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

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Total 325 questions
Question 1

Which of the following relationships regarding shares of common stock are necessarily true?

i. shares outstanding > issued shares

ii. authorized shares issued shares

iii. issued shares = treasury shares

IV. issued shares shares outstanding



Answer : B

Only Selections II and IV are necessarily true. The number of authorized shares must always be greater than or equal to the number of shares that the firm offers to the public, which are the issued shares. The number of issued shares will be equal to the number of shares outstanding as long as the firm doesn't buy back any of its outstanding shares. Otherwise, the number of issued shares will exceed the number of shares outstanding since issued shares = shares outstanding + treasury shares. The issued shares would only be equal to the treasury shares if the firm repurchased all its shares outstanding.


Question 2

Which of the following would offer an investor the most protection against purchasing power risk?



Answer : A

A stock mutual fund would offer an investor the most protection against purchasing power risk. Purchasing power risk is the risk that the money received from the investment won't buy as much because of inflation. Stock funds offer higher returns that have historically exceeded the annual rate of inflation, on average. The majority of the return from bond funds is from the fixed interest payment, which does not change regardless of the inflation rate, so the return earned by the investor may end up being less than the inflation rate in any given year. Likewise, money market funds offer very low returns that, in some years, are less than the rate of inflation.


Question 3

A mutual fund may not do which of the following, under any circumstances?

i. buy securities on margin

ii. engage in short sales

iii. change its investment objective

IV. invest in more than 1% of the outstanding voting stock of another investment company



Answer : A

A mutual fund may not buy securities on margin or engage in short sales, under any circumstances. It may change its investment objective, with shareholder approval. It is permitted to invest in up to 3% of the outstanding voting stock of another investment company.


Question 4

Paul is 36 years old and is married with two children, ages eight and ten. Paul lays carpet for a living, working as an independent contractor, and earns about $35,000 a year. His wife, Paula, is 33 years old, drives a school bus and earns only $18,000 a year, but her job provides the family with low-cost health insurance. They live conservatively and barely make ends meet. Paula recently inherited $180,000, however, and the couple would like to invest it, with the goal that they can both retire when Paul turns 62. The inheritance also included an educational endowment for their children, so they will not have to worry about saving for their children's college educations.

Which of the following would not be a suitable recommendation for the allocation of their investment monies?



Answer : A

Given that their combined income is only $53,000, Paul and Paula's marginal tax rate is low, so a municipal bond fund would not be a good recommendation for the allocation of their investment monies. Municipal bonds offer lower returns, and the couple would get little or no benefit from the tax-free interest income that these bonds provide. Their investment horizon is long enough (26 years) for them to invest some of their money in an aggressive growth stock fund, which has higher risk but also provides the higher expected returns that they may need to be able to retire when Paul turns 62. A Roth IRA is preferred over a traditional IRA in their situation. Although the traditional IRA would allow them to deduct their contributions, they already pay little or no taxes. Contributions to a Roth IRA are made out of after-tax income, but the contributions themselves can be withdrawn at any time without penalty if Paul and Paula run into some unexpected expenses, and the earnings grow tax-deferred and will be completely tax-free if they make no withdrawals until the age of 59 . Given the ages of their children, a life insurance policy that will help provide for them if one or both of the parents die, should be strongly recommended.


Question 5

No: 102

Which of the following bonds would not be considered investment grade?



Answer : A

A municipal bond with a BB rating would not be considered investment grade.

Regardless of whether a bond is issued by a state or local government or a corporation, to be considered investment grade it must be rated BBB or higher.


Question 6

MoeMoney Investments is a diversified management company. This means that:



Answer : C

Since MoeMoney is a diversified management company, it may invest no more than 5% of its investment monies in one issuer. It may be either a closed-end or an open-end company (mutual fund), and it need not necessarily be invested in a variety of industries and geographic regions.


Question 7

Which of the following actions can be expected to result in a decrease in stock and bond prices, all else equal?

i. The Federal Reserve announces a decrease in the discount rate.

ii. Congress votes to decrease payments to Social Security recipients.

iii. Congress votes to decrease taxes.

IV. The Federal Reserve announces that it will sell some of the Treasury securities it owns on the open market.



Answer : B

Only Selections II and IV will result in a decrease in stock and bond prices, all else equal. If Congress votes to decrease payments to Social Security recipients or if the Federal Reserve announces that it will sell some of the Treasury securities it owns on the open market, a decrease in stock and bond prices can be expected. A vote by Congress to decrease payments to Social Security recipients results in a decrease in money supply in our economy. Since interest rates can be thought of as the ''price'' of money, a decrease in the money supply will result in higher interest rates, which results in lower prices in the stock and bond markets. Similarly, if the Federal Reserve sells some of the Treasury securities it owns on the open market, a decrease in the money supply results, leading to an increase in interest rates and a decrease in securities' prices. When the Federal Reserve decreases the discount rate and when Congress decreases taxes, the money supply is increased. The interest rate-the price of money-subsequently decreases (all else equal), and prices of stocks and bonds increase as a result.


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Total 325 questions