4 - Investment Company and Insurance-Based Products - Qs

A registered representative needs which of the following licenses to solicit a variable annuity sale? A) A securities and a life insurance license B) A fixed annuity license C) A securities license only D) A life insurance license only

A) A securities license and a life insurance license A variable annuity requires both a securities license (Series 6 or Series 7) and a life insurance license (issued by the states). There is no "annuity license."

An investor can take advantage of intraday price changes due to normal market forces when investing in which of these? I. Closed-end funds II. Exchange-traded funds III. Hedge funds IV. Open-end funds A) I and II B) II and III C) III and IV D) I and IV

A) I and II Both closed-end funds and ETFs trade in the marketplace based upon supply and demand. Open-end funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday.

What limit is placed on the number of outstanding shares a mutual fund may have in the hands of investors? A) There is no limit. B) Federal law specifies how many shares a mutual fund may sell. C) The number is specified in the fund's corporate charter. D) The limit varies from state to state.

A) There is no limit

If a fund sponsor allows an investor to move funds from one fund to another within its fund family, this is called A) an exchange privilege. B) a reinvestment right. C) a 12b-1 waiver. D) a right of accumulation.

A) an exchange privilege

An investor has purchased Class A mutual fund shares. The net asset value (NAV) per share of the fund is the price the investor A) will use as the cost basis in tax return filings once redeemed. B) will receive upon redemption of the shares. C) has paid for the shares when purchased. D) knows will be the cost per share when the order is entered.

B) will receive upon redemption of the shares he NAV per share of a mutual fund is calculated by dividing the net assets of the fund by the number of shares outstanding. When purchasing Class A shares, NAV plus a sales charge is paid. When redeeming the shares, the investor simply receives NAV. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing. Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order.

Which class of shares use a CDSC as the main sales charge? A) Class C shares B) Class A shares C) Class B shares D) No load

C) Class B shares Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load, and class C shares charge a level load as part of the expense ratio. No load funds have no sales charge.

Which of the following is not part of a mutual fund's expense ratio? A) 12b-1 fees B) Transfer agent's cost C) Sales load D) Manager's fee

C) Sales Load

Which of the following investment companies typically has a fixed portfolio? A) Mutual fund B) Open-end management company C) Unit investment trust D) Closed-end management company

C) Unit Investment Trust

Which of the following investment companies typically has a fixed portfolio? A) Mutual fund B) Open-end management company C) Unit investment trust D) Closed-end management company

C) Unit Investment Trust A fixed UIT's portfolio is static, so there is no need for active management and little or no portfolio turnover. UITs do not generally assess management fees because there is no need to hire an investment adviser to monitor and trade positions within the portfolio.

Which of the following is part of the expense ratio of a mutual fund? A) Contingent sales charges B) Sales loads C) Deferred sales charges D) Administration fees

D) Administrative Fees Administrative costs are part of the expenses of a mutual fund and by extension are part of the expense ratio. The expense ratio does not include sales charges or loads.

Which of these would cause a change in the net asset value of a mutual fund share? A) Many shares are redeemed B) Securities in the portfolio are sold for a capital gain C) The fund takes a new position D) The market value of the portfolio declines

D) The market value of the portfolio declines A decline in the market value of the portfolio would reduce the assets of the fund without changing the number of outstanding shares. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Buying or selling securities for a capital gain simply replaces securities in the portfolio, with an equivalent amount of cash, leaving the NAV unchanged.

The board of directors of the Windmill Growth Fund have declared a dividend. The ex-date for the dividend will likely be on which of the following days? A) Two business days before the record date B) The first business day before the record date C) The first business day after the record date D) The day of record

C) The first business day after the record date Mutual funds do not trade in the secondary market. Orders may be entered on the record date, and the trade settle that day. The ex-date for a mutual fund dividend is the business day after the record date

ABC Growth Fund has total assets of $120 million and liabilities of $5 million. The fund has 5 million outstanding shares. What is the fund's current net asset value (NAV) per share? A) $22 B) $25 C) $24 D) $23

D) $23 To find the net assets, you subtract the fund's liabilities from the fund's total assets. In this question, 120 million - 5 million = 115 million. NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question, 115 million / 5 million = $23 per share

A letter of intent (LOI) must be completed within A) 13 months. B) indefinitely. C) 6 months. D) 90 days.

D) 13 Months The obligation under the LOI must be met within 13 months from the date of the letter. LOIs may be backdated up to 90 days.

Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less? A) Class B shares B) Class C shares C) Class A shares D) No load

D) No Load No load funds have no sales charge and are limited to a 12b-1 fee of 0.25% annually. Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (Contingent deferred sales charge, or CDSC). Class A shares charge an upfront load.

Which of the following investment companies has an actively managed portfolio? A) Closed-end company B) Equity fixed unit investment trust (UIT) C) Debt fixed unit investment trust (UIT) D) Face-amount certificate company

A) Closed-end company The portfolios of both face-amount certificate companies and UITs are nonmanaged. The closest they come to management is when the securities to make up the portfolio are selected. After that, the portfolio does not change. Closed-end companies have an investment adviser who actively manages the portfolio, buying and selling securities.

All of these are true regarding no-load shares except A) they have sales charges associated with sales and redemptions. B) there may be fees charged at redemption. C) they offer more return per dollar invested than load funds if investing results are the same. D) they are sold by the fund with no sales charges of any kind.

A) they have sales charges associated with sales and redemptions. No-load shares have expenses that are not considered sales charges. Some broker-dealers may charge fees for transactions, but these fees are not from the fund, so they are not considered sales charges.

Advantages to the investor offered by investment companies include I. ability to invest small amounts in many different securities. II. special securities prices available only to investment companies. III. elimination of market risk through pooling of investments. IV. increased purchasing power in the marketplace. A) I and IV B) II and IV C) I and III D) II and III

A) I and IV Investors who can only invest relatively small amounts of money can nevertheless purchase interest in many different securities through investment companies. By the same token, they also gain access to increased purchasing power by pooling their investments with others.

An investor has asked a mutual fund company for a copy of its Statement of Additional Information (SAI). How long does the fund have to comply with the request? A) Five business days from the date of the request B) Three business days from the date of the request C) By end of week in which the request was received D) SAI must go into the mail on the same day

B) Three business days from the date of the request If an investor asks for a copy of a mutual fund's SAI, the copy must go into the mail no later than the end of the third business day from the date of the request. It must also be supplied free of charge.

Which of these would not affect the NAV per share of a mutual fund share? A) The portfolio's market value undergoes a large increase. B) The fund pays its monthly operating expenses like utility bills. C) Portfolio securities had to be sold for a big capital loss. D) The fund receives a dividend from one of the portfolio stocks.

C) Portfolio securities had to be sold for a big capital loss. Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

The ABC Growth Fund has a public offering price (POP) of $15 per share and a net asset value (NAV) of $14.25. What is the fund's sales charge (SC)? A) 4% B) 3% C) 6% D) 5%

D) 5% The basic formula is NAV + SC = POP. In this example, 14.25 + .75 = 15. SC is expressed as a percentage of POP: 0.75 / 15 = .05 (5%).

A letter of intent may be backdated to include a prior purchase up to A) indefinitely. B) 13 months. C) 6 months. D) 90 days.

D) 90 Days

Which of the following securities may trade above or below their net asset value? A) Units of a unit investment trust B) Face-amount certificates C) Common shares of an open-end investment company D) Common shares of a closed-end investment company

D) Common shares of a closed-end investment company Supply and demand determine the bid price (price at which an investor can sell) and the ask price (price at which an investor can buy). Closed-end fund shares may trade above (at a premium to) or below (at a discount to) the shares' net asset value (NAV).

If a prospectus is being used to close a mutual fund sale, it must be given to the investor A) always before the sales presentation begins. B) within three business days of purchase. C) within five business days of purchase. D) before or during the sales presentation.

D) before or during the sales presentation. The mutual fund purchaser must receive a prospectus before or during any sales solicitation or presentation. Additionally, sales literature sent out to prospective customers is considered a sales solicitation and must therefore be accompanied by a prospectus.

Under the IRC Subchapter M, if the WWF Fund only distributes 85% of its net investment income to its shareholders, then which of these is true? I. The fund must pay taxes on the undistributed 15% of net investment income. II. The fund must pay taxes on 100% of the net investment income. III. The shareholder pays no tax if the income is reinvested. IV. The shareholder must pay taxes if the income is received in cash or reinvested. A) II and IV B) I and IV C) II and III D) I and III

A) II and IV o avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Since WWF Fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income whether received in cash or reinvested.

Under the Investment Company Act of 1940, all of these are examples of management companies except A) a Windmill Income UIT. B) a Windmill Income Fund, an exchange-listed:closed-end fund. C) an S&P 500 Index Trust ETF. D) a growth fund option for a VA.

A) a Windmill Income UIT. Unit investment trusts are investment companies, but not management companies under the act. Closed-end funds, ETFs, and separate accounts are all types of management companies.

All of the following actions would cause the NAV per share of the mutual fund to increase except A) a large number of investors making deposits in the fund. B) the fund receives dividends. C) the liabilities of the fund decline. D) the fund receives interest.

A) a large number of investors making deposits in the fund. When investors deposit money into the fund they buy more shares, so the assets and number of shares increase proportionately and the NAV per share is unchanged. In a similar way, when shareholders redeem shares the assets in the fund go down but the number of shares also decrease proportionally, so the NAV per share is unchanged. In the other responses the assets increase with no proportional increase in the number of shares, so NAV would increase.

Which of the following is an exempt issue? A) Treasury mutual fund B) Fixed annuity C) Variable annuity D) Variable life insurance

B) fixed annuity Fixed annuities are exempt from registration (fixed annuities and fixed life insurance are not investment products). Variable insurance products and investment companies are required to register.

JIM Technology Fund has reported average net assets of $75 million and expenses of $600,000. What is the fund's expense ratio? A) 1.20% B) 1.00% C) 0.80% D) 0.75%

C) 0.80% Expense ratios are calculated by dividing the expenses for the reporting period by the average assets over that period. In this example, 600,000 / 75 million = 0.8 (0.80%).

ABC Growth Fund has reported average net assets of $120 million and expenses of $1.44 million. What is the fund's expense ratio? A) 12.00% B) 1.00% C) 1.20% D) 1.44%

C) 1.20% Expense ratios are calculated by dividing the expenses for the reporting period by the average assets over that period. In this example, 1.44 million / 120 million = 1.2 (1.20%).

Which of the following would have no effect on the NAV per share of a mutual fund share? A) The fund pays its monthly operating expenses like utility bills. B) The portfolio's market value undergoes a large increase. C) Portfolio securities had to be sold for a big capital loss. D) The fund receives a dividend from one of the portfolio stocks.

C) Portfolio securities had to be sold for a big capital loss. Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

Which of the following is not a feature shared by mutual funds and closed-end funds? A) The fund provides diversification by investing in different companies or securities. B) An investor may liquidate a portion of his holdings without disturbing the portfolio's balance or diversification. C) The fund may offer various withdrawal plans that allow different payment methods at redemption. D) A professional investment adviser manages the portfolio for investors.

C) The fund may offer various withdrawal plans that allow different payment methods at redemption A closed-end fund does not offer redemptions. Shares must be liquidated in the secondary markets. All the other points here are true of both types of managed investment companies.

How often may a mutual fund calculate a new net asset value (NAV)? A) Once per hour B) Once per day C) There is no limit to the number of times this may occur. D) Once per business day

C) There is no limit to the number of times this may occur. The NAV of a fund share is the amount the investor receives upon redemption. It must be calculated at least once per business day, and one of those calculations must occur after the close of trading on the U.S. exchanges. A typical fund calculates its NAV at the end of each business day (4:00 pm ET). However, a mutual fund may calculate NAV more often.

A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be A) a nonfixed UIT. B) a fixed UIT. C) a mutual fund. D) a closed-end company.

D) a closed-end company. A closed-end company, or closed-end management investment company, is much like any other company, just that its source of profit is investments, rather than selling a product or service. Shares of closed-end companies are traded in the secondary markets, while the other choices listed here offer only redeemable securities.

A mutual fund has been in existence for 15 years. The prospectus must disclose the fund's performance A) broken out as an average over the last 10 years. B) for each year over the last 10 years. C) over the last 1, 5, 10, 15, 20, and 25 years. D) over the last 1, 5, and 10 years.

D) over the last 1, 5, and 10 years. The prospectus of a mutual fund must show the fund's performance over the last 10 years or the life of the fund, whichever is shorter. The data must be shown as the last year's performance, the performance over the last 5 years, and the performance over the last 10 years. With this fund, the 15-year performance need not be shown.

Regarding open-end and closed-end investment companies, all of the following are true except A) both may avoid taxation by distributing all of their net investment income to shareholders. B) both may be either diversified or nondiversified portfolios. C) both may offer numerous investment objectives to select from. D) both offer an unlimited number of shares in a continuous public offering.

D) both offer an unlimited number of shares in a continuous public offering. The key difference between open-end investment companies and closed-ends is the fact that new shares are continuously being offered and are unlimited in number for open-end companies. In the case of the closed-end, the number of shares is fixed and once the initial public offering (IPO) is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.