FINRA-SERIES-6 Online Practice Questions and Answers

Correct Answer: C

Explanation: The statement that specialists are employees of the exchange on which they oversee trades is false. Specialists are separate firms that are members of the exchange. Specialists are market makers in the stocks that are assigned them by the exchange and can earn profits (or losses) on these investments, just like any other market maker. They are required to maintain a fair and orderly market in their assigned stocks, however, which means they sometimes must trade against the market. They also maintain a central limit order “book” in their assigned stocks.

Correct Answer: C

Explanation: SuperDOT is an electronic system used to place market and limit orders on the NYSE whereby the orders are routed directly to the specialist in the assigned stocks. It is not an ECN, which is an electronic network that is designed to allow buyers and sellers to interact directly with each other, thereby bypassing the middlemen.

Correct Answer: B

Explanation: In a primary market transaction, the issuer of the security receives the proceeds from the sale of the security. A secondary market transaction involves the purchase and sale of a security between investors, and the seller of the security receives the proceeds from the sale. Both stocks and bonds are initially introduced to the market as primary market securities and are then traded in the secondary market.

Correct Answer: A

Explanation: The current yield on this MBIA bond is 8.745%. The current yield is the annual interest payment of $7 per $100 of par divided by the bond price of $80.05: $7/$80.05 = 8.745%.

Correct Answer: B

Explanation: An ADR is a receipt designating ownership of shares of a foreign stock that are held in a trust. The acronym stands for American Depository Receipt.

Correct Answer: A

Explanation: A long-term, unsecured bond issued by a corporation is called a debenture. Commercial paper is short-term debt of a corporation, and general obligation and industrial revenue bonds are issued by state and local governments.

Correct Answer: C

Explanation: Private placements may be sold to as many as 35 non-accredited investors. Non-accredited investors must have a purchaser representative to help them evaluate the investment. There is no restriction on the number of accredited investors to whom the securities can be sold. Accredited investors include wealthier, more sophisticated individual investors as well as institutional investors.

Correct Answer: B

Explanation: Under current tax law, in order for the profits from the sale of any investment to be considered long-term capital gain income, the investment must have been held for longer than 12 months.

Correct Answer: B

Explanation: 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.

Correct Answer: B

Explanation: The retirement plan that requires the employer to match employee contributions in accordance with specific guidelines is the SIMPLE IRA. SIMPLE is an acronym for Savings Incentive Match Plans for Employees. Although some employers offer some sort of matching contribution to 401(k) participants, it is not required that they do so. A Section 457 plan is a deferred compensation plan.

Correct Answer: C

Explanation: A plan under which employees of state and local governments can contribute part of their salaries such that those earnings will grow tax-deferred until retirement is called a Section 457 plan. Profit-sharing and money purchase plans are retirement plans that may be available to employees of for-profit companies. Section 501 of the IRS code covers non-profit corporations.

Correct Answer: C

Explanation: 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.

Correct Answer: D

Explanation: Yes, the e-mail is in violation of the Securities Act of 1933 because the representative's statement that the “bonds provide income that is free from both federal and state taxes and may also be free from local taxation, if any exists,” is an untrue statement of a material fact. Although the income will be free from federal taxation, residents of states other than Colorado will likely be required to pay state and local income taxes on the interest earned. It is not illegal to sell municipal bonds to investors in other states or to distribute advertisements by electronic means.

Correct Answer: C

Explanation: A fund's transfer agent is responsible for calculating and distributing the capital gain and dividend income of the fund and mailing shareholder account statements. The fund's custodian is responsible for paying fund expenses.

Correct Answer: D

Explanation: A fund's 12b-1 fees may not be used to pay the administrative expense of the fund's investment adviser. This would be part of the fund's management fees. SEC rule 12b-1 authorizes a fund to pay for distribution costs out of a fund's assets only if the fund has adopted a 12b-1 plan. The SEC defines these distribution costs to include the costs of marketing and selling the fund shares, including compensating brokers who help to sell the shares, and printing and mailing prospectuses and sales literature to existing and prospective customers.