Investment companies

A client invests in a mutual fund and signs a letter of intent. Which of the following statements are TRUE? 1. ABC Fund will probably hold some shares in escrow. 2. If additional investments are not made, the client will be required to send a check for the difference in the load. 3. If additional investments are not made, the client will not be required to send a check for the difference in the load, instead a portion of the client's shares would be sold.

1 & 3

Under FINRA rules, a member firm that is acting as a principal underwriter may not sell variable contracts through another broker/dealer unless which of the following is TRUE? 1. The broker/dealer is a member. 2. There is a sales agreement in effect between the parties. 3. The sales agreement provides for the returning to the issuing insurance company of the sales commission if the variable contract is tendered for redemption within 7 business days after acceptance of the contract application.

1,2,3

Changes to the investment objectives of a mutual fund must be approved by the [A] The fund's shareholders [B] The fund's board of directors [C] The fund's transfer agent [D] Any changes to investment objectives must be approved by FINRA.

A

A mutual fund has a bid price of $10.00 and an ask price of 10.85. The redemption fee for the fund is 1/2 of 1%. What amount will a customer receive if he sells 1,000 shares? [A] $ 9,950 [B] $10,000 [C] $10,796 [D] $10,850

A 1000 shrs x 10.00 Bid or NAV = $ 10,000 $10,000 - $50 ($10,000 x .005) Redemption Fee = $ 9,950 Paid to the Customer

According to the Investment Company Act of 1940, distributions to shareholders must be accompanied by which of the following? [A] A written statement disclosing the source of the distribution [B] A current prospectus [C] The investment company's semi-annual report [D] A statement which identifies the amount being withheld for tax purposes

A All distributions made to a shareholder of a mutual fund must be accompanied by a written statement which describes the source of the distribution (shot-term gain, long-term gain, dividends or interest).

A particular mutual fund focuses its investments in one state, and even more specifically, within a specific county of that state. Such a fund would primarily be exposed to which type of risk? [A] Marketability [B] Interest rate [C] Capital [D] Systematic

A The fund described would be a sector fund. Of the choices listed, the marketability or liquidity of such a fund would be a primary risk factor. Though interest rate risks, capital and systematic risks are inherent to mutual funds, these risks will be similar or the same for all mutual funds across the board, and these risks would not differ by region. A lack of geographic diversity within a fund would subject the fund to marketability issues.

A mutual fund's net asset value has increased from $22.00 to $23.50 over the last few months. The cause for the increase would be due to [A] an appreciation in the value of the portfolio [B] the fund manager deciding to increase the number of shares it issues [C] an increasing demand for the fund [D] the decision by the fund manager to reduce the fund's expense ratio

A The increase in the net asset value would be directly related to an increase in the value of the underlying securities held in the fund's portfolio.

When a regulated investment company is set up using the pipe-line theory, which of the following pays the taxes on interest payments and dividends received by investors? [A] The shareholders [B] The investment company [C] The transfer agent [D] The Investment Advisor

A - Because investment companies are simply pipelines or conduits for all capital gains, interest, and dividends passed through to the investors from the funds, the fund should not be taxed at the corporate level. If certain regulations are adhered to, the shareholders are taxed only once at the individual level.

The record date of mutual fund distributions [A] is decided by the mutual fund itself [B] always falls on the third Friday of each month [C] is determined by the Investment Company Institute [D] is the business day after the ex-date

A- Because mutual funds are not traded OTC the record date and ex date always have to be set by the fund itself.

An investor could obtain a refund of sales charges on a spread load contractual plan only if cancellation is of the plan is made [A] within 3 days [B] within 45 days [C] within 18 months [D] at any time

B

Which of the following is TRUE of mutual fund dividend distributions that are reinvested by the investor? [A] The reinvested dividends are not taxable to the investor. [B] The entire reinvested dividends are fully taxable to the investor. [C] Taxation on the dividend is deferred until the shares are sold. [D] Only the portion of the dividend which represents a capital gain is taxable.

B

The ideal time to invest in a long-term bond fund would be when [A] interest rates are rising [B] interest rates are falling [C] inflation is rising [D] GDP has been rising sharply

B A long-term bond fund would benefit most if interest rates fell. As rates fall, bond prices rise. In choices A and C rates would rise or at least remain unchanged. Rising inflation leads to rates rising to fight inflation. If GDP is growing sharply there will be a concern that inflation will rise so rates will either rise or remain unchanged.

A mutual fund which distributes at least 90% of its Net Investment Income is which of the following? [A] Balanced Fund [B] Regulated Fund [C] Diversified Fund [D] Registered Fund

B Funds which pay out at least 90% of the net investment income qualify as "Regulated Investment Companies".

Open-end investment companies do not list on national exchanges because they [A] qualify for listing on the OTC market only [B] are continuously being offered as new issues by the fund [C] require 100% shareholder approval [D] are wholly owned and traded by the underwriter

B Mutual funds or open-end investment companies offer redeemable shares only. The do not offer shares that are publicly traded. Therefore, the fund is always issuing new shares to the public and redeeming shares that are sold back to the fund and would not have shares listed on a national exchange.

Which of the following statements about investment advisory fees paid by a mutual fund is TRUE? [A] The SEC must review and approve the investment advisory fees. [B] In light of differences between funds, fees will differ from fund to fund. [C] For new investors Investment advisory fees are usually fixed for the first two years. [D] FINRA rules regulate the amount of fees paid to an investment advisor.

B The management fee paid by a fund to its registered investment advisor is subject to negotiation and varies from one fund to another. The fee is charged against the assets of the fund and not included in the sales charge. It is not subject to approval by the SEC nor regulated by FINRA.

A customer owns a common stock mutual fund and asks his RR what would have the greatest effect on the value of the fund. Which of the following would be the BEST response? [A] A rise in interest rates [B] The prices changes of the common stocks held in the fund's portfolio [C] Changes to the level of the Dow Jones Industrial Average (DJIA) [D] The fluctuations in the value of the U.S. dollar relative to foreign currencies

B The value of a common stock fund would be directly related to the changing value of the securities in the fund's portfolio. The others could certainly have an effect but not as direct an effect or as strong a relationship as the stocks that comprise the portfolio.

All of the following fall under the definition of a registered investment company EXCEPT [A] a growth and income fund [B] a separately managed account [C] the separate account of a variable annuity [D] a money market fund

B - A growth fund and an income fund are both mutual funds and therefore are investment companies. The sub-account of a variable annuity must register under the Investment Company Act of 1940 and is considered to be an investment company registered under the Act. A separately managed account is a professionally managed portfolio of securities but the securities are directly owned by the account owner (the customer) therefore they are NOT classified as investment companies.

Which of the following is TRUE of mutual fund dividend distributions that are reinvested by the investor? [A] The reinvested dividends are not taxable to the investor. [B] The entire reinvested dividends are fully taxable to the investor. [C] Taxation on the dividend is deferred until the shares are sold. [D] Only the portion of the dividend which represents a capital gain is taxable.

B - Dividends, whether reinvested or not, are fully taxable to the investor each year.

Which of the following is TRUE about the taxation of municipal bond funds? [A] The investor will only pay taxes on capital gains when the fund is sold. [B] Distributions of capital gains are subject to taxation at the federal level, but dividend from municipal funds is not subject to federal taxes. [C] All income from such a fund, including capital gains and dividend distributions, is exempt from taxation at the federal level. [D] All income from such a fund, including capital gains and dividend distributions, is tax-deferred until shares of the fund are sold.

B - EXPLANATION Dividend distributions are exempt from federal income tax because the dividends come from the interest income on the municipal bonds, which is tax exempt. However, capital gains are subject to taxation.

The sales charge on money market funds is usually [A] spread loaded. [B] no load. [C] front end loaded. [D] deducted from the initial investment only.

B - Money market funds do not charge a sales load.

Under SEC rules, quotations of yield and/or equivalent yield provided in sales literature of a mutual fund must include [A] the fund's projected return and its basis for the next five years [B] the total return information of the mutual fund [C] a list of the names of the mutual fund's board of directors [D] a link to the fund's latest annual report

B - The SEC requires funds to disclose their total returns in any sales literature and that the total return be calculated using a standardized formula showing the returns before and after taxes. The "average total return" for one year, 5 years, and 10 years must be shown.

A front-end sales load would most likely be charged in which of the following situations? [A] Sales that take place from the fund directly to the investor [B] Sales that take place from the fund, to the managing underwriter, and then to the investor [C] Sales that take place from the fund, to the managing underwriter, to a mutual fund dealer, and then to the investor [D] Sales that take place from the fund, to the managing underwriter, to a mutual fund transfer agent, and then to the investor

C A front-end sales load is a fee which is paid to a broker-dealer that sells the fund shares to the investor. It would be most common when fund shares go from the fund, to an underwriter, and then to a dealer (mutual fund dealer), after which the sales load is added and shares are sold to the investor.

Utilizing the conversion privilege, a customer redeems shares of one fund for those of another fund within the same family. Which of the following are correct regarding the exchange? The customer is required to pay additional sales charges on the new shares. The customer may be charged a nominal fee for the exchange but does not pay additional sales charges. The exchange is treated as a sale and purchase and could result in a tax consequence to the customer. The transaction is considered an exchange and is exempt from tax until the shares are sold. [A] I and III [B] I and IV [C] II and III [D] II and IV

C The switch may involve a nominal charge for conversion but does not require additional sales charge. This switch may also result in tax gain or loss to the investor because it is classified as a sale or purchase.

Which of the following investment companies invests in a fixed portfolio with little or no sales charges? [A] Open End Fund [B] Closed End Fund [C] Unit Investment Trust [D] Face Amount Certificate Co.

C Unit Investment Trusts are investment companies with little or no management fees which invest in a fixed portfolio of municipal or corporate bonds.

Which of the following would be the MOST important factor to consider when determining the suitability of a mutual fund investment for a customer? [A] Exchange privileges [B] NAV track record [C] Fund objectives [D] Reinvestment privileges

C- Fund objectives would have to match the investor's investment objectives.

A customer purchases shares of an open-end investment company and six weeks later a capital gains distribution is made. For federal income tax purposes, this distribution would be treated as [A] ordinary income. [B] a short-term capital gain. [C] a long-term capital gain. [D] non taxable event.

C- Whenever a capital gains distribution is made by an open- end investment company, it is always taxed as a long-term capital gain regardless of how long the individual has owned the underlying securities.

An investor invests $12,000 in a mutual fund. The value rises to $18,000. The investor decides to invest another $4,000 under a Rights of Accumulation agreement. What is the sales charge on the subsequent investment? Amount Invested Sales Charge $1 - $4,999 8 1/2% $5,000 - $9,999 8 1/4% $10,000 - $14,999 8% $15,000 - $19,999 7 3/4% $20,000 - $49,999 7 1/2% [A] 8 1/4% [B] 8 % [C] 7 3/4% [D] 7 1/2%

D Under a Rights of Accumulation agreement we would use the value of the shares, $18,000, plus the amount invested, $4,000, to qualify for the 7½ % sales load.

Open-end investment companies may NOT do which of the following? [A] Borrow money [B] Lend money [C] Purchase call options [D] Issue senior securities

D - An open-end investment company may only issue one class of common shares. It may not issue senior securities (i.e. preferred stock or bonds). However, a closed-end fund may issue senior securities.

According to the Investment Company Act of 1940, regulations on contractual plans limits deductions for sales charges from the first year's payments on the contract to a maximum of [A] 9% [B] 16% [C] 20% [D] 50%

D - According to the Investment Company Act of 1940, not more than 50% of any of the first 12 monthly payments may be deducted in sales load for contractual plans.

Which of the following would cause an increase in the net asset value per share of a fund? [A] Payments made by purchasers of the fund [B] Reinvestment of dividends and capital gains distributions by shareholders of the fund [C] Capital gains distributions [D] Appreciation in the value of securities held in the fund

D - Appreciation in the market value of securities held in funds portfolio would cause an increase in the net asset value per share of the fund.

All of the following could be found in a money market fund's portfolio EXCEPT [A] bank certificates of deposit. [B] Treasury bills. [C] Treasury bonds having a short time to maturity. [D] common stock.

D - Since common stock does not have a maturity of 12 month or less it would not be found in money market funds.

If NAV and OFFER PRICE ARE THE SAME:

No Load Fund