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

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 261:

  The dividends distributed by which of the following are taxed as ordinary income?

  A. mutual funds
  B. closed-end investment companies
  C. IBM
  D. real estate investment trusts
  D. real estate investment trusts

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  Explanation/Reference:

  The dividends distributed by real estate investment trusts are taxed as ordinary income. Dividends on all of the other choices are subject to preferential tax treatment under current tax laws.

• Question 262:

  Simple Simon owns 1,000 shares in the Pasty Pie Corporation, which has just declared a stock dividend of 5%. Just prior to this announcement, Pasty Pie was selling for $10 a share. This announcement will:

  A. increase Pasty's shares outstanding and reduce Simple's proportionate ownership in the firm.
  B. increase the number of shares that Simple owns to 1,050, which will increase the market value of the shares that he owns from $10,000 to $10,500.
  C. increase the number of shares that Simple owns to 1,050, but this will not affect the market value of Simple's holdings.
  D. increase Simple's cash by the amount of the dividend paid: 0.05 x $10 = $0.50 x 1,000 shares = $500.
  C. increase the number of shares that Simple owns to 1,050, but this will not affect the market value of Simple's holdings.

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  Explanation/Reference:

  If Simple Simon owns 1,000 shares of Pasty Pie Corporation when Pasty declares a 5% stock dividend, the stock dividend will increase his number of shares to 1,050, but it will not affect the market value of Simple's holdings since the market price per share will also decrease proportionately. The aggregate market value of the firm stays the same, but the number of shares outstanding increases, resulting in a lower market value per share. Simple's proportionate ownership remains the same because his shares increased in the same percentage as the shares outstanding of the firm did. A stock dividend does not result in any cash payments to the shareholders.

• Question 263:

  A settlement option associated with a variable life policy in which the insurance company guarantees that the beneficiary will receive equal payments over a specific length of time is known as a:

  A. fixed-amount settlement.
  B. fixed-period settlement.
  C. life-income settlement.
  D. guaranteed-payment settlement.
  B. fixed-period settlement.

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  Explanation/Reference:

  A settlement option associated with a variable life policy in which the insurance company guarantees that the beneficiary will receive equal payments over a specific length of time is known as a fixed-period settlement. The amount that will be paid is uncertain, but the payments will continue for the period specified. With a life-income settlement option, the beneficiary will receive guaranteed payments for the rest of his life, but “the rest of his life” is not a specific length of time.

• Question 264:

  Which of the following activities are prohibited by FINRA when a representative is selling shares of a mutual fund?

  I. recommending that a client purchase shares of a mutual fund prior to its ex-dividend date, so that the client will receive the dividends when they are distributed unless this recommendation is justified by the specific circumstances of the client

  II. telling a client that a mutual fund that has only a contingent deferred sales charge is a no load fund

  III. telling a client that the interest he earns on a municipal bond fund will be free from federal taxation

  IV.

  refraining from placing the customer's order promptly in order to profit himself as a result of having done so

  A. I and III only
  B. II and IV only
  C. I, II, and IV only
  D. I, II, III, and IV
  I. recommending that a client purchase shares of a mutual fund prior to its ex-dividend date, so that the client will receive the dividends when they are distributed unless this recommendation is justified by the specific circumstances of the client II. telling a client that a mutual fund that has only a contingent deferred sales charge is a no load fund III. telling a client that the interest he earns on a municipal bond fund will be free from federal taxation IV. refraining from placing the customer's order promptly in order to profit himself as a result of having done so
  C. I, II, and IV only

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  Explanation/Reference:

  The activities described in Selections I, II, and IV are prohibited by the FINRA when a representative is selling shares of a mutual fund. Representatives are prohibited from recommending that a client purchase shares of a mutual fund prior to its ex-dividend date, so that the client will receive the dividends when they are distributed-a practice known as “selling dividends”-- unless this recommendation is justified by the specific circumstances of the client; they are prohibited from telling a client that a fund that has only a contingent deferred sales charge is a no load fund; and they are prohibited from withholding an order-i.e., refraining from placing a customer's order promptly--in order to profit themselves as a result of having done so. There is nothing wrong with telling a client that the interest he earns on a municipal bond fund will be free from federal taxation since this is a true statement.

• Question 265:

  Under FINRA Rule 2830, a member firm and its associates are prohibited from selling shares of a mutual fund if the service fees disclosed in the fund prospectus exceed:

  A. 0.25% of the fund's average annual net assets.
  B. 0.50% of the fund's average annual net assets.
  C. 0.75% of the fund's average annual net assets.
  D. 1.00% of the fund's average annual net assets.
  A. 0.25% of the fund's average annual net assets.

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  Explanation/Reference:

  Under FINRA Rule 2830, a member firm and its associates are prohibited from offering to sell shares of a mutual fund if the service fees disclosed in the fund prospectus exceed 0.25% of the fund's average annual net assets.

• Question 266:

  Which of the following is not one of the purposes of FINRA as stated in its articles of incorporation?

  A. maintain a fair and orderly securities market
  B. encourage members to uphold high ethical standards
  C. develop lines of communication between the securities industry and governmental agencies
  D. police members and assist with dispute settlements
  A. maintain a fair and orderly securities market

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  Explanation/Reference:

  FINRA's articles of incorporation does not state that one of FINRA's purposes is to maintain a fair and orderly securities market. All the other selections are stated purposes. The articles of incorporation also state that FINRA has the power to write and enforce rules for its members to promote fair practices.

• Question 267:

  Mr. Big of HiGrow Corporation needs more money to support the exceptional growth rate that his firm is enjoying. He meets with BigFee Investment Banker, who agrees to handle the IPO for HiGrow. Subsequently, InTheLoop Brokerage is tapped to be part of the selling group that will handle the sale of the new stock to the public. In this example, the issuer is:

  A. Mr. Big
  B. HiGrow Corporation
  C. BigFee Investment Banker
  D. InTheLoop Brokerage
  B. HiGrow Corporation

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  Explanation/Reference:

  HiGrow Corporation is the issuer in this example. The issuer is the firm that is receiving the proceeds from the IPO.

• Question 268:

  Total Investments, a family of mutual funds, has prepared some new PowerPoint slides that it will use at a free financial planning seminar it offers to the general public. The new slides:

  I. must be signed and dated by a registered principal of Total Investments.

  II. must be filed with FINRA 10 business days prior to their first use.

  III.

  must be kept in a separate file by Total for three years after the date of their first use.

  A. I only
  B. I and II only
  C. I and III only
  D. I, II, and III only
  I. must be signed and dated by a registered principal of Total Investments. II. must be filed with FINRA 10 business days prior to their first use. III. must be kept in a separate file by Total for three years after the date of their first use.
  C. I and III only

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  Explanation/Reference:

  Only Selections I and III are correct. The PowerPoint slides that are being used at a financial planning seminar fall under the definition of sales literature and, as such, must be signed and dated by a registered principal of Total Investments and must be maintained in a separate file by Total for three years after the date of their first use. Sales literature must also be filed with FINRA within 10 business days of first use, but not prior to the first use, unless it concerns bond volatility ratings.

• Question 269:

  Which of the following statements regarding a letter of intent is true?

  A. An investor has 12 months in which to invest the amount stipulated in the letter.
  B. Reinvested dividends and capital gain distributions count toward the amount stipulated in the letter of intent.
  C. An investor who signs a letter of intent and does not invest the amount stipulated must make up the difference between the sales charge he paid and what he should have paid, plus interest.
  D. A letter of intent may be backdated up to 90 days so that any purchases made during that prior time period will count toward making a breakpoint.
  D. A letter of intent may be backdated up to 90 days so that any purchases made during that prior time period will count toward making a breakpoint.

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  Explanation/Reference:

  The true statement is that a letter of intent may be backdated up to 90 days so that any purchases made during that prior time period will count toward making a breakpoint. An investor has 13 months in which to invest the amount stipulated in the letter. The invested funds must consist of new money; reinvested dividends and capital gain distributions don't count. If the amount stipulated in the letter of intent is not invested during the 13 months, the investor must only make up the difference between the sales charge he paid and what he should have paid, given that he didn't qualify for the breakpoint. No interest is charged on the difference.

• Question 270:

  Which of the following bonds would not be considered investment grade?

  A. a municipal bond with a BB rating.
  B. a corporate bond with a BBB rating.
  C. a general obligation bond with an AA rating.
  D. a debenture with an A rating.
  A. a municipal bond with a BB rating.

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  Explanation/Reference:

  A municipal bond with a BB rating would not be considered investment grade.

  Regardless of whether a bond is issued by a state or local government or a corporation, to be considered investment grade it must be rated BBB or higher.