SERIES 6 - STC FINAL EXAM 2
QUESTIONS AND ANSWERS
Cash0trades0(trades0done0for0cash),0as0compared0to0trades0done0in0a0cash0account,0
have0a0delivery0date0on0the:0-0ans✔Same0day0as0the0trade0date
Cash0trades,0or0trades0made0for0cash,0have0a0delivery0date0on0the0same0day0as0the0t
rade0date.0Be0sure0to0distinguish0a0cash0trade0from0a0trade0done0in0a0cash0account0w
hich0generally0settles0regular0way.
An0RR0receives0a0letter0from0a0client0complaining0about0the0performance0of0a0mutual0
fund0that0the0RR's0firm0has0recommended.0The0RR0should:
A)0Send0a0copy0to0the0mutual0fund,0since0it0is0really0a0complaint0about0the0fund
B)0Return0the0letter0to0the0customer0with0the0statement0that0the0customer0must0provid
e0written0evidence0to0support0the0grievance
C)0Forward0the0complaint0to0a0supervisor,0who0must0place0a0copy0in0the0complaint0fil
e
D)0Attempt0to0satisfy0the0customer0before0taking0any0other0action0-
0ans✔C)0Forward0the0complaint0to0a0supervisor,0who0must0place0a0copy0in0the0compl
aint0file
FINRA0rules0require0customer0complaints0to0be0given0to0a0principal.0The0firm0is0then0r
equired0to0keep0a0copy0in0a0complaint0file.
A0variable0annuity0contract0holder0dies0during0the0accumulation0period.0Which0of0the0f
ollowing0is0TRUE0regarding0the0tax0consequences?
A)0All0proceeds0are0considered0a0return0of0capital
B)0The0growth0is0taxable0as0a0capital0gain0to0the0beneficiary
C)0Proceeds0in0excess0of0cost0are0taxable0as0ordinary0income0to0the0beneficiary
D)0The0growth0above0cost0is0not0taxable0if0the0beneficiary0rolls0them0over0into0an0IRA
0-
0ans✔C)0Proceeds0in0excess0of0cost0are0taxable0as0ordinary0income0to0the0beneficiar
y
When0a0variable0annuity0contract0holder0dies0during0the0accumulation0period,0the0proc
eeds0in0excess0of0cost0are0taxable0to0the0beneficiary0as0ordinary0income.
,Your0client0owns0a0portfolio0of0blue-
chip0equity0securities0and0would0like0to0reduce0his0risk0of0a0market0downfall0through0t
he0use0of0options.0The0most0effective0way0to0achieve0this0objective0is0to:
A)0Write0covered0calls
B)0Buy0calls
C)0Write0covered0puts
D)0Buy0puts0-0ans✔D)0Buy0puts
The0most0effective0way0for0the0investor0to0achieve0this0objective0is0to0buy0puts.0The0b
uyer0of0a0put0pays0a0premium0representing0the0price0of0the0option.0In0exchange0for0th
e0premium,0the0buyer0has0the0right0to0sell0stock0at0a0preset0price.0This0would0give0hi
m0protection0against0a0downturn0in0the0market.
Which0of0the0following0statements0best0defines0the0term0duration?
A)0It0is0a0measure0of0a0fixed-income0security's0relative0interest-rate0risk.
B)It0is0a0measure0of0a0fixed0income0portfolio's0average0yield.
C)0It0is0the0period0before0a0fixed-income0security0will0be0called.
D)0It0is0the0measure0of0volatility0that0compares0an0equity0security0to0the0S&P05000Ind
ex.0-0ans✔A)0It0is0a0measure0of0a0fixed-income0security's0relative0interest-rate0risk.
Duration0measures0price0sensitivity0for0fixed-
income0securities0given0changes0in0interest0rates.0For0example,0a0bond0with0a07-
year0duration0would0experience0a070percent0change0in0price0for0every0one0percent0ch
ange0in0market0interest0rates.
A0hurricane0hit0the0hub0of0the0U.S.0financial0system0and0caused0a0significant0disruptio
n0in0the0stock0market.0This0is0an0example0of:0-0ans✔Event0risk
Event0risk0is0the0risk0that0a0large0event0will0cause0a0significant0decline0in0the0market0v
alue0of0securities.0Event0risk0is0a0form0of0systematic0(undiversifiable)0risk.0Each0of0the
0other0choices0are0forms0of0unsystematic0(diversifiable)0risk.
Which0of0the0following0descriptions0best0characterizes0an0index0fund?
A)0High0portfolio0turnover0and0relatively0numerous0taxable0events
B)0Low0portfolio0turnover0and0relatively0numerous0taxable0events
C)0High0portfolio0turnover0and0relatively0few0taxable0events
D)0Low0portfolio0turnover0and0relatively0few0taxable0events0-
0ans✔D)0Low0portfolio0turnover0and0relatively0few0taxable0events
Index0funds0mimic0the0index0they0are0tracking0and0tend0to0make0very0few0changes0in0
the0portfolio.0As0a0result0of0this0low0turnover,0there0are0few0taxable0events0associated
0with0an0index0fund.
, Your0client0is0very0concerned0about0the0future0of0the0economy.0He0is0worried0about0th
e0rise0in0corporate0bankruptcies0and0believes0that0there0will0be0a0dramatic0increase0in
0both0inflation0and0interest0rates0over0the0next0several0years.0You0would0recommend:
A)0T-bonds
B)0STRIPS
C)0TIPS
D)0Blue-chip0common0stock0-0ans✔C)0TIPS
Treasury0Inflation-
Protected0Securities0(TIPS)0are0direct0obligations0of0the0U.S.0government0and0are0con
sidered0free0from0credit0risk.0They0will0provide0the0client0with0safety0of0principal0and0p
rotection0from0inflation0and0rising0interest0rates.0The0principal0of0the0bond0is0adjusted0
semiannually0based0on0the0CPI.0This0will0not0only0protect0the0principal0from0inflation,0
but0since0the0coupon0is0paid0on0a0greater0face0amount,0cash0flow0will0increase.0Choic
es0(a)0and0(b)0are0not0subject0to0credit0risk,0but0do0not0provide0a0hedge0against0rising
0interest0rates0and0a0loss0of0purchasing0power0due0to0inflation.0Historically,0during0peri
ods0of0high0inflation,0common0stock0prices0have0not0fared0well.
Under0FINRA0rules,0which0of0the0following0statements0concerning0electronic0communi
cations0is0TRUE?
A)0Text0messaging0is0not0covered0due0to0the0casual0nature0of0the0medium.
B)0Individual0text0messages0are0considered0retail0communications.
C)0Websites0are0not0covered0under0FINRA's0communications0rules.
D)0Websites0are0considered0retail0communications.0-
0ans✔D)0Websites0are0considered0retail0communications.
According0to0FINRA0rules0individual0text0messages0are0considered0correspondence,0n
ot0retail0communications.0For0that0reason,0the0text0messages0are0subject0to0review0an
d0supervision.0Websites0that0are0available0to0retail0investors0are0considered0retail0com
munications.
Under0the0Code0of0Procedure,0the0initial0review0of0complaints0is0completed0by0the:
A)0Hearing0Panel
B)0National0Adjudicatory0Council
C)0SEC
D)0Federal0court0-0ans✔A)0Hearing0Panel
Under0the0Code0of0Procedure,0the0initial0review0of0complaints0is0completed0by0the0He
aring0Panel.0Decisions0of0the0Hearing0Panel0can0be0appealed0to0the0National0Adjudic
atory0Council,0which0can0then0be0appealed0to0the0SEC,0and0the0final0appeal0can0go0t
o0the0Federal0courts.
QUESTIONS AND ANSWERS
Cash0trades0(trades0done0for0cash),0as0compared0to0trades0done0in0a0cash0account,0
have0a0delivery0date0on0the:0-0ans✔Same0day0as0the0trade0date
Cash0trades,0or0trades0made0for0cash,0have0a0delivery0date0on0the0same0day0as0the0t
rade0date.0Be0sure0to0distinguish0a0cash0trade0from0a0trade0done0in0a0cash0account0w
hich0generally0settles0regular0way.
An0RR0receives0a0letter0from0a0client0complaining0about0the0performance0of0a0mutual0
fund0that0the0RR's0firm0has0recommended.0The0RR0should:
A)0Send0a0copy0to0the0mutual0fund,0since0it0is0really0a0complaint0about0the0fund
B)0Return0the0letter0to0the0customer0with0the0statement0that0the0customer0must0provid
e0written0evidence0to0support0the0grievance
C)0Forward0the0complaint0to0a0supervisor,0who0must0place0a0copy0in0the0complaint0fil
e
D)0Attempt0to0satisfy0the0customer0before0taking0any0other0action0-
0ans✔C)0Forward0the0complaint0to0a0supervisor,0who0must0place0a0copy0in0the0compl
aint0file
FINRA0rules0require0customer0complaints0to0be0given0to0a0principal.0The0firm0is0then0r
equired0to0keep0a0copy0in0a0complaint0file.
A0variable0annuity0contract0holder0dies0during0the0accumulation0period.0Which0of0the0f
ollowing0is0TRUE0regarding0the0tax0consequences?
A)0All0proceeds0are0considered0a0return0of0capital
B)0The0growth0is0taxable0as0a0capital0gain0to0the0beneficiary
C)0Proceeds0in0excess0of0cost0are0taxable0as0ordinary0income0to0the0beneficiary
D)0The0growth0above0cost0is0not0taxable0if0the0beneficiary0rolls0them0over0into0an0IRA
0-
0ans✔C)0Proceeds0in0excess0of0cost0are0taxable0as0ordinary0income0to0the0beneficiar
y
When0a0variable0annuity0contract0holder0dies0during0the0accumulation0period,0the0proc
eeds0in0excess0of0cost0are0taxable0to0the0beneficiary0as0ordinary0income.
,Your0client0owns0a0portfolio0of0blue-
chip0equity0securities0and0would0like0to0reduce0his0risk0of0a0market0downfall0through0t
he0use0of0options.0The0most0effective0way0to0achieve0this0objective0is0to:
A)0Write0covered0calls
B)0Buy0calls
C)0Write0covered0puts
D)0Buy0puts0-0ans✔D)0Buy0puts
The0most0effective0way0for0the0investor0to0achieve0this0objective0is0to0buy0puts.0The0b
uyer0of0a0put0pays0a0premium0representing0the0price0of0the0option.0In0exchange0for0th
e0premium,0the0buyer0has0the0right0to0sell0stock0at0a0preset0price.0This0would0give0hi
m0protection0against0a0downturn0in0the0market.
Which0of0the0following0statements0best0defines0the0term0duration?
A)0It0is0a0measure0of0a0fixed-income0security's0relative0interest-rate0risk.
B)It0is0a0measure0of0a0fixed0income0portfolio's0average0yield.
C)0It0is0the0period0before0a0fixed-income0security0will0be0called.
D)0It0is0the0measure0of0volatility0that0compares0an0equity0security0to0the0S&P05000Ind
ex.0-0ans✔A)0It0is0a0measure0of0a0fixed-income0security's0relative0interest-rate0risk.
Duration0measures0price0sensitivity0for0fixed-
income0securities0given0changes0in0interest0rates.0For0example,0a0bond0with0a07-
year0duration0would0experience0a070percent0change0in0price0for0every0one0percent0ch
ange0in0market0interest0rates.
A0hurricane0hit0the0hub0of0the0U.S.0financial0system0and0caused0a0significant0disruptio
n0in0the0stock0market.0This0is0an0example0of:0-0ans✔Event0risk
Event0risk0is0the0risk0that0a0large0event0will0cause0a0significant0decline0in0the0market0v
alue0of0securities.0Event0risk0is0a0form0of0systematic0(undiversifiable)0risk.0Each0of0the
0other0choices0are0forms0of0unsystematic0(diversifiable)0risk.
Which0of0the0following0descriptions0best0characterizes0an0index0fund?
A)0High0portfolio0turnover0and0relatively0numerous0taxable0events
B)0Low0portfolio0turnover0and0relatively0numerous0taxable0events
C)0High0portfolio0turnover0and0relatively0few0taxable0events
D)0Low0portfolio0turnover0and0relatively0few0taxable0events0-
0ans✔D)0Low0portfolio0turnover0and0relatively0few0taxable0events
Index0funds0mimic0the0index0they0are0tracking0and0tend0to0make0very0few0changes0in0
the0portfolio.0As0a0result0of0this0low0turnover,0there0are0few0taxable0events0associated
0with0an0index0fund.
, Your0client0is0very0concerned0about0the0future0of0the0economy.0He0is0worried0about0th
e0rise0in0corporate0bankruptcies0and0believes0that0there0will0be0a0dramatic0increase0in
0both0inflation0and0interest0rates0over0the0next0several0years.0You0would0recommend:
A)0T-bonds
B)0STRIPS
C)0TIPS
D)0Blue-chip0common0stock0-0ans✔C)0TIPS
Treasury0Inflation-
Protected0Securities0(TIPS)0are0direct0obligations0of0the0U.S.0government0and0are0con
sidered0free0from0credit0risk.0They0will0provide0the0client0with0safety0of0principal0and0p
rotection0from0inflation0and0rising0interest0rates.0The0principal0of0the0bond0is0adjusted0
semiannually0based0on0the0CPI.0This0will0not0only0protect0the0principal0from0inflation,0
but0since0the0coupon0is0paid0on0a0greater0face0amount,0cash0flow0will0increase.0Choic
es0(a)0and0(b)0are0not0subject0to0credit0risk,0but0do0not0provide0a0hedge0against0rising
0interest0rates0and0a0loss0of0purchasing0power0due0to0inflation.0Historically,0during0peri
ods0of0high0inflation,0common0stock0prices0have0not0fared0well.
Under0FINRA0rules,0which0of0the0following0statements0concerning0electronic0communi
cations0is0TRUE?
A)0Text0messaging0is0not0covered0due0to0the0casual0nature0of0the0medium.
B)0Individual0text0messages0are0considered0retail0communications.
C)0Websites0are0not0covered0under0FINRA's0communications0rules.
D)0Websites0are0considered0retail0communications.0-
0ans✔D)0Websites0are0considered0retail0communications.
According0to0FINRA0rules0individual0text0messages0are0considered0correspondence,0n
ot0retail0communications.0For0that0reason,0the0text0messages0are0subject0to0review0an
d0supervision.0Websites0that0are0available0to0retail0investors0are0considered0retail0com
munications.
Under0the0Code0of0Procedure,0the0initial0review0of0complaints0is0completed0by0the:
A)0Hearing0Panel
B)0National0Adjudicatory0Council
C)0SEC
D)0Federal0court0-0ans✔A)0Hearing0Panel
Under0the0Code0of0Procedure,0the0initial0review0of0complaints0is0completed0by0the0He
aring0Panel.0Decisions0of0the0Hearing0Panel0can0be0appealed0to0the0National0Adjudic
atory0Council,0which0can0then0be0appealed0to0the0SEC,0and0the0final0appeal0can0go0t
o0the0Federal0courts.
