Question 1

Which of the following pieces of information may not be contained in a tombstone advertisement under SEC rules?

Accepted Answer

C

Explanation: A tombstone advertisement may not contain the price of the offering under SEC rules. The final price would not have been set at this point anyway.

Question 2

Mr. Investor has purchased 100 shares of the common stock of the Everyman Corporation. As such, which of the following is not a right that Mr. Investor has?

Accepted Answer

D

Explanation: Explanation: Mr. Investor does not have the right to vote on the purchase of a major piece of property that Everyman is considering or any decision involving business operations. He does have the right to receive dividends, if dividends are declared, based on his proportionate ownership of the firm. He also has the right to vote on the members of the firm’s board of directors and to vote on any proposed changes to the corporate by laws.

Question 3

Mr. Big of HiGrow Corporation needs more money to support the exceptional growth rate that his firm is enjoying. He meets with BigFee Investment Banker, who agrees to handle the IPO for HiGrow. As part of the process, BigFee’s staff works with HiGrow’s accountants to prepare the registration statement that is filed with the SEC. After the issue has been sold to the public, Mr. Sharp, a CPA who has invested in the stock of HiGrow, discovers that there are some accounting irregularities in the financial statements provided in HiGrow’s prospectus. Who can be sued for the misleading statements?

I. Mr. Big II. Big Fee Investment Banker III. HiGrow’s accountants IV. HiGrow’s attorneys

Accepted Answer

D

Explanation: All of the entities can be sued for misleading statements found in HiGrow’s financial statements. The Securities Act of 1933 holds any individual who participates in bringing the new issue to the public civilly liable for misrepresentations found in the prospectus.

Question 4

Commercial paper is:

Accepted Answer

B

Explanation: Commercial paper is short-term, unsecured debt issued by large corporations. It generally has a maturity of less than 270 days so that it does not need to be registered with the SEC in order to be offered for sale.

Question 5

The stock of Hasbro Corporation (HAS) is selling for $44.50 and pays a dividend of $1.00 a share. What is its dividend yield, rounded to the nearest hundredth of a percent?

Accepted Answer

B

Explanation: If Hasbro is selling for $44.50 and pays a dividend of $1.00 a share, its dividend yield is 2.25%. The dividend yield is the dividend divided by the market price: $1.00/$44.50 = 2.25%.

Question 6

Any person who willfully acts in violation of the Securities Act of 1933, or any SEC rule, is subject to a penalty of:

Accepted Answer

B

Explanation: Any person who willfully acts in violation of the Securities Act of 1933, or any SEC rule, is subject to a penalty of 5 years in prison or a $10,000 fine, or both.

Question 7

Which of the following statements regarding callable bonds is false?

Accepted Answer

D

Explanation: Statement D is the false statement. A callable bond does not protect the investor by allowing him to sell his bond back to the issuer and invest in another, similar-risk bond that pays a higher rate of interest should the investor choose to do so. The investor does not have the option to redeem or not in the case of a callable bond. It is the issuing firm that has the option. Therefore, a callable bond must offer a higher-yield than similar non-callable bonds, and the investor in a callable bond is subject to prepayment risk. The bond is most likely to be redeemed when interest rates fall, in which case the issuer will want to call it in and replace it with a bond with a lower coupon rate.

Question 8

Which of the following statements regarding CMOs is false?

Accepted Answer

A

Explanation: The false statement is that CMOs are zero-coupon bonds that are backed by real estate. CMOs are not zero-coupon bonds; they make payments that include both interest and principal.

Question 9

The entity that serves as the auctioneer for trades conducted on an organized exchange floor is known as a:

Accepted Answer

B

Explanation: The entity that serves as the auctioneer for trades conducted on an organized exchange floor is known as a specialist. The specialist is assigned stocks by the exchange and is a market maker in those stocks. A registered trader is a private individual who buys and sells on his own account only. Floor brokers and commission brokers execute trades for other investors.

Question 10

Which of the following is not an auction market?

Accepted Answer

A

Explanation: NASDAQ is not an auction market. NASDAQ is a computerized system of geographically dispersed securities’ dealers. As such, it is a negotiated market. The NYSE (New York Stock Exchange) and the CHX (Chicago Stock Exchange) are both auction markets.

Question 11

Which of the following statements about the over-the-counter market is true?

Accepted Answer

D

Explanation: Stocks that are listed on exchange floors are also traded in the over-the-counter market. The term “third market” refers to over-the-counter trading of listed stocks. All types of securities-stocks, bonds, options, warrants, rights-trade over the counter. The over-the-counter market is a negotiated market, not an auction market.

Question 12

Which of the following types of securities would not be traded in the over-the-counter market? I. stock options II. government bonds III. corporate bonds IV. corporate stocks

Accepted Answer

D

Explanation: All of the choices listed-and more-are traded in the over-the-counter market: stock options, government bonds, corporate bonds, and corporate stocks. Additionally, securities such as warrants, rights, forward contracts, and foreign currencies also trade in the over-the-counter market.

Question 13

Nat Informed places a market order to buy 200 shares of Abercrombie & Fitch (ANF) on Thursday, September 16th. When will Nat be required to pay for this Transaction?

Accepted Answer

C

Explanation: If Nat places an order to purchase 200 shares of Abercrombie & Fitch on Thursday, September 16th, payment will be due on Tuesday, September 21st. The settlement date for stock transactions is T + 3, which means the third business day after the trade. Saturday is not a business day.

Question 14

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?

Accepted Answer

C

Explanation: 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 15

A fund’s 12b-1 fees may not be used to pay which of the following?

Accepted 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.

Free Finra Series-6 Actual Exam Questions