7-unit 8
SEC regulations for securities issued by investment companies prohibit which of the following? 1-Closed-end funds from issuing preferred stock 2-Open-end funds from issuing preferred stock 3-Closed-end funds from issuing bonds 4-Open-end funds from issuing bonds
2&4 Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock. They may not issue senior securities.
Which of the following statements best describes a breakpoint sale A)Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission B)Sale of investment company shares in dollar amounts above the point at which the sales charge is reduced C)Sale of investment company shares in anticipation of a distribution scheduled to be paid shortly
A- A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.
A fund seeks maximum capital appreciation by investing in common stocks of companies located outside the United States. The management selects well-established companies that are listed on their national stock exchanges and that have demonstrated high earnings potential. This information describes which of the following mutual funds? A) ATF Overseas Opportunities Fund B) ATF Biotechnology Fund C) ATF Capital Appreciation Fund D)ABC Stock Index Fund
A- Foreign funds, which may also be called international funds, invest in common stocks of companies located outside the United States.
You have a client who invested in the PQR Growth Fund 10 years ago and now, as retirement age approaches, asks you about using the exchange privilege to move into the PQR Balanced Fund. The client should know that A)this exchange is considered a taxable event as of the date. B)the old shares are liquidated at NAV and the new shares are purchased at the POP. C)the exchange qualifies for any breakpoint reduction D)any tax consequences are deferred until the Balanced Fund shares are liquidated.
A- The exchange privilege allows for an exchange at net asset value (NAV) between funds that are members of the same "family." The exchange is considered a taxable event. Because the exchange is made at NAV, the concept of breakpoint is irrelevant.
Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is not true? A) The renewal may be executed orally, provided it is done within two years of the initial contract. B) The contract must be terminable upon no more than 60 days' notice. C)The renewal must state the adviser's compensation.
A- When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for two years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares, as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days' notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned.
The performance of the XYZ Growth Fund has been in the top 1% of all funds in its category for the past 1-, 5-, and 10-year periods. Which of the following would be the biggest risk factor to an investor investing in this fund? A)A dividend yield of less than 2% B)The manager's tenure is six months C)Lack of diversification in the portfolio D)Past performance is no assurance of future results
B- Although one cannot predict the future from the past, when a portfolio manager has consistently been ranked at the top, it is not considered a major risk to bet on a winner. The problem here is that almost all of that performance was achieved under the direction of previous management. With only six months on the job, the new manager is untested and there is no way to know how the future performance will rank. You might see this referred to as tenure risk. Diversification is one of the benefits, not risks, of a mutual fund. In a growth fund, one does not expect a high dividend yield.
An investor purchases a 2x leveraged ETF. The index value is $100. On day 1, the index falls by 10% and then on day 2 goes up by 10%. How has this affected the investor's account? A) It is down 1%. B) It is down 4%. C) It is even. D) It is up 1%
B- If the index drops by 10 points on day 1, it has a 10% loss and a resulting value of 90. Assuming it achieved its stated objective, the leveraged ETF would therefore drop 20% on that day and have an ending value of $80. On day 2, if the index rises 10%, the index value increases to 99. For the ETF, its value for day 2 would rise by 20%, which means the ETF would have a value of $96 (80 × 20% = 16). On both days, the leveraged ETF did exactly what it was supposed to do—it produced daily returns that were two times the daily index returns. But let's look at the results over the two-day period: the index lost 1% (it fell from 100 to 99) while the 2x leveraged ETF lost 4% (it fell from $100 to $96). That means that over the two-day period, the ETF's negative returns were 4 times as much as the two-day return of the index instead of 2 times the return.
One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the net asset value (NAV) of the fund was $17.20. Today, the NAV is $17.56, and your client wants to know what accounts for the difference. You should advise her that the difference likely represents A) capital losses. B) unrealized appreciation. C) realized appreciation. D) capital gains.
B- The NAV of mutual funds is marked to the market daily; the increase reflects higher market prices for the securities in the fund's portfolio
An investor wants part of an existing portfolio to track and move with a popular index. While comfortable knowing that the investment will rise and fall with the index, any risk beyond that needs to be avoided. Which of the following funds would be the most suitable recommendation? A) Inverse leveraged index B) Inverse index C) Index fund D) Leveraged index
C- An index fund would be the only suitable recommendation shown here. While leveraged funds attempt to deliver a multiple of the return of the index they are tracking, magnifying the upside potential, so, too, can the downside potential be magnified. Inverse funds attempt to deliver returns opposite those of the index.
Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86, while the NAV was $10 per share. The client's order is placed at 2:00 pm Eastern time. Based on this information, you could confirm to the client a purchase of A) 4,604.052 shares. B) more than 4,604.052 shares, but fewer than 5,000 shares. C) nothing yet, as you must wait for the POP to be computed based on the day's close D) 5,000 shares
C- Mutual funds use forward pricing, so we never know what we'll be paying per share (if purchasing) or receiving per share (if redeeming) until the next calculated price.
A customer of your broker-dealer is bullish on U.S. equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general? A) Real estate investment trusts (REITs) B) American depositary receipts (ADRs) C) Standard & Poor's depository receipts (SPDRs) D) Variable rate demand obligations (VRDOs)
C- The SPDR is an index fund designed to replicate and track the performance of the S&P 500, a broad-based equity index
An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for three years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class A shares of the MNO High-Yield Bond Fund B) Class C shares of the ABC Investment-Grade Bond Fund C) Class B shares of the ABC Investment-Grade Bond Fund
C- The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best, because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the three years of his investment.
In which of the following mutual funds is it most likely that a dividend paid by that mutual fund would be nontaxable to the shareholders? A) The CHXKC Preferred Stock Income Fund B) The FFLQX Sunbelt Growth Fund C) The WVCXC Gas and Electric Utilities Fund D) The ABQYX State I Municipal Bond Fund
D- A mutual fund whose portfolio consists of tax-free municipal bonds has its net investment income taxed, when distributed as a dividend, in the same manner the individual bonds are taxed. This is an example of a single state fund where the income is not only tax exempt on the federal level, but tax exempt to residents of State I as well.
One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares A) may be priced at a premium or discount relative to its net asset value. B)are traded in the secondary markets rather than on an exchange. C)are purchased and redeemed based on supply and demand. D)outstanding will vary in number at any point in time.
D- Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose share prices are based on supply and demand, which causes them to be bought or sold at a premium or discount to the NAV.
When is the sales charge deducted from purchases of mutual fund shares made under a letter of intent? A) Monthly B) Annually C) When each letter of intent is completed D) When each purchase is made
D- When the customer makes the first investment under a letter of intent, the reduced sales charge applies immediately and to each subsequent investment. With each additional investment, the same reduced charge is deducted. If the customer does not invest the amount stated in the letter, the full sales load applies retroactively to the total investment.
A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. Her current portfolio consists of the following: 50,000 cash 200,000 in retirement accounts 100,000 in various individual stocks in different industries 100,000 in a balance fund She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which investments would be the most appropriate?
For someone who is willing to take the risk and invest for the long haul, a small- or mid-cap growth fund would be appropriate
An investor studying the annual report of a registered investment company reads that the net asset value per share has increased from $16.10 to $17.45. He notes that the market price has declined over the period. The investment company must be A) an open-end company. B) a closed-end company. C) a unit investment trust. D) a real estate investment trust.
It is the closed-end investment company (CEF) where the market price is determined by supply and demand rather than the NAV. As a result, the trading price can be the same, above, or below the NAV. Although REITs do have a net asset value per share and their prices are also set by supply and demand, they are not registered investment companies.
