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

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 71:

  Which of the following statements regarding a Coverdell Education Savings Plan (ESA) are true?

  I. There are income limitations regarding those who may contribute to an ESA.

  II. There is a maximum annual aggregate amount that can be contributed to a single beneficiary's account.

  III. Contributions to an ESA are tax deductible.

  IV.

  The monies must be used prior to the beneficiary's 30th birthday for education-related expenses in order to avoid paying both taxes and a penalty.

  A. I and II only
  B. I and III only
  C. I, II, and IV only
  D. I, II, III, and IV
  I. There are income limitations regarding those who may contribute to an ESA. II. There is a maximum annual aggregate amount that can be contributed to a single beneficiary's account. III. Contributions to an ESA are tax deductible. IV. The monies must be used prior to the beneficiary's 30th birthday for education-related expenses in order to avoid paying both taxes and a penalty.
  C. I, II, and IV only

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  Explanation/Reference:

  Only Statements I, II, and IV regarding an ESA are true. The ability to establish one is limited to those with an adjusted gross income specified by government guidelines, and there is a maximum annual aggregate amount that can be contributed to a single beneficiary's account regardless of how many contributors there are to that account. If the monies are not used for education-related expenses prior to the beneficiary's 30th birthday, there is a mandatory distribution requirement, at which point the distribution will be taxed as ordinary income and a 10% penalty will be assessed.

• Question 72:

  The Slippery Fund is a high-yield bond fund, which means it invests a substantial amount of its money in:

  A. investment-grade bonds.
  B. high-quality bonds.
  C. junk bonds.
  D. bonds with an AAA rating.
  C. junk bonds.

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  Explanation/Reference:

  As a high-yield bond fund, Slippery invests a substantial amount of its money in junk bonds. High yield = high risk. Junk bonds have a rating below BBB.

• Question 73:

  Which of the following is true about treasury bonds?

  A. have no default risk.
  B. have no interest-rate risk.
  C. have no prepayment risk.
  D. are totally risk-free.
  A. have no default risk.

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  Explanation/Reference:

  Treasury bonds have no default risk. They do have interest -rate risk; their prices will fall with increases in interest rates, just like any other bond. Some Treasury bonds are callable, in which case the investor is exposed to prepayment risk.

• Question 74:

  Which of the following investment companies will always be passively managed?

  A. a face-amount certificate company
  B. a unit investment trust
  C. a mutual fund
  D. a closed-end investment company
  B. a unit investment trust

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  Explanation/Reference:

  A unit investment trust is always passively managed. Some mutual funds, such as index funds, may also be passively managed, but not all mutual funds are passively managed.

• Question 75:

  Which of the following are included in the expense ratio of a fund?

  I. 12b-1 fees

  II. brokerage costs incurred by the fund when it buys and sells securities

  III. redemption fees

  IV.

  management fees

  A. I and IV only
  B. I, II, and IV only
  C. I, III, and IV only
  D. I, II, III, and IV
  I. 12b-1 fees II. brokerage costs incurred by the fund when it buys and sells securities III. redemption fees IV. management fees
  A. I and IV only

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  Explanation/Reference:

  Of the selections, only 12b-1 fees and management fees are included in the expense ratio of the fund. Brokerage costs that the fund incurs when it buys and sells securities are not included (which is why a fund's turnover ratio is important to consider.) Redemption fees are paid by the shareholder to the fund, so it would not be included in a fund's expense ratio since it is not an expense of the fund.

• Question 76:

  The board of directors of a mutual fund is responsible for:

  I. authorizing purchases and sales of securities made by the fund.

  II. approving the fund's contract with its investment adviser.

  III. ensuring that the fund complies with federal securities laws regarding such issues as 12b -1 fees.

  IV.

  establishing the fund's dividend and capital gains policy.

  A. I and IV only
  B. I, II, and IV only
  C. II, III, and IV only
  D. I, II, III, and IV
  I. authorizing purchases and sales of securities made by the fund. II. approving the fund's contract with its investment adviser. III. ensuring that the fund complies with federal securities laws regarding such issues as 12b -1 fees. IV. establishing the fund's dividend and capital gains policy.
  C. II, III, and IV only

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  Explanation/Reference:

  The board of directors of a mutual fund is responsible for the activities described in Selections II, III, and IV only. The board is responsible for approving the fund's contract with its investment adviser, ensuring that the fund complies with federal securities laws regarding such issues as 12b-1 fees, and establishing the fund's dividend and capital gains policy. It is not involved in the fund's day-to-day operations, such as the purchases and sales of securities as described in Selection I.

• Question 77:

  In mid-September, the stock of Amazon.com, Inc. (AMZN) is selling for $147.A January call option on the stock is selling for $6.10 and has a strike price of $160. This call option is:

  A. at the money.
  B. in the money.
  C. out of the money.
  D. overpriced. No one should pay $6.10 for the right to buy a share of stock for $160 when its current market price is only $147.
  C. out of the money.

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  Explanation/Reference:

  If Amazon.com is selling for $147 and the strike price on the option is $160, the call option is said to be out of the money since, even if an investor were given the option free, he would not benefit from exercising it at this time. If he did so, he would be paying $160 for a stock that is selling for only $147 on the open market. Even so, the option is not necessarily overpriced at $6.10 because the option has what is known as “time value” on it. The stock of Amazon.com has several months during which it could rise well above the $160 strike price on the option.

• Question 78:

  Liz is a new client of yours. She is 36 years old, single, and has been working and earning a nice salary since her graduation from high school. She has been contributing the maximum allowed to a TSA plan through her employer, and you have no reason to doubt that she will meet her stated goal to retire when she is 58. She also has a good health care plan through her employer and is in excellent health. She has been depositing her non-retirement savings in a money market fund and is not pleased at the pathetic return she has been earning on her current balance of $140,000. Liz has been reading some articles on the web and understands she could allocate her funds to receive a higher return. She's willing to take on a moderate level of risk, but needs your help. She informs you that she does plan to use $40,000 of her current savings as a down payment for a condo and that her investment goals are to have money available for travel and for unexpected expenses and periodic purchases such as new cars and new furniture as the needs arise. She pays taxes at the highest marginal tax rate for individual tax payers.

  Based on these facts, which of the following asset allocations would best meet her needs?

  I. Money market fund: 30%; investment-grade corporate bonds: 20%; blue-chip stocks: 20%; high-yield bonds: 10%; small cap stocks: 10%; foreign stocks: 10%

  II. Money market fund: 10%; investment-grade municipal bonds: 5%; blue-chip stocks: 25%; high-yield bonds: 25%; small cap stocks: 10%; foreign stocks: 25%

  III.

  Money market fund: 10%; investment-grade municipal bonds: 25%; growth stocks: 40%; small cap stocks: 15%; foreign stocks: 10%

  A. I
  B. II
  C. III
  D. Either II or III would be suitable recommendations.
  I. Money market fund: 30%; investment-grade corporate bonds: 20%; blue-chip stocks: 20%; high-yield bonds: 10%; small cap stocks: 10%; foreign stocks: 10% II. Money market fund: 10%; investment-grade municipal bonds: 5%; blue-chip stocks: 25%; high-yield bonds: 25%; small cap stocks: 10%; foreign stocks: 25% III. Money market fund: 10%; investment-grade municipal bonds: 25%; growth stocks: 40%; small cap stocks: 15%; foreign stocks: 10%
  C. III

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  Explanation/Reference:

  The portfolio described in Selection III would be the best choice for Liz. She has little need for liquidity, so the allocation to a money market fund is only 10%. Another 40% of the allocation is in investment-grade municipal bonds and blue-chip stocks, with only 25% allocated to the riskier asset classes of foreign stocks and small caps. This meets her stated willingness to take on only a moderate level of risk. The large percentage that is allocated to municipal bonds is intended to provide her with federal tax-free interest income since she is in such a high marginal tax bracket -income that she can use for traveling and for those unexpected and periodic expenses, perhaps. The 45% allocation to growth stocks and small caps will also serve as a tax shield since these categories of stocks pay little, if any, dividends that would be taxed. Liz will only have to pay tax on capital gains when she chooses to sell these assets. The portfolio described in Selection I has far too much invested in a lower-yielding money market fund for someone who doesn't need much liquidity. Portfolio II has 60% invested in high risk securities-junk bonds, small caps, and foreign stocks-with a full 50% invested in junk bonds and foreign stocks. This would be an inappropriate allocation for an investor who is willing to accept only a moderate level of risk.

• Question 79:

  Under FINRA rules, the variable contract sales agreement must specify that any sales commission is to be returned to the insurance company if the buyer terminates the contract within:

  A. one week.
  B. 5 business days.
  C. 7 business days.
  D. 10 business days.
  C. 7 business days.

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  Explanation/Reference:

  Under FINRA rules, the variable contract sales agreement must specify that any sales commission is to be returned to the insurance company if the buyer terminates the contract within 7 business days.

• Question 80:

  Phil Anthropy wrote his cousin a $15,000 check to pay for medical bills the cousin had accumulated. He also distributed $5,000 checks to three nephews who were in college, and gave his mother a check for $12,000.

  Have Phil's actions triggered any gift taxes?

  A. Yes, $19,000 of his total distributions is subject to the gift tax.
  B. Yes, $2,000 of his total distributions is subject to the gift tax.
  C. Yes, $7,000 in distributions is subject to the gift tax.
  D. No. None of Phil's distributions is subject to the gift tax.
  B. Yes, $2,000 of his total distributions is subject to the gift tax.

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  Explanation/Reference:

  Yes. If Phil gives his cousin a $15,000 check, three nephews $5,000 checks, and his mother a check for $12,000, $2,000 of his total distributions is subject to the gift tax. The current annual gift tax exclusion is $13,000 per person, and he has exceeded that by $2,000 with the check he wrote to his cousin. Had Phil written the check directly to his cousin's medical care provider, no gift taxes would have been due on any of that amount either.