Series-6 Investment Company and Variable Contracts Products Representative Qualification Examination (IR) - Practice Questions

Question 13

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:

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increase Pasty’s shares outstanding and reduce Simple’s proportionate ownership in the firm.
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increase 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.
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increase the number of shares that Simple owns to 1,050, but this will not affect the market value of Simple’s holdings.
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increase Simple’s cash by the amount of the dividend paid: 0.05 x $10 = $0.50 x 1,000 shares = $500.

Question 14

Ms. Mix always assures her clients that she will be calling them with quarterly recommendations for rebalancing their portfolios if there are any changes that she feels are appropriate. This has worked out well for her pocketbook since she has always been able to tweak each of her clients’ investment portfolios a little each quarter by recommending that they redeem their shares in one fund that hasn’t performed as well in the last quarter and use the proceeds to invest in another that has. Her clients feel cared for since she is in such regular contact with them.

Is Ms. Mix violating any securities regulations with this policy of hers?

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No. Ms. Mix is merely providing good service to her customers.
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Yes. Mutual funds are not designed to be short-term investments.
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It depends. There is no violation as long as her clients’ portfolios are increasing in value.
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Yes. Any recommendation that benefits a registered representative is deemed to be in violation of FINRA’s rules regarding fair dealing.

Question 15

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?

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municipal bond fund
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aggressive growth stock fund
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Roth IRA
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life insurance

Reference / correct answer:

municipal bond fund

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 ½. 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.

Series-6 – Investment Company and Variable Contracts Products Representative Qualification Examination (IR)