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

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 81:

  An exchange-traded fund (ETF):

  A. can be structured as either a mutual fund or a unit investment trust.
  B. is a type of closed-end investment company.
  C. is bought and sold at the net asset value of the fund.
  D. charges no management fees.
  A. can be structured as either a mutual fund or a unit investment trust.

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  Explanation/Reference:

  An exchange-traded fund (ETF) can be structured as either a mutual fund or a unit investment trust, which means it is not a type of closed-end company. Shares are bought and sold on exchange floors, just as shares of a closed-end company are, however. Therefore, the price of an ETF is set by supply and demand, so an ETF can not necessarily be bought and sold at its net asset value. Like their cousins, ETFs charge management fees.

• Question 82:

  Tex Payor bought 1,500 shares of the Bonds4U Mutual Fund, a no load fund, on June 12th for $28 a share and sold the shares the following year on June 11th for $40 a share.

  This will result in which of the following tax consequences for Tex?

  A. Tex will have to pay tax on $18,000, taxed as ordinary income at his marginal tax rate.
  B. Tex will have to pay tax on $40,000, taxed as ordinary income at his marginal tax rate.
  C. Tex will have to pay tax on $18,000 of capital gain income, taxed at the preferential rate for long-term capital gains.
  D. Tex will have to pay tax on $40,000 of capital gain income, taxed at the preferential rate for long-term capital gains.
  A. Tex will have to pay tax on $18,000, taxed as ordinary income at his marginal tax rate.

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  Explanation/Reference:

  If Tex bought 1,500 shares of Bonds4U at $28 on June 12th and sold the shares on June 11th the following year for $40 a share, Tex will have to pay tax on $18,000, taxed as ordinary income at his marginal tax rate. He is taxed on his gain of $40 - $28 = $12 a share times 1,500 shares = $18,000. For tax purposes, his holding period begins the day after his purchase, or June 13th in this example, and ends the day on which sells the shares, or June 11th of the following year, in this case. Since this is less than 12 months, the gain on the sale is considered to be a short -term capital gain, which is taxed as ordinary income.

• Question 83:

  Tex Payor is an investor in the Invest4U Mutual Fund. The manager of the fund, fearing a substantial decline in the stock market, sold a lot of the fund's holdings to lock in profits. As a result, the fund earned a lot of long-term capital gain income.

  Which of the following statements is true regarding the tax treatment of this income?

  A. Tex must pay taxes on that portion of the long-term capital gain income that Invest4U distributes to him.
  B. Tex must pay taxes on his proportionate share of the long-term capital gain income earned by Invest4U, whether distributed or not.
  C. Tex must pay taxes only on dividend income distributed by Invest4U.The mutual fund itself pays tax on any capital gains it earns.
  D. None of the above is a true statement.
  A. Tex must pay taxes on that portion of the long-term capital gain income that Invest4U distributes to him.

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  Explanation/Reference:

  Tex must pay taxes on that portion of the long-term capital gain income that Invest4U distributes to him. Invest4U is required to distribute at least 98% of its capital gain income to its shareholders.

• Question 84:

  Which of the following statements regarding the taxes associated with a variable life insurance policy is false?

  A. Earnings on a variable life insurance policy grow tax-free.
  B. Payments to beneficiaries upon the death of the policyholder are taxed as ordinary income.
  C. One variable life policy can be exchanged for another variable life policy without triggering any consequences under Section 1035 of the tax code.
  D. If a policyholder withdraws some of the cash value associated with the policy, taxes need only be paid on the amount that exceeds the total amount of the premiums paid to date.
  B. Payments to beneficiaries upon the death of the policyholder are taxed as ordinary income.

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  Explanation/Reference:

  The statement that payments to beneficiaries upon the death of the policyholder are taxed as ordinary income is false. When a policyholder dies, the death benefit received by the beneficiaries is tax-free. The death benefit will, however, be included in calculating any estate taxes that might be due. All the other choices are true statements. Unlike the tax treatment of variable annuities, the IRS uses first -in, first out (FIFO) accounting when determining whether the withdrawals have come from earnings or premium payments; therefore, when a policyholder withdraws some of the policy's cash value, it is assumed to be a withdrawal of premiums first, and that amount of the withdrawal is tax-free.

• Question 85:

  Which of the following plans does not have the requirement that its participants must begin withdrawing funds from the plan by April 1st of the year after they turn 70 ½?

  I. SIMPLE IRA II. 401(k)

  III. Roth IRA

  IV.

  profit-sharing plan

  A. I and III only
  B. I, III and IV only
  C. III only
  D. All of the above have a mandatory distribution requirement.
  I. SIMPLE IRA II. 401(k) III. Roth IRA IV. profit-sharing plan
  C. III only

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  Explanation/Reference:

  The Roth IRA does not have the requirement that its participants must begin withdrawing funds from the plan by April 1st of the year after they turn 70 ½. The Roth IRA does, however, have a mandatory distribution requirement that goes into effect if the participant dies.

• Question 86:

  Uncle Scrooge (uncharacteristically) wants to set up a Section 529 college savings plan for his nephew, Louie. If he does so:

  A. he can contribute at most $2,000 a year.
  B. his contributions will be tax deductible.
  C. any withdrawals that Louie makes to cover tuition, books, and room and board will be free from both federal and state taxes.
  D. and Louie decides not to go to college, Uncle Scrooge can name Louie's brother, Huey, as the beneficiary of the plan without any tax consequences.
  D. and Louie decides not to go to college, Uncle Scrooge can name Louie's brother, Huey, as the beneficiary of the plan without any tax consequences.

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  Explanation/Reference:

  If Uncle Scrooge sets up a Section 529 college savings plan for his nephew Louie, and Louie decides not to go to college, Uncle Scrooge can name Louie's brother, Huey, as the beneficiary of the plan without any tax consequences. Unlike the Coverdell Education Savings Plan, there is no limit to the contribution that can be made, although gift taxes may apply if the contribution exceeds the threshold for gifts. Scrooge's contributions are not tax deductible, and although any withdrawals Louie makes will be free from federal taxation, different states have different rules regarding the taxation of 529 plans.

• Question 87:

  Which of the following entities is eligible to establish a Keogh Plan?

  A. Ms. Dee Ziner is the owner of an interior design company that is established as a sole proprietorship.
  B. Mr. Hans Deutsch is the owner of a Subchapter S Corporation that imports only Bavarian -made goods.
  C. Mr. Will Writer teaches English at a community college and does freelance writing to supplement his income.
  D. Both A and C are eligible to establish a Keogh Plan.
  D. Both A and C are eligible to establish a Keogh Plan.

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  Explanation/Reference:

  Both A and C are eligible to establish a Keogh Plan. Any individual who is self -employed, even in a second job, is eligible to set up a Keogh Plan as long as they have established themselves as sole proprietors and not as any form of corporation.

• Question 88:

  Giant Investments mass mails a single-page, glossy flyer that lists the types of mutual funds it offers, along with a general explanation of what the investment objective of each type of fund is. The flyer also prominently provides Giant's contact information. Given these facts:

  A. Giant Investments must submit a copy of this brochure within 10 days of its initial distribution date to FINRA.
  B. a principal of Giant Investments must sign (or initial) and date the brochure, giving it his official approval.
  C. the brochure will be subject to spot checks by FINRA and will need to be kept on file.
  D. None of the above statements is true.
  D. None of the above statements is true.

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  Explanation/Reference:

  Given the facts about the content of the flyer, none of the statements is true. If Giant Investments mass mails a flyer that only lists the types of mutual funds it offers along with a general explanation of what the investment objective of each type of fund is and Giant's contact information, it has issued only a generic advertisement as defined by Rule 135A of the Securities Act of 1933. As such, it is not considered an offer to sell and does not have to meet the requirements to which more specific advertising material is subject.

• Question 89:

  The essential difference between a 401(k) plan and a 403(b) plan is that:

  A. the 403(b) plan is for small businesses while the 401(k) plan is for large corporations.
  B. only employers can contribute to 403(b) plans while both employers and employees can contribute to 401(k) plans.
  C. the 403(b) plan is for employees of specific non-profit organizations whereas the 401(k) plan is for the employees of private corporations.
  D. contributions to 403(b) plans are always tax deductible, which is not the case with 401(k) plan contributions.
  C. the 403(b) plan is for employees of specific non-profit organizations whereas the 401(k) plan is for the employees of private corporations.

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  Explanation/Reference:

  The essential difference between a 401(k) plan and a 403(b) plan is that the 403(b) plan is for employees of specific non-profit organizations whereas the 401(k) plan is for the employees of private corporations. The tax advantages and eligibility requirements of a 403(b) plan are the same as those for a 401(k) plan.

• Question 90:

  Steel Dynamics (STLD) has a convertible bond issue that matures in four years. The bond has a face value of $1,000 and pays a coupon of 5.125%, with interest paid semiannually. The conversion ratio is 56.9801. If the stock of Steel Dynamics is currently priced at $15 a share, what is the conversion value of this bond, to the nearest cent?

  A. $854.70
  B. $569.80
  C. $175.50
  D. Until it matures, the conversion value of the bond is equal to its face value of $1,000
  A. $854.70

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  Explanation/Reference:

  The conversion value of this bond $854.70. It is equal to its conversion ratio of 56.9801 times the current market price of its stock, $15. Thus, 56.9801 x $15 = $854.70.