Finra Series-6 Exam Questions Instant Access

Question 1

Which of the following qualifies as an insider under the definition provided by the Securities Exchange Act of 1934?

i. a member of the board of directors of a firm

ii. the vice-president of marketing of a firm

iii. an investor who owns 5% of the voting stock of the firm IV. the daughter of the CEO of a firm

AI and II only

BI, II, and III only

CI, II, and IV only

DI, II, III, and IV

Answer : C

Selections I, II, and IV all describe individuals who qualify as insiders under the definition provided by the Securities Exchange Act of 1934. An insider is any director or officer of the firm or any member of their immediate family. An investor who owns 10% of the voting stock of the firm and his immediate family members are also classified as insiders; an investor who owns 5% of the voting stock does not fall within the guidelines of the definition.

Question 2

Andy and Annie Raggedy own their own graphics art business that they operate out of their home and, happily, generate enough income to meet their current needs. The couple is planning on having children in the not too distant future, however, and they want to start putting money aside for their children's college education and also want to start saving for retirement more aggressively.

AWhich of the following describes one of their primary investment objectives? tax-exempt income

Bpreservation of capital

Ccurrent income

Dcapital appreciation

Answer : D

Since Mr. and Mrs. Raggedy's stated goals are to save for their future children's college education and to save for retirement, one of primary investment objectives is capital appreciation. That is, they will want to invest their monies in assets that will grow at a sufficient rate for them to be able to meet these targets. They have enough income to meet their current needs, so Choices A and C are not primary objectives, and although we'd all like to preserve capital, we need to take some risk in order to get the returns we require.

Question 3

Brian is single and 32 years old. He is employed as a buyer for a large sporting goods retail chain and participates in an employer-matched 401(k) plan. He remembers hearing about the benefits of passively managed portfolios in a college investments course he took. Therefore, he is directing 100% of his 401(k) monies into an S&P 500 Index fund. He has also been investing all of his discretionary income into a regular account with the same S&P 500 Index fund. Brian's goal is to retire no later than his 55th birthday.

Is this the best investment strategy for him?

AYes. He is investing in a diversified portfolio of stocks that is passively managed, so he isn't having to pay big management fees.

BYes. Because index funds are passively managed, they don't have as high a turnover rate, and lower turnover rates result in lower tax bills for the investor. Brian gets diversification and a lower tax bill.

CNo. The S&P 500 Index consists only of large, domestic stocks, so Brian isn't as diversified as he could be, and his investments may not grow fast enough for him to retire on his 55th birthday.

DBoth A and B are reasons that Brian's strategy is the best strategy for him.

Answer : C

No, investing all of his retirement savings and all his discretionary income into the same S&P 500 Index fund is not the best strategy for Brian because the S&P 500 Index consists only of large domestic stocks, so Brian isn't as diversified as he could be, and his investments may not grow fast enough for him to retire on his 55th birthday. Although the S&P 500 Index fund is passively managed, which results in lower management fees and lower tax bills, Brian could spread his money among other index funds that offer these same benefits as well. For example, he could invest in a small cap index fund, a mid-cap index fund, and even a foreign stock index fund, such as an EAFE Index fund. This would give him even more diversification potential, and since the stocks in which these funds invest are a bit riskier, the funds offer a higher expected return, which should advance him toward his retirement goal more quickly. Brian's investment horizon is sufficiently long for him to be able to handle the risk. Furthermore, investing all of one's money in a single fund-even a single S&P 500 Index fund-isn't the best strategy, especially if one has a lot of money to invest as Brian does. Not all S&P 500 Index funds perform equally well.

Question 4

Marge is 57 and wants to retire early. Since she is not yet eligible for social security, she wants to begin tapping a variable annuity to which she has been contributing for the last 20 years.

Which of the following statements regarding her withdrawals is true?

AThere is no way that Marge can begin making withdrawals without facing a 10% penalty for early withdrawal unless she is disabled or needs the money for medical expenses.

BMarge can begin her withdrawals tax-free and without penalty under IRS rule 72(t) as long as she does so following the specific guidelines until she turns 59 , at which point she will no longer have to follow the specific guidelines.

CMarge can begin her withdrawals tax-free and without penalty under IRS rule 72(t) as long as she does so following the specific guidelines for a period of five years.

DMarge can begin her withdrawals without penalty under IRS rule 72(t) as long as she does so following the specific guidelines for a period of five years; however, the withdrawals will be subject to taxation.

Answer : D

Since Marge is only 57, she can begin her withdrawals without penalty under IRS rule 72(t) as long as she does so following the specific guidelines for a period of 5 years, but the withdrawals will be subject to taxation. Once she starts the program outlined in rule 72(t), she must remain on it for at least five years or until she turns 59 , whichever comes last. This means that although she's already 57 and will be turning 59 in 2 years, she will have to continue to follow the guidelines for a full five years, or until she turns 62, in this case.

Question 5

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.

AI only

BI and II only

CI and III only

DI, II, and III

Answer : B

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 6

As her college graduation present, Jennifer's grandmother gave her 200 shares of the stock of IBM. Her grandmother had purchased the shares for $54 a share in October 2002, and the stock was selling for $132 a share on the day of Jennifer's graduation eight years later. Eight months after her graduation,

Jennifer decides to sell the shares to get money to help with the down payment on a condo she is purchasing.

If IBM is selling for $125 on the day of the sale, what are the tax consequences of this sale for Jennifer?

AJennifer will have taxable income of $15,600, which will be taxed as long-term capital gain income at a tax-preferred rate.

BJennifer will have taxable income of $14,200, which will be taxed as long-term capital gain income at a tax-preferred rate.

CJennifer will have a loss of $1,400, which will be treated as a short -term capital loss for tax purposes.

DJennifer will have taxable income of $14,200, which will be taxed as long-term capital gain income at a tax-preferred rate.

Answer : B

If Jennifer's grandmother gave her stock that she had purchased for $54 a share on a day it was selling for $132, and Jennifer then sold it eight months later for $125, Jennifer will have taxable income of $14,200, which will be taxed as long-term capital gain income at a tax-preferred rate. The cost basis of a gift is the price that the donor paid for it --$54, in this case. Jennifer's gain is, therefore, ($125 - $54) x 200 shares = $14,200. The holding period of the donor also becomes the holding period for the gift's recipient, so the $14,200 will be treated as long-term capital gain income since her grandmother had owned the stock for eight years prior to gifting it.

Question 7

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:

Aincrease Pasty's shares outstanding and reduce Simple's proportionate ownership in the firm.

Bincrease 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.

Cincrease the number of shares that Simple owns to 1,050, but this will not affect the market value of Simple's holdings.

Dincrease Simple's cash by the amount of the dividend paid: 0.05 x $10 = $0.50 x 1,000 shares = $500.

Answer : C

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.

Finra Investment Company and Variable Contracts Products Representative Series-6 Exam Questions