Chapter 9 Custom Exam
A client redeems shares of a mutual fund. According to current regulations, a check must be sent within how many days of submitting a redemption notice? A 5 days B 7 days C 10 days D 15 days
B 7 days Federal regulation requires that an individual receive payment for the redemption of a mutual fund within seven days.
A mutual fund shareholder is NOT required to report which of the following events for tax purposes? A Receiving a dividend that is subsequently reinvested in the fund at the net asset value B Appreciation in the value of the shares C Exchanging shares of one fund for another fund within the same family of funds D Receiving a capital gains distribution that was not reinvested in the fund
B Appreciation in the value of the shares Dividends and capital gains distributions are taxable to the investor regardless of whether they are reinvested in the fund. Exchanging shares for another fund within the same family of funds must also be reported on the investor's tax return since shares of one fund are being sold to buy shares in another fund. Appreciation in the value of fund shares is not taxable until the shares are sold to establish a capital gain.
Which of the following would be considered the most volatile mutual fund? A A balanced fund B A municipal bond fund C An emerging markets fund D A U.S. government securities fund
C An emerging markets fund Emerging markets funds invest in securities issued by countries with unsure economic, political, and social climates. This leads to significant volatility in share prices.
The Investment Company Act of 1940 regulates: A Hedge funds B REITs C ETFs D The level of commissions paid on mutual fund trades
C ETFs ETFs (exchange traded funds) must register with the SEC as either an open-end investment company or a unit investment trust. Hegde funds are private investment pools. REITs, real estate invesment trusts, are not a type of investment company. The commissions or sales charges on mutual funds is established by FINRA.
Taxable income normally includes: A The interest on municipal bonds issued in the state in which the taxpayer lives B The taxpayer's annual 401(k) contributions C Reinvested dividends paid on a mutual fund investment D Any unrealized capital appreciation on stocks that the taxpayer owns
C Reinvested dividends paid on a mutual fund investment Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.
An open-end investment company with a NAV of $22.20 and a sales charge of 8% would have an offer price of what amount? A $20.42 B $22.20 C $23.98 D $24.13
D $24.13 To find the asked price, divide the net asset value by the complement of the sales charge, as follows. NAV / (100% - sales charge) = $22.20 / (100% - 8%) = $22.20 / 92% = $22.20 / .92 = $24.13 The asked price is also referred to as the public offering price (POP).
An equity fund invests in the stocks of companies whose earnings are projected to increase greatly over the next 10 years. This is an example of a: A Fund of funds B Value fund C Balanced fund D Growth fund
D Growth fund Growth funds invest in the stocks of companies whose earnings are projected to grow at a more rapid rate than those of other companies.
Regarding ETFs, which of the following statements is TRUE? A ETFs are considered hedge funds by the SEC. B ETFs may only hold equity positions. C ETFs grow tax-deferred. D Typically, ETFs may be sold short.
D Typically, ETFs may be sold short. Exchange-traded funds (ETFs) are investments that resemble UITs. These products may be sold short, may be purchased on margin, and may invest in either equity or debt instruments. A fixed portfolio is typically constructed to either track a specific index (e.g., the Wilshire 5000) or a given market segment (e.g., airlines or medical companies). An ETF's portfolio typically remains constant unless there is a change to the underlying index or in one of the individual investments within the fund. Since ETFs are not hedge funds, there is no requirement for the investors to be accredited.
A mutual fund that invests in stocks that are currently trading below their intrinsic market value is a(n): A Value fund B Growth fund C Index fund D Exchange-traded fund
Value funds invest in stocks that their managers believe are currently undervalued -- selling for less than they are really worth. A Value fund
A specialized or specialty fund invests in stocks that are primarily: A In many industries B In a particular industry or geographical area C Traded in the OTC market D Special situations
A specialized or specialty fund is a type of a fund that invests primarily in a particular industry or geographical area. B In a particular industry or geographical area
The BG mutual fund has an NAV of $11.72 and a maximum offering price of $12.67. What is the maximum sales charge for this fund? A 7% B 7 1/2% C 8 1/2% D 9%
B 7 1/2% The maximum sales charge for the fund is calculated by dividing the difference between the offering price and the NAV ($12.67 - $11.72 = $0.95) by the offering price ($0.95 divided by $12.67 equals 7 1/2%).
Which of the following statements concerning ETFs is TRUE? A These funds are priced once per day. B These funds' values may fluctuate throughout the trading day. C Managers of these funds tend to trade individual portfolio positions frequently. D These funds tend to have very high portfolio turnover.
B These funds' values may fluctuate throughout the trading day. Exchange-traded funds (ETFs) are investments that resemble unit investment trusts (UITs). A fixed portfolio is constructed either to track a specific index (such as the S&P 500) or a given market segment (such as gold or semiconductors). An ETF's portfolio typically remains constant unless there is a change to the underlying index or one of the individual investments within the fund is affected by a corporate action such as a sale or spin-off. ETFs are normally listed on NASDAQ or a traditional exchange and may fluctuate in price throughout the day as a regular stock would. They have a bid and ask as opposed to the NAV and POP found in mutual funds investments. Commissions are paid when trading ETFs as opposed to sales charges when purchasing mutual funds.
Which investment company does NOT charge a management fee? A An open-end investment company B A closed-end investment company C A unit investment trust D An exchange-traded fund
C A unit investment trust A unit investment trust does not charge a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed.
A mutual fund has an NAV of $26.85 and a sales charge of 8%. In order to find the asked price, the investor should divide the $26.85 NAV by: A The 8% sales charge B The number of shares outstanding C 100% plus the 8% sales charge D 100% minus the 8% sales charge
D 100% minus the 8% sales charge To find the asked price for mutual fund shares, divide the NAV by 100% minus the sales charge percentage. $26.85 divided by 92% equals $29.18. Those purchasing shares of this fund would pay $29.18 per share.
An inverse equity exchange-traded fund (ETF) is most similar to which of the following? A A straddle B Buying on margin C An equity mutual fund D Selling short
D Selling short An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells short is anticipating a decline in the price of equity securities. For example, an inverse ETF that is based on the DJIA seeks to deliver the opposite performance of that index. Therefore, if the DJIA rises by 1%, an inverse ETF should decrease by 1%; conversely, if the DJIA falls by 1%, the inverse ETF should increase by 1%.
The determination of when the NAV of a mutual fund is calculated, is stipulated by: A FINRA B The SEC C The board of directors D The prospectus
D The prospectus The net asset value of a mutual fund is calculated whenever stipulated in the fund's prospectus. Most funds calculate daily, at the end of the day's trading.
The Statement of Additional Information is supplied to a client: A When the account is opened B When the customer purchases shares C When the semiannual report is mailed D When a customer requests it
D When a customer requests it The cover page of a mutual fund prospectus indicates that an investor may receive a Statement of Additional Information upon request. There is no requirement for periodic distribution.
Which of the following objectives is the least suitable reason for investing in a mutual fund? A Diversification B Professional management C Short-term trading D Liquidity
Investors in mutual funds usually seek all of the objectives listed except short-term trading C Short-term trading
The closing prices of two mutual funds on Monday, July 17th are: Bid Offer Change WORLD FUND 18.30 20.00 +.10 OCEAN FUND 5.25 5.50 +.02 The sales charge of the OCEAN Fund is: A 4.5% B 4.8% C 8.5% D 9.3%
A 4.5% The sales charge of the OCEAN Fund is the difference between the bid price of $5.25 and the offer price of $5.50, equals $.25 ($5.50 - $5.25 = $.25). The sales charge is always expressed as a percentage of the offering price. The sales charge divided by the offering price of $5.50 equals a sales charge for OCEAN Fund of 4.5% ($.25 sales charge divided by the $5.50 offering price).
A mutual fund that has a diversified portfolio that includes a significant percentage of both stocks and bonds would most likely be a: A Balanced fund B Dual purpose fund C Growth fund D Specialty fund
A Balanced fund A mutual fund that holds both bonds and stock in its portfolio would be a balanced fund. The theory is that the two types of securities lend balance to the portfolio. In periods of declining economic conditions, when stock prices and interest rates have historically declined, the market prices of bonds will increase. Therefore, the bonds work to balance the decline in the common stocks.
To be considered a regulated investment company, a mutual fund must: A Distribute a minimum amount of its net investment income to shareholders B Pay tax on all net investment income prior to making distributions to shareholders C Retain all net investment income to avoid paying tax D Distribute all of its net investment income to shareholders
A Distribute a minimum amount of its net investment income to shareholders To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders. Meeting this requirement allows the investment company to pass on distributions to shareholders without the company having to first pay taxes on the income distributed.
A customer buys 100 shares of a fund and pays the market price plus a commission. The investor has bought: A ETF shares B Open-end investment company shares C Fixed-load fund shares D A Commissionable Trust Fund (CTF)
A ETF shares An Exchange Traded Fund (ETF) lists its shares in the secondary market and is purchased in the same manner as a common stock. The buyer pays the market price plus a commission. An open-end investment company (mutual fund) is distributed in the primary market only. Generally, it is purchased at its net asset value plus a sales charge. If there is no sales charge, it would be a no-load fund. Fixed-load fund shares and Commissionable Trust Funds (CTFs) are terms used to describe other types of open-end investment companies.
Which of the following statements is NOT TRUE about exchange-traded notes (ETNs)? A ETNs generally pay a fixed coupon rate B ETNs may be sold at any time in the secondary markets or held until maturity C ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note D If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs
A ETNs generally pay a fixed coupon rate All of the statements about ETNs are true except ETNs pay a fixed coupon rate. ETNs do not usually pay an annual coupon or specified dividend. They are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.
Which of the following statements is TRUE regarding dollar cost averaging? A It is a systematic method of investing B If employed, the average price will be less than the average cost C It can only be set up through a payroll deduction plan D The benefits can be obtained if one invests in a money-market fund
A It is a systematic method of investing Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.
The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? A It will have a negative impact on the security B It will have a positive impact on the security C It will have no impact on the security D The issuer will be obligated to repay the investor his principal immediately
A It will have a negative impact on the security Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.
An individual has been purchasing shares of a mutual fund and has chosen to reinvest all distributions rather than take the payments. If the individual chooses to sell the shares purchased through these reinvestments, the cost basis will be: A The purchase price of these shares B Zero since reinvestment is made with pretax dollars C The same as the purchase price on previous investments D The purchase price less any sales charge
A The purchase price of these shares Investors must report all distributions from a mutual fund as taxable income, whether reinvested or not. When an individual chooses to reinvest the distributions, the cost basis is the purchase price of the shares.
An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day's NAV for the investor. Which of the following statements concerning this potential trade is TRUE? A This is a sales practice violation known as late trading B This is an acceptable practice known as market timing C The RR would need to have prior written approval by a principal of the firm to execute this order D The investor may only purchase Class B shares in this case, since Class A shares are not available under this arrangement
A This is a sales practice violation known as late trading This activity would constitute a sales practice known as late trading, which is prohibited under federal securities laws. According to securities law, orders placed after the close of trading for the day (and after the determination of the closing NAV) must be filled at the next calculated NAV, which is usually the price at the end of the next business day. Investors placing orders after the close of the market (based on information that they have learned after the close), and seeking to purchase shares at prices determined before the close, are engaging in late trading, which clearly places other investors in that mutual fund at a clear disadvantage. The investor must receive the price as calculated by the fund company at the NAV on the following day.
The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the: A Trustee B Board of directors C Investment adviser D Distributor
A Trustee While mutual funds are often structured as corporations with a board of directors, a UIT is a trust. A trustee is responsible for overseeing the operation of a UIT. Since a UIT is not actively managed, it has no investment adviser.
A mutual fund has a bid price of $13.00 and an offer price of $14.20. The sales charge, when computed as a percentage of the offering price, is approximately: A 8.1% B 8.5% C 8.7% D 9.1%
B 8.5% The sales charge, in this example, is $1.20 which is found by subtracting the bid price of $13 from the offer price of $14.20. To find the sales charge percentage, divide the sales charge of $1.20 by the offer price of $14.20, which comes to approximately 8.5% ($1.20 divided by $14.20 = 8.5%).
According to FINRA rules, a breakpoint sale is: A A sale of mutual fund shares at a dollar level above the point at which a sales charge reduction is available and is acceptable B A sale of mutual fund shares at a dollar level that's below the point at which a sales charge reduction is available and is a violation C The sale of investment company shares in anticipation of a distribution soon to be paid D Payment to a registered representative after retirement and is acceptable if a contract is established prior to retirement
B A sale of mutual fund shares at a dollar level that's below the point at which a sales charge reduction is available and is a violation A breakpoint sale is the prohibited act of selling mutual fund shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. This practice is done to assess higher sales charges on transactions and is a violation of the FINRA rules.
Class A shares of an open-end investment company are different from Class B shares in that: A Class A shares are common shares, while Class B shares are preferred shares B Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge C Class A shares pay quarterly dividends, while Class B shares pay a monthly dividend D Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers
B Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge The difference between Class A and Class B shares is normally the fact that A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period, there is no sales charge deducted upon redemption.
In mutual fund advertising, it is NOT permissible to state that: A A fund does not charge a 12b-1 fee B Dollar cost averaging assures long-term growth C Funds of competitors have higher expense ratios D The investment adviser has 20 years' experience
B Dollar cost averaging assures long-term growth Mutual fund advertising may not state that any systematic method of investing will assure a profit or a specific rate of return. Historical rates of return may be disclosed. The other statements are acceptable.
To determine how much of a mutual fund's distributions are required to be included in taxable income, the shareholder should examine: A Form 4789 B Form 1099 C Form 1040 D The Statement of Additional Information
B Form 1099 Shortly after the end of each calendar year, mutual fund investors will receive a copy of IRS Form 1099-DIV for each fund they own. The form will describe how fund distributions are to be treated for tax purposes.
The most significant factor affecting the net asset value of a fund on a day-to-day basis is the: A Number of trades executed B Mark to market of the portfolio C Number of profits realized for tax purposes D Level of the DJIA
B Mark to market of the portfolio Mutual funds are required to calculate their NAV at the close of business each day. The NAV is based on the price of each security in the portfolio at the close of business in the market(s) that day. This process is called "marking the portfolio to market". Regardless of the number of trades executed or the amount of profits realized during the day, it is the closing prices that are used. The level of the DJIA (or any other index), impacts the daily NAV only to the extent that the portfolio owns the components of that index.
An investor purchases a face-amount certificate on a periodic payment basis. The certificate is scheduled to mature in ten years. After the fifth year, the investor stops making payments. Which of the following statements is TRUE? A The certificate lapses and the investor loses all payments made to this point. B The investor may redeem the certificate for its current cash value less any surrender charges or receive a paid-up certificate for a smaller face amount. C The investor is not entitled to cash, but may receive a paid-up certificate for a smaller face amount. D The investor must wait until the original maturity to redeem the certificate .
B The investor may redeem the certificate for its current cash value less any surrender charges or receive a paid-up certificate for a smaller face amount. A face-amount certificate matures on a set date, at its face value. The cash value of the certificate builds up according to a specific schedule. An investor who stops making payments on a periodic payment certificate may redeem the certificate for the current cash value, less certain surrender charges. The investor may also elect, prior to maturity, to receive a paid-up certificate rather than the current cash value.
A breakpoint sale is best defined as: A The payment of compensation to a registered representative who has ceased to be employed by a member firm B The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions C The sale of investment company shares in anticipation of an impending distribution D The sales amount in an IPO where institutional clients get a price discount
B The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions A breakpoint sale is defined as the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. Breakpoint sales are generally affected in order to assess higher sales charges on transactions and they are a violation of FINRA rules.
Which of the following statements is TRUE regarding the disclosure of back-end sales charges to customers? A A statement in the prospectus is sufficient. B As long as the back-end charges are clearly disclosed, the fund may be represented as "no load". C A confirmation should be sent disclosing that a sales charge may have to be paid upon redemption. D Disclosure is required in addition to that in the prospectus only if the broker-dealer and mutual fund are affiliated through common ownership.
C A confirmation should be sent disclosing that a sales charge may have to be paid upon redemption. In addition to the disclosure in the prospectus, a confirmation sent by a member firm selling a fund with a back-end load (CDSC) must include a statement that a sales charge may be assessed upon redemption.
A CDSC is associated with which share class? A A no-load B Class A shares C Class B shares D Class C shares
C Class B shares The differences in mutual fund share classes represent the method by which a fund collects any applicable sales charge. Class A shares typically have a front-end load, which is assessed at the time that a customer purchases the shares. On the other hand, Class B shares have a back-end load, which is assessed at the time a customer redeems the shares. On B shares, if the back-end load declines over time based on how long an investor owns the shares, it is referred to as a contingent deferred sales charge (CDSC). Class C shares may assess a small front-end load, but always have a 12b-1 fee. The 12b-1 fee is an annual fee that is levied in each year that an investor owns the shares.
All of the following statements are TRUE about closed-end investment companies, EXCEPT that the: A Number of outstanding shares is constant B Shares are sold at the current market price C Shares may not sell below the current net asset value D Shares may be listed on the NYSE
C Shares may not sell below the current net asset value Closed-end investment companies are bought and sold in the same manner as common stocks. If a customer wants to sell a closed-end fund at the market, he would receive the current bid price (the market quote, not the net asset value). If a customer wants to buy a closed-end investment company at the market, he would buy it at the current offering (asked) price. The market price of the shares can be at, above, or below the net asset value. Closed-end investment companies have only one issue of shares. Once sold, no new shares are issued. The amount of outstanding shares remains constant. The shares may be listed on an exchange or may trade in the OTC market.
Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)? A They are designed to deliver the same performance as an index or other benchmark B They are designed to deliver a multiple of the performance of an index or other benchmark C They are designed to deliver the opposite of the performance of an index or other benchmark D They are designed to deliver a multiple of the opposite performance of an index or other benchmark
C They are designed to deliver the opposite of the performance of an index or other benchmark An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. For example, an inverse ETF based on the DJIA seeks to deliver opposite performance of that index. So, if the DJIA rises by 1%, an inverse ETF would decrease by 1%, and if the DJIA falls by 1%, the inverse ETF would increase by 1% before fees and expenses. A regular ETF is designed to deliver the same performance as an index or other benchmark. A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. A leveraged inverse ETF is designed to deliver a multiple of the opposite performance of an index or other benchmark.
The closing prices of two mutual funds on Monday, July 17, are: Bid Offer Change WORLD FUND 18.30 20.00 +.10 OCEAN FUND 5.25 5.50 +.02 An investor who bought 300 shares of WORLD Fund on Monday, July 17, will pay: A $1,575 B $1,650 C $5,490 D $6,000
D $6,000 When an investor buys shares of a mutual fund (open-end investment company), the investor pays the offering price, which includes the sales charge. When buying the WORLD Fund, the investor would pay the offering price of $20.00. Three hundred shares purchased at $20.00 equals, $6,000 ($20.00 x 300 shares).
For the following size transactions, ABC mutual fund has a bid price of $8.50 and an asked price of $9.26. Which of the following sales is allowed under the Conduct Rules? A A member sells 250 shares of ABC fund at $9.10 to a nonmember firm B A member sells 250 shares of ABC fund at $9.10 to another firm through a nonmember firm C A member sells 250 shares of ABC fund at $9.10 to one of the firm's customers D A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients
D A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients A FINRA member firm may not sell the fund at a discount ($9.10) to a nonmember firm or to one of the firm's customers (the public). According to the Conduct Rules, a member firm can only give a discount from the public offering price to another member firm. The discounts and selling concessions member firms give to each other are inducements for firms to be members of FINRA (the self-regulatory organization of over-the-counter broker-dealers) and to abide by its rules and regulations.
Which of the following funds would typically have the LEAST amount of stability in NAV? A A money-market mutual fund B A short-term bond fund C An S&P 500 Index fund D A sector fund
D A sector fund Sector funds focus their investments in specific areas of industry or geography. As a result the funds tend to have more risk and volatility (less stability), than money-market mutual funds, short-term bond funds or index funds that track the broad market indices such as the Standard & Poor's 500.
A mutual fund has the following breakpoints: Dollar Amounts Breakpoints $0 to $24,999 5.50% $25,000 to $49,999 4.50% $50,000 to $74,999 3.50% $75,000 to $99,999 2.50% $100,000 and above 1.50% A customer has signed a letter of intent for $100,000 and makes the following three investments: $35,000 in April $52,000 in June $24,000 in September What's the sales charge percentage on each purchase? A April 4.50%, June 3.50%, September 5.50% B April 4.50%, June 2.50%, September 1.50% C April 3.50%, June 2.50%, September 1.50% D April 1.50%, June 1.50%, September 1.50%
D April 1.50%, June 1.50%, September 1.50% When signing a letter of intent (LOI), all purchases over a 13-month period are accumulated and the sales charge on the first and subsequent purchases are based on the letter of intent amount. In this example, the purchases total $111,000 and, as a result, the sales charge will be 1.50% on each purchase. (17050)
In reviewing prices for a mutual fund, an investor notices that the Beacon Fund has two listings, one for Class A shares and the other for Class B shares. The distinction between the two classes of shares would most likely be: A Class A shares are oriented toward short-term trading, while Class B shares have a long-term perspective B Class A shares should be purchased by income-oriented investors while Class B shares are for those seeking capital appreciation C Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers D Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge
D Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge The difference between Class A and Class B shares is normally that the A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period of time, there is no sales charge deducted upon redemption.
If the NAV of the Greenwich Fund is 90% of its offer price, this must be a(n): A Management company B Unit investment trust C Open-end fund D Closed-end fund
D Closed-end fund Open- and closed-end funds are types of management companies. The NAV could be below the offer price for both of these funds, but the situation referred to could not occur in an open-end fund. For an open-end fund, the NAV must be at least 91.5% of the offer price, because the maximum sales charge is 8.5%.
A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take? A Instruct the client to obtain the information from FINRA B Refer the client to the fund's sponsor since the RR may not be authorized to release this information C Instruct the client to obtain that information from the SEC database of mutual fund prospectuses D Inform the client that this information may be obtained by reviewing the front of the fund's prospectus
D Inform the client that this information may be obtained by reviewing the front of the fund's prospectus Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.
Which the following actions would affect the NAV of a mutual fund? A Client redemptions B Client deposits C A portfolio manager liquidating a $1 million position she has held for 14 months at a 35% loss D None of the above
D None of the above Client deposits or redemptions do not affect the net asset value per share. When a client deposits funds, more assets are in the portfolio but additional shares are issued. When a client redeems shares, fewer assets are in the portfolio but the number of shares is proportionately reduced. A portfolio manager selling a large position at a loss would not affect the NAV since the position has been marked to market (adjusted to reflect current market value) each day and the loss is already reflected in the fund's NAV long before the sale takes place. The net effect of the sale is simply the realization of the loss for income tax purposes.
Which of the following statements is characteristic of a closed-end investment company? A Shares may not sell below the net asset value B The investment company must distribute all income to shareholders C Shares are redeemed at the net asset value minus a redemption fee D Shares may sell at a premium or discount to the net asset value
D Shares may sell at a premium or discount to the net asset value The market price for a closed-end investment company is based upon supply and demand for the shares in the marketplace. A closed-end investment company share may sell at, above, or below its net asset value. Open-end investment company shares may never sell below the current net asset value. Shares are sold at the current market price; they are not redeemed like in an open-end fund.
A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? A The customer will not be able to diversify his assets B The customer will not be able to switch mutual funds within each family C The customer will not be able to receive a single account statement D The customer will not be able to receive sales breakpoints
D The customer will not be able to receive sales breakpoints The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.
The Founders Income Fund has declared a dividend that is payable to stockholders of record on Thursday, May 29. This mutual fund's ex-dividend will typically be on: A Monday, May 26 B Tuesday, May 27 C Wednesday, May 28 D The date that is set by the fund or its principal underwriter (sponsor)
D The date that is set by the fund or its principal underwriter (sponsor) Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend date for a mutual fund will not automatically be one day before the record date, as it is for common stock. Instead, a mutual fund's ex-dividend date is on a date that is determined by the fund or its principal underwriter (sponsor). In practice, mutual funds will often use the day after the record date as the ex-dividend date.
When analyzing a mutual fund's expenses, an analyst does NOT consider: A The management fees charged by the investment adviser B The fees charged by the fund's custodian C The fund's expense ratio D The sales load charged to buy fund shares
D The sales load charged to buy fund shares When analyzing a mutual fund's expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund's expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund's custodian. Total net assets are the fund's assets minus liabilities. Sales charges are not considered expenses of the fund.
Which of the following statements is TRUE regarding dividend and capital gain distributions of mutual funds? A They may be combined to determine the total yield B The taxes may be deferred if they are invested in additional mutual fund shares C Dividends are taxed as long-term capital gains D They can be reinvested automatically in additional shares if the shareholder chooses to do so
D They can be reinvested automatically in additional shares if the shareholder chooses to do so Of the choices listed, the only true statement regarding dividend and capital gain distributions from an open-end investment company (mutual fund) is that they can automatically be reinvested in additional shares if the fundholder chooses to do so. They may not be combined to determine yield. The taxes must be paid in the year that the distribution is realized, even if the distribution is reinvested. Qualified dividends are taxable at a maximum rate of 20% regardless of how long the fund is held and nonqualified dividends are taxed as ordinary income. Long-term capital gain distributions are taxable as long-term capital gains regardless of how long the fund shares are held.
