Finra Series-6 Exam Practice Test Instant Access

Question 1

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.

Question 2

A passive asset allocation strategy that involves establishing specific targeted percentages for the various asset classes and rebalancing only as necessary to maintain those percentages as long as the investor's investment objectives remain unchanged is called:

Astrategic asset allocation.

Btactical asset allocation.

Cinteractive asset allocation.

Ddynamic asset allocation.

Answer : A

A passive asset allocation strategy that involves establishing specific target percentages for the various asset classes and rebalancing only as necessary to maintain those percentages as long as the investor's investment objectives remain unchanged is called strategic asset allocation. Tactical asset allocation is an active strategy that involves trying to time the market to some extent. Dynamic asset allocation is also an active strategy in which the portfolio mix is adjusted as markets rise and fall, such that the weighting is heaviest in those asset classes that can be expected to perform well under the current economy. Interactive asset allocation is a fictitious strategy.

Question 3

Which of the following plans allows the contributor to withdraw both his earnings and contributions tax-free if certain conditions are met?

ARoth IRA

Btraditional IRA

Cmoney purchase plan

D401(k) plan

Answer : A

The Roth IRA allows the contributor to withdraw both his earnings and contributions tax-free if the Roth IRA has been in existence for at least 5 years and the contributor has reached the age of 59 . In all of the other choices, only non-tax-deductible contributions may be withdrawn tax-free.

Question 4

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?

ATex must pay taxes on that portion of the long-term capital gain income that Invest4U distributes to him.

BTex must pay taxes on his proportionate share of the long-term capital gain income earned by Invest4U, whether distributed or not.

CTex must pay taxes only on dividend income distributed by Invest4U.The mutual fund itself pays tax on any capital gains it earns.

DNone of the above is a true statement.

Answer : A

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 5

Your client has recently heard about ''principal-protected funds'' and has asked your ad vice. You should tell her that:

i. the majority of principal-protected funds guarantee the investor's initial investment, less any front-end load, even if the stock market falls.

ii. it would not be a good investment if she thinks she will need the money within the next five to ten years.

iii. it will beat the returns she could earn on an S&P 500 Index fund in most years.

IV. if she sells her shares at any time other than the maturity date specified, she could lose money if the price per share has fallen.

AI only

BI and II only

CI and III only

DI, II, and IV only

Answer : D

Only Statements I, II and IV are true. You can legitimately tell your client that the majority of principal-protected funds guarantee the investor's initial investment, less any front -end load, even if the stock market falls (i.e. Selection I), but that there is a lock-up period involved. Therefore, it would not be a good investment if she thinks she will need the money within the next five to ten years (Selection II) because the principal guarantee will likely be voided, and she might be subject to a penalty for early withdrawal. You should also warn her that if she sells her shares at any time other than the maturity date specified, she could lose money if the price per share has fallen (Selection IV) since the guarantee is only valid on the maturity date of the fund in most instances. You should not tell her that the returns on a principal-protected fund will beat the returns she could earn on an S&P 500 Index fund in most years (Selection III). Although this may happen in a bear market year, it will definitely not be true during bull markets.

Question 6

Which of the following is not a money market security?

Acommercial paper

Bnegotiable certificates of deposit

Ccommon stock

DTreasury bills

Answer : C

Common stock is not a money market security. Money market securities mature in one year or less. Common stock has no maturity.

Question 7

After passing the Series 6 and becoming a registered representative, you will be able to execute transactions in which of the following securities?

i. corporate stocks

ii. mutual funds

iii. corporate bonds

IV. variable contracts

AI, II, III, and IV

BI, II, and IV only

CII and III only

DII and IV only

Answer : D

After passing the Series 6 and becoming a registered representative, you will be able to execute transactions in mutual funds and variable contracts only. A passing grade on the Series 6 qualifies you to be registered as a ''limited representative.''

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