYSE.
  C. Mr. Safe purchases a Treasury bill with two weeks remaining to maturity.
  D. Mr. Green places an order to buy shares of Sunvalley Solar, Inc. (SSOL), a stock selling on the OTC Bulletin Board.
  A. Exco Resources (XCO) sells a new issue of 7.5%, 8-year notes.

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  Explanation/Reference:

  Exco Resources’ new bond issue is a primary market transaction. The primary market refers to the market for new issues. The other three scenarios describe transactions in securities that are already being traded and are secondary market transactions.

• Question 258:

  Which of the following must be true for a fund to be called a “no load” fund?

  I. The fund can have no front-end load.

  II. The fund can have no contingent deferred sales charge.

  III. The fund can charge no 12b-1 fees.

  IV.

  The fund cannot charge investors an exchange fee.

  A. Only I and II must be true.
  B. I, II, and III must all be true.
  C. Only I must be true.
  D. I, II, III, and IV must all be true.
  I. The fund can have no front-end load. II. The fund can have no contingent deferred sales charge. III. The fund can charge no 12b-1 fees. IV. The fund cannot charge investors an exchange fee.
  A. Only I and II must be true.

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  Explanation/Reference:

  Only Statements I and II must be true for a fund to be called a “no load” fund. The fund can have no front-end load, and it can have no contingent deferred sales charge. It can, however, charge 12b-1 fees, as long as the 12b-1 fees do not exceed 0.25% of the fund's average net assets, and it can charge investors an exchange fee when they elect to switch their monies from one fund to another.

• Question 259:

  Paul is 36 years old and is married with two children, ages eight and ten. Paul lays carpet for a living, working as an independent contractor, and earns about $35,000 a year. His wife, Paula, is 33 years old, drives a school bus and earns only $18,000 a year, but her job provides the family with low-cost health insurance. They live conservatively and barely make ends meet. Paula recently inherited $180,000, however, and the couple would like to invest it, with the goal that they can both retire when Paul turns 62. The inheritance also included an educational endowment for their children, so they will not have to worry about saving for their children's college educations.

  Which of the following would not be a suitable recommendation for the allocation of their investment monies?

  A. municipal bond fund
  B. aggressive growth stock fund
  C. Roth IRA
  D. life insurance
  A. municipal bond fund

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  Explanation/Reference:

  Given that their combined income is only $53,000, Paul and Paula's marginal tax rate is low, so a municipal bond fund would not be a good recommendation for the allocation of their investment monies. Municipal bonds offer lower returns, and the couple would get little or no benefit from the tax-free interest income that these bonds provide. Their investment horizon is long enough (26 years) for them to invest some of their money in an aggressive growth stock fund, which has higher risk but also provides the higher expected returns that they may need to be able to retire when Paul turns 62. A Roth IRA is preferred over a traditional IRA in their situation. Although the traditional IRA would allow them to deduct their contributions, they already pay little or no taxes. Contributions to a Roth IRA are made out of after-tax income, but the contributions themselves can be withdrawn at any time without penalty if Paul and Paula run into some unexpected expenses, and the earnings grow tax-deferred and will be completely tax-free if they make no withdrawals until the age of 59 ½. Given the ages of their children, a life insurance policy that will help provide for them if one or both of the parents die, should be strongly recommended.

• Question 260:

  Which of the following actions will result in a taxable event for Tex Payor, an investor in the Invest4U Mutual Fund?

  I. Tex sells some of his shares of the fund at a profit.

  II. Tex exchanges some of his shares in Invest4U for shares of another fund in the same family of funds.

  III.

  Tex opts to reinvest any dividend or capital gain income he might have received in the fund to buy additional shares of the fund in lieu of receiving a check from the fund.

  A. I only
  B. I and II only
  C. I and III only
  D. I, II, and III
  I. Tex sells some of his shares of the fund at a profit. II. Tex exchanges some of his shares in Invest4U for shares of another fund in the same family of funds. III. Tex opts to reinvest any dividend or capital gain income he might have received in the fund to buy additional shares of the fund in lieu of receiving a check from the fund.
  D. I, II, and III

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  Explanation/Reference:

  All three selections describe actions that will result in a taxable event for Tex Payor as an investor in the Invest4U Mutual Fund. If Tex sells some of his shares of the fund for a profit, he will earn capital gains, which represent taxable income to him. When he exchanges some shares of Invest4U for another, he is selling shares of Invest4U to reinvest in the other, and the sale of the shares in Invest4U will result in either a capital gain or capital loss that he must report to the IRS. Even if Tex chooses to reinvest the dividend or capital gain income for which Invest4U would have otherwise have sent him a check, he has to pay taxes on the money as though he had received the check.