Investment Companies
An open-end management company is a: A mutual fund B publicly traded fund C fixed unit investment trust D real estate investment trust
A. A mutual fund portfolio is managed by an investment adviser and the fund continuously issues and redeems its common shares - so it is an "open- end" management company. Review
Index ETFs are: I passively managed II actively managed III negotiable IV redeemable A I and III B I and IV C II and III D II and IV
A. Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable. Review question # 3-2-75-2 Investment Companies : Management Companies : Exchange Traded Funds : Passive Management Copyright 1989-2020 Pass Perfect, LLC All Rights Reserved
The underwriter of a mutual fund is known as the: A Sponsor B Manager C Custodian D Guardian
A. The fund underwriter is also known as the fund sponsor. The sponsor is responsible for establishing the fund in compliance with the requirements of the Investment Company Act of 1940.
When a sales charge is not imposed on a fund purchase, nor on redemption, this is known as a: A front-end load fund B no load fund C contingent deferred sales charge fund D negotiated sales charge fund
B. The sales charge that is imposed when a customer initially purchases fund shares is known as a "front-end load sales charge."
Why does a no-load mutual fund have lower expenses than a load mutual fund? A Because it does not charge an annual management fee B Because it cannot charge an annual 12b-1 fee C Because it can only charge a maximum annual 12b-1 fee of .25% D Because it can only charge a maximum annual 12b-1 fee of .75%
C. FINRA allows a mutual fund to call itself "no load" (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%. Otherwise, the fund is subject to a FINRA maximum annual 12b-1 fee limitation of .75%. Note, in contrast, that if a fund wishes to advertise itself as a "pure no-load fund" then it cannot charge any 12b-1 fees. Finally, generally all mutual funds charge management fees.
A 200% Leveraged Dow Jones Industrial Average Index ETF would be expected to move: I up 50% in price when the DJIA moves up 100% II up 100% in price when the DJIA moves up 50% III down 50% in price when the DJIA moves down 100% IV down 100% in price when the DJIA moves down 50% A I and III B I and IV C II and III D II and IV
D. A leveraged ETF uses borrowing (margin) and options to magnify price movement as compared to the reference index. A 200% leveraged ETF can be expected to move 2 times as fast as the reference index, either up or down. A 300% leveraged ETF can be expected to move 3 times as fast as the reference index, either up or down
ETFs trade on all of the following markets EXCEPT: A NYSE B AMEX C NASDAQ D OTC
D. OTC Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX listed (now renamed the NYSE American), but there are ETFs on the NYSE and NASDAQ as well. The OTC market for equities is the OTCBB and the Pink OTC Market. These are markets for thinly traded illiquid securities.
"SPIDERS" are: I a mutual fund II an exchange traded fund III based on the Standard and Poor's 100 Index IV based on the Standard and Poor's 500 Index A I and III B I and IV C II and III D II and IV
D. SPDR is the acronym for the Standard and Poor's 500 Index Depository Receipt. This is an Exchange Traded Fund - an ETF.
Publicly traded fund shares are: I Negotiable II Redeemable III Managed IV Non-Managed A I and III B I and IV C II and III D II and IV
A. Publicly Traded shares are NEGOTIABLE AND MANAGED Publicly traded fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is negotiable it trades in the market like any other stock.
Which of the following funds MUST be a closed end fund? I Net Asset Value = $10 / Purchase Price = $9.50II Net Asset Value = $10 / Purchase Price = $10III Net Asset Value = $10 / Purchase Price = $10.50 A I only B I and II C II and III D I, II, III
A. Purchase price is LESS THAN NAV - so it can only be a closed-fund because minimum of an open-fund/mutual fun is equal to NAV A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." Thus, the minimum price for a mutual fund is Net Asset value; while the only type of fund that can trade for less than Net Asset Value is a closed end fund.
Which of the following is an Exchange Traded Fund? A SPDRs B REPOs C ADRs D ADSs
A. SPDRs are "Spiders" - the Standard and Poor's 500 Index exchange traded fund. REPOs are repurchase agreements; ADRs are American Depositary Receipts; and ADSs are American Depositary Shares.
Which of the following can be purchased on margin? I Mutual Funds II Initial public offerings of Closed End Funds III Closed End Funds trading on the NYSE A I only B III only C II and III D None of the above
B. CLOSED END FUNDS TRADING ON THE NYSE New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the initial public offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock.
A 60-year old man wants to trade in and out of the market on a daily basis. He has the investment objectives of income and capital gains. The best recommendation is a(n): A ETN B ETF C Mutual Fund D UIT
B. Do not confuse an ETN (Exchange Traded Note) with an ETF (Exchange Traded Fund). ETFs are index funds that are exchange traded. ETFs are actively traded and are quite liquid. By choosing the correct index, a match to the customer's investment objectives of income and capital gains can be achieved.
Mutual funds must send their financial statements to shareholders: A once a year B two times per year C three times per year D four times per year
B. Mutual funds must send their financial statements to shareholders semi-annually (twice a year).
The type of investment company that only redeems its shares periodically at stated dates is known as a(n): A open end fund B sector fund C interval fund D hedge fund
C. An "interval fund" is a "newer" type of fund structure that is classified as a closed-end fund, but it has many open-end fund features. It offers its shares continuously like an open-end fund. The shares are not listed on an exchange, like an open-end fund. However, it will only redeem shares at stated "intervals" - usually quarterly - and it will not redeem the investor's entire holding at these redemption dates. Instead, it will only redeem anywhere from 5% to 25% of the investor's net assets at a single time. Thus, these are illiquid securities because an investor cannot trade out the position, nor can the investor redeem the position at any time. The manager of the fund, not having to worry about redemptions, can make less liquid, more risky investments similar to hedge funds. And the fees charged are more similar to hedge funds than a traditional closed-end fund as well - with annual ongoing fees averaging 3%, and another average 2% fee when shares are redeemed (and this ignores the up-front sales charge that is imposed when the shares are purchased!). So why would an investor buy into such a fund? Because the investor might be able to achieve "hedge fund" like returns (since the interval fund makes investments in a much broader range of assets such as commercial property, private equity funds, hedge funds, business loans, catastrophe bonds, etc.) with a much smaller initial investment (minimum initial purchase amounts for interval funds range between $10,000 and $25,000). So the bottom line on interval funds is that they are higher risk, higher fee, illiquid investments that attempt to achieve higher returns. Thus, they are only suitable for relatively risk tolerant, sophisticated investors. Review question # 3-2-87-5 Investment Companies : Management Companies : Interval Funds Copyright 1989-2020 Pass Perfect, LLC All Rights Reserved
Aggregation to qualify for a breakpoint is NOT available to: A a group of family members in the same household that aggregates investment funds B a single individual who has an accumulated position in a fund and who is making an additional purchase C an investment club that purchases different mutual funds within the same fund family D an individual who purchases funds with different investment objectives in the same fund family
C. UNRELATED PERSONS cannot group together to take advantage of a break point. A breakpoint on a mutual fund is a lowered sales charge for a large purchase. The breakpoint schedule is in the fund prospectus. Unrelated persons cannot group together to take advantage of a breakpoint, so these are not available to investment clubs or investment partnerships. However, all members of a "household" can group together for a breakpoint. Mutual fund sponsors apply the breakpoint sales charge reductions to all funds purchased within that fund's family. It is not based solely on the purchase of an individual fund. Finally, under rights of accumulation (ROA), an individual's accumulated holding counts towards a breakpoint when the next purchase is made.
In order to be regulated under Subchapter M of the IRS Code, at least how much of the Net Investment Income must be distributed to the mutual fund shareholders? A 70% B 80% C 90% D 100%
C. A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.
Which of the following securities are redeemable with the sponsor? A Real estate investment trusts B Closed end funds C Mutual funds D Corporate preferred stock
C. Mutual funds (open end funds) are redeemable with the sponsor - they do not trade. REITs, closed-end funds, and corporate stock (both common and preferred) are listed on exchanges or OTC and are traded.
D. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acme Fund is $10.25, so 100 shares will cost $1,025 plus a commission.
Customer pays the last price / end of day price * number of shares plus a commission
Exchange traded funds can NOT be: A bought on margin B sold short C traded anytime during exchange hours D redeemed with the sponsor
D. ETFs (Exchange Traded Funds) such as SPDRs are negotiable - they trade as would any regular stock. They are marginable and they can be sold short since ETFs are available for many different indexes and sectors. ETFs are not redeemable - it is mutual fund shares that are redeemable.
Which of the following mutual fund terms are synonymous? A Bid; Asking Price B Bid; Public Offering Price C Ask; Net Asset Value D Ask; Public Offering Price
D. For mutual funds the Ask is the same thing as Public Offering Price. Bid, Redemption Price, and Net Asset Value are all the same terms.
When comparing a mutual fund to a hedge fund, all of the following are true EXCEPT hedge funds: A are subject to less regulation B use aggressive investment strategies and have higher risk C are only available to qualified purchasers D are liquid
D. Hedge funds are completely illiquid investments. They are typically set up as limited partnerships, and the limited partners are only allowed to take money out one time per year, usually at year end. Hedge funds offer higher returns coupled with higher risk and are only sold to accredited (wealthy, sophisticated) investors who understand the risks involved. Review
An individual wishes to receive a fixed amount monthly from her investment company. She should elect which type of withdrawal plan? A Fixed shares B Fixed period C Fixed percentage D Fixed dollar
D. If an individual wishes to redeem shares of a mutual fund under a "systematic withdrawal plan," he or she gets to elect a withdrawal option. He or she could elect to have a fixed number of shares liquidated each month (Choice A); could elect to have a fixed percentage of the portfolio liquidated each month (Choice C); or could elect to have enough shares liquidated so that a specific dollar amount is received each month (Choice D). In this example, Choice D meets the customer's requirements. Review
A variable annuity is a: A face amount certificate company B management company C fixed unit investment trust D participating unit investment trust
D. Participating Unit Trust Investment -------> Variable Annuity A variable annuity is a participating unit investment trust. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received.
Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: A 5% of Net Asset Value B 5% of the Public Offering Price C 8 1/2% of Net Asset Value D 8 1/2% of the Public Offering Price
D. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.
A customer switches from a growth fund to an income fund within the same "family of funds." Which statement is TRUE? A No tax liability is incurred because this is treated as a "wash sale" B No tax liability is incurred because this is treated as a "like kind exchange" of assets C Tax must be paid on any amount by which the NAV of the new fund exceeds the old fund's NAV D The sale results in a "taxable event" on which tax on any gain is due, and the purchase establishes a new cost basis
D. When the shares of one fund are sold, unless the monies are reinvested in the same fund, (resulting in a non-taxable "like-kind" exchange), capital gains tax is due on the sale proceeds versus the cost basis in the shares. The purchase of the new (different) shares results in a new cost basis.
An investment that does not require periodic rebalancing and which does not require the investor to actively change asset allocations over the investment time horizon is a(n): A Specialty Fund B Target Date Fund C Managed Index Fund D Hedge Fund
B. A Target Date Fund starts with a more aggressive asset allocation and then moves to a safer and safer asset mix as the target date approaches. Investment might start with growth stocks, then shift to a balance of stocks and bonds, and finally shifts into money market instruments as the "target date" approaches. Basically, it puts investing on "autopilot" over the client's investment time horizon.
The ex dividend date for mutual funds is set by: A FINRA B the Fund Board of Directors C the shareholders of the Fund D the SEC
B. Since mutual funds do not trade, the Board of Directors sets the ex (reduction) date for fund distributions.
Which statement is TRUE regarding management fees imposed by mutual funds? A Management fees are limited to 8 1/2% of fund average net assets and are deducted from the initial investment B Management fees are limited to a maximum of 1/2% of fund average net assets and are deducted when fund shares are redeemed C Management fees are deducted from fund gross investment income before any dividend distributions are made D Management fees are not imposed by mutual funds
C. Management fees imposed by mutual funds are based on a percentage of assets under management, and are an annual reduction of the fund's gross investment income. Thus, these are deducted by the fund to arrive at the net investment income available for distribution to shareholders. Sales charges on mutual funds are limited under FINRA rules to 8 1/2% of Public Offering Price. This is applied to the total of both "up front" sales charges and "back end" redemption fees. Thus, if a fund imposes a 4% sales charge, the maximum permitted redemption fee is 4 1/2%.
Mutual fund shares are: I Negotiable II Redeemable III Managed IV Non-Managed A I and III B I and IV C II and III D II and IV
Mutual Funds are II. Redeemable NOT TRADED III. Managed C. Mutual fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. Mutual fund shares do not trade - they are not negotiable. The shares are redeemed by the fund at Net Asset Value. The fund continuously issues and redeems its shares. Review
What is the Net Asset Value per share of a mutual fund? A Assets - Liabilities / Outstanding Shares B Assets - Operating Expenses / Issued Shares C Assets - Management Fees / Outstanding Shares D Assets - Redemption Fees / Issued Shares
A. The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share. Review
The essential difference between an open end management company and a closed end management company is: A management B capitalization C investment objective D regulation
B. Capitalization Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange or NASDAQ where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both types of funds are regulated under the Investment Company Act of 1940.
An investor purchases 1,000 mutual fund shares with a Net Asset Value of $10 each, where the fund imposes a 5% contingent deferred sales charge if the shares are redeemed within the first year. The sales charge decreases by 1% for each year the investor remains invested in the fund. If the investor were to redeem his shares during the second year of holding the fund, based upon the NAV of $10, he or she will receive: A $10,000 B $9,600 C $9,500 D $9,400
B. Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment after holding it for 1 full year; therefore the fund is being redeemed during the 2nd year. This means the Contingent Deferred Sales Charge is 4% (it is 5% if redeemed in year 1; 4% in year 2; 3% in year 3; 2% in year 4; 1% in year 5; 0 thereafter). If the investor redeems during year 2, he or she must pay the 4% deferred sales charge, and the investor will receive $10,000 x .96 = $9,600 upon redemption.
The maximum annual 12b-1 fee permitted under FINRA rules is: A .25% B .50% C .75% D 1.00%
C. .75% 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules.
A customer buys a 3X Inverse Leveraged ETF at $30 per share. The customer's maximum loss per share is: A $30 B $60 C $90 D Unlimited
A. Buying an ETF is no different than buying any stock. The most that can be lost is the investment made - which is $30 per share. The fact that this is an inverse, leveraged, ETF has nothing to do with how much can be lost. Rather, the fact that it is inverse means that it will lose when then market rises and will gain when the market falls; and the fact that it is 3X means that it will move 3 times as fast as the reference index. So this stock will move opposite to the movement of the reference index, at a rate that is 3 times as fast. Thus, in a rising market, the customer will lose at 3 times the rate of the reference index, but the maximum loss is still the amount invested.
Mutual funds that have an automatic reinvestment provision will typically reinvest: I dividends at NAV II dividends at POP III capital gains at NAV IV capital gains at POP A I and III B I and IV C II and III D II and IV
A. If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.
Which of the following statements are TRUE regarding management fees imposed by mutual funds? I Management fees are paid to the investment adviser of the fund II Management fees are paid to the individuals selling the fund III Management fees are deducted from fund gross investment income before any dividend distributions are made IV Management fees are not deducted from fund gross investment income A I and III B I and IV C II and III D II and IV
A. Management fees imposed by mutual funds are based on a percentage of assets under management, and are an annual reduction of the fund's gross investment income. Thus, these are deducted by the fund to arrive at the net investment income available for distribution to shareholders.
Which statement is TRUE regarding dollar cost averaging? A If market prices remain constant, the plan will produce a lower average per share cost B If market prices are fluctuating, the plan will produce a lower average per share cost C If prices rise, smaller dollar purchases must be made; while if prices fall, larger dollar purchases must be made D The plan requires that a constant dollar amount be maintained in equity securities, with any excess invested in debt
B. Dollar cost averaging requires that an investor make periodic payments (say monthly) of a fixed dollar amount (say $100 per month) to buy a given security. If the price of the security is fluctuating, the average purchase cost per share will be lower for the investor than the simple mathematical average price of the shares over the same period. Dollar cost averaging does not work if the price of the stock remains fixed, nor does it protect against loss in a falling market.
Exchange Traded Funds (ETFs) are: I registered under the Investment Company Act of 1940 II not registered under the Investment Company Act of 1940 III closed-end management companies IV open-end management companies A I and III B I and IV C II and III D II and IV
B. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940.
A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, which fund listed would have the highest yield from investment income? A Government Bond Fund B Corporate Bond Fund C Municipal Bond Fund D Any of the above
B. If the securities held in each of the bond funds have similar maturities and the funds have similar expense ratios, the remaining differences affecting yields are credit rating and tax status. Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.
A customer is considering the purchase of $5,000 of ABC Growth Fund, to use as the down payment on a new car purchase that will be made in 5 - 6 years. The fund offers the following share classes: Class A shares:5% initial sales chargeNo 12b-1 feesBreakpoint Schedule:$0 -$10,0005% sales charge$10,001 -$30,0003% sales charge$30,001 -$50,0002% sales charge$50,001 -$100,0001% sales chargeClass B shares:No initial sales charge.40% annual 12b-1 feeCDSC if the customer redeems within the following time periods:Redeem within Year 1:5% redemption feeRedeem within Year 2:4% redemption feeRedeem within Year 3:3% redemption feeRedeem within Year 4:2% redemption feeRedeem within Year 5:1% redemption feeRedeem after Year 5:0% redemption feeClass C shares:No initial sales charge.75% annual 12b-1 feeNo CDSC The best recommendation for this customer is: A purchase Class A shares B purchase Class B shares C purchase Class C shares D divide the purchase equally into $2,500 each for Class A and Class C shares
B. If this customer invested $5,000 in Class A shares, he pays a 5% sales charge and no annual 12b-1 fees for the 5 year investment time horizon. If the customer invested $5,000 in Class B shares, there is no up-front sales charge; but because the customer will redeem after year 5, there will be no redemption fee on these shares. However, the customer must pay .40% in annual 12b-1 fees for 5 years = 2.00% total fees. If the customer invested the $5,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees over 5 years, for a total of 3.75%. The lowest fee purchase is, therefore, Class B shares. Review
The net asset value of a mutual fund is $15.00 and the ask price is $15.96. The fund has the following breakpoint schedule: Purchase Amount Sales Charge$0$10,001$25,001---$10,000$25,000over 876 1/4%%% The fund charges a redemption fee of 1/2%. A customer who redeems 200 shares this day will receive: A $2,975 B $2,985 C $3,000 D $3,015
B. Mutual funds are redeemed at NAV less a redemption fee (if any). The redemption fee of 1/2% must be deducted to get the net proceeds. $15.00 NAV x .995 x 200 shares = $2,985
Question:The purchase price of each of the following can be negotiated EXCEPT: A Commercial paper B Variable annuity C Certificate of deposit D Banker's acceptance
B. Purchase of a VARIABLE ANNUITY IS NON-NEGOTIABLE ----NO TRADING The purchase price of a variable annuity unit or a mutual fund share is the "public offering price" as stated in the prospectus. This is the next computed net asset value plus the appropriate sales charge. There is no negotiation because there is no trading of these securities. Commercial paper, certificates of deposit, and banker's acceptances are all "negotiable" securities. Review
Which statement is TRUE regarding ETFs (Exchange Traded Funds)? A The purchaser of an ETF is not required to receive a disclosure document because the shares are purchased in the secondary market B The purchaser of an ETF is required to receive either a prospectus or a Product Description summarizing key information about the ETF C The purchaser of an ETF is required to receive an Offering Memorandum because a public offering of securities is being made D The purchaser of an ETF is required to receive an Official Statement, at, or prior to, settlement of the transaction
B. Regarding Exchange Traded Funds (ETFs), the shares trade in the secondary market like any other stock. However, any purchaser is required to be delivered either a prospectus (similar to that for a mutual fund) or a Product Document summarizing key information about the ETF and the details of where a prospectus can be obtained. The basic idea here is that the customer is buying the equivalent of an exchange traded index-mutual fund; and even though technically each purchase is not a "new issue" like the purchase of a mutual fund, the customer must still receive a disclosure document. An Offering Memorandum is the disclosure document used for a Regulation D private placement. An Official Statement is the disclosure document used for a new municipal bond issue.
A customer sells stock out of his account receiving net proceeds of $28,000. The customer wishes to use the proceeds to buy ACME mutual fund shares. The fund has breakpoints at $5,000 intervals. The customer has no additional funds available for investment. You should recommend that the customer: A reinvest $25,000 ACME fund, and use the remaining $3,000 to buy common stocks B sign a Letter of Intent to buy $30,000 of ACME fund C invest an additional $2,000 in ACME fund in addition to the proceeds from the stock sale D refrain from investing in ACME fund until $30,000 has been accumulated
B. Since the customer needs to invest $30,000 to achieve the next breakpoint, and has $28,000 now, an additional $2,000 is required. The customer may not have this money at this time. If the customer signs a Letter of Intent to complete the $30,000 breakpoint, he or she has 13 months to make payment of the additional $2,000, and will still receive the lower sales charge.
The front-end load on a mutual fund is best described as the: A expense ratio B cost of investing in a fund C taxation of dividend distributions from investing in the fund D taxation of capital gains from investing in the fund
B. The front-end load cost of a mutual fund is the actual "cost" of investing in a fund. This is the sales charge. This charge is deducted from the gross dollars paid, with the net amount invested in the fund.
During a period of falling interest rates, which investment would be most profitable? A 2X (Leveraged) S&P 500 Index ETF B Inverse (Short) S&P 500 Index ETF C 2X (Leveraged) 20+ Year Treasury ETF D Inverse (Short) 20+ Year Treasury ETF
C. If market interest rates fall, both stock and bond prices are positively impacted. However, fixed income security prices rise more than stock prices. Furthermore, the longer maturity and lower coupon issues rise the fastest as market interest rates fall. A bond ETF profits when prices rise. An ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates fall. This type of ETF is long 20+ year Treasuries in the hopes that prices will rise, and because it is a 2X leveraged ETF, it has margined the bond positions so that as interest rates fall, the price should rise at 2 times the normal rate of increase of a similar maturity unleveraged bond portfolio.
The Class A shares have the following sales charge breakpoint schedule with no annual 12b-1 fees: Purchase Amount Sales Charge0 - $10,0006%$10,001 - $20,0005%$20,001 - $30,0004%$30,001 - $50,0003%$50,000 - $100,0002%$100,000 and over1% A customer puts $25,000 in the Class A shares of the mutual fund shown in the exhibit window under a Letter of Intent that obligates the customer to complete a $30,001 purchase amount to qualify for a lower sales charge. Prior to making the additional $5,001 purchase, the assets in the fund appreciate to $31,000. The customer does not make the additional $5,001 investment in the fund. Which statement isTRUE? A The customer will qualify for the lower sales charge based on the asset appreciation and is not required to make the additional $5,001 purchase B The customer must make the additional $5,001 investment in the fund otherwise the customer will forfeit the amount invested because the contract was not completed C The customer is not required to make the additional $5,001 investment but the sales charge will be recalculated based on the lower investment amount D The customer is not required to make the additional $5,001 investment in this fund, but must invest another $5,001 in any other fund offered by the same sponsor
C. The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $25,000 of the $30,001 required by the LOI already, the remaining $5,001 must be deposited to retain the reduced sales charge. If this is not done, the 3% sales charge used for the original share purchase calculation under the LOI will be recalculated using the 4% sales charge level, and the price charged per share will go up, resulting in the customer owning fewer shares.
When must a mutual fund prospectus be delivered to a customer? A At, or prior to, discussing the investment with the customer B At, or prior to, taking a purchase order from a customer C At, or prior to confirmation of the purchase D At, or prior to, settlement of the purchase
C. The basic rule on prospectus delivery is that the prospectus must be delivered "at, or prior to, confirmation." When a customer buys a security that requires a prospectus delivery (a new issue), in the "good old days," a confirmation was generated detailing the purchased security and amount due, a prospectus was included in the envelope, and this was mailed by "snail mail" to the customer. When the customer opened the envelope, the prospectus was included with the confirmation, meeting the rule's requirements. The SEC has modernized the prospectus delivery rule for stock and bond offerings, allowing an electronic prospectus to be sent to the customer's e-mail address. However, the mutual fund rule still requires a paper "profile prospectus" sent to the customer with the confirmation, with the full paper prospectus being available electronically if requested.
Crane Mutual Funds offers investors the opportunity to receive breakpoints on all purchases within their family of funds. The following lists the breakpoint schedule: Purchase AmountSales Charge$0-$10,000 8 ½%>$10,000-$20,000 7 ½%>$20,000-$45,000 6 ½%>$45,000-$65,000 5 ½%>$65,000 5 % An investor owns $15,000 worth of the Crane Government Fund and wishes to buy $4,000 worth of the Crane Income Fund. What will be the sales charge for this purchase? A 5 ½% B 6 ½% C 7 ½% D 8 ½%
C. 7 1/2% --- rights of accumulation
If a regulated mutual fund pays out a dividend and capital gains distribution, which the shareholder has automatically reinvested, which statement is TRUE? A The dividend is taxable B The capital gain is taxable C Both the dividend and the capital gain are taxable D Neither the dividend nor the capital gain are taxable
C. Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.
To impose the maximum sales charge, under FINRA rules, mutual funds must offer investors which of the following benefits? I Breakpoints II Plan Completion Insurance III Rights of Accumulation IV Letter of Intent A I and II only B III and IV only C I, III and IV D I, II, III, IV
C. In order to impose the maximum sales charge, FINRA must impose: 1. Breakpoints 2. Rights of Accumulation 3. Letter of Intent To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor's accumulated position counts towards completion of a breakpoint). There is no requirement for the sponsor to offer plan completion insurance, which is often included in variable annuity contracts; and which funds the annuity for a beneficiary if the contract holder dies prematurely.
Which statements are TRUE regarding money market funds? I Money market funds are typically sold without a sales charge II Money market funds typically do not impose management fees III Fund dividends are not taxable if reinvested in additional shares IV Typical maturities of securities held in the portfolio are 30 days or less A I and II B III and IV C I and IV D II and III
C. Money market funds usually do not impose sales charges but all funds impose management fees. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares. The reason why these funds are called "money" funds is that the securities held in the portfolios have very short maturities (less than 30 days) and turn over into cash quickly.
A new customer wishes to open an account at your firm by purchasing $5,000 of DEF mutual fund shares. He informs you that he has previously invested $30,000 in the fund at another broker-dealer. As the registered representative handling the account, you should tell the customer that: A to qualify for the breakpoint, he must buy the shares from the other broker-dealer B he must transfer the account from the other broker-dealer in order to qualify for the breakpoint C he qualifies for a breakpoint sales charge reduction on the $5,000 purchase D cannot qualify for a breakpoint sales charge reduction on the $5,000 purchase
C. Mutual fund breakpoints are calculated based on amounts invested with a given fund sponsor - it makes no difference which broker-dealers were used to make the fund share purchases. The breakpoints are not calculated based on how much of a fund is purchased through a given broker-dealer.
The essential difference between an open end fund and closed end fund is that a(n): A open-end fund is managed; while a closed-end fund is not managed B closed-end fund is managed; while an open-end fund is not managed C open-end fund has a different capital structure than a closed-end fund D open-end fund computes Net Asset Value daily; while a closed-end fund does not
C. Open-end funds have a different CAPITAL STRUCTURE than a closed-end fund Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange or NASDAQ where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both open-end and closed-end funds compute Net Asset Value per share daily.
All of the following terms apply to publicly traded fund shares EXCEPT: A one-time issuance B managed C redeemable D negotiable
C. Redeemable Publicly traded fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is "closed end." Review
Which of the following investment company securities are redeemable? I Open end fund shares II Closed end fund shares III Fixed unit investment trusts IV Participating unit investment trusts A I and II only B III and IV only C I, III and IV D I, II, III, IV
C. Redeemable = OPEN-END FUND SHARES FIXED UNIT INVESTMENT TRUSTS PARTICIPATING UNIT INVESTMENT TRUSTS Closed-end fund shares are not redeemable - they are listed on an exchange and trade like any other security. Open-end fund shares are redeemable with the fund itself and do not trade. Unit trust interests are also "redeemable" securities, in the sense that the trust sponsor makes a market in trust units, and will buy them back from the purchaser. There is no "trading" of trust units, however. Review
A customer invests $31,000 in a mutual fund and signs a Letter of Intent to complete a $50,000 breakpoint. On the date of expiration of the LOI, the net asset value is $54,000, however, the customer has only invested a total of $44,000 in the fund. What should the representative do? A Nothing, since the account value is over $50,000 B Distribute the amount in excess of the $50,000 LOI requirement C Inform the client that he or she must invest another $6,000, otherwise the price paid per share will be recalculated and will be higher D Explain to the customer that if the additional $6,000 is not deposited, the account will be liquidated
C. The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $44,000 of the $50,000 required by the LOI already, the remaining $6,000 must be deposited to retain the reduced sales charge. If this is not done, the price paid per share will be recalculated using a higher sales charge level, resulting in the customer owning fewer shares.
Which of the following funds MUST be closed end? A NAV - $20.00 /Purchase Price - $20.00 B NAV - $20.00 /Purchase Price - $20.50 C NAV - $20.00 /Purchase Price - $19.50 D NAV - $20.00 /Purchase Price - $20.25
C. The minimum purchase price for an open-end (mutual) fund is net asset value. The fund cannot be sold for less than this amount. It may be sold for more with a sales charge not exceeding 8 1/2% of the offering price. Closed-end funds trade in the market. The market may value the fund at NAV, at a discount to NAV or at a premium to NAV. Therefore, the only fund that can sell at a discount to NAV is a closed-end fund.
At the market opening, a customer purchases 200 shares of an S&P 500 2X ETF at $50 per share. At the end of that day, the S&P 500 Index increases by 10%. The next day, the index declines by 5%. What will be the market value of the 200 share position? A $10,000 B $10,450 C $10,500 D $10,800
D. Since this ETF is "2x," it is an ETF that moves in the same direction as the market, but it moves twice as fast The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index rises by 10%, this position will rise by 20% to $12,000 value ($10,000 x 1.2). At the end of the second day, because the index goes down by 5%, the ETF value will decline by 10%. $12,000 x .90 = $10,800.
An investor buys $10,000 of a "regulated" mutual fund investing solely in municipal securities. Which statement is TRUE regarding the Federal tax treatment of the interest income? A The investor must pay Federal income tax on all interest received, since payments come from the investment company B The investor must pay tax on any distributions received from the investment company, while the company has no tax obligation C The investor has no tax liability on any distributions received, while the investment company must pay tax on any retained income D The investor has no tax liability on distributions received, and the investment company has no tax liability on retained income
D. Since this mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income. Review
What is a characteristic of a Unit Investment Trust? A High portfolio turnover B Disclosure of the identity of the investment adviser C Board of directors overseeing investments D Securities that are redeemable with the sponsor
D. UNIT INVESTMENT TRUST Securities that are redeemable with the sponsor Unit Investment Trusts (UITs) create a fixed portfolio, transfer it into a trust, and then sell units of the trust (typically $1,000 amounts) that are sold to investors. For that $1,000 investment, the client gets a piece of a diversified portfolio. Once the trust is created, the portfolio does not change. There is no investment adviser and no management fees. There is no Board of Directors (as is the case with a mutual fund) - rather there is a Board of Trustees. The true statement is that the securities are redeemable. There is no trading. The sponsor will buy back trust units from clients that wish to sell. These "slightly used" units are then resold to other investors by the sponsor.
Which of the following statements are TRUE about investment companies? I An open end fund is a type of management company II A closed end fund is a type of management company III An open end fund is a mutual fund IV A closed end fund is a publicly traded fund
I, II, III, IV D. Management companies are types of investment companies that are either open-end or closed-end. An open-end management company is a mutual fund. A closed-end management company is a publicly traded fund.
An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is: A $10 B $10 plus a commission C the market price D the market price plus a commission
NAV = $10 A. Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.
Which of the following terms are synonymous? I Open end fund / Mutual fund II Closed end fund / Mutual fund III Open end fund / Publicly traded fund IV Closed end fund / Publicly traded fund
Open end fund = MUTUAL FUND Closed end fund = PUBLICLY TRADED FUND C. An open-end fund portfolio is managed and the fund continuously issues and redeems its common shares - so it is an "open end" management company. A closed-end fund has a 1 time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "publicly traded" fund. Review
