FINRA Series 6 — All Questions

Class A shares charge a 4.5% front-end load and 0.25% a year in 12b-1 fees. Class C shares have no load and charge 1.00% a year. Ignoring growth, about how long until the Class C shares cost more in total?

• a.About 18 years, dividing the load by Class A's 0.25% fee
• b.About 4.5 years, dividing the load by Class C's full 1.00% fee
• c.About 3.6 years, dividing the load by the combined 1.25% of annual fees
• d.About 6 years, since 4.5% divided by the 0.75% annual gap is 6 years✓

Class A costs 4.5% more on day one but saves 1.00% - 0.25% = 0.75% each year afterward. The extra up-front cost is made up in 4.5 / 0.75 = 6 years, and a holding longer than that favors Class A. Using the full 1.00% ignores that Class A also pays a yearly fee. Dividing by 0.25% looks only at Class A's fee, and adding the two annual fees treats the classes' costs as if they were stacked rather than compared.

A customer redeems all of her Class B shares in year two. She paid $10,000 and the shares are now worth $13,000. The prospectus applies a 4% deferred charge to the lower of original cost or current value. What is the charge?

• a.$120, which is 4% of the $3,000 gain on the shares
• b.$0, because shares that have gained are not subject to the charge
• c.$520, which is 4% of the $13,000 value of the shares
• d.$400, which is 4% of the $10,000 original cost of the shares✓

The prospectus applies the charge to the lower of cost or value, and $10,000 is lower than $13,000, so the charge is 4% x $10,000 = $400. Applying it to the current value would give $520 and ignores the stated base. Charging only the gain gives $120 and misreads the base as profit rather than the lesser amount. A charge of $0 would require a waiver for shares that have gained, but the stated terms apply the charge to the lower base whether or not the shares gained.

A customer buys 1,000 fund shares at $10. During the year she reinvests $500 of distributions at $12.50 a share, and at year end the NAV is $13.00. What is her total return on the original $10,000?

• a.28.8%, which treats the $500 reinvested as new money invested
• b.35.2%, since her 1,040 shares are now worth $13,520✓
• c.30.0%, which counts only the rise in price from $10 to $13
• d.35.0%, which adds the $500 distribution to 1,000 shares at $13

The $500 reinvested at $12.50 buys 40 shares, so she holds 1,040 shares worth 1,040 x $13.00 = $13,520. The gain on her original $10,000 is $3,520, a 35.2% total return. Looking at the price alone gives 30.0% and leaves out the distributions. Adding $500 to 1,000 shares at $13 gives 35.0% and ignores that the reinvested shares also rose from $12.50 to $13. Treating the $500 as a new investment gives 28.8%, though it was her own income and not additional cash.

A customer sells shares of XYZ at a loss on June 15. To avoid a wash sale, she must not buy substantially identical securities during which period?

• a.Within the 31-day period from June 15 through July 15, and not before June 15, which is when the sale occurred
• b.Within the 61-day period from 30 days before to 30 days after June 15✓
• c.Within 30 days before June 15 only
• d.Within 90 days after June 15 only

A wash sale arises when substantially identical securities are acquired within 30 days before or 30 days after the sale, a window of 61 days including the sale date. Buying within the window disallows the loss and adds it to the basis of the new shares.Internal Revenue Code Section 1091(a)

A single investor has $9,000 of net capital losses and no capital gains for the year. What is the most she may deduct against other income in that year?

• a.$9,000, since losses are fully deductible
• b.$6,000, with the remaining $3,000 carried forward
• c.$1,500, with the remaining $7,500 carried forward
• d.$3,000, with the remaining $6,000 carried forward✓

Net capital losses offset capital gains and then up to $3,000 of other income ($1,500 if married filing separately). The remainder carries forward to later years.Internal Revenue Code Section 1211(b)

A customer buys 100 shares of ABC and holds them for 8 months. She then sells short 100 shares of ABC at a profit and closes the short sale 6 months later. How is the gain taxed?

• a.As ordinary income, because short sale gains are never capital gains
• b.As long-term, because the short position was open for more than 1 year in total
• c.As short-term, because she held substantially identical property for one year or less on the date of the short sale✓
• d.As long-term, because she held the long shares for 14 months in total when the short sale was closed, which is more than one year

Section 1233(b) treats a short sale gain as short-term if, on the date of the short sale, substantially identical property had been held for one year or less. Time spent with the short position open does not turn the gain into a long-term gain.Internal Revenue Code Section 1233(b)

An investor in a taxable account buys a newly issued corporate zero-coupon bond. How is the investor taxed while holding it?

• a.Only the cash interest actually received is taxable each year
• b.The discount is taxed as a capital gain in the year the bond matures, with no tax on any accrual before the maturity date
• c.The accrued original issue discount is taxable each year as interest, though no cash is received✓
• d.Nothing is taxed until the bond matures or is sold

Original issue discount accrues and is included in income each year as interest under Section 1272, so a zero-coupon holder pays tax on income that is not received until maturity. That is why zeros are often held in tax-deferred accounts.Internal Revenue Code Section 1272(a)

A 45-year-old owner takes a withdrawal from a nonqualified deferred annuity, and part of it is taxable earnings. What additional tax can apply to the taxable part?

• a.A 20% additional tax, unless the owner reinvests the money within 60 days
• b.A 6% excise tax on the amount of the earnings withdrawn
• c.A 10% additional tax, unless an exception such as disability or a life annuity applies✓
• d.No additional tax, because the 10% tax applies only to qualified plans

Section 72(q) adds 10% to the taxable part of an early distribution from an annuity contract, with exceptions such as age 59½, death, disability, or substantially equal periodic payments. It applies to nonqualified annuities too.Internal Revenue Code Section 72(q)

A customer buys the same stock in three lots at different prices, then sells part of the position without identifying which lot is sold. Which lots are treated as sold?

• a.The shares most recently acquired, on a last-in, first-out basis
• b.The shares with the highest cost, to minimize the gain
• c.The shares first acquired, on a first-in, first-out basis✓
• d.The shares with the lowest cost, to maximize the deduction

When a taxpayer does not adequately identify the lot sold, the stock is treated as coming from the earliest acquired shares. Specific identification, or average basis for mutual funds where permitted, requires an election.Treasury Regulation Section 1.1012-1(c)

A mutual fund shareholder has owned shares for 3 months when the fund pays a capital gain distribution. How must the shareholder treat the distribution?

• a.As short-term capital gain, because the shares were held for less than a year
• b.As ordinary dividend income, because it was paid by a fund
• c.As long-term capital gain, regardless of how long the shareholder has owned the shares✓
• d.As a return of capital, which reduces the shareholder's basis

A capital gain dividend is treated by shareholders as gain from the sale of a capital asset held for more than one year, whatever their own holding period in the fund shares. The fund's holding period for the underlying securities does not control it either.Internal Revenue Code Section 852(b)(3)(B)

An investor in the 32% federal tax bracket owns a municipal bond yielding 4.5% that is exempt from federal tax. What is its tax-equivalent yield?

• a.About 6.62%✓
• b.About 4.50%
• c.About 5.94%
• d.About 3.06%

The tax-equivalent yield is the tax-free yield divided by one minus the tax rate: 4.5% divided by 0.68 is about 6.62%. Multiplying 4.5% by 1.32 gives about 5.94%, and multiplying by 0.68 gives 3.06%, which goes the wrong way.

A customer buys a stock at $50, receives $2 in dividends during the year, and sells at $53. What is her total return for the year?

• a.10.0%✓
• b.4.0%
• c.5.0%
• d.6.0%

The total return is the price gain of $3 plus the $2 in dividends, divided by the $50 cost: $5 divided by $50 is 10%. Price appreciation alone is 6%, and dividends alone are 4%.

A fund has $120 million in assets, $15 million in liabilities and 5 million shares outstanding. What is its net asset value per share?

• a.$3.00
• b.$21.00✓
• c.$24.00
• d.$22.50

NAV per share is total assets minus liabilities, divided by shares outstanding: $105 million divided by 5 million is $21.00. Using assets alone gives $24.00, which ignores the liabilities.

A customer buys a stock on June 3, 2025 and sells it at a gain on June 3, 2026. How is the gain taxed?

• a.As a long-term capital gain, because the stock was held for one full year
• b.As a short-term capital gain, because the stock was not held for more than one year✓
• c.As a long-term capital gain, because a sale on the anniversary date counts as one year plus a day
• d.As ordinary income, because a gain on a sale after exactly one year is not a capital gain

A gain is long-term only if the asset was held more than one year. The holding period starts the day after the purchase and includes the sale date, so a sale on the first anniversary is short-term and a sale on June 4, 2026 would be long-term.Internal Revenue Code Section 1222; IRS Publication 550

A 45-year-old employee takes a taxable lump-sum distribution from her 401(k) plan after leaving her job at age 45, with no exception applying. What is the tax result?

• a.The taxable amount is added to income with no additional tax, because she separated from service
• b.A 20% additional tax applies, which replaces ordinary income tax
• c.The taxable amount is added to income and a 10% additional tax applies✓
• d.The taxable amount is taxed at long-term capital gain rates because it is a lump sum

Section 72(t) adds 10% to the taxable part of early distributions from qualified retirement plans unless an exception applies. A separation from service exception applies only if it occurs in or after the year the employee reaches age 55, so age 45 does not qualify.Internal Revenue Code Section 72(t)