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

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 301:

  Marshall's employer offers a 403(b) plan, and Marshall must decide into which of several mutual fund alternatives the contributions will be invested.

  Regardless of other factors, which of the following would clearly not be a good choice?

  A. a municipal bond fund
  B. a fund that invests in stocks that are expected to experience high growth
  C. a fund that invests almost exclusively in high-tech stocks
  D. a fund that invests in both foreign and domestic stocks
  A. a municipal bond fund

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  Explanation/Reference:

  A municipal bond fund is clearly not a good investment choice for a 403(b) plan. Earnings in a 403(b) plan grow tax-deferred, so Marshall would not be receiving the tax-free income benefits offered by a municipal bond fund. All he would be receiving is a lower return on his investment.

• Question 302:

  Which of the following correctly describes a difference between closed-end and open-end investment companies?

  A. Open-end investment companies have a fixed number of shares; closed-end companies can create new shares if there are more buyers than sellers.
  B. Open-end investment company shares will never be offered at a price below the net asset value per share of the fund; this is not true of closed-end companies.
  C. Open-end companies may invest in non-diversified portfolios; closed-end companies are required to invest only in diversified portfolios.
  D. Shares of open-end companies sell on exchange floors; shares of closed-end companies are bought and sold through the company itself.
  B. Open-end investment company shares will never be offered at a price below the net asset value per share of the fund; this is not true of closed-end companies.

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  Explanation/Reference:

  A difference between closed-end and open-end investment companies is that open-end investment company shares will never be offered at a price below the net asset value of the fund; this is not true of closed-end companies.

  The shares of open-end investment companies (mutual funds) are bought (and sold) through the company itself at net asset value or net asset value plus a load charge.

  Therefore, the offer price will always be greater than or equal to the fund's net asset value per share.

  Closed-end company shares are bought and sold on exchange floors, and the price is set by supply and demand, so closed-end shares may sell for less than the net asset value of the fund. Closed-end companies have a fixed number of

  shares. Open-end companies can create new shares if there are more buyers than sellers. Both types of management companies can be either diversified or non-diversified in their holdings.

• Question 303:

  The “statement of additional information” (SAI) that mutual funds and closed-end funds are required to produce:

  A. must be provided to prospective investors whenever an offer to sell shares of these funds is made.
  B. must be sent to shareholders of the fund on at least a semiannual basis.
  C. usually contains some biographical information on the officers and directors of the fund.
  D. Both A and B are true statements.
  C. usually contains some biographical information on the officers and directors of the fund.

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  Explanation/Reference:

  The “statement of additional information” (SAI) that mutual funds and closed-end funds are required to produce usually contains some biographical information on the officers and directors of the fund. The SAI need only be provided to prospective investors upon request, and it is not sent to shareholders of the fund. Shareholders of the fund receive annual and semiannual reports from the fund, however.

• Question 304:

  On which of the following items do mutual fund shareholders get to vote?

  I. any change in the investment objective of the fund

  II. the election of a new investment adviser

  III. the renewal of the fund's 12b-1 fee

  IV.

  the purchase or sale of real estate by the fund

  A. I, II, III, and IV
  B. I, II, and IV only
  C. I, II, and III only
  D. I, III, and IV only
  I. any change in the investment objective of the fund II. the election of a new investment adviser III. the renewal of the fund's 12b-1 fee IV. the purchase or sale of real estate by the fund
  D. I, III, and IV only

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  Explanation/Reference:

  Mutual fund shareholders get to vote on any change in the investment objective of the fund, the renewal of the fund's 12b-1 fee, and the purchase or sale of real estate by the fund. They do not elect the fund's investment adviser; they only vote to approve the investment adviser's contract.

• Question 305:

  Which of the following bonds will experience the greatest percentage change in price for a given change in interest rates?

  A. a bond with 5 years to maturity that pays a 5% coupon
  B. a bond with 10 years to maturity that pays a 5% coupon
  C. a bond with 5 years to maturity that pays a 7% coupon
  D. a bond with 10 years to maturity that pays a 7% coupon
  B. a bond with 10 years to maturity that pays a 5% coupon

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  Explanation/Reference:

  The bond that will experience the greatest percentage change in price for a given change in interest rates is the bond with 10 years to maturity that pays a 5% coupon. Bonds with longer durations experience greater changes in price, and the long maturity, low coupon bonds have longer durations.

• Question 306:

  Which of the following is not required to be included in a management company's prospectus?

  A. the various fees charged by the company
  B. the potential risks to which the company's investors are exposed
  C. a statement of the investment objective of the company
  D. the financial statements of the company
  D. the financial statements of the company

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  Explanation/Reference:

  The financial statements of the investment company are not required to be included in a management company's prospectus. Management companies, otherwise known as closed-end or open-end investment companies, are required to have a “statement of additional information,” however, that would include the financial statements of the company.

• Question 307:

  Which of the following securities would be exempt from SEC registration requirements?

  I. a 15-year bond issued by the state of Colorado

  II. an issue of preferred stock that has an aggregate par value of $5 million

  III.

  an issue of commercial paper that has a 5-month maturity

  A. I only
  B. III only
  C. I and III only
  D. I and II only
  I. a 15-year bond issued by the state of Colorado II. an issue of preferred stock that has an aggregate par value of $5 million III. an issue of commercial paper that has a 5-month maturity
  C. I and III only

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  Explanation/Reference:

  Only Selections I and III are exempt from SEC registration requirements. The bond issued by Colorado is exempt because bonds issued by a government body are exempt from registration. The issue of commercial paper is exempt because securities with less than 270 days to maturity are exempt from registration.

• Question 308:

  Which of the following statements about hedge funds is true?

  A. They are fairly low risk since the portfolio managers use investment strategies designed to “hedge their bets.”
  B. They are not regulated by the Investment Company Act of 1940.
  C. They are considered to be very liquid investments.
  D. They have low management fees, like index funds.
  B. They are not regulated by the Investment Company Act of 1940.

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  Explanation/Reference:

  The true statement about hedge funds is that they are not regulated by the Investment Company Act of 1940. They are very risky, are illiquid-investors may only make contributions and withdrawals at specified times-and they have extremely high management fees.

• Question 309:

  Which of the following statements regarding profit-sharing plans is false?

  A. A profit-sharing plan must stipulate a minimum employer contribution that will be made, even in less profitable years.
  B. The employer can deduct contributions made to a profit-saving plan, within specific guidelines.
  C. The withdrawals made by an employee from a profit-sharing plan are taxable as ordinary income.
  D. Employees are not permitted to make contributions of their own to a profit-sharing plan.
  A. A profit-sharing plan must stipulate a minimum employer contribution that will be made, even in less profitable years.

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  Explanation/Reference:

  The false statement is that a profit-sharing plan must stipulate a minimum employer contribution that will be made, even in less profitable years. Under a profit -sharing plan, the employer need make no contribution whatsoever if the firm has had a bad year.

• Question 310:

  In 2008, Mr. Conservative bought a 1-year Treasury bill that was yielding 1.63%. The average annual rate of inflation in 2008 was 3.85%. In this case:

  A. Mr. Conservative earned a nominal return of +3.85% on his T-bill investment.
  B. Mr. Conservative earned a real return of -2.22% on his investment.
  C. Mr. Conservative earned a real return of +1.63% on his investment.
  D. Mr. Conservative earned a nominal return of +2.22% on his investment.
  B. Mr. Conservative earned a real return of -2.22% on his investment.

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  Explanation/Reference:

  If Mr. Conservative bought a 1-year Treasury bill in 2008 that was yielding 1.63%, and the average annual rate of inflation in 2008 was 3.85%, Mr. Conservative earned a real return of -2.22 % on his investment. In other words, he lost 2.22% in purchasing power since the dollars he received when the bill matured were worth less than the dollars he paid to buy the bill. Real return = nominal return - inflation rate = 1.63% - 3.85% = -2.22%.