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

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 291:

  Which of the following correctly describe differences between a profit-sharing plan and a money purchase plan?

  I. An employer can elect to make no contribution to a profit-sharing plan in a bad year, but the employer must make contributions to a money purchase plan, regardless.

  II. Only employers make contributions to profit-sharing plans whereas both employers and employees can contribute to a money purchase plan.

  III.

  A profit-sharing plan is a defined benefit plan whereas a money purchase plan is a defined contribution plan.

  A. I only
  B. I and II only
  C. I and III only
  D. I, II, and III
  I. An employer can elect to make no contribution to a profit-sharing plan in a bad year, but the employer must make contributions to a money purchase plan, regardless. II. Only employers make contributions to profit-sharing plans whereas both employers and employees can contribute to a money purchase plan. III. A profit-sharing plan is a defined benefit plan whereas a money purchase plan is a defined contribution plan.
  B. I and II only

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  Explanation/Reference:

  Selections I and II correctly describe differences between a profit -sharing plan and a money purchase plan. Under a profit-sharing plan, an employer can elect to make no contribution in a bad year, but an employer must make contributions to a money purchase plan, regardless. Only employers make contributions to profit-sharing plans, but both employers and employees can contribute to a money purchase plan. Both profit-sharing plans and money purchase plans are defined contribution plans, so the statement made in Selection III is false.

• Question 292:

  Which of the following is not considered to be a “security” as defined by the Securities Exchange Act of 1934?

  A. an interest in an oil drilling lease
  B. a collateral trust certificate with an initial maturity of 5 years
  C. a straddle that expires in 3 months
  D. a bankers’ acceptance, issued with a maturity of 4 months
  D. a bankers’ acceptance, issued with a maturity of 4 months

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  Explanation/Reference:

  A bankers’ acceptance is specifically excluded from the definition of a security under the Securities Exchange Act of 1934 as long as its maturity at issue does not exceed 9 months. All the other choices are specifically named under the Act's definition of a security.

• Question 293:

  Which of the following risks would not be a risk associated with a municipal bond fund?

  I. credit risk

  II. reinvestment risk

  III.

  currency exchange risk

  A. I and III only
  B. III only
  C. II and III only
  D. I, II, and III
  I. credit risk II. reinvestment risk III. currency exchange risk
  B. III only

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  Explanation/Reference:

  Currency exchange risk is the only risk listed that would not be associated with a municipal bond fund. Municipal bond funds invest only in bonds of state and local governments in the U.S., so there is no exposure to exchange rate fluctuations. Like corporate bonds, municipal bonds have varying degrees of credit risk. Investors are also exposed to reinvestment risk since interest payments received may have to be reinvested at lower interest rates if rates have been falling.

• Question 294:

  Which of the following steps in the underwriting process will occur last?

  A. The underwriting syndicate is formed.
  B. The selling group is organized.
  C. The public offering price is set.
  D. A red herring prospectus is circulated to the public.
  C. The public offering price is set.

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  Explanation/Reference:

  The public offering price is set at the latest possible minute. The underwriters want to have the most current information available when setting the price, especially since they will experience the loss if the securities fail to sell for at least that price.

• Question 295:

  A face-amount certificate company:

  A. is a company that invests primarily in bonds that sell at either par value or a premium.
  B. is an investment company that has management fees.
  C. sells its debt, which is backed by the assets owned by the company, to its investors.
  D. is all of the above.
  C. sells its debt, which is backed by the assets owned by the company, to its investors.

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  Explanation/Reference:

  A face-amount certificate company sells its debt, which is backed by the assets owned by the company, to its investors. It does not invest primarily in bonds that sell at or above par value, and it does have management fees that are paid to the portfolio managers of the company.

• Question 296:

  In 2004, your Uncle Oscar purchased 300 shares of Hasbro, Inc. for $19 a share. Uncle Oscar died earlier year and left his Hasbro stock to you. The stock was selling for $44 on the day he died, but by the time you learned that you were the beneficiary of the stock, the price was $47. A month later, you notice that the stock is selling for $55 and decide to sell it.

  What is the tax consequence of this sale to you?

  A. $10,800, taxed as long-term capital gain income
  B. $3,300, taxed as long-term capital gain income
  C. $2,400 taxed as short-term capital gain income
  D. None of the above is the correct tax consequence of this sale.
  B. $3,300, taxed as long-term capital gain income

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  Explanation/Reference:

  If you sell Hasbro stock for $55 and it was selling for $44 on the day that your uncle died, the sale will result in $3,300 of taxable income, taxed to you as long-term capital gain income. Your cost basis is the price at which the stock was selling on the day your uncle died, $44, so your gain on the sale is ($55 - $44) x 300 shares = $3,300. Although you owned the stock for only a month, the IRS stipulates that capital gain (or loss) earned on the disposition of inherited investment property will be considered to be long-term capital gain, regardless of how long it is held by the beneficiary prior to its sale.

• Question 297:

  Your cousin has recently attended a seminar on the benefits of diversification. Based on what he learned, he decided to sell the shares he had in a large stock growth fund and put 50% of his money in hotel stocks and 50% in airline stocks. Based on this information, you can tell him:

  A. that he's wise beyond his years.
  B. that he's less diversified than he was before.
  C. that he's less diversified than he was before, but can expect a higher rate of return.
  D. none of the above.
  B. that he's less diversified than he was before.

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  Explanation/Reference:

  If your cousin sold his shares in a large stock growth fund and put 50% of his money in hotel stocks and 50% in airline stocks, you can tell him that he's less diversified than he was before. The large stock growth fund was invested in many more industries than two-industries whose returns are less likely to move together than stocks in the hotel and airline industries. His expected return will not necessarily be higher and may even be lower; he's just exposed to more risk. The return that can be expected from an investment is based on its non-diversifiable, or market, risk. An investor cannot expect a higher return by putting all his eggs in one (or in this case, two) baskets.

• Question 298:

  A warrant differs from a standard call option in that:

  A. a standard call option generally has a longer period to expiration than a warrant.
  B. when a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised.
  C. a warrant gives the holder the right to sell shares of the underlying stock; a call option gives the holder the right to buy shares of the underlying stock.
  D. when a call option is exercised, the outstanding shares of the firm whose stock is being purchased increases; this does not occur when a warrant is exercised.
  B. when a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised.

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  Explanation/Reference:

  A warrant differs from a standard call option in that when a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised. Both the warrant and the call option give the holder the right to purchase shares of a firm's stock, but the writer (seller) of a warrant is the firm itself whereas the writer of a standard call option is simply another investor. Upon exercising a warrant, the investor buys the stock from the firm itself, which increases the firm's cash account. When a call option is exercised, another investor's cash account is increased. For the same reason, when a call option is exercised, nothing happens to the outstanding shares of the firm; but when a warrant is exercised, the firm's outstanding shares will increase.

• Question 299:

  The difference between an international fund and a global fund is:

  A. an international fund invests in both domestic and foreign securities while a global fund invests only in foreign securities.
  B. a global fund has more currency risk exposure than an international fund.
  C. an international fund invests only in stocks of foreign companies whereas a global fund invests in both stocks and bonds of foreign companies.
  D. None of the above is a true statement.
  D. None of the above is a true statement.

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  Explanation/Reference:

  None of the choices is a true statement. An international fund is one that invests only in foreign securities, while a global fund also invests in domestic (i.e., U.S.) securities. Because of this, it would be the international fund that has more currency risk exposure. Both types of funds may invest in stocks and bonds.

• Question 300:

  Which of the following is not one of the rules stipulated by the Securities Exchange Act of 1934?

  A. All securities’ exchanges and SROs are required to register with the SEC.
  B. All brokers and dealers are required to be members of a national securities association.
  C. Investment companies are prohibited from using any sales literature that contains an omission of a material fact.
  D. Firms are required to send copies of their annual reports to investors before an annual meeting at which directors are to be elected.
  C. Investment companies are prohibited from using any sales literature that contains an omission of a material fact.

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  Explanation/Reference:

  The rule prohibiting investment companies from using any sales literature that contains an omission of a material fact is not one of the rules stipulated by the Securities Exchange Act of 1934. This involves the market for new securities and, as such, is a rule stipulated by the Securities Act of 1933. The 1934 Act deals with the secondary market.